PROSPECTUS SUPPLEMENT
(To Prospectus dated February 25, 1998)
$338,789,900
(APPROXIMATE)
Bear Stearns Mortgage Securities Inc.
DEPOSITOR
Countrywide Home Loans, Inc.
MASTER SERVICER
Bear Stearns Mortgage Securities Trust 1998-3
Mortgage Pass-Through Certificates, Series 1998-3
The Mortgage Pass-Through Certificates, Series 1998-3 (collectively,
the "Certificates"), consist of all Classes identified in the chart below (the
"Offered Certificates") as well as an additional Class of Other Certificates (as
hereinafter defined) which are not being offered 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 of the Offered Certificates. It is a condition to
their issuance that each Class of Certificates receive the respective ratings
(set forth under "Summary of Terms -- Rating") of Moody's Investors Service,
Inc. ("Moody's" or the "Rating Agency").
(COVER CONTINUED ON NEXT PAGE)
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THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN BSMSI, THE
TRUSTEE, CO-TRUSTEE, BANKUNITED, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, BSMSI, BANKUNITED, THE MASTER
SERVICER OR ANY OF THEIR AFFILIATES, OR ANY OTHER PERSON, DISTRIBUTIONS ON THE
CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS TRANSFERRED OR PLEDGED TO
THE TRUST FOR THE BENEFIT OF CERTIFICATEHOLDERS.
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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.
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$333,510,000 (1) Class A Certificates
$ 5,279,800 (1) Class B-1 Certificates
$ 100 (1) Class R Certificate
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(1) During each Interest Accrual Period (as defined herein), the Class A,
Class B-1 and Class R Certificates will each bear interest at a
variable Pass-Through Rate equal to the weighted average of the Net
Rates of the Mortgage Loans (as defined herein). The Pass-Through Rate
for the first Interest Accrual Period for these Certificates will be
approximately 6.202% per annum.
The Certificates will be issued to BankUnited, FSB ("BankUnited") in
exchange for the Mortgage Loans. BankUnited will pay the costs of issuance of
the Certificates including a fee of $100,000 to Bear, Stearns & Co Inc. for
assisting in the pooling of the Mortgage Loans and the structuring of the
transaction.
The Offered Certificates, when, as and if issued, are expected to be
available for delivery on or about March 12, 1998. It is expected that delivery
of the Class R Certificates will be made at the offices of the Depositor, 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.
The date of this Prospectus Supplement is March 11, 1998
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(COVER CONTINUED FROM PREVIOUS PAGE)
The Offered Certificates and the Other Certificates (as defined herein)
will represent, in the aggregate, the entire beneficial ownership interest in
Bear Stearns Mortgage Securities Trust 1998-3 (the "Trust") consisting primarily
of conventional, first lien, fully amortizing, adjustable rate mortgages loans
with original terms of approximately 30 years, secured by one- to four-family
residences, individual condominium units and units in planned unit developments,
located primarily in Michigan, Illinois, Colorado and Massachusetts (each a
"Mortgaged Property"). The characteristics of the Mortgage Loans are described
herein under "Description of the Mortgage Loans" and in Annex A hereto. All the
Mortgage Loans will be acquired by Bear Stearns Mortgage Securities Inc.
("BSMSI") from BankUnited on the date of issuance of the Certificates.
Principal and interest on the Certificates are payable as described
herein on the 25th day of each month or, if such day is not a business day, then
on the next succeeding business day, beginning in March 1998 (each, a
"Distribution Date"). Interest will accrue on the Certificates at the
Pass-Through Rate 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 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, WHICH GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME
WITHOUT PENALTY. THE YIELD TO MATURITY OF A CLASS OF OFFERED CERTIFICATES
PURCHASED AT A DISCOUNT OR PREMIUM WILL BE MORE SENSITIVE TO THE RATE AND TIMING
OF PAYMENTS THEREON. HOLDERS OF THE OFFERED CERTIFICATES SHOULD CONSIDER, IN THE
CASE OF ANY SUCH CERTIFICATES PURCHASED AT A DISCOUNT, 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 EACH CLASS OF CERTIFICATES, THE YIELD TO MATURITY WILL BE
ADVERSELY AFFECTED BY PRINCIPAL PREPAYMENTS OF THE MORTGAGE LOANS WITH
RELATIVELY HIGH RATES. SINCE ALL OF THE MORTGAGE LOANS BEAR ADJUSTABLE INTEREST
RATES BASED ON THE ONE-YEAR CONSTANT MATURITY TREASURY INDEX (AS DEFINED
HEREIN), THE YIELD TO INVESTORS IN EACH CLASS OF CERTIFICATES WILL ALSO BE
HIGHLY SENSITIVE TO THE LEVEL OF SUCH INDEX. 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 LEVEL OF THE ONE-YEAR CONSTANT
MATURITY TREASURY INDEX, 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 OF TERMS -- YIELD AND PREPAYMENT CONSIDERATIONS" AND
"YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN.
As described herein, a real estate mortgage investment conduit
("REMIC") election 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 Certificate will be designated as "regular
interests" in the REMIC and the Class R Certificate will represent the "residual
interest" in the REMIC. See "Federal Income Tax Considerations" herein and
"Certain Federal Income Tax Consequences" in the Prospectus. The Class R
Certificate will be subject to certain restrictions on transfer and may have tax
liabilities during the early years of the REMIC that substantially exceed the
principal and interest paid thereon during such period. See "Restrictions on
Purchase and Transfer of the Residual Certificate" herein.
Certain limited representations and warranties concerning the Mortgage
Loans will be made by BankUnited. The obligations of BankUnited to repurchase or
substitute for a Mortgage Loan as to which a breach has occurred and is
continuing will constitute the sole remedies available to Certificateholders
with respect to a breach of any representations or warranties concerning the
Mortgage Loans.
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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.
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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.
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Trust................................... Bear Stearns Mortgage Securities Trust 1998-3, a Delaware business
trust.
Title of Series......................... Mortgage Pass-Through Certificates, Series 1998-3 (the
"Certificates"). The Offered Certificates and the Other
Certificates will represent in the aggregate the entire
beneficial ownership interest in the Trust consisting primarily
of Mortgage Loans having aggregate principal balances as of
February 1, 1998 (the "Cut-off Date") of approximately
$351,989,605 The Certificates will be issued pursuant to a
Pooling and Servicing Agreement (the "Agreement") to be dated
as of February 1, 1998 among Bear Stearns Mortgage Securities
Inc., as depositor ("BSMSI"), Countrywide Home Loans, Inc., as
master servicer (the "Master Servicer "), The Bank of New York,
as trustee (the "Trustee") and The Bank of New York (Delaware),
as co-trustee (the "Co-Trustee"), which will constitute the
governing instrument of the Trust.
Offered Certificates....................
$333,510,000 (1) Class A Certificates
$ 5,279,800 (1) Class B-1 Certificates
$ 100 (1) Class R Certificate
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(1) During each Interest Accrual Period, the Class A,
Class B-1 and Class R Certificates will each bear
interest at a variable Pass-Through Rate equal to
the weighted average of the Net Rates (as defined
herein) of the Mortgage Loans (as defined
herein). The Pass-Through Rate for the first
Interest Accrual Period for these Certificates
will be approximately 6.202% per annum.
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 Agency. Accordingly, any
investor's commitments with respect to the Certificates may be
correspondingly decreased or increased.
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Other Certificates:..................... In addition to the Offered Certificates, the Trust will issue one
additional Class of Certificates (the "Other Certificates") in
the indicated approximate original principal amount, which will
provide credit support to the Offered Certificates, but which
is not offered hereby:
Class B-2 (1) $13,199,705
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(1) Interest accrues at the same variable Pass-Through Rate as
interest accrues on the Class A, Class B-1 and Class R
Certificates
Any information contained herein with respect to the Other
Certificates is provided only to permit a better understanding of
the Offered Certificates.
Designations
CERTIFICATES....................... Offered Certificates and Other Certificates.
OFFERED CERTIFICATES............... Class A, Class B-1 and Class R Certificates.
OTHER CERTIFICATES................. Class B-2 Certificates (not offered hereby).
SENIOR CERTIFICATES................ Class A and Class R Certificates.
SUBORDINATE CERTIFICATES........... Class B-1 and Class B-2 Certificates.
REGULAR CERTIFICATES............... All Classes of Certificates other than the Class R Certificate.
RESIDUAL CERTIFICATES.............. The Class R Certificates.
PHYSICAL CERTIFICATES.............. The Residual Certificate and the Other Certificates.
BOOK-ENTRY CERTIFICATES............ All Offered Certificates other than the Physical Certificates.
Denominations........................... Each Class of Book-Entry Certificates will be registered as a single
Certificate held by a nominee of The Depository Trust Company, and
beneficial interests will be held by investors through the
book-entry facilities of The Depository Trust Company, as described
herein, in minimum denominations of $25,000 and increments of $1.00
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.
The Class R Certificate will be issued in certificated fully-registered
form in a single certificate of $100.
Depositor............................... BSMSI. See Bear Stearns Mortgage Securities Inc. in the Prospectus.
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Seller.................................. BankUnited, pursuant to a Mortgage Loan Purchase Agreement, dated as
of March 11, 1998, between BankUnited and BSMSI.
Master Servicer......................... Countrywide Home Loans, Inc. will act as master servicer and servicer
with respect to the Mortgage Loans and is referred to herein as the
"Master Servicer." See "The Master Servicer" and "The Pooling and
Servicing Agreement" herein.
Trustee................................. The Bank of New York.
Co-Trustee.............................. The Bank of New York (Delaware).
Custodian............................... The Federal Home Loan Bank of Atlanta.
Cut-off Date............................ February 1, 1998.
Closing Date............................ On or about March 12, 1998.
The Mortgage Pool....................... The Mortgage Loans in the aggregate (the "Mortgage Pool") consist of
conventional, first lien, fully amortizing, adjustable rate
mortgage loans with original terms of approximately 30 years,
secured by one- to four-family residences, individual condominium
units and units in planned unit developments located primarily in
Michigan, Illinois, Colorado and Massachusetts.
As of the Cut-off Date, the Mortgage Pool consisted of approximately 1,301
Mortgage Loans with an aggregate Scheduled Principal Balance (as defined herein)
of approximately $351,989,605 (subject to a permitted variance of up to 10%)
(the "Cut-off Date Scheduled Principal Balance"). All of the Mortgage Loans were
originated by or on behalf of, or were acquired by Countrywide Home Loans, Inc.,
and sold directly or indirectly on a servicing retained basis to BankUnited in
or after May 1997.
The interest rate borne by each Mortgage Loan (each, a "Mortgage
Rate") is adjusted annually to equal the weekly average yield on U.S.
Treasury Securities, adjusted to a constant maturity of one year (the
"One-Year Constant Maturity Treasury Index") plus a fixed
percentage set forth in or computed in accordance with the related
note (a "Gross Margin") generally subject to rounding and to certain
other limitations (including a maximum lifetime Mortgage Rate (a
"Maximum Lifetime Mortgage Rate") of 6% above the initial
Mortgage Rate and a maximum upward or downward adjustment on
each Interest Adjustment Date (as defined herein) of 2%, and the
Monthly Payment (as defined herein) is adjusted annually, all as
more fully described under "Description of the Mortgage Loans"
herein. None of the Mortgage Loans permit negative amortization.
See "Description of the Mortgage Loans -- General" and "Yield and
Prepayment Considerations" herein as Annex A hereto.
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Set forth below is certain information regarding the Mortgage Loans
and the related Mortgaged Properties as of the Cut-off Date (except
as otherwise indicated). 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 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.
Number of Mortgage Loans.........................................1,301
Aggregate Scheduled Principal Balance.....................$351,989,605
Minimum Scheduled Principal Balance............................$27,587
Maximum Scheduled Principal Balance...........................$871,652
Average Scheduled Principal Balance...........................$270,553
Minimum Mortgage Rate.................................5.000% per annum
Maximum Mortgage Rate.................................9.125% per annum
Weighted Average Mortgage Rate........................6.489% per annum
Weighted Average Net Rate.............................6.202% per annum
Minimum Gross Margin............................................2.500%
Maximum Gross Margin............................................3.875%
Weighted Average Gross Margin...................................2.902%
Weighted Average Maximum Lifetime Mortgage
Rate...............................................12.330% per annum
Minimum Remaining Term to Stated Maturity...................239 months
Maximum Remaining Term to Stated Maturity...................359 months
Weighted Average Remaining Term to
Stated Maturity ..........................................352 months
Weighted Average Original Loan-to-Value Ratio...................72.04%
Loan Type (by Scheduled Principal Balance)
Conventional..................................................87.18%
Conventional with Primary Mortgage Insurance..................12.82%
Delinquency Status (as of January 31, 1998)
current.......................................................99.50%
30 days delinquent.............................................0.50%
Net Rate................................ The "Net Rate" for each Mortgage Loan is the Mortgage Rate less the
Master Servicing Fee (as defined herein) attributable thereto
(expressed as a per annum rate). It is expected that with
respect to each Distribution Date, the Master Servicing Fee for
each Mortgage Loan will be at a rate of 0.375% per annum of the
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Outstanding Principal Balance of each Mortgage Loan as of the
Due Date in the month preceding the month in which such
Distribution Date occurs (provided that the Master Servicing
Fee during the first year following origination of certain of
the Mortgage Loans is either 0.125% or 0.250% per annum) plus
an amount up to 1.00% per annum with respect to certain
Mortgage Loans to cover lender paid primary mortgage insurance
premiums. For any Distribution Date, the "Due Date" for a
Mortgage Loan will be the first day of the month in which such
Distribution Date occurs.
The "Scheduled Principal Balance" of a Mortgage Loan with respect
to a Distribution Date is (i) the unpaid principal balance of
such Mortgage Loan as of the close of business on the 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.
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 March 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. On each Distribution Date, (i) the Senior Certificates
will be entitled to receive all amounts distributable to them
for such Distribution Date before any distributions are made to
the Classes of Subordinate Certificates on such date and (ii) as
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among the Subordinate Certificates, Class B-1 Certificates
will be entitled to receive all amounts distributable to them
for such Distribution Date before any distributions are made on
such date on Class B-2 Certificates. In general, an amount
equal to the Available Funds (as defined herein) will be
allocated FIRST, to pay interest on and then to reduce the
Current Principal Amounts (as defined below) of the Classes of
Senior Certificates; and SECOND, to pay interest on and then
principal of each Class of Subordinate Certificates in the
order of their numerical Class designations. The Available
Funds will be allocated among the Classes of Certificates in
the manner set forth in "Description of the Certificates --
Distributions on the Certificates -- Allocation of Available
Funds" herein. No distribution of interest or principal will
be made on any Class of Subordinate Certificates on any
Distribution Date until all distributions of interest and
principal have been made on such date on each Class of
Certificates having a higher priority with respect thereto.
INTEREST. Interest will accrue during the preceding Interest Accrual
Period for each Class at the variable rate for such Class
determined as set forth 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 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, commencing in
February 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 in an aggregate amount
in each case 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, after the Distribution Date on
which the Current Principal Amounts of all 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
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would have been allocated thereto in the absence of such
shortfalls. The interest portion of Realized Losses with respect
to all Mortgage Loans will be allocated first to the Subordinate
Certificates in reverse order of their numerical designations
commencing with the Class B-2 Certificates and following the
Cross-Over Date, such Realized Losses will be allocated to the
Classes of Senior Certificates (PRO RATA between the Class A and
Class R Certificates based on the amount of interest otherwise
due). See "Description of the Certificates -- Distributions on the
Certificates -- Allocations of Losses; Subordination" herein.
Any Interest Shortfalls resulting from prepayments during the
related Prepayment Period will be offset by the Master Servicer
to the extent such Interest Shortfalls do not exceed the Master
Servicing Fee (other than the portion used to cover lender
paid primary mortgage insurance premiums) in connection with
such Distribution Date (the amount of the Master Servicer's fee
so used, a "Compensating Interest Payment"). 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
Certificate on account of principal, (ii) the principal portion
of all Realized Losses previously allocated to such Certificate
taking account of the 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 Subordinate
Certificate Writedown Amount (as defined herein) for previous
Distribution Dates.
PRINCIPAL. Principal will be distributable monthly on the Senior
Certificates of each Class on each Distribution Date in an
aggregate amount equal to the Senior Optimal Principal Amount
(as defined herein) for such Distribution Date to the extent of
Available Funds subject to certain limited exceptions, for such
Distribution Date, remaining after distributions of interest are
made on such Senior Certificates on such date.
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 Available Funds remaining
after (i) distributions of interest and principal have been made on
each Class of Senior Certificates entitled thereto as described
herein and the Class of Subordinate Certificates, if any, with a
lower numerical Class designation than such Class and
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(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 Certificate................... In addition to distributions of principal and interest, the holder
of the Residual Certificate will be entitled to receive (i) the
amount, if any, of Available Funds remaining on any
Distribution Date after distributions of interest and principal
are made on the Certificates on such date and (ii) the
proceeds, if any, of the assets of the Trust remaining after
the Current Principal Amount of each Class of Certificates has
been reduced to zero. It is not anticipated that any material
assets will be remaining for such distributions at any such
time.
Credit Enhancement --
General.............................. In general, credit enhancement for the Senior Certificates will be
provided by the Subordinate Certificates and credit enhancement
for the Class B-1 Certificates will be provided by the Class
B-2 Certificates.
Credit Enhancement --
Subordination........................ 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 of the Class of Subordinate Certificates, if
any, having a lower numerical Class designation than such
Class. The subordination of the Subordinate Certificates to
the Senior Certificates and the further subordination among the
Subordinate Certificates are each intended to increase the
likelihood of timely receipt by the holders of 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. Notwithstanding the foregoing, in certain
circumstances, the amount of available subordination may be
exhausted and shortfalls in distributions on the Offered
Certificates could result. Holders of Senior Certificates will
bear their share of any Realized Losses with respect to
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 Amount of
the Subordinate Certificates and of the Other Certificates which
constitute a portion of the Subordinate Certificates will equal
approximately 5.25% and 3.75%, respectively, of the aggregate
Current Principal Amounts of the Certificates.
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In addition, to extend the period during which the Subordinate
Certificates remain available as credit enhancement for the
Senior Certificates, the entire amount of any prepayments and
certain other unscheduled recoveries of principal with respect
to the Mortgage Loans will be allocated to the Senior
Certificates to the extent described herein during the first
ten years after the Closing Date (except if certain loss and
delinquency tests are met and the original Credit Support
Percentage (as defined herein) doubles) (with such allocation
being subject to reduction over an additional five year period
thereafter or sooner if such tests are met as described
herein). This allocation has the effect of accelerating the
amortization of the Senior Certificates as a whole while, in
the absence of losses in respect of the Mortgage Loans,
increasing the percentage interest in the principal balance of
the Mortgage Loans evidenced by the Subordinate Certificates.
See "Description of the Certificates -- Distributions on the
Certificates" and " -- Subordination" herein.
Monthly Advances........................ The Master Servicer will be obligated to advance delinquent
scheduled payments of principal and interest on Mortgage Loans,
under certain circumstances (each such advance, a "Monthly
Advance"). See "The Pooling and Servicing Agreement -- Monthly
Advances" herein.
Allocation of Losses.................... Subject to the limitations set forth below, Realized Losses on the
Mortgage Loans will be allocated as follows: first, among the
Subordinate Certificates in the inverse order of their
numerical Class designations beginning with the Class B-2
Certificates and second, Realized Losses will be allocated to
the Class A Certificates until, in each case, the Current
Principal Amount of each such Class of Certificates is reduced
to zero. See "Description of the Certificates -- Allocation of
Losses; Subordination" herein.
The Offered Certificates are not insured or guaranteed by a
governmental agency or instrumentality or by BSMSI, the
Trustee, BankUnited, the Master Servicer, or any affiliate thereof
or any other person.
Yield and Prepayment
Considerations....................... GENERAL CONSIDERATIONS. The yield to maturity of each Class of
Certificates will be affected by the amount and timing of
principal payments on the Mortgage Loans, the allocation of
Available Funds to such Class of Certificates, the Pass-Through
Rate for such Class of Certificates (which in turn will be
affected by the level of the One-Year Constant Maturity
Treasury Index on which the Mortgage Rates on the Mortgage
Loans are based) and the purchase price paid for such
Certificates. In addition, the yields to investors in the
Certificates will be adversely affected by Realized Losses and
Net Interest Shortfalls allocated thereto. The interaction of
the foregoing factors may have different
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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 level of
the One-Year Constant Maturity Treasury Index, 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 of such items 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.
ADJUSTABLE RATE MORTGAGES. All of the Mortgage Rates, subject to
certain limitations, will adjust annually in reference to changes in
the level of the One-Year Constant Maturity Treasury Index. As
a result, the yield to maturity on each Class of Certificates will be
sensitive to the level of such index which may not correlate with
mortgage interest rates generally. It is possible that lower
prevailing mortgage interest rates, which might be expected to
result in faster prepayments, could occur concurrently with an
increase in the level of such index.
Adjustments of the Mortgage Rates on all Mortgage Loans are
subject to rounding (as described herein) and to a Maximum
Lifetime Mortgage Rate, and maximum limitations applicable to
increases or decreases of the Mortgage Rate on such Interest
Adjustment Date, all as set forth in the related Notes.
MORTGAGE LOAN PAYMENTS. If prevailing mortgage rates fall
significantly below the Mortgage Rates on the Mortgage Loans,
the Mortgage Loans are likely to be subject to higher prepayment
rates than if prevailing rates remain at or above the Mortgage
Rates on the Mortgage Loans. Other factors affecting
prepayments of Mortgage Loans include changes in Mortgagors'
housing needs, job transfers, unemployment, net equity in the
Mortgaged Properties and servicing decisions. Amounts received
by virtue of liquidations of Mortgage Loans, repurchases of
Mortgage Loans upon breach of representations or warranties
and optional termination of the Trust also affect the receipt of
principal on the Mortgage Loans. In general, the Mortgage
Loans may be prepaid at any time without penalty.
TIMING OF PAYMENTS AND DISTRIBUTIONS. Unlike certain
corporate bonds, the timing and amount of principal payments on the
Certificates are not fixed because they are generally determined
by the timing and amount of principal payments on the Mortgage
Loans. The timing of payments on the Mortgage Loans may
significantly affect an investor's yield. In general, the earlier a
prepayment of principal on the Mortgage Loans, the greater will
be the effect on an investor's yield to maturity. As a result, the
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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 Pass-Through Rate and
applicable 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 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 each Class of Certificates will equal the weighted
average of the Net Rates of the Mortgage Loans,
disproportionate prepayments of Mortgage Loans with higher
Net Rates will adversely affect the yield on each Class of
Certificates. Mortgage Loans with higher Net Rates will have
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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 in the case of
the Class B-2 Certificates, the Class B-1 Certificates. 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 each Mortgage Loan will be allocated
solely to the Senior Certificates during at least the first ten years
after the Closing Date (except if certain loss and delinquency
tests are met and the Original Credit Support Percentage
doubles), and then such allocation will decrease subject to
meeting certain loss and delinquency tests during the next five
years (or sooner if such tests are met) until the Certificates share
PRO RATA in such allocations. Consequently, unless certain tests
are met, during not less than the first 15 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 related Mortgage Loans evidenced by
the Subordinate Certificates.
To the extent that Realized Losses are incurred on Mortgage Loans,
the allocation of such Realized Losses to the Subordinate
Certificates will have the effect of increasing the percentage
interest in the Mortgage Loans evidenced by the Senior
Certificates. See "Description of Certificates -- Distributions of
Principal" and "-- Allocation of Losses; Subordination" herein.
RESIDUAL CERTIFICATE. The Holder of the Residual Certificate is
entitled to receive distributions of principal and interest as
described herein. However, the holder of such Certificate may
have tax liabilities with respect to its Certificate 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. Each
Certificateholder will receive monthly reports pertaining to
the Certificates as described under "The Pooling and Servicing
Agreement -- Reports to Certificateholders" herein. There are a
limited number of sources which provide certain information
about mortgage pass-through certificates in the secondary
market, and there can be no assurance that any of these sources
will provide information about the Certificates. Investors should
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consider the effect of limited information on the
liquidity of the Certificates.
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,
the Master Servicer or its designee may repurchase from the
Trust all Mortgage Loans remaining outstanding and any REO
Property remaining in the Trust at the purchase price set forth
in the Agreement. The Trust may also be terminated and the
Certificates retired on any Distribution Date upon the
determination by BSMSI, based upon an opinion of counsel, that
the REMIC status of certain assets of the Trust 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 and certain
other assets owned by the Trust as a real estate mortgage
investment conduit ("REMIC") for federal income tax purposes.
The Certificates (other than the Class R Certificate) will be
designated as regular interests in the REMIC and are herein
referred to as the "Regular Certificates" or the "REMIC Regular
Certificates." The Class R Certificate will be designated as
the residual interest in the REMIC (the "Residual Certificate"
or the "REMIC Residual Certificate"). See "Federal Income Tax
Considerations" herein and "Certain Federal Income Tax
Consequences" in the Prospectus and "Restrictions on Purchase
and Transfer of the Residual Certificate" herein.
ERISA Considerations.................... The Certificates, or interests therein, will not be offered for
sale and may not be transferred to any investor who is, or who
is acquiring such Certificate directly or indirectly for, on
behalf of or with the assets of, an employee benefit plan or
other retirement arrangement subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")
and/or Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"). See "ERISA Considerations" herein.
Restrictions on Purchase and
Transfer of the Residual
Certificate.......................... The Residual Certificate is 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 Certificate. Further, neither the
Residual Certificate nor any beneficial interest therein may be
sold or otherwise
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transferred without the express written consent of The Bank of
New York, acting as agent for the holder of the Residual
Certificate 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 Certificate" herein. Finally, unless the Tax Matters
Person and BSMSI consent in writing (which consent may be
withheld in the Tax Matters Person's and BSMSI's sole
discretion), the 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. For certain
additional tax-related restrictions on the transfer of the Residual
Certificate, 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 rating set forth below from Moody's
Investors Service, Inc. ("Moody's"). Moody's is sometimes
referred to herein as the "Rating Agency."
Rating
----------------------
CLASS
-----
Class A Aaa
Class B-1 Aa2
Class R Aaa
The rating 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 Agency. See "Rating" herein.
BSMSI has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agency. 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 ratings assigned by
such other rating agency to the Offered Certificates could be
lower than the respective ratings assigned by the Rating Agency.
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
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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 Class of Certificates will not constitute "mortgage
related securities" under SMMEA (the "Non-SMMEA
Certificates"). The appropriate characterization of the
Non-SMMEA Certificates under various legal investment
restrictions, and thus the ability of investors subject to
these restrictions to purchase Non-SMMEA Certificates, may be
subject to significant interpretive uncertainties.
All investors whose investment activities are subject to legal
investment laws and regulations or to review by certain
regulatory authorities may be subject to restrictions on
investment in the Certificates. Any such institution should
consult its own legal advisors in determining whether and to
what extent there may be restrictions on its ability to invest
in the Certificates. See "Legal Investment" herein and in the
Prospectus.
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DESCRIPTION OF THE MORTGAGE LOANS
The Mortgage Pool will consist of approximately 1,301 conventional
Mortgage Loans which are first lien, fully amortizing, adjustable rate mortgages
with original terms of approximately 30 years secured by one- to four-family
residences, individual condominium units and units in planned unit developments,
located primarily in the States of Michigan, Illinois, Colorado and
Massachusetts. The Cut-off Date Scheduled Principal Balance set forth herein is
subject to a permitted variance of up to 10%. The following paragraphs and the
tables set forth in Annex A set forth additional information with respect to the
Mortgage Pool*.
The Mortgage Loans were originated by or on behalf of, or were acquired
by, Countrywide Home Loans Inc. (in such capacity, "Countrywide"), and were
subsequently sold directly or indirectly on a servicing retained basis to
BankUnited in or after May 1997. Concurrently with the closing, BSMSI will
acquire the Mortgage Loans from BankUnited. All of the Mortgage Loans have
adjustable rates of interest, with a weighted average Mortgage Rate of 6.489%
per annum based on their Scheduled Principal Balances as of the Cut-off Date. No
Mortgage Loan provides for negative amortization and no Mortgage Loan was more
than 30 days delinquent as of January 31, 1998. All Mortgage Loans with
loan-to-value ratios in excess of 80% have primary mortgage insurance. All of
the Mortgage Loans are assumable upon sale or transfer of the Mortgaged
Property.
UNDERWRITING STANDARDS. All of the Mortgage Loans met credit, appraisal
and underwriting standards acceptable to Countrywide. Such underwriting
standards are applied to evaluate the prospective borrower's credit standing and
repayment ability and the value and adequacy of the mortgaged property as
collateral. These standards are applied in accordance with applicable federal
and state laws and regulations.
Countrywide's underwriting standards are applied by or on behalf of
Countrywide to evaluate the prospective borrower's credit standing and repayment
ability and the value and adequacy of the mortgaged property as collateral.
Under such standards, a prospective borrower must generally demonstrate that the
ratio of the borrower's monthly housing expenses (including principal and
interest on the proposed mortgage loan and, as applicable, the related monthly
portion of property taxes, hazard insurance and mortgage insurance) to the
borrower's monthly gross income and the ratio of total monthly debt to the
monthly gross income (the "debt-to-income" ratios) are within certain limits. If
the prospective borrower has applied for an adjustable rate loan and the
Loan-to-Value Ratio is less than or equal to 75%, the interest component of the
monthly housing expense is calculated based on the initial loan interest rate,
if the Loan-to-Value Ratio exceeds 75%, the interest component of the monthly
housing expense calculation is based on the maximum possible interest rate
payable in the second year of the mortgage loan. In general, the "Loan-to-Value
Ratio" of a mortgage loan at any given time is the fraction, expressed as a
percentage, the numerator of which is the original principal balance of the
related mortgage loan and the denominator is the value of the related mortgaged
property, which is the lesser of the appraisal value thereof obtained at the
time of origination and the sale price of such property. The maximum acceptable
debt-to-income ratio, which is determined on a loan-by-loan basis varies
depending on a number of underwriting criteria, including the Loan-to-Value
Ratio, loan purpose, loan amount and credit history of the borrower. In addition
to meeting the debt-to-income ratio guidelines, each prospective borrower is
required to have sufficient cash resources to pay the down payment and closing
costs. Certain exceptions to Countrywide's underwriting guidelines are made in
the event that compensating factors are demonstrated by a prospective borrower.
- ----------
* 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, Mortgate Loans may be removed as a
result of (i) Principal Prepayments thereof in full prior to February 1, 1998,
(ii) requirement's of Moody's 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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The nature of the information which a borrower is required to disclose
and whether such information is verified depends, in part, on the documentation
program used in the origination process. In general under the Full Documentation
Loan Program (the "Full Documentation Program"), each prospective borrower is
required to complete an application which includes information with respect to
the applicant's assets, liabilities, income, credit history, employment history
and other personal information. Self-employed individuals are generally required
to submit their two most recent federal income tax returns. The underwriter
generally verifies the information contained in the application relating to
employment, income, assets or mortgages.
Countrywide also originates or acquires mortgage loans pursuant to
alternative sets of underwriting criteria. Those which pertain to the Mortgage
Loans are its Alternative Documentation Loan Program (the "Alternative
Documentation Program"), its Reduced Documentation Loan Program (the "Reduced
Documentation Program") and its No Income/No Asset Documentation Loan Program
(the "No Income/No Asset Documentation Loan Program"). The Alternative
Documentation Program permits a borrower to provide W-2 forms instead of tax
returns covering the most recent two years, permits bank statements in lieu of
verification of deposits and permits alternative methods of employment
verification. The Reduced Documentation and No Income/No Asset Documentation
Programs place relatively more emphasis on property underwriting and, therefore,
certain credit underwriting documentation concerning income and employment and
asset verification therefore is waived.
Under the Reduced Documentation Program, Countrywide obtains from the
prospective borrowers either a verification of deposit or bank statements for
the most recent two-month period preceding the loan application. Mortgage loans
underwritten under the Reduced Documentation Program generally are limited to
self-employed borrowers with credit histories that demonstrate an established
ability to repay indebtedness in a timely fashion. The maximum Loan-to-Value
Ratio (including secondary financing), which is more restrictive than
Countrywide's standard underwriting, ranges up to a 70% maximum. The maximum
loan amount is $650,000.
The No Income/No Asset Documentation Program requires no verification
of assets or income. This program is not limited to self employed borrowers but
rather requires continuous employment with the same employer or in the same
industry for a certain period of time (1 year). The maximum loan-to-value ratio
(including secondary financing), which is more restrictive than Countrywide's
standard underwriting, ranges up to a 75% maximum. The maximum loan amount is
$1,000,000.
Countrywide obtains a credit report relating to the applicant from a
credit reporting company. The credit report typically contains information
relating to such matters as credit history with local and national merchants and
lenders, installment debt payments and any record of defaults, bankruptcy,
dispossession, suits or judgments. All adverse information in the credit report
is required to be explained by the prospective borrower to the satisfaction of
the lending officer.
Except with respect to certain programs which do not pertain to any of
the Mortgage Loans, Countrywide obtains appraisals from independent appraisers
or appraisal services for properties that are to secure mortgage loans. Such
appraisers inspect and appraise the subject property and verify that such
property is in acceptable condition. Following each appraisal, the appraiser
prepares a report which includes a market data analysis based on recent sales of
comparable homes in the area and, when deemed appropriate, a replacement cost
analysis based on the current cost of constructing a similar home. All
appraisals are required to conform to FNMA or FHLMC appraisal standards then in
effect. Every independent appraisal is reviewed by a Countrywide underwriter
before the loan is funded.
Countrywide requires title insurance on all of its mortgage loans
secured by liens on real property. Countrywide also requires that fire and
extended coverage casualty insurance be maintained on the secured property in an
amount at least equal to the principal balance of the related single-family loan
or the replacement cost of the property, whichever is less.
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Countrywide has stated that it does not maintain separate records
regarding the delinquency or foreclosure rates of mortgage loans underwritten
under the Alternative Documentation Program, the Reduced Documentation Program
or the No Income/No Asset Documentation Programs, as compared to mortgage loans
underwritten pursuant to its Full Documentation Program.
ADJUSTABLE MORTGAGE LOANS. All of the Mortgage Loans are adjustable
rate mortgage loans evidenced by a note bearing interest at a Mortgage Rate
which is adjusted annually to equal an index plus a fixed percentage set forth
in or computed in accordance with the related note (the "Gross Margin"), the sum
of which is rounded to the nearest one-eighth of one percentage point (0.125%),
as specified in the related note, subject, however, to certain limitations
described below. The index on which each such adjustment will be based is the
One-Year Constant Maturity Treasury Index. The value of the index on which each
adjustment is based generally corresponds to that available one month prior to
the date on which such adjustment is made (each such date, an "Interest
Adjustment Date"). If the index described herein becomes unavailable, the Master
Servicer on behalf of the Trustee will, consistent with the terms of the notes
and Mortgages, select an alternative index based on comparable information and
such alternative index will become the index.
With respect to all of the Mortgage Loans, adjustments of the Mortgage
Rates are subject to rounding (as described above) and to a maximum Mortgage
Rate of 6% above the initial Mortgage Rate (the "Maximum Lifetime Mortgage
Rate") and to maximum limitations applicable to increases or decreases of the
Mortgage Rate on such Interest Adjustment Date of 2%, all as set forth in the
related Note.
Under the terms of certain of the Notes, the borrower has the option at
certain times and under certain conditions to convert the Mortgage Rate to a
fixed rate from a variable rate (each such loan, a "Convertible Mortgage Loan").
Approximately 2.81%% of the Mortgage Loans, are, as of the Cut-off Date,
convertible to fixed rate. The option to convert to a fixed Mortgage Rate may be
exercised by the borrower on the date or dates specified in the related Note.
The conversion option typically may not be exercised if the borrower is in
default under the terms of the related Note or Mortgage. The Master Servicer
shall purchase each mortgage loan which has been converted at a price equal to
the Repurchase Price (as defined herein) therefor.
The monthly payment amount due on the related Mortgage Loan (the
"Monthly Payment") from the borrower is generally adjusted for the Due Date
following the first Interest Adjustment Date or another date specified in the
related Note and at annual intervals thereafter, all as specified in the related
Note, to an amount that would fully amortize the remaining principal balance of
the Mortgage Loan over its remaining amortization term on a level-debt service
basis, generally at the Mortgage Rate in effect on the related Interest
Adjustment Date or during the previous month.
ONE-YEAR CONSTANT MATURITY TREASURY INDEX. The index with respect to all of the
Mortgage Loans is the weekly average yield on U.S. Treasury securities, adjusted
to a constant maturity of one year (the "One-Year Constant Maturity Treasury
Index").
Yields on U.S. Treasury securities are estimated from the U.S.
Treasury's daily yield curve. This curve, which relates the yield on a security
to its time to maturity, is based on the closing market bid yields on
actively-traded U.S. Treasury securities in the over-the-counter market. These
market yields are calculated from composites of quotations reported by five
leading U.S. Treasury securities dealers to the Federal Reserve Bank of New
York. The constant yield values are read from the yield curve at fixed
maturities. This method permits, for example, estimations of the yield for a
one-year maturity even if no outstanding security has exactly one year remaining
to maturity. Such yields of different U.S. Treasury securities are generally
published in Federal Reserve Statistical Release No. H.15 (519).
Listed below are some of the historical values of the One-Year Constant
Maturity Treasury Index since January 1988:
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YEAR*
---------------------------------------------------------------------------------------------
MONTH 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January.......... 6.99% 9.05% 7.92% 6.64% 4.15% 3.50% 3.54% 7.05% 5.09% 5.61%
February......... 6.64 9.25 8.11 6.27 4.29 3.39 3.87 6.70 4.94 5.53
March............ 6.71 9.57 8.35 6.40 4.63 3.33 4.32 6.43 5.34 5.80
April............ 7.01 9.36 8.40 6.24 4.30 3.24 4.82 6.27 5.54 5.99
May.............. 7.40 8.98 8.32 6.13 4.19 3.36 5.31 6.00 5.64 5.87
June............. 7.49 8.44 8.10 6.36 4.17 3.54 5.27 5.64 5.81 5.69
July............. 7.75 7.89 7.94 6.31 3.60 3.47 5.48 5.59 5.85 5.54
August........... 8.17 8.18 7.78 5.78 3.47 3.44 5.56 5.75 5.67 5.56
September........ 8.09 8.22 7.76 5.57 3.18 3.36 5.76 5.62 5.83 5.52
October.......... 8.11 7.99 7.55 5.33 3.30 3.39 6.11 5.59 5.55 5.46
November......... 8.48 7.77 7.31 4.89 3.68 3.58 6.54 5.43 5.42 5.46
December......... 8.99 7.72 7.05 4.38 3.71 3.61 7.14 5.31 5.47 5.53
</TABLE>
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* Figures are averages of daily rates and do not necessarily correspond
to the One-Year Constant Maturity Treasury Index values determined as
provided in any related Notes.
THE MASTER SERVICER
GENERAL. The Master Servicer will service the Mortgage Loans in
accordance with the terms set forth in the Agreement. The Master Servicer may
perform any of its obligations under the Agreement through one or more
subservicers. Notwithstanding any such subservicing arrangement, the Master
Servicer will remain liable for its servicing duties and obligations under the
Agreement as if the Master Servicer alone were servicing the Mortgage Loans.
THE MASTER SERVICER. Countrywide Home Loans, Inc. (the "Master
Servicer"), a New York corporation and a subsidiary of Countrywide Credit
Industries, Inc., will act as Master Servicer for the Mortgage Loans pursuant to
the Agreement. The Master Servicer is engaged primarily in the mortgage banking
business, and as such, originates, purchases, sells and services mortgage loans.
The Master Servicer originates mortgage loans through a retail branch system and
through mortgage loan brokers and correspondents nationwide. The Master
Servicer's mortgage loans are principally first-lien, fixed or adjustable rate
mortgage loans secured by single-family residences.
At November 30, 1997, the Master Servicer provided servicing for
approximately $175.2 billion aggregate principal amount of mortgage loans,
substantially all of which are being serviced for unaffiliated persons.
The principal executive offices of the Master Servicer are located at
4500 Park Granada, Calabasas, California 91302.
The Master Servicer initially services substantially all of the
mortgage loans it originates or acquires. In addition, it has purchased in bulk
the rights to service mortgage loans originated by other lenders. Servicing
includes collecting and remitting loan payments, accounting for principal and
interest, holding escrow (impound) funds for payment of taxes and insurance,
making inspections as required of the mortgaged premises, contacting delinquent
mortgagors, supervising foreclosures in the event of unremedied defaults and
generally administering the loans, for which the Master Servicer receives
servicing fees. The Master Servicer has in the past and may in the future sell
to other mortgage bankers a portion of its portfolio of loan servicing rights.
MORTGAGE LOAN PRODUCTION. The following table sets forth, by number and
dollar amount of mortgage loans, the Master Servicer's residential mortgage loan
production for the periods indicated.
S-22
<PAGE>
<TABLE>
Year to Date as
Year Ended February 28 (29), of November 30,
--------------------------------------------------------------
1994 1995 1996 1997 1997
--------------- -------------- --------------- --------------- -------------------
(Dollar Amounts in Millions, Except Average Loan Balance)
<S> <C> <C> <C> <C> <C>
FHA/VA Loans
Number of Loans.......... 67,154 72,365 125,127 143,587 119,004
Volume of Loans.......... $ 5,985.5 $ 6,808.3 $12,259.3 $13,657.1 $11,510.3
Conventional Loans
Number of Loans.......... 315,699 175,823 191,534 190,250 156,378
Volume of Loans.......... $46,473.4 $ 20,958.7 $21,883.4 $22,676.2 $19,003.0
Other Loans
Number of Loans - 2,147 9,927 29,214 37,818
Volume of Loans - $ 99.2 $ 441.0 $ 1,477.5 $ 2,141.0
Total Loans
Number of Loans.......... 382,853 250,335 326,588 363,051 313,200
Volume of Loans.......... $52,458.9 $ 27,866.2 $34,583.7 $37,810.8 $32,654.3
Average Loan Balance......... $ 137,000 $ 111,000 $ 106,000 $ 104,000 $ 104,000
</TABLE>
DELINQUENCY AND FORECLOSURE EXPERIENCE. Historically, a variety of
factors, including the appreciation of real estate values, have limited the
Master Servicer's loss and delinquency experience on its portfolio of serviced
mortgage loans. There can be no assurance that factors beyond the Master
Servicer's control, such as national or local economic conditions or downturns
in the real estate markets of its lending areas, will not result in increased
rates of delinquencies and foreclosure losses in the future.
Over the last several years, there has been a general deterioration of
the real estate market and weakening of the economy in several regions of the
country. The general deterioration of the real estate market has been reflected
in increases in delinquencies of loans secured by real estate, slower absorption
rates of real estate into the market and lower sales prices for real estate. The
general weakening of the economy has been reflected in decreases in the
financial strength of borrowers and decreases in the value of collateral serving
as security for loans. If the real estate market and economy continue to
decline, the Master Servicer may experience an increase in delinquencies on the
loans it services and higher net losses on liquidated loans.
The following table summarizes the delinquency and foreclosure
experience, respectively, on the dates indicated, of conventional mortgage loans
serviced or master serviced by the Master Servicer. The delinquency and
foreclosure percentages may be affected by the size and relative lack of
seasoning of the servicing portfolio which increased from approximately $84.6
billion at February 28, 1994, to approximately $113.1 billion at February 28,
1995 to approximately $136.8 billion at February 29, 1996, to approximately
$158.6 billion at February 28, 1997 and to approximately $175.2 billion at
November 30, 1997. Accordingly, the information should not be considered as a
basis for assessing the likelihood, amount or severity of delinquency or losses
on the Mortgage Loans and no assurances can be given that the foreclosure and
delinquency experience presented in the table below will be indicative of such
experience on the Mortgage Loans:
S-23
<PAGE>
<TABLE>
At
At February 28 (29), November 30,
-----------------------------------------
1994 1995 1996 1997 1997
---- ---- ---- ---- ----
Delinquent Mortgage Loans and Pending Foreclosures at
period End(1)
<S> <C> <C> <C> <C> <C>
30-59 days..................................... 1.82% 1.80% 2.13% 2.26% 3.44%
60-89 days..................................... 0.28 0.29 0.48 0.52 0.30
90 days or more (excluding pending foreclosures) 0.39 0.42 0.59 0.66 0.54
---- ---- ---- ---- ----
Total of delinquencies.................... 2.49% 2.51% 3.20% 3.44% 4.28%
==== ==== ==== ==== ====
Foreclosures pending............................... 0.29% 0.29% 0.49% 0.71% 0.62%
==== ==== ==== ==== ====
Total delinquencies and foreclosures pending....... 2.78% 2.80% 3.69% 4.15% 4.90%
==== ==== ==== ==== ====
</TABLE>
- ----------
(1) As a percentage of the total number of loans serviced excluding loans
subserviced for others.
S-24
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following summaries describing certain provisions of the
Certificates do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, the Prospectus and the provisions of the
Agreement relating to the Certificates offered hereby.
GENERAL
The Mortgage Pass-Through Certificates, Series 1998-3 (the
"Certificates") will consist of the classes of Certificates offered hereby (the
"Offered Certificates") in addition to the Certificates (the "Other
Certificates"), which are not being offered hereby.
The Certificates will evidence in the aggregate the entire beneficial
ownership interest in the Trust. The Trust will consist of (i) the Mortgage
Loans, (ii) such assets as from time to time are identified as deposited in
respect of the Mortgage Loans in the Protected Account (as defined herein)
established by the Master Servicer for the collection of payments on the
Mortgage Loans and in the Certificate Account (as defined herein) 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 Mortgage Insurance
Policies (as defined herein) 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"). Regular Certificates, and
beneficial interests in Book-Entry Certificates may be issued or held by
investors in minimum denominations of $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 distributions,
notices, reports and statements to holders of Book-Entry Certificates shall
refer to distributions, notices, reports and statements to DTC or Cede, as the
registered holder of the Book-Entry Certificates, as the case may be, for
distribution to Certificate Owners in accordance with DTC procedures.
The Class R Certificate will each be issued in certificated
fully-registered form in a single certificate of $100.
Distributions of principal and interest as set forth below initially
will be made by the Trustee to Cede, as the registered holder of the Book-Entry
Certificates, and to the holders 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.
S-25
<PAGE>
A "Business Day" is generally any day other than a Saturday, a Sunday
or a day on which the New York Stock Exchange is closed or on which banking
institutions in New York City or California are authorized or obligated by law
or executive order to be closed.
BOOK-ENTRY REGISTRATION
DTC is a limited purpose trust company organized under the laws of the
State of New York and is a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934. DTC was created to hold securities for its participating
organizations ("Participants") and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Certificate Owners that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants and
Indirect Participants. In addition, Certificate Owners will receive all
distributions of principal and interest on the Book-Entry Certificates through
Participants. Under a book-entry format, Certificate Owners may experience some
delay in their receipt of payments, since such payments will be forwarded to
Cede, as nominee for DTC. DTC will forward such payments to its Participants,
which thereafter will forward them to Indirect Participants or Certificate
Owners. It is anticipated that, except as provided below under " --Definitive
Certificates," the only "Certificateholder" with respect to the Book-Entry
Certificates will be Cede, as nominee for DTC. Certificate Owners will not be
recognized by the Trustee as Certificateholders, as such term is used in the
Agreement, and Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC will be required to make book-entry
transfers of Book-Entry Certificates among Participants and to receive and
transmit distributions of principal of, and interest on, Book-Entry
Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Book-Entry Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Certificate Owners. Accordingly, although,
Certificate Owners will not possess physical certificates, the Rules provide a
mechanism by which Participants and Certificate Owners will receive payments and
will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, and on behalf of certain banks, the ability of
a Certificate Owner to pledge Book-Entry Certificates to persons or entities
that do not participate in the DTC system, or to otherwise act with respect to
such Book-Entry Certificates, may be limited due to the absence of physical
certificates for such Book-Entry Certificates.
DTC has advised BSMSI that it will take any action permitted to be
taken by a holder of Book-Entry Certificates under the Agreement only at the
direction of one or more Participants to whose accounts with DTC the Book-Entry
Certificates are credited. Additionally, DTC has advised BSMSI that it will take
such action where the consent of specified percentages of the Book-Entry
Certificates is required under the Agreement only at the direction of and on
behalf of Participants whose interests represent such specified percentages. DTC
may take conflicting actions on behalf of other Participants.
Neither BSMSI, the Master Servicer nor the Trustee will have any
liability for any aspect of the records relating to or payment made on account
of beneficial ownership interests of the Book-Entry Certificates held by Cede,
as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
S-26
<PAGE>
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 $25,000
principal amount 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 at the office or agency of the Trustee maintained for that purpose
in New York, New York. 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 101 Barclay Street,
12E, New York, New York 10286.
Available Funds
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 portion of Net Liquidation Proceeds) and all
previously undistributed payments on account of interest received on and after
the Cut-off Date and on or prior to the related Determination Date, (b) any
Monthly Advances (including Certificate Account Advances, as defined under "The
Pooling and Servicing Agreement -- Monthly Advances" herein) and Compensating
Interest Payments (as defined under "The Pooling and Servicing Agreement --
Servicing Compensation and Payment of Expenses" herein) by the Master Servicer
and (c) any amount reimbursed by the Trustee or the Master Servicer in
connection with losses on certain eligible investments, except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all Principal Prepayments and Liquidation Proceeds received
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 or Certificate Account Advances;
(v) amounts of Monthly Advances or Certificate Account Advances
determined to be nonrecoverable;
(vi) amounts of Master Servicing Fees for such Distribution Date;
S-27
<PAGE>
(vii) amounts of Trustee's Fees for such Distribution Date; and
(vii) amounts permitted to be withdrawn from the Certificate Account
pursuant to clauses (i) through (xi) described under the caption "The Pooling
and Servicing Agreement -- Certificate Account" herein.
Distributions on the Certificates
ALLOCATION OF AVAILABLE FUNDS. Interest and principal on the
Certificates will be distributed monthly on each Distribution Date commencing in
March 1998, in an aggregate amount equal to the Available Funds for such
Distribution Date.
On each Distribution Date, the Available Funds will be
distributed in the following order of priority:
FIRST, to the Class A Certificates and the Class R Certificate,
the Accrued Certificate Interest on each such Class for such
Distribution Date, any shortfall in available amounts being allocated
between such Classes in proportion to the amount of Accrued Certificate
Interest otherwise distributable thereon;
SECOND, to the Class A Certificates and the Class R Certificate,
any Accrued Certificate Interest thereon remaining undistributed from
previous Distribution Dates, to the extent of remaining Available
Funds, any shortfall in available amounts being allocated between such
Classes in proportion to the amount of such Accrued Certificate
Interest remaining undistributed for each such Class for such
Distribution Date;
THIRD, sequentially to the Class R Certificate and then to the
Class A Certificates, in reduction of the Current Principal Amounts
thereof, the Senior Optimal Principal Amount (as defined herein) for
such Distribution Date to the extent of remaining Available Funds,
until the Current Principal Amounts thereof have been reduced to zero;
FOURTH, sequentially, in the following order, to the Class B-1 and
Class B-2 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.
On each Distribution Date, Available Funds remaining after payment of
interest and principal to the Certificates entitled thereto, as described above,
will be distributed to the Residual Certificate. It is not anticipated that
there will be any significant amounts remaining for such distribution.
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 Pass-Through
Rate and applicable 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, 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
S-28
<PAGE>
such shortfalls. The interest portion of Realized Losses with respect to all
Mortgage Loans will be allocated first to the Subordinate Certificates in
reverse order of their numerical designations commencing with the Class B-2
Certificates, and following the Cross-Over Date, such Realized Losses will be
allocated to the Classes of Senior Certificates (PRO RATA between the Class A
and Class R Certificates based on the amount of interest otherwise due). 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
the 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 (as defined below) 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
Amounts (after giving effect to the distribution of principal and the allocation
of Realized Losses in reduction of the Current Principal Amounts of the
Certificates on such Distribution Date) of all of the Certificates exceeds (b)
the sum of the Scheduled Principal Balances of the Mortgage Loans on the first
day of the month of such Distribution Date. The Subordinate Certificate
Writedown Amount will be allocated to the Classes of Subordinate Certificates in
inverse order of their numerical Class designations, commencing with the Class
B-2 Certificates, until the Current Principal Amount of each such Class has been
reduced to zero and from and after the Cross-Over Date to the Class A
Certificates.
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
related Due 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 related Due Date
will result in a reduction of the Scheduled Principal Balance of the related
Mortgage Loan without a corresponding reduction of the Current Principal Amount
of any Certificate and (iii) the Relief Act limits, in certain circumstances,
the interest rate required to be paid by a Mortgagor in the military service, to
6% per annum. Interest Shortfalls resulting from prepayments in full or in part
in any calendar month will be offset by the Master Servicer on the Distribution
Date in the following calendar month to the extent that such Interest Shortfalls
do not exceed the Master Servicing Fee (other than the portion used to cover
lender paid primary mortgage insurance premiums) in connection with such
Distribution Date. No assurance can be given that the servicing compensation
available to cover Interest Shortfalls will be sufficient therefor. The amount
of the Master Servicing Fee used to offset such Interest Shortfalls is referred
to herein as "Compensating Interest Payments." Interest Shortfalls net of
Compensating Interest Payments are referred to herein as "Net Interest
Shortfalls."
If on any Distribution Date the Available Funds for a Class of Senior
Certificates is less than the Accrued Certificate Interest on such Class 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 such 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 entitled to such amounts on
subsequent Distribution Dates, to the extent of Available Funds after current
interest distributions as required herein. Any such amounts so
S-29
<PAGE>
carried forward will not bear interest. Shortfalls in interest payments will not
be offset by a reduction in the servicing compensation of the Master Servicer or
otherwise, except to the limited extent described above.
PRINCIPAL. Distributions in reduction of the Current Principal Amounts
of the Senior Certificates will be made on each Distribution Date pursuant to
priority THIRD and the paragraph after priority FOURTH under "-- Allocation of
Available Funds" above.
Distributions in reduction of the Current Principal Amounts of the
Subordinate Certificates will be made pursuant to priority FOURTH under "--
Allocation of Available Funds" above. 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
related Class ranking prior thereto has received distributions of interest and
principal, and such Class has received distributions of interest, on such
Distribution Date.
The "Senior Optimal Principal Amount" with respect to each Distribution
Date will be an amount equal to the sum of:
(i) the Senior Percentage (as defined below) of the sum of all
scheduled payments of principal 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, but before any adjustment
to such amortization schedule by reason of any bankruptcy or similar proceeding
or any moratorium or similar waiver or grace period);
(ii) the Senior Prepayment Percentage (as defined below) of the
Scheduled Principal Balance of each Mortgage Loan which was the subject of a
prepayment in full received by the Master Servicer during the related Prepayment
Period (as defined below);
(iii) the Senior Prepayment Percentage of all partial prepayments of
principal received during the related Prepayment Period;
(iv) the lesser of (a) the Senior Prepayment Percentage of the sum
of (w) the net liquidation proceeds allocable to principal on each Mortgage Loan
which became a Liquidated Mortgage Loan during the related Prepayment Period
(other than Mortgage Loans described in clause (x)) and (x) the Scheduled
Principal Balance of each Mortgage Loan that was purchased by a private mortgage
insurer during the related Prepayment Period as an alternative to paying a claim
under the related insurance policy, and (b) the Senior Percentage of the sum of
(y) the Scheduled Principal Balance of each Mortgage Loan which became a
Liquidated Mortgage Loan during the related Prepayment Period (other than
Mortgage Loans described in clause (z)) and (z) the Scheduled Principal Balance
of each Mortgage Loan that was purchased by a private mortgage insurer during
the related Prepayment Period as an alternative to paying a claim under the
related insurance policy; and
(v) the Senior Prepayment Percentage of the sum of (a) the
Scheduled Principal Balance of each Mortgage Loan which was repurchased by
BankUnited or the holder of the Class R Certificate 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 BankUnited with a
substitute Mortgage Loan pursuant to the Agreement in connection with such
Distribution Date and the Scheduled Principal Balance of such substitute
Mortgage Loan.
With respect to any Mortgage Loan and any Distribution Date, the
"Prepayment Period" is the period from the first day through the last day of the
month preceding the month of such Distribution Date.
The "Senior Percentage" will initially equal approximately 94.75%. The
Senior Percentage will be recalculated with respect to each Distribution Date to
equal the lesser of (i) 100% and (ii) the percentage (carried to six places
rounded up) obtained by dividing the aggregate Current Principal Amounts of all
of the Class A
S-30
<PAGE>
Certificates and the Class R Certificate immediately preceding such Distribution
Date by the aggregate Scheduled Principal Balance of all of the Mortgage Loans
as of the beginning of the related Due Period.
The " Senior Prepayment Percentage" with respect to the Mortgage Loans
on any Distribution Date occurring during the periods set forth below will be as
follows:
<TABLE>
PERIOD (DATES INCLUSIVE) SENIOR PREPAYMENT PERCENTAGE
- ------------------------ ----------------------------
<S> <C>
March 25, 1998 -February 25, 2008.......................... 100%
March 25, 2008 -February 25, 2009.......................... Senior Percentage plus 70% of the applicable
Subordinate Percentage
March 25, 2009 -February 25, 2010.......................... Senior Percentage plus 60% of the applicable
Subordinate Percentage
March 25, 2010 -February 25, 2011.......................... Senior Percentage plus 40% of the applicable
Subordinate Percentage
March 25, 2011 - February 25, 2012......................... Senior Percentage plus 20% of the applicable
Subordinate Percentage
March 25, 2012 and thereafter.............................. Senior Percentage
</TABLE>
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 a 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 Outstanding Principal
Balance of the Mortgage Loans delinquent 60 days or more (including for this
purpose any Mortgage Loans in foreclosure and Mortgage Loans with respect to
which the related Mortgaged Property has been acquired by the Trust), averaged
over the last six months, as a percentage of the aggregate Current Principal
Amount of the Subordinate Certificates averaged over the last six months, does
not exceed 40%, and (ii) cumulative Realized Losses on the Mortgage Loans do not
exceed 30% of the aggregate Current Principal Amounts of the Subordinate
Certificates as of the Closing Date (the "Original Subordinate Principal
Balance"). Notwithstanding the above, if on any Distribution Date (a) the Credit
Support Percentage (as defined below) prior to giving effect to any
distributions on such Distribution Date, exceeds twice the initial Credit
Support Percentage for such Certificate Group ( the "Two Times Test") and (b)
the provisions of clauses (i) and (ii) of the immediately preceding sentence are
met, then the Senior Prepayment Percentage for such Distribution Date will equal
the sum of the Senior Percentage for such Distribution Date and 50% of the
Subordinate Percentage for such Distribution Date, if such Distribution Date is
prior to March 2001, and will equal the Senior Percentage for such Distribution
Date, if such Distribution Date occurs on or after March 2001.
The "Credit Support Percentage" for any Distribution Date is equal to
the aggregate Current Principal Amount of the Subordinate Certificates
immediately prior to such Distribution Date divided by the Scheduled Principal
Balance of the Mortgage Loans as of the end of the Prepayment Period relating to
such Distribution Date.
The "Subordinate Percentage," which will initially equal approximately
5.25%, will be recalculated for each Distribution Date to equal 100% minus the
Senior Percentage for such Distribution Date. The "Subordinate Prepayment
Percentage" on any Distribution Date will equal 100% minus the Senior Prepayment
Percentage for
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<PAGE>
such Distribution Date, 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 "Subordinate Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the sum of the following (but in no
event greater than the aggregate Current Principal Amounts of the Subordinate
Certificates immediately prior to such Distribution Date):
(i) the Subordinate Percentage of the sum of all scheduled
payments of principal 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, 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 Master Servicer during the related Prepayment Period;
(iii) the Subordinate Prepayment Percentage of all partial
prepayments of principal received during the related Prepayment Period;
(iv) the excess, if any, of the sum of (a) the net liquidation
proceeds allocable to principal received during the related Prepayment Period in
respect of each Liquidated Mortgage Loan (other than Mortgage Loans described in
clause (b)) and (b) the principal balance of each Mortgage Loan that was
purchased by a private mortgage insurer during the related Prepayment Period as
an alternative to paying a claim under the related insurance policy over (c) the
sum of the amounts distributable to the Senior Certificateholders pursuant to
clause (iv) of the definition of Senior Optimal Principal Amount on such
Distribution Date;
(v) the Subordinate Prepayment Percentage of the sum of (a) the
Scheduled Principal Balance of each Mortgage Loan which was repurchased by
BankUnited or the holder of the Class R Certificate 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 BankUnited 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 the
Senior Optimal Principal Amount, remaining undistributed on such date, subject
to the limitations described herein.
The "Allocable Share" with respect to any Class of Subordinate
Certificates on any Distribution Date will generally equal such Class' 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 shall be entitled on any
Distribution Date to receive distributions pursuant to clauses (ii), (iii), (v)
and (vi) of the definition of 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 the 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), (v) and (vi) of the definition of Subordinate Optimal Principal
Amount, to the extent of such Class's remaining Allocable Share, shall be
distributed to the remaining Class of Subordinate Certificates which satisfies
the Class Prepayment Distribution Trigger in reduction of its Current Principal
Amount. If the Class Prepayment Distribution Trigger is
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<PAGE>
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 the 18th 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 by
BankUnited and any cash deposit in connection with the substitution of a
Mortgage Loan pursuant to the provisions described under "The Pooling and
Servicing Agreement -- Assignment of Mortgage Loans" and "-- Representations and
Warranties" herein.
"Principal Prepayment" is any payment or other recovery of principal on
a Mortgage Loan which is received in advance of its scheduled Due Date to the
extent that it is not accompanied by an amount as to interest representing
scheduled interest due on any date or dates in any month or months subsequent to
the month of prepayment, including Insurance Proceeds and Repurchase Proceeds,
but excluding Liquidation Proceeds received at the time a Mortgage Loan becomes
a Liquidated Mortgage Loan.
"Monthly Payment" with respect to any Mortgage Loan and any month is
the scheduled payment or payments of principal and interest due during such
month on such Mortgage Loan which either is payable by a Mortgagor in such month
under the related Mortgage Note, or in the case of any Mortgaged Property
acquired through foreclosure or deed-in-lieu of foreclosure (each such Mortgaged
Property, an "REO Property"), would otherwise have been payable under the
related Mortgage Note.
ALLOCATION OF LOSSES; SUBORDINATION
A "Realized Loss" with respect to a Mortgage Loan is (i) a Deficient
Valuation (as defined below) or (ii) as to any Liquidated Mortgage Loan, the
unpaid principal balance thereof plus accrued and unpaid interest thereon at the
Mortgage Rate through the last day of the month of liquidation less the Net
Liquidation Proceeds with respect to such Mortgage Loan and the related
Mortgaged Property. A "Liquidated Mortgage Loan" is any defaulted Mortgage Loan
as to which the Master Servicer has determined that all amounts which it expects
to recover from or on account of such Mortgage Loan have been recovered.
"Liquidation Proceeds" are amounts received by the Master Servicer in
connection with the liquidation of a defaulted Mortgage Loan whether through
trustee's sale, foreclosure sale, proceeds of insurance policies, condemnation
proceeds or otherwise.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are
Liquidation Proceeds net of expenses incurred by the Master Servicer in
connection with the liquidation of such Mortgage Loan and the related Mortgaged
Property.
In the event of a personal bankruptcy of a Mortgagor, the bankruptcy
court may establish the value of the Mortgaged Property at an amount less than
the then Outstanding Principal Balance of the Mortgage Loan secured by such
Mortgaged Property and could reduce the secured debt to such value. In such
case, the holder of such Mortgage Loan would become an unsecured creditor to the
extent of the difference between the Outstanding Principal Balance of such
Mortgage Loan and such reduced secured debt (such difference, a "Deficient
Valuation"). In addition, certain other modifications of the terms of a Mortgage
Loan can result from a bankruptcy proceeding,
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<PAGE>
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.
The principal portion of any Realized Loss on a Mortgage Loan for any
Distribution Date will not be allocated to any Senior Certificates until the
Cross-Over Date. Prior to the Cross-Over Date (and on such date under certain
circumstances), any such Realized Loss will be allocated among the outstanding
Classes of Subordinate Certificates, in inverse order of priority, first to the
Class B-2 Certificates, while such Certificates are outstanding, second to the
Class B-1 Certificates, until the Current Principal Amount of each such Class
has been reduced to zero. Commencing on the Cross-Over Date, the principal
portion of any Realized Loss (other than a Debt Service Reduction) will be
allocated to the outstanding Classes of Senior Certificates.
No reduction of the Current Principal Amount of any Class shall be made
on any Distribution Date on account of Realized Losses to the extent that such
reduction would have the effect of reducing the aggregate Current Principal
Amount of all of the Certificates as of such Distribution Date to an amount less
than the Scheduled Principal Balances of all of the Mortgage Loans as of the
first day of the month of such Distribution 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, (x)
after the Cross-Over Date, the amounts distributable under clause (i) of the
definition 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, otherwise available for distribution on a Distribution Date. As a result
of the subordination of the Subordinate Certificates in right of distribution,
any Debt Service Reductions prior to the Cross-Over Date will be borne by the
Subordinate Certificates (to the extent then outstanding) in inverse order of
priority.
Except as described above, 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 all Realized Losses will be allocated among the
outstanding Classes of Certificates offered hereby to the extent described under
"Distributions on the Certificates -- Interest" above.
SUBORDINATION
PRIORITY OF SENIOR CERTIFICATES. As of the Closing Date, the aggregate
Current Principal Amounts of the Subordinate Certificates will equal
approximately 5.25% of the aggregate Current Principal Amounts of the
Certificates. The rights of the holders of each Class of Subordinate
Certificates to receive distributions with respect to the Mortgage Loans will be
subordinated to such rights of the holders of the Senior Certificates and of
each Class, if any, of Subordinate Certificates having a lower numerical Class
designation than such Class, to the extent described above. The subordination of
the Subordinate Certificates to the Senior Certificates, and the further
subordination among the Subordinate Certificates, are each intended to increase
the likelihood of timely receipt by the holders of the Certificates with higher
relative payment priorities of the maximum amount to which they are entitled on
any Distribution Date and to provide such holders protection against losses
resulting from defaults on the Mortgage Loans to the extent described above.
However, in certain circumstances, the amount of available
subordination may be exhausted and shortfalls in distributions on the Offered
Certificates could result. Holders of Senior Certificates will bear their
proportionate
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<PAGE>
share of Realized Losses in excess of the total subordination
amount. The allocation of the principal portion of any Realized Loss 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
will be allocated to the Senior Certificates, to the extent and subject to
meeting certain tests described herein, during the first ten years after the
Closing Date (with such allocations being subject to reduction thereafter as
described herein). This allocation has the effect of accelerating the
amortization of the Senior Certificates, while, in the absence of losses in
respect of the Mortgage Loans, increasing the percentage interest in the
principal balance of the Mortgage Loans evidenced by the Subordinate
Certificates.
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 the Class B-1 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 the Class B-2 Certificates. In
addition, except as described herein, the principal portion of any Realized Loss
will be allocated, to the extent set forth herein, in reduction of the Current
Principal Amounts of the Subordinate Certificates in the inverse order of their
numerical Class designation. The effect of the allocation of such Realized
Losses to the Class B-2 Certificates will be to reduce future distributions
allocable to such Class and increase the relative portion of distributions
allocable to the Class B-1 Certificates.
In order to maintain the relative levels of subordination among the
Classes of Subordinate Certificates, 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 ten years after the
Closing Date) will not be distributable to the holders of any applicable Class
of Subordinate Certificates on any Distribution Date for which the related Class
Prepayment Distribution Trigger is not satisfied. See "Description of the
Certificates -- Distributions on the Certificates -- Principal." If the Class
Prepayment Distribution Trigger is not satisfied with respect to the Class B-2
Certificates, the amortization of Class B-1 Certificates may occur more rapidly
than would otherwise have been the case and, in the absence of losses in respect
of the Mortgage Loans, the percentage interest in the principal balance of the
Mortgage Loans evidenced by the Class B-2 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 on the Mortgage
Loans, the allocation of Available Funds to various Classes of Certificates, the
amount and timing of Realized Losses and, the level of the One-Year Constant
Maturity Treasury Index. Investors should carefully consider the associated
risks discussed under the headings "Yield and Prepayment
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<PAGE>
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 February 25, 2028. The Assumed Final Distribution Date is the
Distribution Date in the month immediately following the month in which the last
Due Date of any Mortgage Loan occurs. Since the rate of payment (including
prepayments) of principal on the Mortgage Loans can be expected to exceed the
scheduled rate of payments, and could exceed the scheduled rate by a substantial
amount, the disposition of the last remaining Mortgage Loan may be earlier, and
could be substantially earlier, than the Assumed Final Distribution Date. In
addition, the Master Servicer or its designee may, at its option, repurchase all
the Mortgage Loans from the Trust on or after any Distribution Date on which the
aggregate unpaid principal balance of the Mortgage Loans is less than 10% of the
Cut-off Date Scheduled Principal Balance of the Mortgage Loans. 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 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
increases.
PREPAYMENT MODEL
Prepayments on mortgage loans are commonly measured by a prepayment
standard or model. The model used in this Prospectus Supplement ("CPR")
represents an assumed constant rate of prepayments each month, expressed as an
annual rate, relative to the then Outstanding Principal Balance of a pool of
mortgage loans for the life of such mortgage loans. CPR 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
mortgage loans, including the Mortgage Loans.
PRICING ASSUMPTION
The Certificates were structured assuming, among other things, a
prepayment assumption applicable to the Mortgage Loans of 18% CPR. 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 the Prepayment Assumption and the
corresponding weighted average lives of such Classes of Offered Certificates.
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<PAGE>
The following tables have been prepared based on the assumptions that:
(i) the Mortgage Loans have the characteristics as described herein, (ii) the
One-Year Constant Maturity Treasury Index remains constant at 5.40%, (iii) the
Mortgage Loans prepay at the specified percentages of CPR, (iv) no defaults in
the payment by Mortgagors of principal of and interest on the Mortgage Loans are
experienced, (v) the Mortgage Rate on each Mortgage Loan will be adjusted on
each Interest Adjustment Date (as necessary) to a rate equal to the index (as
described in (ii) above) plus the applicable Gross Margin, subject to Maximum
Lifetime Mortgage Rates and periodic caps, (vi) scheduled Monthly Payments of
principal and interest on each adjustable rate Mortgage Loan will be adjusted on
each payment adjustment date (as necessary) for such Mortgage Loan to equal the
fully amortizing payment as described in (x) below subject to periodic payment
cap limitations (as applicable), (vii) scheduled payments on the Mortgage Loans
are received on the first day of each month commencing in March 1998 and are
computed prior to giving effect to prepayments received on the last day of the
prior month, (viii) prepayments are allocated as described herein without giving
effect to loss and delinquency tests, (ix) 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 February 1998, (x)
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, (xi) the initial principal amounts of the
Certificates are as set forth on the cover page hereof and under "Summary of
Terms--Other Certificates," (xii) distributions in respect of the Certificates
are received in cash on the 25th day of each month, commencing in March 1998,
(xiii) the Offered Certificates are purchased on March 12, 1998, and (xiv) the
option to purchase the Mortgage Loans described under the caption "The Pooling
and Servicing Agreement Termination" is not exercised. While it is assumed that
each of the Mortgage Loans prepays at the specified constant percentages of the
Prepayment Assumption, this is not likely to be the case.
Discrepancies will exist between the characteristics of the actual
Mortgage Loans 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 February of each of the
years indicated, assuming that the Mortgage Loans prepay at the percentage of
CPR indicated therein. Neither CPR 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 CPR.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
Class A Certificates Class B-1 Certificates
-------------------------------------------- ------------------------------------------------
% of CPR % of CPR
-------------------------------------------- ------------------------------------------------
0% 10% 18% 25% 40% 0% 10% 18% 25% 40%
--- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial 100 100 100 100 100 100 100 100 100 100
Percentage
February 25, 1999 99 89 80 73 57 99 99 99 99 99
February 25, 2000 98 78 64 53 33 98 98 98 98 85
February 25, 2001 97 69 51 38 19 97 97 97 89 65
February 25, 2002 96 61 41 28 11 96 96 87 66 39
February 25, 2003 95 54 33 21 7 95 95 70 49 23
February 25, 2004 94 47 27 16 4 94 94 57 36 14
February 25, 2005 92 42 22 12 2 92 88 46 27 8
February 25, 2006 91 37 18 8 1 91 78 37 20 5
February 25, 2007 89 33 14 6 1 89 69 30 15 3
February 25, 2008 87 29 11 5 * 87 61 24 11 2
February 25, 2009 86 25 9 3 * 86 54 19 8 1
February 25, 2010 84 22 7 2 * 84 47 15 6 1
February 25, 2011 81 20 6 2 * 81 41 12 4 *
February 25, 2012 79 17 5 1 * 79 36 10 3 *
February 25, 2013 76 15 4 1 * 76 31 8 2 *
February 25, 2014 73 13 3 1 * 73 27 6 2 *
February 25, 2015 70 11 2 * * 70 23 5 1 *
February 25, 2016 67 9 2 * * 67 20 4 1 *
February 25, 2017 63 8 1 * * 63 17 3 1 *
February 25, 2018 59 7 1 * * 59 14 2 * *
February 25, 2019 55 6 1 * * 55 12 2 * *
February 25, 2020 50 5 1 * * 50 10 1 * *
February 25, 2021 45 4 * * * 45 8 1 * *
February 25, 2022 40 3 * * * 40 6 1 * *
February 25, 2023 33 2 * * * 33 5 * * *
February 25, 2024 27 2 * * * 27 3 * * *
February 25, 2025 20 1 * * * 20 2 * * *
February 25, 2026 12 1 * * * 12 1 * * *
February 25, 2027 4 * * * * 4 * * * *
February 25, 2028 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life to 20.1 7.6 4.5 3.2 1.8 20.1 12.9 7.9 5.9 3.9
Maturity
(years)**
</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.
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
Class R Certificate
---------------------------------------------------
% of CPR
---------------------------------------------------
0% 10% 18% 25% 40%
--- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100
February 25, 1999 0 0 0 0 0
February 25, 2000 0 0 0 0 0
February 25, 2001 0 0 0 0 0
February 25, 2002 0 0 0 0 0
February 25, 2003 0 0 0 0 0
February 25, 2004 0 0 0 0 0
February 25, 2005 0 0 0 0 0
February 25, 2006 0 0 0 0 0
February 25, 2007 0 0 0 0 0
February 25, 2008 0 0 0 0 0
February 25, 2009 0 0 0 0 0
February 25, 2010 0 0 0 0 0
February 25, 2011 0 0 0 0 0
February 25, 2012 0 0 0 0 0
February 25, 2013 0 0 0 0 0
February 25, 2014 0 0 0 0 0
February 25, 2015 0 0 0 0 0
February 25, 2016 0 0 0 0 0
February 25, 2017 0 0 0 0 0
February 25, 2018 0 0 0 0 0
February 25, 2019 0 0 0 0 0
February 25, 2020 0 0 0 0 0
February 25, 2021 0 0 0 0 0
February 25, 2022 0 0 0 0 0
February 25, 2023 0 0 0 0 0
February 25, 2024 0 0 0 0 0
February 25, 2025 0 0 0 0 0
February 25, 2026 0 0 0 0 0
February 25, 2027 0 0 0 0 0
February 25, 2028 0 0 0 0 0
Weighted Average
Life to Maturity 0.04 0.04 0.04 0.04 0.04
(years)**
</TABLE>
- --------------------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a)
multiplying the amount of the reduction, if any, of the principal
balance of such Certificate from one Distribution Date to the next
Distribution Date by the number of years from the date of issuance to
the second such Distribution Date, (b) summing the results and (c)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Certificate
S-39
<PAGE>
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement. Reference is
made to the Prospectus for important information additional to that set forth
herein regarding the terms and conditions of the Agreement and the Certificates.
BSMSI will provide to a prospective or actual Certificateholder without charge,
upon written request, a copy (without exhibits) of the Agreement. Requests
should be addressed to Bear Stearns Mortgage Securities Inc., 245 Park Avenue,
New York, New York 10167.
VOTING RIGHTS
Voting rights of the Trust in general will be allocated 1% to the Class
R Certificate, with the balance allocated among the remaining Classes of
Certificates based upon their respective Current Principal Amounts.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, BSMSI will cause the
Mortgage Loans, together with all principal and interest due on or with respect
to such Mortgage Loans after the Cut-off Date, to be transferred 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 Master Servicing Fee and
the loan-to-value ratio.
In addition, BSMSI will cause to be deposited with the Custodian on
behalf of the Trustee, with respect to each Mortgage Loan, the original Mortgage
Note, endorsed without recourse to the order of the Trustee and showing an
unbroken chain of endorsements from the original payee thereof to the person
endorsing it to the Trustee; the original Mortgage which shall have been
recorded, with evidence of such recording indicated thereon; the assignment
(which may be in the form of a blanket assignment) to the Trustee of the
Mortgage, with evidence of recording with respect to each Mortgage Loan in the
name of the Trustee thereon; all intervening assignments of the Mortgage
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; the original Mortgagee's title insurance policy; originals of all available
modification agreements; PROVIDED, HOWEVER, that in lieu of the foregoing, BSMSI
may cause the delivery of certain other documents, under the circumstances set
forth in the Agreement. The documents delivered to the Custodian with respect to
each Mortgage Loan are referred to collectively as the "Mortgage File".
BankUnited 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; provided, however, if such assignment cannot be recorded within
such time because the original assignments have not been returned by the
applicable jurisdiction, then an additional 180 days will be permitted.
The Custodian 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 Custodian after the Closing Date, if received by the Custodian after the
initial 45-day period, promptly after its delivery to the Custodian). If, as a
result of its review, the Custodian determines that any document is missing,
does not appear regular on its face, or appears to be unrelated to the Mortgage
Loans identified in the Mortgage Loan schedules (a "Material Defect"), the
Custodian shall notify BankUnited of such Material Defect. BankUnited shall
correct or cure any such Material Defect within 60 days from the date of notice
from the Custodian of the Material Defect and if BankUnited does not correct or
cure such Material Defect within such period and such defect materially and
adversely affects the interests of the Trust in the related Mortgage Loan,
BankUnited will, within 90 days of the date of notice, provide the Custodian
with a substitute Mortgage Loan (if within two years of the Closing Date) or
purchase the related Mortgage Loan at the applicable Repurchase Price.
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The Custodian also will review the Mortgage Files within 180 days of
the Closing Date. If the Custodian discovers a Material Defect, the Custodian
shall notify BankUnited of such Material Defect. BankUnited shall correct or
cure any such Material Defect within 60 days from the date of notice from the
Custodian of the Material Defect and if BankUnited does not correct or cure such
Material Defect within such period and such defect materially and adversely
affects the interests of the Trust in the related Mortgage Loan, BankUnited
will, within 90 days of the date of notice, provide the Custodian 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 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.
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 BankUnited, BankUnited made certain representations and
warranties to BSMSI concerning the Mortgage Loans. BSMSI will assign to the
Trustee all of its right, title and interest in such purchase agreement insofar
as it relates to such representations and warranties, as well as the remedies
provided for breach of such representations and warranties. The representations
and warranties of BankUnited include, among other things, that as of the Closing
Date or such other date as may be specified below:
(a) The information set forth in the Mortgage Loan Schedule is true,
complete and correct in all material respects as of the Cut-off Date;
(b) The Mortgage creates a first lien or a first priority ownership
interest in an estate in fee simple in real property securing the related
Mortgage Note, free and clear of all adverse claims, liens and encumbrances
having priority over the first lien of the Mortgage subject only to certain
permitted exceptions;
(c) No Mortgage Loan has been delinquent more than thirty (30) days at
any time within 12 months prior to the Cut-off Date and, as of the Cut-off Date,
no more than 0.50% of the Cut-off Date Principal Balance of the Mortgage Loans
were 30 days delinquent. As of the Closing Date, no Mortgage Loan has been
dishonored; there are no defaults under the terms of the Mortgage Loans; and
BankUnited 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 Loans;
(d) There are no delinquent taxes, ground rents, assessments or other
outstanding charges affecting the related Mortgaged Property;
(e) The Mortgage Note and the Mortgage are not subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
nor will the operation of any of the terms of the Mortgage Note and the
Mortgage, or the exercise of any right thereunder, render the Mortgage Note or
Mortgage unenforceable, in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
and no such right of rescission, set-off, counterclaim or defense has been
asserted with respect thereto;
(f) The Mortgage has not been satisfied, canceled or subordinated, in
whole or in part, or rescinded, and the Mortgaged Property has not been released
from the lien of the Mortgage, in whole or in part, 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;
(g) Immediately prior to the transfer and assignment to BSMSI, the
Mortgage Note and the Mortgage were not subject to an assignment or pledge, and
BankUnited had good and marketable title to and was the sole owner thereof
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and had full right to transfer and sell the Mortgage Loan to BSMSI free and
clear of any encumbrance, equity, lien, pledge, charge, claim or security
interest;
(h) There is no default, breach, violation or event of acceleration
existing under the Mortgage or the related Mortgage Note and no event, which,
with the passage of time or with notice and the expiration of any grace or cure
period, would constitute a default, breach, violation or event permitting
acceleration; and neither BankUnited nor any prior mortgagee has waived any
default, breach, violation or event permitting acceleration;
(i) There are no mechanics, or similar liens or claims which have been
filed for work, labor or material affecting the related Mortgaged Property which
are or may be liens prior to or equal to the lien of the related Mortgage;
(j) All improvements subject to the Mortgage lie wholly within the
boundaries and building restriction lines of the Mortgaged Property (and wholly
within the project with respect to a condominium unit) 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;
(k) The Mortgaged Property at origination of the Mortgage Loan was and
currently is free of damage and waste and at origination of the Mortgage Loan
there was, and there currently is, no proceeding pending for the total or
partial condemnation thereof; and
(l) No Mortgage Loan has a Loan-to-Value Ratio in excess of 95.00%. The
original Loan-to-Value Ratio of each Mortgage Loan either was not more than
95.00% or the excess over 80.00% is insured as to payment defaults by a Primary
Mortgage Insurance Policy issued by a primary mortgage insurer acceptable to
FHLMC and FHCMS until the Loan-to-Value Ratio of such Mortgage Loan is reduced
to 80.00%.
Upon any substitution for a Mortgage Loan, the representations and
warranties set forth above shall be deemed to be made as to any substitute
Mortgage Loan as of the date of substitution.
Upon discovery or receipt of notice by BankUnited, BSMSI or the Trustee
of a breach of any representation or warranty set forth above which materially
and adversely affects the value of the interests of the Trust in any of the
Mortgage Loans, the party discovering or receiving notice of such breach shall
give prompt written notice to the others. In the case of any such breach, within
90 days from the date of discovery by BankUnited, or the date BankUnited is
notified by the party discovering or receiving notice of such breach (whichever
occurs earlier), BankUnited has agreed to (i) cure such breach in all material
respects, (ii) purchase the affected Mortgage Loan at the applicable Repurchase
Price (or, if such Mortgage Loan or the related Mortgage Property acquired in
respect thereof has been sold, pay the excess of the Repurchase Price over the
Net Liquidation Proceeds (as defined herein)) to the Trust or (iii) if within
two years of the Closing Date, substitute a qualifying substitute Mortgage Loan
in exchange for such Mortgage Loan. The obligations of BankUnited to cure,
purchase or substitute a qualifying substitute Mortgage Loan shall constitute
the Trust's sole and exclusive remedy respecting a breach of such
representations or warranties.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer will use its reasonable efforts to ensure that all
payments required under the terms and provisions of the Mortgage Loans are
collected, and shall follow collection procedures comparable to the collection
procedures of prudent mortgage lenders servicing mortgage loans for their own
account, to the extent such procedures shall be consistent with the Agreement.
Consistent with the foregoing, the Master Servicer may in its discretion (i)
waive or permit to be waived any late payment or prepayment charge, assumption
fee or any penalty interest in connection with the prepayment of a Mortgage Loan
and (ii) suspend or temporarily reduce or permit to be suspended or temporarily
reduced regular monthly payments for a period of up to six months or arrange or
permit an arrangement with a Mortgagor for a schedule for the liquidation of
delinquencies. In the event the Master Servicer shall consent to the deferment
of due dates for payments due on a Mortgage Note, the Master Servicer shall
nonetheless continue to make advances as described herein to the same extent as
if such installment were due, owing and delinquent and had not been deferred
through liquidation of the Mortgaged Property, but the obligation
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of the Master Servicer to advance shall apply only to the extent that the Master
Servicer believes, in good faith, that such advances are recoverable from future
payments on any Mortgage Loan.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor and the Master Servicer has knowledge thereof, the Master Servicer
will accelerate the maturity of the Mortgage Loan, to the extent permitted by
the terms of the related Mortgage Note and applicable law. If it reasonably
believes that any due-on-sale clause cannot be enforced under applicable law or
if there is no due-on-sale clause, the Master Servicer may enter into an
assumption agreement with the person to whom such property has been or is about
to be conveyed, pursuant to which such person becomes liable under the Mortgage
Note and the Mortgagor, to the extent permitted by applicable law, remains
liable thereon. The Master Servicer will retain any fee collected for entering
into an assumption agreement, as additional servicing compensation. In regard to
circumstances in which the Master Servicer may be unable to enforce due-on-sale
clauses, see "Certain Legal Aspects of Mortgage Loans -- Due-on-Sale Clauses" in
the Prospectus. In connection with any such assumption, the Mortgage Rate borne
by the related Mortgage Note may not be changed. No Mortgage Loan may be assumed
unless coverage under any existing Primary Mortgage Insurance Policy continues
as to that Mortgage Loan after such assumption or a new policy has been
obtained.
The Master 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 or such
other account acceptable to the Rating Agency. The Master Servicer will deposit
and retain therein all collections from the Mortgagors for the payment of taxes,
assessments, insurance premiums, or comparable items as agent of the Mortgagors
and in trust as provided in the Agreement. Each Servicing Account shall be fully
insured by the FDIC and to the extent that the balance in such account exceeds
the limits of such insurance, such excess must be transferred to another
fully-insured account in another institution the accounts of which are insured
by the FDIC or must be invested in certain investments permitted by the
Agreement ("Permitted Investments"). Such Permitted Investments must be held in
trust by the Master Servicer, as described above. In addition, the Master
Servicer may establish Servicing Accounts not conforming to the foregoing
requirements to the extent that such Servicing Accounts meet the requirements of
the Rating Agency for the maintenance of the ratings on the Certificates.
Withdrawals of amounts from the Servicing Accounts may be made only to effect
timely payment of taxes, assessments, insurance premiums, or comparable items,
to reimburse the Master Servicer for any advances made with respect to such
items, to refund to any Mortgagors any sums as may be determined to be overages,
to pay interest, if required, to Mortgagors on balances in the Servicing
Accounts, to pay earnings not required to be paid to Mortgagors to the Master
Servicer or to clear and terminate the Servicing Accounts at or at any time
after the termination of the Agreement.
For each Mortgage Loan which as of the Cut-off Date was covered by a
Primary Mortgage Insurance Policy, the Master Servicer will maintain and keep,
or cause to be maintained and kept, with respect to each such Mortgage Loan, in
full force and effect a Primary 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 Agreement, at least until such excess has
been eliminated. Pursuant to applicable state law, the Master 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 the then
Outstanding Principal Balance of the Mortgage Loan does not exceed 80% or as
required by applicable law. Primary Insurance Policies may be replaced by
substantially equivalent insurance but such replacement is subject to the
condition, to be evidenced by a writing from each Rating Agency, that it would
not cause the ratings on the Certificates to be downgraded or withdrawn.
The Master Servicer will maintain errors and omissions insurance and
fidelity bonds in certain specified amounts.
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HAZARD INSURANCE
The Master Servicer will maintain and keep, or cause to be maintained
and kept, with respect to each Mortgage Loan, in full force and effect for each
Mortgaged Property a hazard insurance policy equal to at least the lesser of the
Outstanding Principal Balance of the Mortgage Loan or the current replacement
cost of the Mortgaged Property and containing a standard mortgagee clause;
PROVIDED, HOWEVER, that the amount of hazard insurance may not be less than the
amount necessary to prevent loss due to the application of any co-insurance
provision of the related policy. Unless a higher deductible is required by law,
the deductible on such hazard insurance policy may be no more than $1,000 or 1%
of the applicable amount of coverage, whichever is less. Any amounts collected
by the Master Servicer under any such hazard insurance policy (other than
amounts to be applied to the restoration or repair of the Mortgaged Property or
amounts released to the Mortgagor in accordance with normal servicing
procedures) shall be deposited in a Protected Account. Any cost incurred in
maintaining any such hazard insurance policy shall not be added to the amount
owing under the Mortgage Loan for the purpose of calculating monthly
distributions to Certificateholders, notwithstanding that the terms of the
Mortgage Loan so permit. Such costs shall be recoverable by the Master Servicer
out of related late payments by the Mortgagor or out of Insurance Proceeds or
Liquidation Proceeds or any other amounts in the Certificate Account. The right
of the Master Servicer to reimbursement for such costs incurred will be prior to
the right of Certificateholders to receive any related Insurance Proceeds or
Liquidation Proceeds or any other amounts in the Certificate Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism and malicious mischief. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not
intended to be all-inclusive.
Hazard insurance policies covering properties similar to the Mortgaged
Properties typically contain a clause which in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation, or (ii) such
proportion of the loss as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance to be maintained on the
improvements securing the Mortgage Loans may decline as the principal balances
owing thereon decrease, and since residential properties have historically
appreciated in value over time, in the event of partial loss, hazard insurance
proceeds may be insufficient to restore fully the damaged property.
Where the property securing a Mortgage Loan is located at the time of
origination in a federally designated flood area, the Master Servicer will cause
with respect to such Mortgage Loan flood insurance to the extent available and
in accordance with industry practices to be maintained. Such flood insurance
will be in an amount equal to the lesser of (i) the Outstanding Principal
Balance of the related Mortgage Loan and (ii) the minimum amount required under
the terms of coverage to compensate for any damage or loss on a replacement cost
basis, but not more than the maximum amount of such insurance available for the
related Mortgaged Property under either the regular or emergency programs of the
National Flood Insurance Program (assuming that the area in which such Mortgaged
Property is located is participating in such program). Unless applicable state
law requires a higher deductible, the deductible on such flood insurance may not
exceed $1,000 or 1% of the applicable amount of coverage, whichever is less.
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The Master Servicer, on behalf of the Trustee and Certificateholders,
will present claims to the insurer under any applicable Primary Mortgage
Insurance Policy or hazard insurance policy. As set forth above, all collections
by the Master Servicer under such policies that are not applied to the
restoration or repair of the related Mortgaged Property or released to the
Mortgagor in accordance with normal servicing procedures are to be deposited in
a Protected Account.
REALIZATION UPON DEFAULTED MORTGAGE LOANS; PURCHASES OF DEFAULTED MORTGAGE LOANS
The Master Servicer will use its reasonable efforts to maximize the
receipt of principal and interest on Defaulted Mortgage Loans and foreclose upon
or otherwise comparably convert the ownership of properties securing Defaulted
Mortgage Loans as to which no satisfactory collection arrangements can be made.
The Master Servicer will service the property acquired by the Trust through
foreclosure or deed-in-lieu of foreclosure and use its reasonable efforts to
maximize the receipt of principal and interest on Defaulted Mortgage Loans;
PROVIDED, HOWEVER, that the Master Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of any
property unless it determines in good faith (i) that such foreclosure or
restoration will increase the proceeds of liquidation of the Mortgage Loan to
the Certificateholders after reimbursement to itself for such expenses and (ii)
that such expenses will be recoverable to it through Liquidation Proceeds or
insurance proceeds (respecting which it shall have priority for purposes of
reimbursements from the Certificate Account).
Since Insurance Proceeds cannot exceed deficiency claims and certain
expenses incurred by the Master Servicer, no insurance payments will result in a
recovery to Certificateholders which exceeds the principal balance of the
Defaulted Mortgage Loan together with accrued interest thereon at its Net Rate.
Notwithstanding the foregoing, under the Agreement, the holder of the
Class R Certificate will have the option (but not the obligation) to purchase
any Mortgage Loan as to which the Mortgagor has failed to make unexcused payment
in full of three or more scheduled payments of principal and interest (a
"Defaulted Mortgage Loan"); provided that such holder has first offered the
Master Servicer the right to purchase such Defaulted Mortgage Loan. If the
Master Servicer does not elect to purchase the Defaulted Mortgage Loan and the
holder of the Class R Certificate makes such purchase, the holder of the Class R
Certificate will pay the Master Servicer a fee equal to 1% of the Outstanding
Principal Balance of the purchased Defaulted Mortgage Loan in addition to the
Repurchase Price of such Mortgage Loan. The Repurchase Price for any Defaulted
Mortgage Loan will be deposited in the Certificate Account on the Business Day
prior to the Distribution Date on which the proceeds of such purchase are to be
distributed to the Certificateholders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer shall be entitled to receive a fee on each
Distribution Date at a rate of 0.375% per annum of the Outstanding Principal
Balance of each Mortgage Loan as of the Due Date in the month preceding the
month on which such Distribution Date occurs (provided that the Master Servicing
Fee during the first year following origination of certain of the Mortgage Loans
is at a rate of either 0.125% or 0.250%) plus up to 1.000% per annum with
respect to certain Mortgage Loans to cover lender paid primary mortgage
insurance premiums (the "Master Servicing Fee") from full payments of accrued
interest on each Mortgage Loan as compensation for its activities under the
Agreement. However, Interest Shortfalls resulting from prepayments in full or in
part in any calendar month will be offset by the Master Servicer on the
Distribution Date in the following calendar month to the extent such Interest
Shortfalls do not exceed the Master Servicing Fee (other than the portion used
to cover lender paid primary mortgage insurance premiums) in connection with
such Distribution Date (the amount of the Master Servicing Fee used to offset
Interest Shortfalls is referred to herein as "Compensating Interest Payments").
Any remaining amount of Interest Shortfalls after applying Compensating Interest
Payments is referred to herein as "Net Interest Shortfalls".
In addition to the primary compensation described above, the Master
Servicer will retain all prepayment charges, if any, assumption fees, tax
service fees, fees for statement of account payoff and late payment charges, all
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to the extent collected from Mortgagors, and, with respect to any Due Date. The
Master Servicer will also be entitled to retain, as additional servicing
compensation, any income earned on certain accounts other than the Certificate
Account and 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), but only to the extent
that transfers or withdrawals from the Certificate Account with respect thereto
are permitted under the Agreement.
The Master Servicer will pay all expenses incurred in connection with
its servicing responsibilities (subject to limited reimbursement as described
herein). On each Distribution Date, the Trustee will pay itself the respective
fees and reimbursable expenses to which it is entitled for the month of such
Distribution Date from amounts in the Certificate Account.
In the event a successor Trustee is appointed by the Certificateholders
pursuant to the Agreement, that portion, if any, of the successor Trustee's fees
which exceeds the Trustee's fees established at the time of issuance of the
Certificates will be borne by the Certificateholders.
PROTECTED ACCOUNT
The Master Servicer will establish and maintain one or more segregated
accounts (each, a "Protected Account") into which it will deposit daily all
collections of principal and interest on any Mortgage Loan, including Principal
Prepayments, Insurance Proceeds, Liquidation Proceeds, the Repurchase Price for
any Mortgage Loans repurchased, and advances made from the Master Servicer's own
funds (less servicing compensation as permitted above). All Protected Accounts
shall be held in a depository institution, the accounts of which are insured by
the FDIC to the maximum extent permitted by law, segregated on the books of such
institution and held in trust or in such other account with a depository
institution as may be acceptable to the Rating Agencies. The amount at any time
credited to a Protected Account shall be fully insured by the FDIC to the
maximum extent permitted by law or, to the extent that such balance exceeds the
limits of such insurance, such excess must be transferred to an account or
invested in permitted investments meeting the requirements of the Rating
Agencies or to the Certificate Account.
Prior to each Distribution Date, the Master Servicer shall withdraw or
shall cause to be withdrawn from the Protected Accounts and any other permitted
accounts and shall deposit or cause to be deposited in the Certificate Account
amounts representing the following collections and payments (other than with
respect to principal of or interest on the Mortgage Loans due on or before the
Cut-off Date):
(i) Scheduled payments on the Mortgage Loans received or
advanced by the Master Servicer which were due on the related Due Date,
net of servicing fees (including amounts to which the Master Servicer
is entitled for payment of lender paid primary mortgage insurance
premiums) due the Master Servicer;
(ii) Full principal prepayments and any Liquidation Proceeds
received by the Master Servicer with respect to such Mortgage Loans in
the related Prepayment Period, with interest to the date of prepayment
or liquidation, net of servicing fees (including amounts to which the
Master Servicer is entitled for payment of lender paid primary mortgage
insurance premiums) due the Master Servicer; and
(iii) Partial prepayments of principal received by the Master
Servicer for such Mortgage Loans in the related Prepayment Period.
To the extent provided in the Agreement, certain amounts due the Master
Servicer may be withdrawn by it directly from the Protected Accounts prior to
deposit in the Certificate Account.
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CERTIFICATE ACCOUNT
The Trustee shall establish and maintain in the name of the Trustee,
for the benefit of the Certificateholders, an account (the "Certificate
Account") as a non-interest bearing trust account. The Trustee
will deposit in the Certificate Account, as received, the following amounts:
(i) Any amounts withdrawn from a Protected Account or
other permitted account;
(ii) Any Monthly Advance and Compensating Interest
Payments and any payments required to be made by the Master Servicer;
(iii) Any Insurance Proceeds or Liquidation Proceeds
received by the Master Servicer which were not deposited in a Protected
Account or other permitted account;
(iv) The Repurchase Price with respect to any Mortgage
Loans repurchased and all proceeds of any Mortgage Loans or
property acquired in connection with the optional termination
of the Trust;
(v) Any amounts required to be deposited with respect to
losses on Permitted Investments; and
(vi) Any other amounts received by the Master Servicer or
the Trustee and required to be deposited in the
Certificate Account pursuant to the Agreement.
All amounts deposited to the Certificate Account shall be held by the
Trustee in the name of the Trustee in trust for the benefit of the
Certificateholders in accordance with the terms and provisions of the Agreement,
subject to the right of the Master Servicer to require the Trustee to make
withdrawals therefrom as provided below. The amount at any time credited to the
Certificate Account shall be in general (i) fully insured by the FDIC or the
Bank Insurance Fund to the maximum coverage provided thereby or (ii) at the
written direction of the Master Servicer invested, in the name of the Trustee,
in such Permitted Investments as the Master Servicer may direct or deposited in
demand deposits with such depository institutions as designated by the Master
Servicer, provided that time deposits of such depository institutions would be a
Permitted Investment.
The Trustee will, from time to time on demand of the Master Servicer,
make or cause to be made such withdrawals or transfers from the Certificate
Account as the Master Servicer has designated for such transfer or withdrawal
for the following purposes (limited in the case of amounts due to the Master
Servicer to those not withdrawn from the Protected Accounts in accordance with
the terms of the Agreement) :
(i) to reimburse the Master Servicer for any Monthly
Advance of its own funds, the right of the Master Servicer to
reimbursement pursuant to this subclause (i) being limited to amounts
received on a particular Mortgage Loan (including, for this purpose,
the Repurchase Proceeds, Insurance Proceeds and Liquidation Proceeds)
which represent late payments or recoveries of the principal of or
interest on such Mortgage Loan respecting which such Monthly Advance or
advance was made;
(ii) to reimburse the Master Servicer from Insurance
Proceeds or Liquidation Proceeds relating to a particular Mortgage Loan
for amounts expended by the Master Servicer in good faith in connection
with the restoration of the related Mortgaged Property which was
damaged by an uninsured cause or in connection with the liquidation of
such Mortgage Loan;
(iii) to reimburse the Master Servicer to the extent
permitted by the Agreement from Insurance Proceeds relating to a
particular Mortgage Loan for expenses incurred with respect to such
Mortgage Loan and to reimburse the Master Servicer from Liquidation
Proceeds from a particular Mortgage Loan for liquidation expenses
incurred with respect to such Mortgage Loan;
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(iv) to pay the Master Servicer to the extent permitted by
the Agreement from Liquidation Proceeds or Insurance Proceeds received
in connection with the liquidation of a Mortgage Loan, the amount which
the Master Servicer would have been entitled to receive under subclause
(ix) below as servicing compensation on account of each defaulted
scheduled payment on such Mortgage Loan if paid in a timely manner by
the related Mortgagor;
(v) to pay the Master Servicer to the extent permitted by
the Agreement from the Repurchase Price for any Mortgage Loan, the
amount which the Master Servicer would have been entitled to receive
under subclause (ix) below as servicing compensation;
(vi) to reimburse the Master Servicer for certain advances
of funds made to protect a Mortgaged Property, the right to
reimbursement pursuant to this subclause being limited to amounts
received on the related Mortgage Loan (including, for this purpose, the
Repurchase Proceeds, Insurance Proceeds and Liquidation Proceeds) which
represent late recoveries of the payments for which such advances were
made;
(vii) to pay the purchaser thereof with respect to each
Mortgage Loan that has been repurchased, all amounts received thereon,
representing recoveries of principal that reduce the Outstanding
Principal Balance of the related Mortgage Loan below the Outstanding
Principal Balance used in calculating the Repurchase Price or
representing interest included in the calculation of the Repurchase
Price or accrued after the end of the month during which such
repurchase occurs;
(viii) to reimburse the Master Servicer for any Monthly
Advance or advance, if a Realized Loss is to be allocated with respect
to the related Mortgage Loan on the related Distribution Date, if the
advance has not been reimbursed pursuant to clauses (i) and (vi);
(ix) to pay the Master Servicer servicing compensation as
set forth above;
(x) to reimburse the Master Servicer and the Trustee for
expenses, costs and liabilities incurred by and reimbursable to it
pursuant to the Agreement;
(xi) to pay to the Master Servicer, as additional
servicing compensation, any Excess Liquidation Proceeds;
(xii) to clear and terminate the Certificate Account; and
(xiii) to remove amounts deposited in error.
On each Distribution Date, the Trustee shall make the following
payments from the funds in the Certificate Account:
(i) First, from reinvestment earnings, the Trustee's Fees
shall be paid to the Trustee; and
(ii) Second, the amount distributable to the
Certificateholders shall be paid in accordance with the provisions set
forth under "Description of the Certificates -- Distributions on the
Certificates."
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Agreement will provide that the Master Servicer may not resign from
its obligations and duties thereunder, except upon determination that the
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until the Trustee or a successor has
assumed the obligations and duties of the Master Servicer to the extent required
under the Agreement. The Master Servicer, however, has the right, with the
written consent of the Trustee (which consent will not be unreasonably
withheld), to assign, sell or
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transfer its rights and delegate its duties and obligations under the Agreement;
provided that the rating of the Certificates in effect immediately prior to such
assignment, sale, transfer or delegation is not qualified, downgraded or
withdrawn as a result of such assignment, sale, transfer or delegation and the
purchaser or transferee accepting such assignment, sale, transfer or delegation
(i) is qualified to service mortgage loans for FNMA or FHLMC, (ii) is reasonably
satisfactory to the Trustee, (iii) has a net worth of not less than $10,000,000
and (iv) executes and delivers to the Trustee an agreement, in form and
substance reasonably satisfactory to the Trustee, which contains an assumption
by such purchaser or transferee of the due and punctual performance and
observance of each covenant and condition to be performed or observed by the
Master Servicer under the Agreement from and after the date of such agreement.
The Agreement will further provide that neither the Master Servicer nor
any of its directors, officers, employees and agents shall be under any
liability to the Trustee, the Trust or the Certificateholders for taking any
action or for refraining from taking any action in good faith pursuant to the
Agreement, or for errors in judgment; PROVIDED, HOWEVER, that neither the Master
Servicer nor any such person will be protected against any breach of warranties
or representations made in the Agreement or any liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or gross negligence in
the performance of duties or by reason of reckless disregard of obligations and
duties thereunder. The Agreement will further provide that the Master Servicer
and its directors, officers, employees and agents are entitled to
indemnification from the Certificate Account and will be held harmless thereby
against any loss, liability or expense incurred in connection with any legal
proceeding relating to the Agreement or the Certificates, other than any loss,
liability or expense related to its failure to perform its duties in compliance
with the Agreement (except as otherwise reimbursable under the Agreement) or
incurred by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, the Agreement will provide that
the Master Servicer is under no obligation to appear in, prosecute or defend any
legal action which is not incidental to its duties under the Agreement and which
in its opinion may involve it in any expense or liability. The Master Servicer
may, however, in its discretion undertake any such action which it may deem
necessary or desirable in respect of the Agreement and the rights and duties of
the parties thereto and the interests of the Certificateholders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust and the
Master Servicer will be entitled to be reimbursed therefor from the Certificate
Account.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer is a party, or any corporation
succeeding to the business of the Master Servicer will be the successor of the
Master Servicer under the Agreement, PROVIDED that any such successor to the
Master Servicer shall be qualified to service Mortgage Loans on behalf of FNMA
or FHLMC.
EVENTS OF DEFAULT
"Events of Default" under the Agreement consist of (i) failure by the
Master Servicer to cause to be deposited in the Certificate Account amounts
required to be deposited by the Master Servicer pursuant to the Agreement, and
such failure continues unremedied for three Business Days, (ii) failure by the
Master Servicer to observe or perform in any material respect any other material
covenants and agreements set forth in the Certificates or the Agreement to be
performed by it, and such failure continues unremedied for 60 days after the
date on which written notice of such failure has been given to the Master
Servicer by the Trustee or to the Master Servicer and the Trustee by the holders
of Certificates aggregating ownership of not less than 25% of the Trust, (iii)
the entry against the Master Servicer of a decree or order by a court or agency
or supervisory authority having jurisdiction in the premises for the appointment
of a conservator, receiver or liquidator in any insolvency, readjustment of
debt, marshaling of assets and liabilities or similar proceedings, or for the
winding up or liquidation of its affairs, and the continuance of any such decree
or order unstayed and in effect for a period of 60 consecutive days, or the
commencement of an involuntary case against the Master Servicer under any
applicable insolvency or reorganization statute which case is not dismissed
within 60 days, (iv) consent by the Master Servicer to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of debt,
marshaling of assets
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<PAGE>
and liabilities or similar proceedings of or relating to the Master Servicer or
substantially all of its property, admission by the Master Servicer in writing
of its inability to pay its debts generally as they become due, filing of a
petition to take advantage of any applicable insolvency or reorganization
statute, any assignment for the benefit of its creditors, or voluntary
suspension of payment of its obligations or (v) assignment or delegation by the
Master Servicer of its duties or rights under the Agreement in contravention of
the provisions permitting such assignment or delegation under the Agreement.
In each and every such case, so long as such Event of Default with
respect to the Master Servicer shall not have been remedied, the Trustee or the
holders of Certificates aggregating ownership of not less than 51% of the Trust
may in each case by notice in writing to the Master Servicer (and to the Trustee
if given by such Certificateholders), with a copy to the Rating Agency,
terminate all of the rights and obligations (but not the liabilities) of the
Master Servicer under the Agreement and in and to the Mortgage Loans serviced by
the Master Servicer and the proceeds thereof. Upon the receipt by the Master
Servicer of such written notice, all authority and power of the Master Servicer
under the Agreement, whether with respect to the Certificates, the Mortgage
Loans or under any other related agreements (but only to the extent that such
other agreements relate to the Mortgage Loans) shall, subject to the provisions
of the Agreement, automatically and without further action pass to and be vested
in the Trustee.
Upon the receipt by the Master Servicer of a notice of termination or
an opinion of counsel to the effect that the Master Servicer is legally unable
to act or to delegate its duties to a person which is legally able to act, the
Trustee shall automatically become the successor in all respects to the Master
Servicer in its capacity under the Agreement and the transactions set forth or
provided for therein and shall thereafter be subject to all the
responsibilities, duties, liabilities and limitations on liabilities relating
thereto placed on the Master Servicer by the terms and provisions hereof;
PROVIDED, HOWEVER, that the Trustee (i) shall be under no obligation to
repurchase any Mortgage Loan; and (ii) shall have no obligation whatsoever with
respect to any liability incurred by the Master Servicer at or prior to the time
of receipt by such Master Servicer of such notice or of such opinion of counsel
other than the obligation to make any required advances which were not made by
the Master Servicer. As compensation therefor, the Trustee shall be entitled to
all funds relating to the Mortgage Loans which the Master Servicer would have
been entitled to retain if the Master Servicer had continued to act as such,
except for those amounts due the Master Servicer as reimbursement for advances
previously made. Notwithstanding the above, the Trustee may, if it shall be
unwilling so to act, or shall, if it is legally unable so to act, appoint, or
petition a court of competent jurisdiction to appoint, any established housing
and home finance institution which is a FNMA or FHLMC approved servicer having a
net worth of not less than $10,000,000, as the successor to the Master Servicer
under the Agreement in the assumption of all or any part of the
responsibilities, duties or liabilities of the Master Servicer under the
Agreement. Pending appointment of a successor to the Master Servicer under the
Agreement, the Trustee shall act in such capacity as provided under the
Agreement. In connection with such appointment and assumption, the Trustee may
make such arrangements for the compensation of such successor out of payments on
Mortgage Loans as it and such successor shall agree; PROVIDED, HOWEVER, that no
such compensation shall be in excess of that permitted the Trustee as provided
above, and that such successor shall undertake and assume the obligations of the
Trustee to pay compensation to any third person acting as an agent or
independent contractor in the performance of master servicing responsibilities
under the Agreement.
MONTHLY ADVANCES
If the scheduled payment on a Mortgage Loan which was due on a related
Due Date and is delinquent other than as a result of application of the Relief
Act exceeds the amount deposited in the appropriate subaccount of the
Certificate Account which will be used for a Certificate Account Advance (as
defined below) with respect to such Mortgage Loan, the Master Servicer will
deposit in the Certificate Account not later than the Business Day immediately
preceding the Distribution Date an amount equal to such deficiency net of the
related Master Servicing Fee except to the extent the Master Servicer determines
any such advance to be nonrecoverable from Liquidation Proceeds, Insurance
Proceeds or from future payments on the Mortgage Loan for which such advance was
made. Subject to the foregoing, such advances will be made through liquidation
of the related Mortgaged Property. Any amount used as a Certificate Account
Advance shall be replaced by the Master Servicer by deposit in the Certificate
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Account on or before any future date to the extent that funds in the Certificate
Account on such date are less than the amount required to be transferred to the
Certificate Account. If applicable, on the fifth Business Day preceding each
Distribution Date, the Master Servicer shall present an Officer's Certificate to
the Trustee (i) stating that the Master Servicer elects not to make a Monthly
Advance in a stated amount and (ii) detailing the reason it deems the advance to
be nonrecoverable.
As of any Determination Date, a "Certificate Account Advance" is the
amount on deposit in a Protected Account or another permitted account which is
not required to be transferred to the Certificate Account for distribution
during the calendar month in which such Determination Date occurs but which is
used to make a distribution to Certificateholders during such calendar month on
account of scheduled payments on the Mortgage Loans due on the Due Date for such
month not being paid on or before the Determination Date except insofar as such
unpaid amounts are the result of application of the Relief Act.
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.
TERMINATION
The obligations of the Master Servicer and the Trustee created by the
Agreement will terminate upon (i) the later of the making of the final payment
or other liquidation, or any advance with respect thereto, of the last Mortgage
Loan subject thereto or the disposition of all property acquired upon
foreclosure or acceptance of a deed in lieu of foreclosure of any such Mortgage
Loans and (ii) the payment to Certificateholders of all amounts required to be
paid to them pursuant to such Agreement.
On any Distribution Date on which the aggregate unpaid principal
balance of the Mortgage Loans is less than 10% of the aggregate Cut-off Date
Scheduled Principal Balance of the Mortgage Loans, the Master Servicer or its
designee may repurchase from the Trust all Mortgage Loans remaining outstanding
at a purchase price equal to (a) the unpaid principal balance of such Mortgage
Loans (other than Mortgage Loans related to REO Property), net of the principal
portion of any unreimbursed Monthly Advances made by the purchaser, plus accrued
but unpaid interest thereon at the applicable Mortgage Rate to the next Due
Date, plus (b) the appraised value of any REO Property (but not more than the
unpaid principal balance of the related Mortgage Loan, together with accrued but
unpaid interest on that balance at the applicable Mortgage Rate to the next Due
Date), less the good faith estimate of the Master Servicer of liquidation
expenses to be incurred in connection with its disposal thereof. The Trust may
also be terminated and the Certificates retired on any Distribution Date upon
BSMSI's determination, based upon an opinion of counsel, that the real estate
mortgage investment conduit status of the REMIC 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 will receive as its fee all income earned on funds in the
Certificate Account and in certain instances is entitled to be indemnified by
the Trust.
The Trustee may resign at any time, in which event the Master Servicer
will be obligated to appoint a successor Trustee. The Master Servicer may also
remove the Trustee if the Trustee ceases to be eligible to continue as such
under the Agreement or if the Trustee becomes incapable of acting, bankrupt,
insolvent or if a receiver or public officer takes charge of the Trustee or its
property. Upon becoming aware of such circumstances, the Master Servicer will be
entitled to appoint a successor Trustee. The Trustee may also be removed at any
time by the holders of Certificates evidencing ownership of not less than 51% of
the Trust. In the event that the Certificateholders remove the Trustee, the
compensation of any successor Trustee shall be paid by the
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Certificateholders to the extent that such compensation exceeds the amount
agreed to by the Trustee. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the Mortgage Loans, the Certificate
Account and certain assets owned by the Trust as a REMIC for federal income tax
purposes. The Certificates (other than the Class R Certificate) will be
designated as regular interests in the REMIC and are herein referred to as
"Regular Certificates" or "REMIC Regular Certificates". The Class R Certificate
will be designated as the residual interest in the REMIC (the "Residual
Certificate" or the "REMIC Residual Certificate"). 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 Certificate.
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 have original issue discount. 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
with respect to the Certificates is 18% CPR. The prepayment assumption
represents a rate of payment of unscheduled principal on a pool of mortgage
loans, expressed as an annualized percentage of the Outstanding Principal
Balance of such mortgage loans at the beginning of each period. However, no
representation is made as to the rate at which prepayments actually will occur.
In addition, other Classes of Regular Certificates may be treated as having been
issued at a premium. See "Certain Federal Income Tax Consequences -- REMIC
Regular Certificates -- Premium" in the Prospectus.
The Residual Certificate generally will not be treated as an evidence
of indebtedness for federal income tax purposes. Instead, the Residual
Certificate will be considered a residual interest in a REMIC, representing
rights to the taxable income or net loss of the REMIC. Holders of the Residual
Certificate 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 the
Residual Certificate previously may have received full payment of any stated
interest and principal. The taxable income of holders of the Residual
Certificate attributable to the Residual Certificate 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 Certificate) 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.
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ERISA CONSIDERATIONS
The Certificates, or interests therein, will not be offered for sale
and may not be transferred to any investor who is, or who is acquiring such
Certificates directly or indirectly for, on behalf of or with the assets of, an
employee benefit plan or other retirement arrangement subject to Title I of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") and/or
Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"),
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 Definitive Certificate.
LEGAL INVESTMENT
The Senior Certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated in one of the
two highest rating categories by at least one nationally recognized statistical
rating organization, and, as such, will be legal investments for certain
entities to the extent provided in SMMEA, subject to state laws overriding
SMMEA. Certain states have enacted legislation overriding the legal investment
provisions of SMMEA. The remaining Classes of Certificates will NOT constitute
"mortgage related securities" under SMMEA the Non-SMMEA Certificates. The
appropriate characterization of the Non-SMMEA Certificates under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Non-SMMEA Certificates, may be subject to significant
interpretive uncertainties.
All investors whose investment activities are subject to legal
investment laws and regulations or to review by certain regulatory authorities
may be subject to restrictions on investment in the Certificates. Any such
institution should consult its own legal advisors in determining whether and to
what extent there may be restrictions on its ability to invest in the
Certificates. See "Legal Investment" In the Prospectus.
RESTRICTIONS ON PURCHASE AND TRANSFER
OF THE RESIDUAL CERTIFICATE
The Residual Certificate is 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.
The 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 The Bank of New
York 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 the REMIC as a REMIC) on the transfer of an
interest in the Residual Certificate to any other person or persons, the Tax
Matters Person 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
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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 Mortgage Loan
Purchase Agreement between BankUnited and BSMSI, the Certificates, are being
purchased from BSMSI by BankUnited in exchange for the Mortgage Loans. Bear,
Stearns & Co. Inc. ("Bear Stearns") an affiliate of BSMSI, will receive a fee of
$100,000 from BankUnited for assisting in the pooling of the Mortgage Loan and
the structuring of the transaction, and will be indemnified by BankUnited
against certain liabilities including liabilities under the 1933 Act. BankUnited
will pay the costs of issuance.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon
for BSMSI 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 Moody's.
Rating
-------------------
CLASS
-----
Class A Aaa
Class B-1 Aa2
Class R Aaa
The ratings assigned by the Rating Agency 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 are issued. The Rating Agency's ratings take into
consideration the credit quality of the related mortgage pool, including any
credit support providers, the structural and legal aspects associated with such
certificates, and the extent to which the payment stream on the mortgage pool is
adequate to make payments required by such certificates. The Rating Agency's
ratings on such certificates do not, however, constitute a statement regarding
frequency of prepayments on the mortgage loans.
The ratings of the Rating Agency do not address the possibility that,
as a result of principal prepayments Certificateholders might suffer a lower
than anticipated yield and in the case of the Class R Certificate address only
the return of its principal balance and interest thereon.
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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 Agency.
BSMSI has not requested ratings of the Offered Certificates by any
rating agency other than the Rating Agency. 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
Agency.
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PRINCIPAL DEFINITIONS
1933 Act.....................................................................S-3
1934 Act.....................................................................S-3
Accrued Certificate Interest.................................................S-9
Agreement....................................................................S-4
Allocable Share.............................................................S-32
Assumed Final Distribution Date.............................................S-36
Available Funds.............................................................S-27
Bankruptcy Loss.............................................................S-34
BankUnited...................................................................S-1
Bear Stearns................................................................S-54
Book-Entry Certificates......................................................S-5
BSMSI........................................................................S-2
Business Day................................................................S-26
Cede........................................................................S-25
Certificate Account.........................................................S-47
Certificate Account Advance.................................................S-51
Certificate Owner...........................................................S-25
Certificate Register........................................................S-27
Certificates..............................................................S-1, 5
Class Prepayment Distribution Trigger.......................................S-32
Code........................................................................S-52
Compensating Interest Payment...............................................S-10
Compensating Interest Payments..........................................S-29, 45
Convertible Mortgage Loan...................................................S-21
Co-Trustee...................................................................S-4
CPR.........................................................................S-36
Credit Support Percentage...................................................S-31
Cross-Over Date..............................................................S-9
Current Principal Amount....................................................S-10
Custodian....................................................................S-6
Cut-off Date.................................................................S-4
Cut-off Date Scheduled Principal Balance.....................................S-6
Debt Service Reduction......................................................S-34
Defaulted Mortgage Loan.....................................................S-45
Deficient Valuation.........................................................S-33
Definitive Certificates.....................................................S-27
Depositor....................................................................S-5
Determination Date..........................................................S-33
Distribution Date............................................................S-2
S-56
<PAGE>
DTC.........................................................................S-25
Due Date.....................................................................S-8
Due Period...................................................................S-8
Events of Default...........................................................S-49
Gross Margin.................................................................S-6
Indirect Participants.......................................................S-26
Insurance Proceeds..........................................................S-33
Interest Accrual Period......................................................S-9
Interest Adjustment Date....................................................S-21
Interest Shortfall..........................................................S-29
Liquidated Mortgage Loan....................................................S-33
Liquidation Proceeds........................................................S-33
Loss Allocation Limitation..................................................S-34
Master Servicer..............................................................S-4
Master Servicing Fee........................................................S-45
Material Defect.............................................................S-40
Maximum Lifetime Mortgage Rate...............................................S-6
Monthly Advance.............................................................S-12
Monthly Payment.............................................................S-21
Moody's......................................................................S-1
Mortgage File...............................................................S-40
Mortgage Pool................................................................S-6
Mortgage Rate................................................................S-6
Mortgaged Property...........................................................S-2
Net Interest Shortfalls.................................................S-29, 45
Net Liquidation Proceeds....................................................S-33
Net Rate.....................................................................S-7
Non-SMMEA Certificates......................................................S-18
Offered Certificates......................................................S-1, 5
One-Year Constant Maturity Treasury Index....................................S-6
Original Subordinate Principal Balance......................................S-31
Other Certificates...........................................................S-5
Outstanding Principal Balance...............................................S-41
Participants................................................................S-26
Pass-Through Rate............................................................S-9
Percent of Initial Principal Amount Outstanding.............................S-36
Permitted Investments.......................................................S-43
Physical Certificates........................................................S-5
Prepayment Period............................................................S-8
Primary Mortgage Insurance Policy...........................................S-33
Principal Prepayment........................................................S-33
Protected Account...........................................................S-46
Rating Agency...............................................................S-17
Realized Loss...............................................................S-33
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Record Date..................................................................S-8
Regular Certificates.................................................S-5, 16, 52
REITs.......................................................................S-52
Relief Act..................................................................S-29
REMIC....................................................................S-2, 16
REMIC Regular Certificates..............................................S-16, 52
REMIC Residual Certificate..............................................S-16, 52
Repurchase Price............................................................S-41
Repurchase Proceeds.........................................................S-33
Residual Certificate....................................................S-16, 52
Residual Certificates........................................................S-5
Rules.......................................................................S-26
Scheduled Principal Balance..................................................S-8
Senior Certificates.......................................................S-5, 8
Senior Optimal Principal Amount.............................................S-30
Senior Percentage...........................................................S-30
Senior Prepayment Percentage Stepdown Limitation............................S-31
Servicing Account...........................................................S-43
SMMEA...................................................................S-17, 53
Subordinate Certificate Writedown Amount....................................S-29
Subordinate Certificates.....................................................S-5
Subordinate Optimal Principal Amount........................................S-32
Subordinate Prepayment Percentage...........................................S-31
Tax Matters Person......................................................S-17, 53
Trust........................................................................S-2
Trustee......................................................................S-4
Two Times Test..............................................................S-31
U.S. Person.................................................................S-54
S-58
<PAGE>
ANNEX A
CERTAIN CHARACTERTERISTICS OF THE MORTGAGE LOANS
The description herein of the Mortgage Loans and the Mortgage Loan
Groups 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 Moody's 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 repect to the Mortgage Loans and the Mortgage
Loan Groups as presently constituted is representative of the characteristics of
the mortgage Loans and the Mortgage Loan Goups as they will be constituted at
the time the Certificates are issued, although certain characteristics of the
Mortgage Loan Groups may vary.
ORIGINAL PRINCIPAL BALANCES OF THE MORTGAGE LOANS
AVERAGE: $275,452
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL PRINCIPAL BALANCE* LOANS CUT-OFF DATE POOL
- --------------------------- ----- ------------ ----
Less than $ 50,000 9 $ 362,789 0.10 %
$ 50,000 - $ 99,999 69 5,186,829 1.47
$100,000 - $149,999 105 12,510,082 3.55
$150,000 - $199,999 101 17,214,805 4.89
$200,000 - $249,999 260 59,024,528 16.77
$250,000 - $299,999 311 82,774,103 23.52
$300,000 or greater 446 174,916,469 49.69
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
- ----------
* The table reflects principal balances at time of origination or any later
modification or assumption of the Mortgage Loans.
<TABLE>
<CAPTION>
SCHEDULED PRINCIPAL BALANCES OF MORTGAGE LOANS
AVERAGE: $270,553
Aggregate
Number of Scheduled Balance % of
Mortgage Outstanding as of Mortgage
Scheduled Principal Balance as of Cut-Off Date Loans Cut-Off Date Pool
- ---------------------------------------------- ----- ------------ ----
<S> <C> <C> <C>
Less than $50,000 11 $ 456,179 0.13 %
$ 50,000 - $ 99,999 79 6,085,847 1.73
$100,000 - $149,999 113 13,988,961 3.97
$150,000 - $199,999 97 16,936,566 4.81
$200,000 - $249,999 291 67,232,497 19.10
$250,000 - $299,999 303 82,901,017 23.55
$300,000 or greater 407 164,388,538 46.70
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
</TABLE>
A-1
<PAGE>
MORTGAGE RATES AS OF THE CUT-OFF DATE OF MORTGAGE LOANS
WEIGHTED AVERAGE: 6.489%
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
MORTGAGE RATE LOANS CUT-OFF DATE POOL
- ------------- ----- ------------ ----
6.000% or less 196 $ 57,857,385 16.44 %
6.001% - 6.500% 680 193,414,392 54.95
6.501% - 7.000% 276 70,677,543 20.08
7.001% - 7.500% 28 6,746,023 1.92
7.501% - 8.000% 35 8,291,669 2.36
8.001% - 8.500% 72 13,570,419 3.86
8.501% - 9.000% 13 1,134,735 0.32
9.001% - 9.500% 1 297,439 0.08
--------- ----------------- -------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- -------
ORIGINAL LOAN-TO-VALUE RATIOS OF MORTGAGE LOANS
WEIGHTED AVERAGE:* 72.04%
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL LOAN-TO-VALUE** LOANS CUT-OFF DATE POOL
- ------------------------ ----- ------------ ----
50.00% or less 87 $ 25,296,182 7.19 %
50.01% - 55.00% 33 8,893,972 2.53
55.01% - 60.00% 71 18,997,778 5.40
60.01% - 65.00% 88 27,777,621 7.89
65.01% - 70.00% 144 44,578,585 12.66
70.01% - 75.00% 274 76,012,069 21.59
75.01% - 80.00% 389 105,294,468 29.91
80.01% - 85.00% 35 7,987,782 2.27
85.01% - 90.00% 124 28,680,144 8.15
90.01% - 95.00% 56 8,471,003 2.41
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
- ----------
* Excludes Mortgage Loans with unknown Original Loan-to-Value Ratios.
** For purpose of the table, the Loan-to-Value Ratio generally was determined
based on the ratio of the principal amount of the Mortgage Loan at
origination to the lesser of (i) the sales price for the related Mortgaged
Property or (ii) the appraised value, in each case, at the time of
origination.
PROPERTY TYPES OF MORTGAGED PROPERTIES
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
PROPERTY TYPE LOANS CUT-OFF DATE POOL
- ------------- ----- ------------ ----
Single Family 986 $ 265,891,499 75.54 %
Condominium 63 13,314,061 3.78
Planned Unit Development 251 72,705,196 20.66
Two-Family to Four-Family 1 78,849 0.02
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
A-2
<PAGE>
OCCUPANCY STATUS OF MORTGAGED PROPERTIES
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
OCCUPANCY STATUS* LOANS CUT-OFF DATE POOL
- ----------------- ----- ------------ ----
Owner Occupied 1,269 343,818,159 97.68
Second Home 32 8,171,445 2.32
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
- ----------
* The determination of occupancy status is based solely on the Borrower's
representation at the time of origination of the Mortgage Loan or, in a
limited number of cases, at the time of any modification or assumption of the
Mortgage Loans.
LOAN PURPOSES OF MORTGAGED PROPERTIES
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE POOL
- ------------ ----- ------------ ----
Purchase 482 $ 120,428,610 34.21 %
Rate and Term Refinance 653 185,770,736 52.78
Cash Out Refinance 153 41,402,472 11.76
Construction / Permanent 13 4,387,788 1.25
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
DOCUMENTATION TYPES OF MORTGAGED PROPERTIES
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
DOCUMENTATION TYPE LOANS CUT-OFF DATE POOL
- ------------------ ----- ------------ ----
Full Documentation 970 $ 264,935,978 75.27 %
Alternative Documentation 258 67,729,103 19.24
Reduced Documentation 72 19,115,842 5.43
No Income / No Assets 1 208,681 0.06
--------- ----------------- ---------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- ---------
ORIGINAL TERMS OF MORTGAGE LOANS
WEIGHTED AVERAGE: 360 MONTHS
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL TERM LOANS CUT-OFF DATE POOL
- ------------- ----- ------------ ----
360 Months 1,301 $ 351,989,605 100.00 %
-------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
-------- ----------------- --------
A-3
<PAGE>
YEARS OF ORIGINATION OF MORTGAGE LOANS
WEIGHTED AVERAGE SEASONING: 8 MONTHS
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
YEAR OF ORIGINATION LOANS CUT-OFF DATE POOL
- ------------------- ----- ------------ ----
1996 40 $ 10,652,318 3.03 %
1997 1,261 341,337,287 96.97
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
STATED REMAINING MONTHS TO MATURITY OF MORTGAGE LOANS
WEIGHTED AVERAGE: 352 MONTHS
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
MONTHS REMAINING AS OF CUT-OFF DATE LOANS CUT-OFF DATE POOL
- ----------------------------------- ----- ------------ ----
181 - 240 Months 1 $ 220,588 0.06 %
301 - 360 Months 1,300 351,769,017 99.94
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
STATE LOANS CUT-OFF DATE POOL
- ----- ----- ------------ ----
<S> <C> <C> <C>
Michigan 259 $ 65,549,522 18.62 %
Illinois 222 62,745,364 17.83
Colorado 131 42,254,447 12.00
Massachusetts 113 35,438,823 10.07
California 74 23,043,425 6.55
Arizona 51 14,282,256 4.06
Washington 32 9,355,314 2.66
Minnesota 24 7,502,400 2.13
Missouri 34 7,386,797 2.10
Pennsylvania 39 5,725,635 1.63
Georgia 20 5,663,027 1.61
Utah 23 5,467,770 1.55
Indiana 21 5,196,273 1.48
Ohio 20 4,945,260 1.40
Texas 18 4,895,570 1.39
New Mexico 15 4,323,511 1.23
New Jersey 17 4,178,770 1.19
Maryland 15 4,140,590 1.18
North Carolina 20 3,922,427 1.11
Virginia 9 3,505,064 1.00
Other (no more than 1% in any one of 25 states) 144 32,467,360 9.22
--------- ----------------- ---------
Total 1,301 $ 351,989,605 100.00 %
</TABLE>
A-4
<PAGE>
ZIP CODE CONCENTRATION (OVER 1%) OF MORTGAGE LOANS
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ZIP CODE CONCENTRATIONS LOANS CUT-OFF DATE POOL
- ----------------------- ----- ------------ ----
48323 - West Bloomfield, MI 14 $ 3,786,412 1.08 %
GROSS MARGINS OF MORTGAGE LOANS
WEIGHTED AVERAGE: 2.902%
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
GROSS MARGIN LOANS CUT-OFF DATE POOL
- ------------ ----- ------------ ----
2.001% - 2.500% 1 $ 194,222 0.06 %
2.501% - 3.000% 1,272 344,071,879 97.75
3.001% - 3.500% 5 1,416,505 0.40
Greater than 3.500% 23 6,307,000 1.79
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
MAXIMUM RATES OF MORTGAGE LOANS
WEIGHTED AVERAGE: 12.330%
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
MAXIMUM INTEREST RATE LOANS CUT-OFF DATE POOL
- --------------------- ----- ------------ ----
12.000% or less 276 $ 70,800,462 20.11 %
12.001% - 12.500% 716 202,556,743 57.55
12.501% - 13.000% 281 71,646,421 20.35
13.001% - 13.500% 25 6,451,482 1.83
13.501% - 14.000% 1 250,149 0.07
14.001% - 14.500% 1 63,760 0.02
Greater than 14.500% 1 220,588 0.06
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
PERIODIC RATE ADJUSTMENT CAPS OF MORTGAGE LOANS
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
PERIODIC RATE ADJUSTMENT CAPS LOANS CUT-OFF DATE POOL
- ----------------------------- ----- ------------ ----
2.000% 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
A-5
<PAGE>
NEXT INTEREST ADJUSTMENT DATES OF MORTGAGE LOANS
WEIGHTED AVERAGE: 5.7 MONTHS
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
NEXT INTEREST ADJUSTMENT DATE LOANS CUT-OFF DATE POOL
- ----------------------------- ----- ------------ ----
March 1998 146 $ 44,201,950 12.56 %
April 1998 82 21,345,874 6.06
May 1998 236 46,725,913 13.27
June 1998 194 57,295,367 16.28
July 1998 61 16,019,165 4.55
August 1998 28 7,305,890 2.08
September 1998 99 26,489,881 7.53
October 1998 173 49,583,891 14.09
November 1998 105 32,990,051 9.37
December 1998 85 24,260,075 6.89
January 1999 36 9,774,229 2.78
February 1999 56 15,997,318 4.54
--------- ----------------- --------
Total 1,301 $ 351,989,605 100.00 %
--------- ----------------- --------
A-6
<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.
-2-
<PAGE>
Any statement contained herein or in a Prospectus Supplement for a
series of Certificates or in a document incorporated or deemed to be
incorporated by reference herein or therein shall be deemed to be modified or
superseded for purposes of this Prospectus and such Prospectus Supplement and,
if applicable, the Registration Statement to the extent that a statement
contained herein or therein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein or therein modifies or
supersedes such statement, except to the extent that such subsequently filed
document expressly states otherwise. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or the related Prospectus Supplement or, if
applicable, the Registration Statement.
The Depositor will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and the related Prospectus
Supplement is delivered, on the written or oral request of any such person, a
copy of any and all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the President, Bear Stearns Mortgage Securities Inc., 245
Park Avenue, New York, New York 10167. Telephone requests for such copies should
be directed to the President at (212) 272-2000.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund will be
provided to the Certificateholders. See "Description of the Certificates-Reports
to Certificateholders."
-3-
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE RELATED
PROSPECTUS SUPPLEMENT WHICH WILL BE PREPARED IN CONNECTION WITH EACH SERIES OF
CERTIFICATES.
<TABLE>
<S> <C>
Title of Securities........................... Mortgage Pass-Through Certificates (Issuable in Series).
Seller........................................ Bear Stearns Mortgage Securities Inc., a Delaware corporation
and a wholly-owned subsidiary of Bear Stearns Mortgage Capital
Corporation. See "The Seller."
Trustee....................................... The Trustee for each Series of Certificates will be specified
in the related Prospectus Supplement.
Master Servicer............................... One or more entities named as a Master Servicer in the related
Prospectus Supplement, which may be an affiliate of the Seller.
See "The Pooling and Servicing Agreement -Certain Matters
Regarding the Master Servicer and the Seller."
Trust Fund Assets............................. A Trust Fund for a Series of Certificates will include the
Mortgage Assets consisting of (i) a pool (a "Mortgage Pool") of
Single Family Loans, Multifamily Loans, Cooperative Loans or
Contracts (collectively, the "Mortgage Loans"), (ii) Agency
Securities or (iii) Private Mortgage-Backed Securities,
together with payments in respect of such Mortgage Assets and
certain other accounts, obligations or agreements, in each case
as specified in the related Prospectus Supplement.
A. Single Family, Cooperative
and Multi-family Loans................... Unless otherwise specified in the related Prospectus
Supplement, Single Family Loans will be secured by first
mortgage liens on one- to four-family residential properties.
Unless otherwise specified in the related Prospectus
Supplement, Cooperative Loans will be secured by security
interests in shares issued by private, nonprofit, cooperative
housing corporations ("Cooperatives") and in the related
proprietary leases or occupancy agreements granting exclusive
rights to occupy specific dwelling units in such Cooperatives'
buildings. Single Family Loans and Cooperative Loans may be
conventional loans (I.E., loans that are not insured or
guaranteed by any governmental agency), insured by the Federal
Housing Authority ("FHA") or partially guaranteed by the
Veterans Administration ("VA") as specified in the related
Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, Single Family Loans and
Cooperative Loans will all have individual principal balances
at origination of not less than $25,000 and not more than
$1,000,000, and original terms to stated maturity of 15 to 40
years.
Multifamily Loans will be secured by first mortgage liens on rental
apartment buildings or projects containing five or more residential
units, including apartment buildings owned by Cooperatives. Such
</TABLE>
-4-
<PAGE>
<TABLE>
<S> <C>
loans may be conventional loans or insured by the FHA, as
specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, Multifamily Loans
will all have individual principal balances at origination of not less
than $25,000 and original terms to stated maturity of not more than
40 years.
The payment terms of the Mortgage Loans to be included in a Trust
Fund will be described in the related Prospectus Supplement and
may include any of the following features or combinations thereof
or other features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an index,
a rate that is fixed for a period of time or under
certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time,
or a rate that is convertible from an adjustable rate
to a fixed rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the
principal of a Mortgage Loan for such periods and
under such circumstances as may be specified in the
related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower
than the specified interest rate on the Mortgage Loan
(the "Mortgage Rate") for a period of time or for the
life of the Mortgage Loan, and the amount of any
difference may be contributed from funds supplied by
the seller of the Mortgaged Property or another source
("Buydown Loans") or may be treated as accrued
interest and added to the principal of the Mortgage
Loan.
(b) Principal may be payable on a level debt service basis
to fully amortize the Mortgage Loan over its term, may
be calculated on the basis of an assumed amortization
schedule that is significantly longer than the
original term to maturity or on an interest rate that
is different from the interest rate on the Mortgage
Loan or may not be amortized during all or a portion
of the original term. Payment of all or a substantial
portion of the principal may be due on maturity
("balloon" payments). Principal may include interest
that has been deferred and added to the principal
balance of the Mortgage Loan.
(c) Payments of principal and interest may be fixed for
the life of the Mortgage Loan, may increase over a
specified period of time or may change from period to
period. Mortgage Loans may include limits on periodic
increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts
of monthly payments.
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C>
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of the
Mortgage Loan or may decline over time, and may be
prohibited for the life of the Mortgage Loan or for
certain periods ("lockout periods"). Certain Mortgage
Loans may permit prepayments after expiration of the
applicable lockout period and may require the payment
of a prepayment fee in connection with any such
subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The
Mortgage Loans may include due-on-sale clauses which
permit the mortgagee to demand payment of the entire
Mortgage Loan in connection with the sale or certain
transfers of the related Mortgaged Property. Other
Mortgage Loans may be assumable by persons meeting the
then applicable underwriting standards of the Lender.
Certain Mortgage Loans may be originated or acquired in
connection with employee relocation programs. The real property
constituting security for repayment of a Mortgage Loan may be
located in any one of the fifty states or the District of Columbia.
Unless otherwise specified in the related Prospectus Supplement, all
of the Mortgage Loans will be covered by standard hazard
insurance policies insuring against losses due to fire and various
other causes. The Mortgage Loans will be covered by primary
mortgage insurance policies to the extent provided in the related
Prospectus Supplement. All Mortgage Loans will have been purchased
by the Seller, either directly or through an affiliate, from Lenders.
B. Contracts................................ Contracts will consist of conditional sales and installment
sales or loan agreements secured by new or used Manufactured
Homes (as defined herein). Contracts may be conventional loans,
insured by the FHA or partially guaranteed by the VA, as
specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, each
Contract will be fully amortizing and will bear interest at a
fixed accrual percentage rate ("APR"). Unless otherwise
specified in the related Prospectus Supplement, Contracts will
all have individual principal balances at origination of not
less than $10,000 and not more than $1,000,000 and original
terms to stated maturity of 5 to 30 years.
C. Agency Securities........................ The Agency Securities will consist of (i) fully modified
pass-through mortgage-backed certificates guaranteed as to
timely payment of principal and interest by the Government
National Mortgage Association ("GNMA Certificates"), (ii)
Guaranteed Mortgage Pass-Through Certificates issued and
guaranteed as to timely payment of principal and interest by
the Federal National Mortgage Association ("FNMA
Certificates"), (iii) Mortgage Participation Certificates issued
and guaranteed as to timely payment of interest and, unless
otherwise specified in the related Prospectus Supplement,
ultimate payment of principal by the
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Federal Home Loan Mortgage Corporation ("FHLMC Certificates"), (iv) stripped
mortgage-backed securities representing an undivided interest in all or a part
of either the principal distributions (but not the interest distributions) or
the interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain GNMA, FNMA, FHLMC or other government agency or
government-sponsored agency Certificates and, unless otherwise specified in the
Prospectus Supplement, guaranteed to the same extent as the underlying
securities, (v) another type of guaranteed pass-through certificate issued or
guaranteed by GNMA, FNMA, FHLMC or another government agency or
government-sponsored agency and described in the related Prospectus Supplement,
or (vi) a combination of such Agency Securities. All GNMA Certificates will be
backed by the full faith and credit of the United States. No FNMA or FHLMC
Certificates will be backed, directly or indirectly, by the full faith and
credit of the United States. The Agency Securities may consist of pass-through
securities issued under the GNMA I Program, the GNMA II Program, FHLMC's Cash or
Guarantor Program or another program specified in the Prospectus Supplement. The
payment characteristics of the Mortgage Loans underlying the Agency Securities
will be described in the related Prospectus Supplement.
D. Private Mortgage-Backed
Securities............................... Private Mortgage-Backed Securities may include (i) mortgage
participations or pass-through certificates representing
beneficial interests in certain Mortgage Loans or (ii)
Collateralized Mortgage Obligations ("CMOs") secured by such
Mortgage Loans. Private Mortgage-Backed Securities may include
stripped mortgage-backed securities representing an undivided
interest in all or a part of any of the principal distributions
(but not the interest distributions) or the interest
distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions
(but not all of such distributions) on certain mortgage loans.
Although individual Mortgage Loans underlying a Private
Mortgage-Backed Security may be insured or guaranteed by the
United States or an agency or instrumentality thereof, they
need not be, and the Private Mortgage-Backed Securities
themselves will not be so insured or guaranteed. See "The Trust
Fund-Private Mortgage-Backed Securities." Unless otherwise
specified in the Prospectus Supplement relating to a Series of
Certificates, payments on the Private Mortgage-Backed
Securities will be distributed directly to the Trustee as
registered owner of such Private Mortgage-Backed Securities.
See "The Trust Fund-Private Mortgage-Backed Securities."
The related Prospectus Supplement for a Series will specify (i)
the aggregate approximate principal amount and type of any
Private Mortgage-Backed Securities to be included in the Trust
Fund for such Series; (ii) certain characteristics of the
Mortgage Loans which comprise the underlying assets for the
Private Mortgage-Backed
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Securities including to the extent available (A) the payment features of such
Mortgage Loans, (B) the approximate aggregate principal amount, if known, of the
underlying Mortgage Loans which are insured or guaranteed by a governmental
entity, (C) the servicing fee or range of servicing fees with respect to the
Mortgage Loans, and (D) the minimum and maximum stated maturities of the
Mortgage Loans at origination; (iii) the maximum original term-to-stated
maturity of the Private Mortgage-Backed Securities; (iv) the weighted average
term-to-stated maturity of the Private Mortgage-Backed Securities; (v) the
pass-through or certificate rate or ranges thereof for the Private
Mortgage-Backed Securities; (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities; (vii) the issuer of
the Private Mortgage-Backed Securities (the "PMBS Issuer"), the servicer of the
Private Mortgage-Backed Securities (the "PMBS Servicer") and the trustee of the
Private Mortgage-Backed Securities (the "PMBS Trustee"); (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, letters of credit, financial guaranty insurance policies or third
party guarantees, relating to the Mortgage Loans underlying the Private
Mortgage-Backed Securities, or to such Private Mortgage-Backed Securities
themselves; (ix) the terms on which underlying Mortgage Loans for such Private
Mortgage-Backed Securities may, or are required to, be repurchased prior to
stated maturity; and (x) the terms on which substitute Mortgage Loans may be
delivered to replace those initially deposited with the PMBS Trustee. See "The
Trust Fund."
E. Pre-Funding and
Capitalized Interest
Accounts................................. If specified in the related Prospectus Supplement, a Trust Fund
will include one or more segregated trust accounts (each, a
"Pre-Funding Account") established and maintained with the
Trustee for the related Series. If so specified, on the closing
date for such Series, a portion of the proceeds of the sale of
the Certificates of such Series (such amount, the "Pre-Funded
Amount") will be deposited in the Pre-Funding Account and may
be used to purchase additional Primary Assets during the period
of time, not to exceed six months, specified in the related
Prospectus Supplement (the "Pre-Funding Period"). The Primary
Assets to be so purchased will be required to have certain
characteristics specified in the related Prospectus Supplement.
If any Pre-Funded Amount remains on deposit in the Pre-Funding
Account at the end of the Pre-Funding Period, such amount will
be applied in the manner specified in the related Prospectus
Supplement to prepay the Certificates of the applicable Series.
The amount initially deposited in a pre-funding account for a
Series of Certificates will not exceed fifty percent of the
aggregate principal amount of such Series of Certificates.
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If a Pre-Funding Account is established, one or more segregated trust accounts
(each, a "Capitalized Interest Account") may be established and maintained with
the Trustee for the related Series. On the closing date for such Series, a
portion of the proceeds of the sale of the Certificates of such Series will be
deposited in the Capitalized Interest Account and used to fund the excess, if
any, of (x) the sum of (i) the amount of interest accrued on the Certificates of
such Series and (ii) if specified in the related Prospectus Supplement, certain
fees or expenses during the Pre-Funding Period such as trustee fees and credit
enhancement fees, over (y) the amount of interest available therefor from the
Primary Assets in the Trust Fund. Any amounts on deposit in the Capitalized
Interest Account at the end of the Pre-Funding Period that are not necessary for
such purposes will be distributed to the person specified in the related
Prospectus Supplement.
Description of the
Certificates............................. Each Certificate will represent a beneficial ownership interest
in a Trust Fund created by the Seller pursuant to a Pooling and
Servicing Agreement (each, an "Agreement") among the Seller,
the Master Servicer(s) and the Trustee for the related Series.
The Certificates of any Series may be issued in one or more
classes as specified in the related Prospectus Supplement. A
Series of Certificates may include one or more classes of
senior Certificates (collectively, the "Senior Certificates")
which receive certain preferential treatment specified in the
related Prospectus Supplement with respect to one or more
classes of subordinate Certificates (collectively, the
"Subordinated Certificates"). Certain Series or classes of
Certificates may be covered by insurance policies, cash
accounts, letters of credit, financial guaranty insurance
policies, third party guarantees or other forms of credit
enhancement as described herein and in the related Prospectus
Supplement.
One or more classes of Certificates of each Series (i) may be entitled to
receive distributions allocable only to principal, only to interest or to any
combination thereof; (ii) may be entitled to receive distributions only of
prepayments of principal throughout the lives of the Certificates or during
specified periods; (iii) may be subordinated in the right to receive
distributions of scheduled payments of principal, prepayments of principal,
interest or any combination thereof to one or more other classes of Certificates
of such Series throughout the lives of the Certificates or during specified
periods or may be subordinated with respect to certain losses or delinquencies;
(iv) may be entitled to receive such distributions only after the occurrence of
events specified in the Prospectus Supplement; (v) may be entitled to receive
distributions in accordance with a schedule or formula or on the basis of
collections from designated portions of the assets in the related Trust Fund;
(vi) as to Certificates entitled to distributions allocable to interest, may be
entitled to receive interest at a fixed rate or a rate that is subject to change
from time to time; and (vii) as to Certificates entitled to distributions
allocable to interest, may be
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entitled to distributions allocable to interest
only after the occurrence of events specified in the Prospectus Supplement and
may accrue interest until such events occur, in each case as specified in the
Prospectus Supplement. The timing and amounts of such distributions may vary
among classes, over time, or otherwise as specified in the related Prospectus
Supplement.
Distributions on the
Certificates............................. Distributions on the Certificates entitled thereto will be made
monthly, quarterly, semi-annually or at such other intervals
and on such other Distribution Dates specified in the
Prospectus Supplement solely out of the payments received in
respect of the assets of the related Trust Fund or other assets
pledged for the benefit of the Certificates as specified in the
related Prospectus Supplement. The amount allocable to payments
of principal and interest on any Distribution Date will be
determined as specified in the Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement, all
distributions will be made pro rata to Certificateholders of
the class entitled thereto, and the aggregate original
principal balance of the Certificates will equal the aggregate
distributions allocable to principal that such Certificates
will be entitled to receive. If specified in the Prospectus
Supplement, the Certificates will have an aggregate original
principal balance equal to the aggregate unpaid principal
balance of the Mortgage Assets as of a date specified in the
related Prospectus Supplement related to the creation of the
Trust Fund (the "Cut-off Date") and will bear interest in the
aggregate at a rate equal to the interest rate borne by the
underlying Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities, net of the aggregate servicing fees
and any other amounts specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, the aggregate
original principal balance of the Certificates and interest
rates on the classes of Certificates will be determined based
on the cash flow on the Mortgage Assets. The Pass-Through Rate
at which interest will be passed through to holders of
Certificates entitled thereto may be a fixed rate or a rate
that is subject to change from time to time from the time and
for the periods, in each case as specified in the Prospectus
Supplement. Any such rate may be calculated on a loan-by-loan,
weighted average or other basis, in each case as described in
the Prospectus Supplement.
Credit Enhancement ...................... The assets in a Trust Fund or the Certificates of one or more
classes in the related Series may have the benefit of one or
more types of credit enhancement described in the related
Prospectus Supplement. The protection against losses afforded
by any such credit support will be limited. Such credit
enhancement may include one or more of the following types:
A. Subordination............................ The rights of the holders of the Subordinated Certificates of a
Series to receive distributions with respect to the assets in
the related Trust Fund will be subordinated to such rights of
the holders of the Senior Certificates of the same Series to
the extent described in the related Prospectus Supplement. This
subordination is intended to enhance
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the likelihood of regular receipt by holders of Senior Certificates
of the full amount of payments which such holders would be entitled
to receive if there had been no losses or delinquencies. The
protection afforded to the holders of Senior Certificates of a Series
by means of the subordination feature may be accomplished by (i) the
preferential right of such holders to receive, prior to any distribution
being made in respect of the related Subordinated Certificates, the
amounts of principal and interest due them on each Distribution Date out of
the funds available for distribution on such date in the related Certificate
Account and, to the extent described in the related Prospectus Supplement, by
the right of such holders to receive future distributions on the assets in the
related Trust Fund that would otherwise have been payable to the Subordinated
Certificateholders; (ii) reducing the ownership interest of the related
subordinated Certificates; (iii) a combination of clauses (i) and (ii) above; or
(iv) as otherwise described in the related Prospectus Supplement. The protection
afforded to the holders of Senior Certificates of a Series by means of the
subordination feature also may be accomplished by allocating certain types of
losses or delinquencies to the Subordinated Certificates to the extent described
in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the same class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payments or types of losses or
delinquencies. If so specified in the related Prospectus Supplement,
subordination may apply only in the event of certain types of losses not covered
by other forms of credit support, such as hazard losses not covered by standard
hazard insurance policies or losses due to the bankruptcy of the borrower. If
specified in the Prospectus Supplement, a reserve fund may be established and
maintained by the deposit therein of distributions allocable to the holders of
Subordinated Certificates until a specified level is reached. The related
Prospectus Supplement will set forth information concerning the amount of
subordination of a class or classes of Subordinated Certificates in a Series,
the circumstances in which such subordination will be applicable, the manner, if
any, in which the amount of subordination will decrease over time, the manner of
funding the related reserve fund, if any, and the conditions under which amounts
in any such reserve fund will be used to make distributions to holders of Senior
Certificates or released from the related Trust Fund.
B. Reserve Accounts......................... One or more Reserve Accounts may be established and maintained
for each Series. The related Prospectus Supplement will specify
whether or not any such Reserve Account will be included in the
corpus of the Trust Fund for such Series and will also specify
the manner of funding the related Reserve Account and the
conditions under which the amounts in any such Reserve Account
will be used to make distributions to holders of Certificates
of a particular class or released from the related Trust Fund.
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C. Pool Insurance Policy.................... A mortgage pool insurance policy or policies (the "Pool
Insurance Policy") may be obtained and maintained for each
Series pertaining to Single Family Loans, Cooperative Loans or
Contracts, limited in scope, covering defaults on the related
Single Family Loans, Cooperative Loans or Contracts in an
initial amount equal to a specified percentage of the aggregate
principal balance of all Single Family Loans, Cooperative Loans
or Contracts included in the Mortgage Pool as of the Cut-off
Date or such other date as is specified in the related
Prospectus Supplement.
D. Special Hazard Insurance
Policy................................... In the case of Single Family Loans, Cooperative Loans or
Contracts, certain physical risks that are not otherwise
insured against by standard hazard insurance policies may be
covered by a special hazard insurance policy or policies (the
"Special Hazard Insurance Policy"). Unless otherwise specified
in the related Prospectus Supplement, each Special Hazard
Insurance Policy will be limited in scope and will cover losses
in an initial amount equal to the greatest of (i) a specified
percentage of the aggregate principal balance of the Single
Family Loans, Cooperative Loans or Contracts as of the related
Cut-off Date, (ii) twice the unpaid principal balance as of the
related Cut-off Date of the largest Single Family Loan,
Cooperative Loan or Contract in the related Mortgage Pool, or
(iii) the aggregate principal balance of Single Family Loans,
Cooperative Loans or Contracts as of the Cut-off Date secured
by property in any single zip code concentration.
E. Bankruptcy Bond.......................... A bankruptcy bond or bonds (the "Bankruptcy Bond") may be
obtained covering certain losses resulting from action which
may be taken by a bankruptcy court in connection with a Single
Family Loan, Cooperative Loan or Contract. The level of
coverage of each Bankruptcy Bond will be specified in the
related Prospectus Supplement.
F. FHA Insurance and VA
Guarantee................................ All or a portion of the Mortgage Loans in a Mortgage Pool may
be insured by FHA insurance and all or a portion of the Single
Family Loans or Contracts in a Mortgage Pool may be partially
guaranteed by the VA.
G. Other Arrangements....................... Other arrangements as described in the related Prospectus
Supplement including, but not limited to, one or more letters
of credit, financial guaranty insurance policies or third party
guarantees, interest rate or other swap agreements, caps,
collars or floors, may be used to provide coverage for certain
risks of defaults or losses. These arrangements may be in
addition to or in substitution for any forms of credit support
described in the Prospectus. Any such arrangement must be
acceptable to each nationally recognized rating agency that
rates the related Series of Certificates (the "Rating Agency").
H. Cross Support............................ If specified in the Prospectus Supplement, the beneficial
ownership of separate groups of assets or separate Trust Funds
may be
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evidenced by separate classes of the related Series of
Certificates. In such case, credit support may be provided by a
cross-support feature which requires that distributions be made
with respect to certain Certificates evidencing beneficial
ownership of one or more asset groups or Trust Funds prior to
distributions to other Certificates evidencing a beneficial
ownership interest in other asset groups or Trust Funds. If
specified in the Prospectus Supplement, the coverage provided
by one or more forms of credit support may apply concurrently
to two or more separate Trust Funds, without priority among
such Trust Funds, until the credit support is exhausted. If
applicable, the Prospectus Supplement will identify the asset
groups or Trust Funds to which such credit support relates and
the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the
identified asset groups or Trust Funds.
Advances................................. Unless otherwise specified in the related Prospectus
Supplement, each Master Servicer and, if applicable, each
mortgage servicing institution that services a Mortgage Loan in
a Mortgage Pool on behalf of a Master Servicer (a
"Sub-Servicer") will be obligated to advance amounts
corresponding to delinquent principal and interest payments on
such Mortgage Loan until the date on which the related
Mortgaged Property is sold at a foreclosure sale or the related
Mortgage Loan is otherwise liquidated. Any such obligation to
make advances may be limited to amounts due holders of Senior
Certificates of the related Series, to amounts deemed to be
recoverable from late payments or liquidation proceeds, for
specified periods or any combination thereof, or as otherwise
specified in the related Prospectus Supplement. See
"Description of the Certificates-Advances." Advances will be
reimbursable to the extent described herein and in the related
Prospectus Supplement.
Optional Termination..................... The Master Servicer, the holders of the residual interests in a
REMIC, or any other entity specified in the related Prospectus
Supplement may have the option to effect early retirement of a
Series of Certificates through the purchase of the Mortgage
Assets and other assets in the related Trust Fund under the
circumstances and in the manner described in "The Pooling and
Servicing Agreement-Termination; Optional Termination."
Legal Investment......................... Unless otherwise specified in the related Prospectus
Supplement, each class of Certificates offered hereby and by
the related Prospectus Supplement will constitute
"mortgage-related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") and, as such,
will be legal investments for certain types of institutional
investors to the extent provided in SMMEA, subject, in any
case, to any other regulations which may govern investments by
such institutional investors. See "Legal Investment."
Institutions whose investment activities are subject to legal investment laws
and regulations or to review by certain regulatory authorities may be subject to
restrictions on investment in the
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Certificates. Any such institution should consult its own legal advisors in
determining whether and to what extent there may be restrictions on its ability
to invest in the Certificates. See "Legal Investment" herein.
Certain Federal Income Tax
Consequences............................. The federal income tax consequences of the purchase, ownership
and disposition of the Certificates of each series will depend
on whether an election is made to treat the corresponding Trust
Fund (or certain assets of the Trust Fund) as a REMIC under the
Internal Revenue Code of 1986, as amended (the "Code").
REMIC. If an election is to be made to treat the Trust Fund for a series of
Certificates as a REMIC for federal income tax purposes, the related Prospectus
Supplement will specify which class or classes thereof will be designated as
regular interests in the REMIC ("REMIC Regular Certificates") and which class of
Certificates will be designated as the residual interest in the REMIC ("REMIC
Residual Certificates").
For federal income tax purposes, REMIC Regular Certificates generally will be
treated as debt obligations of the Trust Fund with payment terms equivalent to
the terms of such Certificates. Holders of REMIC Regular Certificates will be
required to report income with respect to such Certificates under an accrual
method, regardless of their normal tax accounting method. Original issue
discount, if any, on REMIC Regular Certificates will be includible in the income
of the Holders thereof as it accrues, in advance of receipt of the cash
attributable thereto, which rate of accrual will be determined based on a
reasonable assumed prepayment rate. The REMIC Residual Certificates generally
will not be treated as evidences of indebtedness for federal income tax
purposes, but instead, as representing rights to the taxable income or net loss
of the REMIC.
Each holder of a REMIC Residual Certificate will be required to take into
account separately its pro rata portion of the REMIC's taxable income or loss.
Certain income of a REMIC (referred to as "excess inclusions") generally may not
be offset by such a holder's net operating loss carryovers or other deductions,
and in the case of a tax-exempt holder of a REMIC Residual Certificate will be
treated as "unrelated business taxable income". In certain situations,
particularly in the early years of a REMIC, holders of a REMIC Residual
Certificate may have taxable income, and possibly tax liabilities with respect
to such income, in excess of cash distributed to them. "DISQUALIFIED
ORGANIZATIONS," AS DEFINED IN "CERTAIN FEDERAL INCOME TAX CONSEQUENCES-REMIC
RESIDUAL CERTIFICATES-TAX ON DISPOSITION OF REMIC RESIDUAL CERTIFICATES;
RESTRICTION ON TRANSFER; HOLDING BY PASS-THROUGH ENTITIES," ARE PROHIBITED FROM
ACQUIRING OR HOLDING ANY BENEFICIAL INTEREST IN THE REMIC RESIDUAL CERTIFICATES.
In certain cases, a transfer of a REMIC Residual Certificate will not be
effective for Federal income tax purposes. See "Certain Federal
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Income Tax Consequences-Transfers of REMIC Residual Certificates" and "-Foreign
Investors" herein.
GRANTOR TRUST. If no election is to be made to treat the Trust Fund for a series
of Certificates ("Non-REMIC Certificates") as a REMIC, the Trust Fund will be
classified as a grantor trust for federal income tax purposes and not as an
association taxable as a corporation. Holders of Non-REMIC Certificates will be
treated for such purposes, subject to the possible application of the stripped
bond rules, as owners of undivided interests in the related Mortgage Loans and
generally will be required to report as income their pro rata share of the
entire gross income (including amounts paid as reasonable servicing
compensation) from the Mortgage Loan and will be entitled, subject to certain
limitations, to deduct their pro rata share of expenses of the Trust Fund.
Investors are advised to consult their tax advisors and to review "Certain
Federal Income Tax Consequences" herein and, if applicable, in the related
Prospectus Supplement.
ERISA Considerations.......................... A fiduciary of any employee benefit plan or other retirement
plan or arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Code should carefully review with its legal advisors
whether the purchase, holding or disposition of Certificates
could give rise to a prohibited transaction under ERISA or the
Code or subject the assets of the Trust Fund to the fiduciary
investment standards of ERISA. See "ERISA Considerations."
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THE TRUST FUND
A Trust Fund for a Series of Certificates will include the Mortgage
Assets consisting of (A) a Mortgage Pool* comprised of (i) Single Family Loans,
(ii) Multifamily Loans, (iii) Cooperative Loans or (iv) Contracts, (B) Agency
Securities, or (C) Private Mortgage-Backed Securities, in each case, as
specified in the related Prospectus Supplement, together with payments in
respect of such Mortgage Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of any
other trust fund established by the Seller. If specified in the related
Prospectus Supplement, certain Certificates will evidence the entire beneficial
ownership interest in a Trust Fund which will contain a beneficial ownership
interest in another Trust Fund which will contain the Mortgage Assets. Unless
otherwise specified in the related Prospectus Supplement, the Mortgage Assets of
any Trust Fund will consist of Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities but not a combination thereof.
The Mortgage Assets will be acquired by the Seller, either directly or
through affiliates, from the Lenders and conveyed by the Seller to the related
Trust Fund. The Lenders may have originated the Mortgage Assets or acquired the
Mortgage Assets from the originators or other entities. See "Mortgage Loan
Program-Underwriting Standards."
The following is a brief description of the Mortgage Assets expected to
be included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Certificates (the "Detailed Description"). A copy of
the Agreement with respect to each Series of Certificates will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule of the
Mortgage Assets relating to such Series will be attached to the Agreement
delivered to the Trustee upon delivery of the Certificates.
THE MORTGAGE LOANS-GENERAL
The real property and Manufactured Homes, as the case may be, which
secure repayment of the Mortgage Loans (the "Mortgaged Properties") may be
located in any one of the fifty states or the District of Columbia, Guam, Puerto
Rico or any other territory of the United States. Certain Mortgage Loans may be
conventional loans (I.E., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the Prospectus Supplement and described below. Mortgage Loans with
certain Loan-to-Value Ratios (as defined herein) and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly or bi-weekly. Unless otherwise specified in the related Prospectus
Supplement, all of the monthly-pay Mortgage Loans in a Mortgage Pool will have
payments due on the first day of each month. The payment terms of the Mortgage
Loans to be included in a Trust Fund will be described in the related Prospectus
Supplement and may include any of the following features or combination thereof
or other features described in the related Prospectus Supplement:
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* Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Mortgage Pool and the Certificates
representing certain undivided interests, as described below, in a
single Trust Fund consisting primarily of the Mortgage Loans in such
Mortgage Pool. Similarly, the term "Pass-Though 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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(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is fixed for period of
time or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible from
an adjustable rate to a fixed rate. Changes to an adjustable rate may be subject
to periodic limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be specified
in the related Prospectus Supplement. Mortgage Loans may provide for the payment
of interest at a rate lower than the Mortgage Rate for a period of time or for
the life of the Mortgage Loan, and the amount of any difference may be
contributed from funds supplied by the seller of the Mortgaged Property or
another source or may be treated as accrued interest added to the principal of
the Mortgage Loan.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate that
is different from the interest rate on the Mortgage Loan or may not be
amortized during all or a portion of the original term. Payment of all
or a substantial portion of the principal may be due on maturity
("balloon" payments). Principal may include interest that has been
deferred and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time or may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments. Certain Mortgage Loans sometimes called graduated payment
mortgage loans may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred
payment of a portion of the interest due monthly during such period,
and recoup the deferred interest through negative amortization whereby
the difference between the scheduled payment of interest and the amount
of interest actually accrued is added monthly to the outstanding
principal balance. Other Mortgage Loans sometimes referred to as
growing equity mortgage loans may provide for periodic scheduled
payment increases for a specified period with the full amount of such
increases being applied to principal. Other Mortgage Loans sometimes
referred to as reverse mortgages may provide for monthly payments to
the borrowers with interest and principal payable when the borrowers
move or die. Reverse mortgages typically are made to older persons who
have substantial equity in their homes.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to demand payment of the
entire Mortgage Loan in connection with the sale or certain transfers
of the related Mortgaged Property. Other Mortgage Loans may be
assumable by persons meeting the then applicable underwriting standards
of the Lender.
Each Prospectus Supplement will contain information, as of the date of
such Prospectus Supplement and to the extent then specifically known to the
Seller, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Mortgage Loans (E.G., one- to
four-family houses, vacation and second homes, Manufactured Homes, multifamily
apartments or other real property), (iii) the original terms to maturity of the
Mortgage Loans, (iv) the largest original principal balance and the smallest
original principal balance of any of the Mortgage Loans, (v) the earliest
origination date and latest maturity date of any of the Mortgage Loans, (vi) the
aggregate principal balance of Mortgage Loans having Loan-to-Value Ratios at
origination exceeding 80%, (vii) the Mortgage Rates or APR's or range of
Mortgage Rates or APR's borne by the Mortgage Loans,
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and (viii) the geographical distribution of the Mortgage Loans on a
state-by-state basis. If specific information respecting the Mortgage Loans is
not known to the Seller at the time the related Certificates are initially
offered, more general information of the nature described above will be provided
in the Prospectus Supplement and specific information will be set forth in the
Detailed Description.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio, expressed as a percentage, of the then outstanding principal balance of
the Mortgage Loan to the Collateral Value of the related Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, the "Collateral
Value" of a Mortgaged Property, other than with respect to Contracts and certain
Mortgage Loans the proceeds of which were used to refinance an existing mortgage
loan (each, a "Refinance Loan"), is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
Mortgage Loan and (b) the sales price for such property. Unless otherwise
specified in the related Prospectus Supplement, in the case of Refinance Loans,
the Collateral Value of the related Mortgaged Property is the appraised value
thereof determined in an appraisal obtained at the time of refinancing. Unless
otherwise specified in the related Prospectus Supplement, for purposes of
calculating the Loan-to-Value Ratio of a Contract relating to a new Manufactured
Home, the Collateral Value is no greater than the sum of a fixed percentage of
the list price of the unit actually billed by the manufacturer to the dealer
(exclusive of freight to the dealer site) including "accessories" identified in
the invoice (the "Manufacturer's Invoice Price"), plus the actual cost of any
accessories purchased from the dealer, a delivery and set-up allowance,
depending on the size of the unit, and the cost of state and local taxes, filing
fees and up to three years prepaid hazard insurance premiums. Unless otherwise
specified in the related Prospectus Supplement, the Collateral Value of a used
Manufactured Home is the least of the sales price, appraised value, and National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home is based upon the
age and condition of the manufactured housing unit and the quality and condition
of the mobile home park in which it is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Pool. In the case of
Multifamily Loans, such other factors could include excessive building resulting
in an oversupply of rental housing stock or a decrease in employment reducing
the demand for rental units in an area; federal, state or local regulations and
controls affecting rents; prices of goods and energy; environmental
restrictions; increasing labor and material costs; and the relative
attractiveness to tenants of the Mortgaged Properties. To the extent that such
losses are not covered by credit enhancements, such losses will be borne, at
least in part, by the holders of the Certificates of the related Series.
The Seller will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "Mortgage Loan Program"
and "The Pooling and Servicing Agreement." With respect to Mortgage Loans
serviced by a Master Servicer through a Sub-Servicer, the Master Servicer will
remain liable for its servicing obligations under the related Agreement as if
the Master Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Seller with respect to a Series of Certificates will be
to obtain certain representations and warranties from the Lenders or other third
parties and to assign to the Trustee for such Series of Certificates the
Seller's rights with respect to such representations and warranties. See "The
Pooling and Servicing Agreement-Assignment of Mortgage Assets." The obligations
of each Master Servicer with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related Agreement
(including its obligation to enforce the obligations of the Sub-Servicers,
Lenders or other
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third parties as more fully described herein under "Mortgage Loan Program -
Representations by Lenders; Repurchases" and "The Pooling and Servicing
Agreement-Sub-Servicing by Lenders," "-Assignment of Mortgage Assets") and its
obligation to make certain cash advances in the event of delinquencies in
payments on or with respect to the Mortgage Loans in the amounts described
herein under "Description of the Certificates-Advances." The obligations of a
Master Servicer to make advances may be subject to limitations, to the extent
provided herein and in the related Prospectus Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
Unless otherwise specified in the Prospectus Supplement, Single Family
Loans will consist of mortgage loans, deeds of trust or participation or other
beneficial interests therein, secured by first liens on one- to four-family
residential properties. If so specified, the Single Family Loans may include
loans or participations therein secured by mortgages or deeds of trust on
condominium units in condominium buildings together with such condominium unit's
appurtenant interest in the common elements of the condominium building. Unless
otherwise specified, the Cooperative Loans will be secured by security interests
in or similar liens on stock, shares or membership certificates issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. Single Family Loans and Cooperative Loans may be
conventional loans (I.E., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, Single Family Loans and Cooperative Loans
will all have individual principal balances at origination of not less than
$25,000 and not more than $1,000,000, and original terms to stated maturity of
15 to 40 years.
The Mortgaged Properties relating to Single Family Loans will consist
of detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, and certain other dwelling units. Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold will exceed the scheduled maturity of the Mortgage Loan by at
least five years, unless otherwise specified in the related Prospectus
Supplement. Certain Mortgage Loans may be originated or acquired in connection
with employee relocation programs.
MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first liens on
rental apartment buildings or projects containing five or more residential
units. Such loans may be conventional loans or FHA-insured loans, as specified
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Multifamily Loans will all have original terms to stated
maturity of not more than 40 years.
Mortgaged Properties which secure Multifamily Loans may include
high-rise, mid-rise and garden apartments. Certain of the Multifamily Loans may
be secured by apartment buildings owned by Cooperatives. The Cooperative owns
all the apartment units in the building and all common areas. The Cooperative is
owned by tenant-stockholders who, through ownership of stock, shares or
membership certificates in the corporation, receive proprietary leases or
occupancy agreements which confer exclusive rights to occupy specific apartments
or units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its mortgage loan, real property taxes,
maintenance expenses and other capital or ordinary expenses. Those payments are
in addition to any payments of principal and interest the tenant-stockholder
must make on any loans to the tenant-stockholder secured by its shares in the
Cooperative. The Cooperative will be directly responsible for building
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. A Cooperative's ability to meet debt service obligations on
a Multifamily Loan, as well as all other operating expenses, will be dependent
in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the Cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
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CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Contract will be fully amortizing and will bear interest at its APR. Unless
otherwise specified in the related Prospectus Supplement, Contracts will all
have individual principal balances at origination of not less than $10,000 and
not more than $1,000,000 and original terms to stated maturity of 5 to 40 years.
Unless otherwise specified in the related Prospectus Supplement, the
"Manufactured Homes" securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust Fund, among other things, the date of origination
of the Contracts; the APRs on the Contracts; the Contract Loan-to-Value Ratios;
the minimum and maximum outstanding principal balances as of the Cut-off Date
and the average outstanding principal balance; the outstanding principal
balances of the Contracts included in the related Trust Fund; and the original
maturities of the Contracts and the last maturity date of any Contract.
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GNMA is a wholly-owned
corporate instrumentality of the United States with the United States Department
of Housing and Urban Development. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgage loans insured by FHA under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or Chapter 37 of Title 38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury in an amount which is at
any time sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
GNMA CERTIFICATES. Each GNMA Certificate held in a Trust Fund (which
may be issued under either the GNMA I Program or the GNMA II Program) will be a
"fully modified pass-through" mortgaged-backed certificate issued and serviced
by a mortgage banking company or other financial concern ("GNMA Issuer")
approved by GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or VA
Loans. The mortgage loans underlying the GNMA Certificates will consist of FHA
Loans and/or VA Loans. Each such mortgage loan is secured by a one- to
four-family residential property or a manufactured home. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate,
even if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each such
GNMA Certificate.
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The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties or manufactured homes and will provide for the payment by
or on behalf of the GNMA Issuer to the registered holder of such GNMA
Certificate of scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loan or VA Loan
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate
as it becomes due, it must promptly notify GNMA and request GNMA to make such
payment. Upon notification and request, GNMA will make such payments directly to
the registered holder of such GNMA Certificate. In the event no payment is made
by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make
such payment, the holder of such GNMA Certificate will have recourse only
against GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have
the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on such GNMA I
Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or Buydown Loans. No statistics comparable
to the FHA's prepayment experience on level payment, non-buydown loans
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are available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Certificates may be held in book-entry form.
If specified in a Prospectus Supplement, GNMA Certificates may be
backed by multifamily mortgage loans having the characteristics specified in
such Prospectus Supplement.
The GNMA Certificates included in a Trust fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act (the "Charter Act"). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA CERTIFICATES. FNMA Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by FNMA. Each mortgage loan must meet the applicable
standards of the FNMA purchase program. Mortgage loans comprising a pool are
either provided by FNMA from its own portfolio or purchased pursuant to the
criteria of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or other servicers
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than in its annual pass-through rate and under a
special servicing option (pursuant to which FNMA assumes the entire risk for
foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will generally be between 55 basis points and 255 basis
points greater than the annual FNMA Certificate pass-through rate. If specified
in the Prospectus Supplement, FNMA Certificates may be backed by adjustable rate
mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's operations or to assist
FNMA in any other manner. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
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distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than FNMA Certificates backed by pools
containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each FNMA Certificate will be made by FNMA on the 25th
day of each month to the persons in whose name the FNMA Certificate is entered
in the books of the Federal Reserve Banks (or registered on the FNMA Certificate
register in the case of fully registered FNMA Certificates) as of the close of
business on the last day of the preceding month. With respect to FNMA
Certificates issued in book-entry form, distributions thereon will be made by
wire, and with respect to fully registered FNMA Certificates, distributions
thereon will be made by check.
The FNMA Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION. FHLMC is a publicly held United
States government-sponsored enterprise created pursuant to the Federal Home Loan
Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC CERTIFICATES. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 30 years. Each such
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate group. Under the Guarantor Program, any
such FHLMC Certificate group may include only whole loans or participation
interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the Prospectus
Supplement for a Series of Certificates, guarantee the timely payment of
scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the timely
payment of principal based on the difference between the pool factor, published
in the month preceding the month of distribution and the pool factor published
in such month of distribution. Pursuant to its guarantees, FHLMC indemnifies
holders of FHLMC Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. FHLMC may remit the
amount due on account of its guarantee of collection of principal at any time
after default on an underlying mortgage loan, but not later than (i) 30 days
following foreclosure sale, (ii) 30 days following payment of the claim by any
mortgage insurer, or (iii) 30 days
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following the expiration of any right of redemption, whichever occurs later, but
in any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. In taking actions regarding the
collection of principal after default on the mortgage loans underlying FHLMC
Certificates, including the timing of demand for acceleration, FHLMC reserves
the right to exercise its judgment with respect to the mortgage loans in the
same manner as for mortgage loans which it has purchased but not sold. The
length of time necessary for FHLMC to determine that a mortgage loan should be
accelerated varies with the particular circumstances of each mortgagor, and
FHLMC has not adopted standards which require that the demand be made within any
specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, interest rates on the mortgage loans
underlying a FHLMC Certificate may exceed the pass-through rate on the FHLMC
Certificate by 50 to 100 basis points. Under such program, FHLMC purchases
groups of whole mortgage loans from sellers at specified percentages of their
unpaid principal balances, adjusted for accrued or prepaid interest, which when
applied to the interest rate of the mortgage loans and participations purchased,
results in the yield (expressed as a percentage) required by FHLMC. The required
yield, which includes a minimum servicing fee retained by the servicer, is
calculated using the outstanding principal balance. The range of interest rates
on the mortgage loans and participations in a FHLMC Certificate group under the
Cash Program will vary since mortgage loans and participations are purchased and
assigned to a FHLMC Certificate group based upon their yield to FHLMC rather
than on the interest rate on the underlying mortgage loans. Under FHLMC's
Guarantor Program, the pass-through rate on a FHLMC Certificate is established
based upon the lowest interest rate on the underlying mortgage loans, minus a
minimum servicing fee and the amount of FHLMC's management and guaranty income
as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of
one or more stripped mortgage-backed securities, each as described herein and in
the related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA, GNMA
or other government agency or government-sponsored agency Certificates. The
underlying securities will be held under a trust agreement by FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency, each as
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trustee, or by another trustee named in the related Prospectus Supplement.
FHLMC, FNMA, GNMA or another government agency or government-sponsored agency
will guarantee each stripped Agency Security to the same extent as such entity
guarantees the underlying securities backing such stripped Agency Security,
unless otherwise specified in the related Prospectus Supplement.
OTHER AGENCY SECURITIES. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage
pass-through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of Mortgage
Loans, or (b) collateralized mortgage obligations secured by Mortgage Loans.
Private Mortgage-Backed Securities will have been issued pursuant to a PMBS
agreement (the "PMBS Agreement"). The seller/servicer of the underlying Mortgage
Loans will have entered into the PMBS Agreement with the PMBS Trustee under the
PMBS Agreement. The PMBS Trustee or its agent, or a custodian, will possess the
Mortgage Loans underlying such Private Mortgage-Backed Security. Mortgage Loans
underlying a Private Mortgage-Backed Security will be serviced by the PMBS
Servicer directly or by one or more sub-servicers who may be subject to the
supervision of the PMBS Servicer. Unless otherwise described in the Prospectus
Supplement, the PMBS Servicer will be a FNMA or FHLMC approved servicer and, if
FHA Loans underlie the Private Mortgage-Backed Securities, approved by the
Department of Housing and Urban Development ("HUD") as an FHA mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate of
the Seller. The obligations of the PMBS Issuer will generally be limited to
certain representations and warranties with respect to the assets conveyed by it
to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the Mortgage Loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will he made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
UNDERLYING LOANS. The Mortgage Loans underlying the Private
Mortgage-Backed Securities may consist of fixed rate, level payment, fully
amortizing loans or graduated payment mortgage loans, buydown loans, adjustable
rate mortgage loans, or loans having balloon or other special payment features.
Such Mortgage Loans may be secured by single family property, multifamily
property, Manufactured Homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a Cooperative and the
related shares issued by such Cooperative. Except as otherwise specified in the
related Prospectus Supplement, (i) no Mortgage Loan will have had a
Loan-to-Value Ratio at origination in excess of 95%, (ii) each Single Family
Loan secured by a Mortgaged Property having a Loan-to-Value Ratio in excess of
80% at origination will be covered by a primary mortgage insurance policy until
the principal balance is reduced to 80%, (iii) each Mortgage Loan will have had
an original term to stated maturity of not less than 5 years and not more than
40 years, (iv) no Mortgage Loan that was more than 30 days delinquent more
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than once in the past 12 months and will not be delinquent as of the Cut-off
Date as to the payment of principal or interest will have been eligible for
inclusion in the assets under the related PMBS Agreement, (v) each Mortgage Loan
(other than a Cooperative Loan) will be required to be covered by a standard
hazard insurance policy (which may be a blanket policy), and (vi) each Mortgage
Loan (other than a Cooperative Loan or a Contract secured by a Manufactured
Home) will be covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Mortgage Loans underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Mortgage-Backed Securities will specify
(i) the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the Mortgage Loans which comprise the underlying assets for
the Private Mortgage-Backed Securities including to the extent available (A) the
payment features of such Mortgage Loans, (B) the approximate aggregate principal
balance, if known, of underlying Mortgage Loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Mortgage Loans, and (D) the minimum and maximum stated maturities
of the underlying Mortgage Loans at origination, (iii) the maximum original
term-to-stated maturity of the Private Mortgage-Backed Securities, (iv) the
weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the Mortgage Loans underlying the Private
Mortgage-Backed Securities or to such Private Mortgage-Backed Securities
themselves, (ix) the terms on which the underlying Mortgage Loans for such
Private Mortgage-Backed Securities may, or are required to, be purchased prior
to their stated maturity or the stated maturity of the Private Mortgage-Backed
Securities and (x) the terms on which Mortgage Loans may be substituted for
those originally underlying the Private Mortgage-Backed Securities.
SUBSTITUTION OF MORTGAGE ASSETS
If so provided in the related Prospectus Supplement, substitution of
Mortgage Assets will be permitted in the event of breaches of representations
and warranties with respect to any original Mortgage Asset or in the event the
documentation with respect to any Mortgage Asset is determined by the Trustee to
be incomplete. The period during which such substitution will be permitted
generally will be indicated in the related Prospectus Supplement. The related
Prospectus Supplement will describe any other conditions upon which Mortgage
Assets may be substituted for Mortgage Assets initially included in the Trust
Fund.
USE OF PROCEEDS
The Seller intends to use the net proceeds to be received from the sale
of the Certificates of each Series to repay short-term loans incurred to finance
the purchase of the Mortgage Assets related to such Certificates, to acquire
certain of the Mortgage Assets to be deposited in the related trust Fund, and/or
to pay other expenses connected with pooling Mortgage Assets and issuing
Certificates. Any amounts remaining after such payments may be used for general
corporate purposes. The Seller expects to sell Certificates in Series from time
to time.
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THE SELLER
Bear Stearns Mortgage Securities Inc., the Seller, is a Delaware
corporation organized on October 17, 1991 for the purpose of acquiring Mortgage
Assets and selling interests therein or bonds secured thereby. It is a wholly
owned subsidiary of Bear Stearns Mortgage Capital Corporation, a Delaware
corporation, and an affiliate of Bear, Stearns & Co. Inc. The Seller maintains
its principal office at 245 Park Avenue, New York, New York 10167. Its telephone
number is (212) 272-2000.
The Seller does not have, nor is it expected in the future to have, any
significant assets.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Seller, either
directly or through affiliates, from Lenders. Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Loans so acquired by the Seller will
have been originated in accordance with the underwriting criteria specified
below under "Underwriting Standards."
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will represent and warrant that all Mortgage Loans originated and/or sold
by it to the Seller or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by mortgage lenders or
manufactured home lenders generally during the period of origination. As to any
Mortgage Loan insured by the FHA or partially guaranteed by the VA, the Lender
will represent that it has complied with underwriting policies of the FHA or the
VA, as the case may be.
Underwriting standards are applied by or on behalf of a Lender to
evaluate the borrower's credit standing and repayment ability, and the value and
adequacy of the Mortgaged Property as collateral. In general, a prospective
borrower applying for a Single Family Loan or a Cooperative Loan or for
financing secured by a Manufactured Home is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report which summarizes the borrower's credit history with
local merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained from an independent source (typically the
borrower's employer) which verification reports the length of employment with
that organization, the current salary, and whether it is expected that the
borrower will continue such employment in the future. If a prospective borrower
is self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
Underwriting standards which pertain to the creditworthiness of borrowers
seeking Multifamily Loans will be described in the related Prospectus
Supplement.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. With respect to Single Family
Loans, the appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. With respect to Cooperative Loans, the appraisal is based
on the market value of comparable units. With respect to Contracts, the
appraisal is based on recent sales of comparable Manufactured Homes and, when
deemed applicable, a replacement cost analysis based on the cost of a comparable
Manufactured Home. With respect to a Multifamily Loan, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis, was
used. An appraisal employing the income approach to value analyzes a multifamily
project's cashflow, expenses, capitalization and other operational information
in determining the property's value. The market approach to value focuses its
analysis on the prices paid for the purchase of similar properties in the
multifamily project's area, with adjustments made for variations between these
other properties and the multifamily project being appraised. The cost approach
calls for the appraiser to make an estimate of land value and then determine the
current cost of reproducing
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the building less any accrued depreciation. In any case, the value of the
property being financed, as indicated by the appraisal, must be such that it
currently supports, and is anticipated to support in the future, the outstanding
loan balance.
In the case of Single Family Loans, Cooperative Loans and Contracts,
once all applicable employment, credit and property information is received, a
determination generally is made as to whether the prospective borrower has
sufficient monthly income available (i) to meet the borrower's monthly
obligations on the proposed mortgage loan (determined on the basis of the
monthly payments due in the year of origination) and other expenses related to
the Mortgaged Property (such as property taxes and hazard insurance) and (ii) to
meet monthly housing expenses and other financial obligations and monthly living
expenses. The underwriting standards applied by Lenders may be varied in
appropriate cases where factors such as low Loan-to-Value Ratios or other
favorable credit factors exist.
A Lender may originate Mortgage Loans under a reduced documentation
program. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the Lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain credit underwriting documentation concerning income and employment
verification is waived.
In the case of a Single Family or Multifamily Loan secured by a
leasehold interest in a real property, the title to which is held by a third
party lessor, the Lender will represent and warrant, among other things, that
the remaining term of the lease and any sublease is at least five years longer
than the remaining term of the Mortgage Loan.
Certain of the types of Mortgage Loans which may be included in the
Mortgage Pools are recently developed and may involve additional uncertainties
not present in traditional types of loans. For example, certain of such Mortgage
Loans may provide for escalating or variable payments by the mortgagor or
obligor. These types of Mortgage Loans are underwritten on the basis of a
judgment that mortgagors or obligors will have the ability to make monthly
payments required initially. In some instances, however, a mortgagor's or
obligor's income may not be sufficient to permit continued loan payments as such
payments increase.
QUALIFICATIONS OF LENDERS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will be required to satisfy the qualifications set forth herein. Each
Lender must be an institution experienced in originating and servicing Mortgage
Loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those Mortgage Loans. Unless otherwise
specified in the Prospectus Supplement, each Lender must be a seller/servicer
approved by either FNMA or FHLMC, and each Lender must be a mortgagee approved
by the HUD or an institution the deposit accounts in which are insured by the
Federal Deposit Insurance Corporation (the "FDIC").
REPRESENTATIONS BY LENDERS; REPURCHASES
Unless otherwise specified in the related Prospectus Supplement or
Agreement, each Lender will have made representations and warranties in respect
of the Mortgage Loans sold by such Lender and evidenced by a Series of
Certificates. Such representations and warranties generally include, among other
things: (i) that title insurance (or in the case of Mortgaged Properties located
in areas where such policies are generally not available, an attorney's
certificate of title) in the case of Single Family Loans and Multifamily Loans
and any required hazard insurance policy was in effect on the date of purchase
of the Mortgage Loan from the Lender by or on behalf of the Seller; (ii) that
the Lender had title to each such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims; (iii) that each Mortgage Loan
constituted a valid first lien on, or a perfected security interest with respect
to, the Mortgaged Property (subject only to permissible title insurance
exceptions, if applicable, and certain other exceptions described in the
Agreement) and that the Mortgaged Property was free from damage and was in good
repair; (iv) that there were no delinquent tax or assessment liens against the
Mortgaged Property, (v) that no required payment on a Mortgage Loan
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was more than thirty days delinquent; and (vi) that each Mortgage Loan was made
in compliance with, and is enforceable under, all applicable state and federal
laws and regulations in all material respects.
Unless otherwise specified in the related Prospectus Supplement, all of
the representations and warranties of a Lender in respect of a Mortgage Loan
will have been made as of the date on which such Lender sold the Mortgage Loan
to the Seller or one of its affiliates. A substantial period of time may have
elapsed between such date and the date of initial issuance of the Series of
Certificates evidencing an interest in such Mortgage Loan. Since the
representations and warranties of a Lender do not address events that may occur
following the sale of a Mortgage Loan by such Lender, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a Mortgage Loan occurs after
the date of sale of such Mortgage Loan by such Lender to the Seller or its
affiliates. If the Master Servicer is also a Lender with respect to a particular
Series, such representations will be in addition to the representations and
warranties, if any, made by the Master Servicer in its capacity as a Master
Servicer.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer or the Trustee, if the Master Servicer is the Lender, will
promptly notify the relevant Lender of any breach of any representation or
warranty made by it in respect of a Mortgage Loan which materially and adversely
affects the interests of the Certificateholders in such Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Lender cannot
cure such breach within 60 days after notice from the Master Servicer or the
Trustee, as the case may be, then such Lender will be obligated to repurchase
such Mortgage Loan from the Trust Fund at a price (the "Purchase Price") equal
to the unpaid principal balance thereof as of the date of the repurchase plus
accrued interest thereon to the first day of the month following the month of
repurchase at the Mortgage Rate (less any amount payable as related servicing
compensation if the Lender is the Master Servicer) or such other price as may be
described in the related Prospectus Supplement. Except in those cases in which
the Master Servicer is the Lender, the Master Servicer will be required under
the applicable Agreement to enforce this obligation for the benefit of the
Trustee and the holders of the Certificates, following the practices it would
employ in its good faith business judgment were it the owner of such Mortgage
Loan. This repurchase obligation will constitute the sole remedy available to
holders of Certificates or the Trustee for a breach of representation by a
Lender. Certain rights of substitution for defective Mortgage Loans may be
provided with respect to a Series in the related Prospectus Supplement.
Neither the Seller nor the Master Servicer (unless the Master Servicer
is the Lender) will be obligated to purchase a Mortgage Loan if a Lender
defaults on its obligation to do so, and no assurance can be given that Lenders
will carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty of
a Lender may also constitute a breach of a representation made by the Master
Servicer, the Master Servicer may have a repurchase obligation as described
below under "The Pooling and Servicing Agreement-Assignment of Mortgage Assets."
If specified in the related Prospectus Supplement, the Lender may have
acquired the Mortgage Loans from a third party which made certain
representations and warranties to the Lender as of the time of the sale to the
Lender. In lieu of representations and warranties made by the Lender as of the
time of the sale to the Seller, the Lender may assign the representations and
warranties from the third party to the Seller, which will assign them to the
Trustee on behalf of the Certificateholders. In such cases, the third party will
be obligated to purchase a Mortgage Loan upon a breach of such representations
and warranties, and the Lender will not be obligated to purchase a Mortgage Loan
if the third party defaults on its obligation to do so.
The Lender and any third party which conveyed the Mortgage Loans to the
Lender may experience financial difficulties and in some instances may enter
into insolvency proceedings. As a consequence, the Lender or such third party
may be unable to perform its repurchase obligations with respect to the Mortgage
Loans. Any arrangements for the assignment of representations and the repurchase
of Mortgage Loans must be acceptable to the Rating Agency rating the related
Certificates.
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OPTIONAL PURCHASE OF DEFAULTED LOANS
If specified in the related Prospectus Supplement, the Master Servicer
may, at its option, purchase from the Trust Fund any Mortgage Loan which is
delinquent in payment by 91 days or more. Any such purchase shall be at such
price as may be described in the related Prospectus Supplement.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement,
dated as of the related Cut-off Date, among the Seller, one or more Master
Servicers and the Trustee for the benefit of the holders of the Certificates of
such Series. The provisions of each Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the related
Trust Fund. A form of an Agreement is an exhibit to the Registration Statement
of which this Prospectus is a part. The following summaries describe certain
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Certificates will describe any provision of the Agreement relating to
such Series that materially differs from the description thereof contained in
this Prospectus. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Seller will provide a copy of the Agreement (without exhibits)
relating to any Series without charge upon written request of a holder of a
Certificate of such Series addressed to Bear Stearns Mortgage Securities Inc.,
245 Park Avenue, New York, New York 10167.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the
Certificates of each Series will be issued in fully registered form only, in the
denominations specified in the related Prospectus Supplement, will evidence
specified beneficial ownership interests in the related Trust Fund created
pursuant to each Agreement and will not be entitled to payments in respect of
the Mortgage Assets included in any other Trust Fund established by the Seller.
The Certificates will not represent obligations of the Seller or any affiliate
of the Seller. The Mortgage Loans will not be insured or guaranteed by any
governmental entity or other person, unless otherwise specified in the
Prospectus Supplement. Each Trust Fund will consist of, to the extent provided
in the Agreement, (i) the Mortgage Assets, as from time to time are subject to
the related Agreement (exclusive of any amounts specified in the Prospectus
Supplement ("Retained Interest")), (ii) such assets as from time to time are
required to be deposited in the related Protected Account, Certificate Account
or any other accounts established pursuant to the Agreement (collectively, the
"Accounts"); (iii) property which secured a Mortgage Loan and which is acquired
on behalf of the Certificateholders by foreclosure or deed in lieu of
foreclosure and (iv) any Primary Insurance Policies, FHA insurance (the "FHA
Insurance"), VA guarantees (the "VA Guarantees"), other insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
Agreement. If so specified in the related Prospectus Supplement, a Trust Fund
may include one or more of the following: reinvestment income on payments
received on the Mortgage Assets, a reserve fund, a mortgage pool insurance
policy, a special hazard insurance policy, a bankruptcy bond, one or more
letters of credit, a financial guaranty insurance policy, third party guarantees
or similar instruments or other agreements. If provided in the related
Agreement, a certificate administrator may be obligated to perform certain
duties in connection with the administration of the Certificates.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that receive certain preferential
treatment with respect to one or more other classes of Certificates of such
Series. Certain Series or classes of Certificates may he covered by insurance
policies or other forms of credit enhancement, in each case as described herein
and in the related Prospectus Supplement. Distributions on one or more classes
of a Series of Certificates may be made prior to one or more other classes,
after the occurrence of specified events, in accordance with a schedule or
formula, on the basis of collections from designated portions of the Mortgage
Assets in the related Trust Fund or on a different basis, in each
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case, as specified in the related Prospectus Supplement. The timing and amounts
of such distributions may vary among classes or over time as specified in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Distribution Date (I.E, monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the Prospectus Supplement) in
proportion to the percentages specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Certificates are
registered at the close of business on the dates specified in the Prospectus
Supplement (each, a "Record Date"). Distributions will be made by check or money
order mailed to the persons entitled thereto at the address appearing in the
register maintained for holders of Certificates (the "Certificate Register") or,
if specified in the related Prospectus Supplement, in the case of Certificates
that are of a certain minimum denomination, upon written request by the
Certificateholder, by wire transfer or by such other means as are described
therein; provided, however, that the final distribution in retirement of the
Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee or other person specified in
the notice to Certificateholders of such final distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
DISTRIBUTIONS ON CERTIFICATES
GENERAL. In general, the method of determining the amount of
distributions on a particular Series of Certificates will depend on the type of
credit support, if any, that is used with respect to such Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Certificates of a
particular Series. The Prospectus Supplement for each Series of Certificates
will describe the method to be used in determining the amount of distributions
on the Certificates of such Series.
Distributions allocable to principal and interest on the Certificates
will be made by the Trustee out of, and only to the extent of, funds in the
related Certificate Account, including any funds transferred from any Reserve
Account and funds received as a result of credit enhancement. As between
Certificates of different classes and as between distributions of interest and
principal and, if applicable, between distributions of prepayments of principal
and scheduled payments of principal, distributions made on any Distribution Date
will be applied as specified in the Prospectus Supplement. Unless otherwise
specified in the Prospectus Supplement, distributions to any class of
Certificates will be made pro rata to all Certificateholders of that class.
AVAILABLE FUNDS. All distributions on the Certificates of each Series
on each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related Prospectus
Supplement, "Available Funds" for each Distribution Date will equal the sum of
the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including principal prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Mortgage Loans in the related Trust
Fund received by the Master Servicer after the Cut-off Date and on or
prior to the day of the month of the related Distribution Date
specified in the Prospectus Supplement (the "Determination Date")
except:
(a) all payments which were due on or before the
Cut-off Date;
(b) all Liquidation Proceeds, all Insurance
Proceeds, all Principal Prepayments (each defined herein) and
all proceeds of any Mortgage Loan purchased by a Lender or any
other entity pursuant to the Agreement that were received
after the prepayment period specified in the Prospectus
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Supplement and all related payments of interest representing
interest for any period after such prepayment period;
(c) all scheduled payments of principal and
interest due on a date or dates subsequent to the first day of
the month of distribution;
(d) amounts received on particular Mortgage
Loans as late payments of principal or interest or other
amounts required to be paid by the mortgagors (the
"Mortgagors"), but only to the extent of any unreimbursed
advance in respect thereof made by the Master Servicer
(including the related Sub-Servicers);
(e) amounts representing reimbursement, to the
extent permitted by the Agreement and as described under
"Advances" below, for advances made by the Master Servicer and
advances made by Sub-Servicers that were deposited into the
Certificate Account, and amounts representing reimbursement
for certain other losses and expenses incurred by the Master
Servicer or the Seller and described below or in the related
Agreement; and
(f) that portion of each collection of interest
on a particular Mortgage Loan in such Trust Fund which
represents servicing compensation payable to the Master
Servicer or Retained Interest which is to be retained from
such collection or is permitted to be retained from related
Insurance Proceeds, Liquidation Proceeds or proceeds of
Mortgage Loans purchased pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer
(including Sub-Servicers) as described under "Advances" below and
deposited by it in the Certificate Account; and
(iii) if applicable, amounts withdrawn from a Reserve
Account or received in connection with other credit support.
DISTRIBUTIONS OF INTEREST. Unless otherwise specified in the Prospectus
Supplement, interest will accrue on the aggregate Current Principal Amount
(defined herein) (or, in the case of Certificates entitled only to distributions
allocable to interest, the aggregate notional principal balance) of each class
of Certificates entitled to interest from the date, at the Pass-Through Rate and
for the periods specified in the Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on each
class of Certificates entitled to interest (other than a class of Certificates
that provides for interest that accrues, but is not currently payable, referred
to hereafter as "Accrual Certificates") will be distributable on the
Distribution Dates specified in the Prospectus Supplement until the aggregate
Current Principal Amount of the Certificates of such class has been distributed
in full or, in the case of Certificates entitled only to distributions allocable
to interest, until the aggregate notional principal balance of such Certificates
is reduced to zero or for the period of time designated in the Prospectus
Supplement. The original Current Principal Amount of each Certificate will equal
the aggregate distributions allocable to principal to which such Certificate is
entitled. Unless otherwise specified in the Prospectus Supplement, distributions
allocable to interest on each Certificate that is not entitled to distributions
allocable to principal will be calculated based on the notional principal
balance of such Certificate. The notional principal balance of a Certificate
will not evidence an interest in or entitlement to distributions allocable to
principal but will be used solely for convenience in expressing the calculation
of interest and for certain other purposes.
With respect to any class of Accrual Certificates, if specified in the
Prospectus Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Current Principal Amount of
such class of Certificates on that Distribution Date. Unless otherwise specified
in the Prospectus Supplement, distributions of interest on each class of Accrual
Certificates will commence only after the occurrence of the events specified in
the Prospectus Supplement. Unless otherwise specified in the Prospectus
Supplement, prior to such time, the beneficial ownership interest of such class
of Accrual Certificates in the Trust Fund, as reflected in the aggregate Current
Principal Amount of such class of Accrual Certificates, will increase on each
Distribution Date by the amount
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of interest that accrued on such class of Accrual Certificates during the
preceding interest accrual period but that was not required to be distributed to
such class on such Distribution Date. Any such class of Accrual Certificates
will thereafter accrue interest on its outstanding Current Principal Amount as
so adjusted.
DISTRIBUTIONS OF PRINCIPAL. Unless otherwise specified in the
Prospectus Supplement, the aggregate "Current Principal Amount" of any class of
Certificates entitled to distributions of principal will be the aggregate
original Current Principal Amount of such class of Certificates specified in the
Prospectus Supplement, reduced by all distributions and losses reported to the
holders of such Certificates as allocable to principal, and, in the case of
Accrual Certificates, unless otherwise specified in the Prospectus Supplement,
increased by all interest accrued but not then distributable on such Accrual
Certificates. The Prospectus Supplement will specify the method by which the
amount of principal to be distributed on the Certificates on each Distribution
Date will be calculated and the manner in which such amount will be allocated
among the classes of Certificates entitled to distributions of principal.
If so provided in the Prospectus Supplement, one or more classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments ("Principal
Prepayments") in the percentages and under the circumstances or for the periods
specified in the Prospectus Supplement. Any such allocation of Principal
Prepayments to such class or classes of Certificateholders will have the effect
of accelerating the amortization of such Senior Certificates while increasing
the interests evidenced by the Subordinated Certificates in the Trust Fund.
Increasing the interests of the Subordinated Certificates relative to that of
the Senior Certificates is intended to preserve the availability of the
subordination provided by the Subordinated Certificates. See "Credit
Enhancement-Subordination."
UNSCHEDULED DISTRIBUTIONS. If specified in the Prospectus Supplement,
the Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner described
below and in the Prospectus Supplement. If applicable, the Trustee will be
required to make such unscheduled distributions on the day and in the amount
specified in the Prospectus Supplement if, due to substantial payments of
principal (including Principal Prepayments) on the Mortgage Assets, low rates
then available for reinvestment of such payments or both, the Trustee or the
Master Servicer determines, based on the assumptions specified in the Agreement,
that the amount anticipated to be on deposit in the Certificate Account on the
next Distribution Date, together with, if applicable, any amounts available to
be withdrawn from any Reserve Account, may be insufficient to make required
distributions on the Certificates on such Distribution Date. Unless otherwise
specified in the Prospectus Supplement, the amount of any such unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
Certificates on the next Distribution Date. Unless otherwise specified in the
Prospectus Supplement, all unscheduled distributions will include interest at
the applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified in
the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Certificates would have been made on the next Distribution Date, and with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be required to advance on or before each Distribution Date
(from its own funds, funds advanced by Sub-Servicers or funds held in any of the
Accounts for future distributions to the holders of such Certificates), an
amount equal to the aggregate of payments of principal and interest that were
delinquent on the related Determination Date and were not advanced by any
Sub-Servicer, subject to the Master Servicer's determination that such advances
will be recoverable out of late payments by Mortgagors, Liquidation Proceeds,
Insurance Proceeds or otherwise with respect to the specific Mortgage Loan or,
if required by the applicable Rating Agency, with respect to any of the Mortgage
Loans.
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In making advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Certificates, rather than to guarantee or insure against losses. If advances are
made by the Master Servicer from cash being held for future distribution to
Certificateholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Account on
such Distribution Date would be less than the amount required to be available
for distributions to Certificateholders on such date. Any Master Servicer funds
advanced will be reimbursable to the Master Servicer out of recoveries on the
specific Mortgage Loans with respect to which such advances were made (E.G.,
late payments made by the related Mortgagor, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Mortgage Loan purchased by a Lender
under the circumstances described hereinabove). Advances by the Master Servicer
(and any advances by a Sub-Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer) from cash otherwise distributable to
Certificateholders (including the holders of Senior Certificates) at such time
as the Master Servicer determines that any such advances previously made are not
ultimately recoverable from the proceeds with respect to the specific Mortgage
Loan or, if required by the applicable Rating Agency, at such time as a loss is
realized with respect to a specific Mortgage Loan. The Master Servicer also will
be obligated to make advances, to the extent recoverable out of Insurance
Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and
insurance premiums not paid by Mortgagors on a timely basis. Funds so advanced
are reimbursable to the Master Servicer to the extent permitted by the
Agreement. If specified in the related Prospectus Supplement, the obligations of
the Master Servicer to make advances may be supported by a cash advance reserve
fund, a surety bond or other arrangement, in each case as described in such
Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date
and except as otherwise set forth in an applicable Prospectus Supplement or
Agreement, the Master Servicer or the Trustee will furnish to each
Certificateholder of record of the related Series a statement setting forth, to
the extent applicable or material to such Series of Certificates, among other
things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and if so specified in the related Prospectus Supplement,
prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any advance by the Master Servicer;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Certificateholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the
amounts distributed to the Senior Certificateholders;
(v) the outstanding Current Principal Amount or notional
principal balance of such class after giving effect to the distribution
of principal on such Distribution Date;
(vi) if applicable, the percentage of principal payments on
the Mortgage Loans, if any, which such class will be entitled to
receive on the following Distribution Date;
(vii) unless the Pass-Through Rate is a fixed rate, the
Pass-Through Rate applicable to the distribution on the Distribution
Date;
(viii) the number and aggregate principal balances of Mortgage
Loans in the related Mortgage Pool delinquent (a) one month and (b) two
or more months;
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(ix) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure, and if such real
estate secured a Multifamily Loan, such additional information as may
be specified in the related Prospectus Supplement; and
(x) if applicable, the amount remaining in any Reserve Account
or the amount remaining of any other credit support, after giving
effect to the distribution on the Distribution Date.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Certificate of the relevant class having a denomination
or interest specified in the related Prospectus Supplement or the report to
Certificateholders. The report to Certificateholders for any Series of
Certificates may include additional or other information of a similar nature to
that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year and (b) such other customary information as may be deemed
necessary or desirable for Certificateholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, a class of
Certificates initially may be represented by one or more certificates registered
in the name of Cede & Co. ("Cede"), the nominee for The Depository Trust Company
("DTC"). DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code ("UCC")
and a "clearing agency" registered pursuant to the provisions of Section 17A of
the Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to others such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participant").
Certificateholders that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of Certificates
registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Certificateholders
will receive all distributions of principal of and interest on the Certificates
from the Trustee through DTC and its Participants. Under a book-entry format,
Certificateholders will receive payments after the related Distribution Date
because, while payments are required to be forwarded to Cede, as nominee for
DTC, on each such date, DTC will forward such payments to its Participants which
thereafter will be required to forward them to Indirect Participants or
Certificateholders. Under a book-entry format, it is anticipated that the only
Certificateholder will be Cede, as nominee of DTC, and that the beneficial
holders of Certificates will not be recognized by the Trustee as
Certificateholders under the Agreement. The beneficial holders of such
Certificates will only be permitted to exercise the rights of Certificateholders
under the Agreement indirectly through DTC and its Participants who in turn will
exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Certificates and is
required to receive and transmit payments of principal of and interest of the
Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the
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DTC system, or otherwise take actions in respect of such Certificates may be
limited due to the lack of a physical certificate for such Certificates.
DTC in general advises that it will take any action permitted to be
taken by a Certificateholder under an Agreement only at the direction of one or
more Participants to whose account with DTC the Certificates are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Certificateholders only at the direction of and
on behalf of Participants whose holdings include current principal amounts of
outstanding Certificates that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Certificates to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee
of DTC, will be issued in fully registered, certificated form to
Certificateholders or their nominees ("Definitive Certificates"), rather than to
DTC or its nominee only under the events specified in the related Agreement.
Such events may include the following: (i) the Seller advises the Trustee in
writing that DTC is no longer willing or able to properly discharge its
responsibilities as Depository with respect to the Certificates, and the Trustee
or the Seller is unable to locate a qualified successor, (ii) the Seller, at its
option, elects to terminate the book-entry system through DTC, or (iii) after
the occurrence of an Event of Default (defined herein), Certificateholders
representing not less than 50% of the aggregate Current Principal Amount of the
Certificates advise the Trustee and DTC through Participants in writing that the
continuation of a book-entry system through DTC (or a successor thereto) is no
longer in the best interest of the Certificateholders. Upon the occurrence of
any of the events specified in the related Agreement, DTC will be required to
notify all Participants of the availability through DTC of Definitive
Certificates. Upon surrender by DTC of the certificates representing the
Certificates and instruction for re-registration, the Trustee will issue the
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as
Certificateholders. Thereafter, payments of principal of and interest on the
Certificates will be made by the Trustee directly to Certificateholders in
accordance with the procedures set forth herein and in the Agreement. The final
distribution of any Certificate (whether Definitive Certificates or Certificates
registered in the name of Cede), however, will be made only upon presentation
and surrender of such Certificates on the final Distribution Date at such office
or agency as is specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Certificates or with respect to the Mortgage Assets in the
related Trust Fund. Credit enhancement may be in the form of (i) the
subordination of one or more classes of the Certificates of such Series, (ii)
the use of a Pool Insurance Policy, Special Hazard Insurance Policy, Bankruptcy
Bond, FHA Insurance, VA Guarantees, Reserve Accounts, a letter of credit, a
limited financial guaranty insurance policy, other third party guarantees,
interest rate or other swap agreements, caps, collars or floors, another method
of credit enhancement described in the related Prospectus Supplement, or the use
of a cross-support feature, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any credit enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, holders of one or more
classes of Certificates will bear their allocable share of deficiencies. If a
form of credit enhancement applies to several classes of Certificates, and if
principal payments equal to the Current Principal Amounts of certain classes
will be distributed prior to such distributions to other classes, the classes
which receive such distributions at a later time are more likely to bear any
losses which exceed the amount covered by credit enhancement. Unless otherwise
specified in the Prospectus Supplement, coverage under any credit enhancement
may be canceled or reduced by the Master Servicer or the Seller if such
cancellation or reduction would not adversely affect the rating or ratings of
the related Certificates.
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SUBORDINATION
If so specified in the Prospectus Supplement, distributions in respect
of scheduled principal, Principal Prepayments, interest or any combination
thereof that otherwise would have been payable to one or more classes of
Subordinated Certificates of a Series will instead be payable to holders of one
or more classes of Senior Certificates under the circumstances and to the extent
specified in the Prospectus Supplement. If specified in the Prospectus
Supplement, delays in receipt of scheduled payments on the Mortgage Loans and
losses on defaulted Mortgage Loans will be borne first by the various classes of
Subordinated Certificates and thereafter by the various classes of Senior
Certificates, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate distributions
in respect of delinquent payments on the Mortgage Loans over the lives of the
Certificates or at any time, the aggregate losses in respect of defaulted
Mortgage Loans which must be borne by the Subordinated Certificates by virtue of
subordination and the amount of the distributions otherwise distributable to the
Subordinated Certificateholders that will be distributable to Senior
Certificateholders on any Distribution Date may be limited as specified in the
Prospectus Supplement. If aggregate distributions in respect of delinquent
payments on the Mortgage Loans or aggregate losses in respect of such Mortgage
Loans were to exceed the total amounts payable and available for distribution to
holders of Subordinated Certificates or, if applicable, were to exceed the
specified maximum amount, holders of Senior Certificates would experience losses
on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Distribution Date may instead be
deposited into one or more Reserve Accounts established with the Trustee. If so
specified in the Prospectus Supplement, such deposits may be made on each
Distribution Date, on each Distribution Date for specified periods or until the
balance in the Reserve Account has reached a specified amount and, following
payments from the Reserve Account to holders of Senior Certificates or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the Prospectus Supplement, amounts on deposit in
the Reserve Account may be released to the holders of the class of Certificates
specified in the Prospectus Supplement at the times and under the circumstances
specified in the Prospectus Supplement.
If so specified in the Prospectus Supplement, the same class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the Prospectus Supplement, various classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement.
POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to a Mortgage Pool of
Single Family Loans or Cooperative Loans, a separate Pool Insurance Policy will
be obtained for the Mortgage Pool and issued by the insurer (the "Pool Insurer")
named in such Prospectus Supplement. Each Pool Insurance Policy will, subject to
the limitations described below, cover loss by reason of default in payment on
Single Family Loans or Cooperative Loans in the Mortgage Pool in an amount
specified in such Prospectus Supplement. As more fully described below, the
Master Servicer will present claims thereunder to the Pool Insurer on behalf of
itself, the Trustee and the holders of the Certificates. The Mortgage Pool
Insurance Policies, however, are not blanket policies against loss, since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in the Prospectus Supplement, a Pool Insurance Policy will
not cover losses due to a failure to pay or denial of a claim under a Primary
Insurance Policy.
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Unless otherwise specified in the related Prospectus Supplement, each
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Insurance Policy is in effect for the defaulted
Mortgage Loan and a claim thereunder has been submitted and settled; (ii) hazard
insurance on the related Mortgaged Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Mortgaged Property, it
has been restored to its physical condition (reasonable wear and tear excepted)
at the time of issuance of the policy; and (iv) the insured has acquired good
and merchantable title to the Mortgaged Property free and clear of liens except
certain permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the Mortgaged Property at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the Mortgage Rate to the date of purchase and certain expenses incurred by the
Master Servicer on behalf of the Trustee and Certificateholders, or (b) to pay
the amount by which the sum of the principal balance of the defaulted Mortgage
Loan plus accrued and unpaid interest at the Mortgage Rate to the date of
payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under the related Primary
Insurance Policy. If any Mortgaged Property securing a defaulted Mortgage Loan
is damaged and proceeds, if any, from the related hazard insurance policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged Mortgaged Property to a condition sufficient to permit recovery under
the Pool Insurance Policy, the Master Servicer will not be required to expend
its own funds to restore the damaged Mortgaged Property unless it determines
that (i) such restoration will increase the proceeds to Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer for
its expenses and (ii) such expenses will be recoverable by it through proceeds
of the sale of the Mortgaged Property or proceeds of the related Pool Insurance
Policy or any related Primary Insurance Policy.
A Pool Insurance Policy generally will not insure (and many Primary
Insurance Policies do not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. If
so specified in the related Prospectus supplement, an endorsement to the Pool
Insurance Policy, a bond or other credit support may cover fraud in connection
with the origination of Mortgage Loans. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to an event specified
in clause (i) or (ii) above might result in a breach of the related Lender's
representations described above and, in such event, might give rise to an
obligation on the part of such Lender to purchase the defaulted Mortgage Loan if
the breach cannot be cured by such Lender. No Pool Insurance Policy will cover
(and many Primary Insurance Policies do not cover) a claim in respect of a
defaulted Mortgage Loan occurring when the servicer of such Mortgage Loan, at
the time of default or thereafter, was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Certificates by the aggregate dollar amount of
claims paid less the aggregate of the net dollar amounts realized by the Pool
Insurer upon disposition of all foreclosed properties covered thereby. The
amount of claims paid will include certain expenses incurred by the Master
Servicer as well as accrued interest on delinquent Mortgage Loans to the date of
payment of the claim. Accordingly, if aggregate net claims paid under any Pool
Insurance Policy reach the original policy limit, coverage under that Pool
Insurance Policy will be exhausted and any further losses will be borne by the
Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts
will be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the "Special Hazard Insurer") named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
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earthquakes and, to a limited extent, tidal waves and related water damage) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located or under a flood
insurance policy if the Mortgaged Property is located in a federally designated
flood area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Pooling and Servicing
Agreement-Hazard Insurance". Each Special Hazard Insurance Policy will not cover
losses occasioned by war, civil insurrection, certain governmental action,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the Mortgaged Property is located in
a federally designated flood area), chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will be
specified in the related Prospectus Supplement. Each Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, each Special Hazard Insurance
Policy will provide that where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
the Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
Special Hazard Insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Master Servicer with respect to such property. If the
unpaid principal balance of a Mortgage Loan plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair of the property will further reduce coverage by such amount. So long
as a Pool Insurance Policy remains in effect, the payment by the Special Hazard
Insurer of the cost of repair or of the unpaid principal balance of the related
Mortgage Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to Certificateholders, but will affect the
relative amounts of coverage remaining under the related Special Hazard
Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, since
each Special Hazard Insurance Policy will be designed to permit full recovery
under the Pool Insurance Policy in circumstances in which such recoveries would
otherwise be unavailable because property has been damaged by a cause not
insured against by a standard hazard policy and thus would not be restored, each
Agreement will provide that, if the related Pool Insurance Policy shall have
been terminated or been exhausted through payment of claims, the Master Servicer
will be under no further obligation to maintain such Special Hazard Insurance
Policy.
To the extent specified in the Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Certificates of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Special Hazard
Insurance Policy. The amount of any Special Hazard Insurance Policy or of the
deposit to the special trust account in lieu thereof relating to such
Certificates may be reduced so long as any such reduction will not result in a
downgrading of the rating of such Certificates by any such rating agency.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond
for proceedings under the federal Bankruptcy Code will be issued by an insurer
named in such Prospectus Supplement. Each Bankruptcy Bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit
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or any other instrument acceptable to each nationally recognized rating agency
rating the Certificates of the related Series in the Trust Fund to provide
protection in lieu of or in addition to that provided by a Bankruptcy Bond. See
"Certain Legal Aspects of the Mortgage Loans-Anti-Deficiency Legislation and
Other Limitations on Lenders."
To the extent specified in the Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Certificates of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Bankruptcy Bond. The
amount of any Bankruptcy Bond or of the deposit to the special trust account in
lieu thereof relating to such Certificates may be reduced so long as any such
reduction will not result in a downgrading of the rating of such Certificates by
any such rating agency.
The terms of any Bankruptcy Bond relating to a pool of Contracts will
be described in the related Prospectus Supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Mortgage Loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family Loans insured by
the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Single Family Loan
relating to a Series may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time of origination of such loan.
The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by HUD or by the Master Servicer or any
Sub-Servicers and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or upon assignment of the defaulted
Mortgage Loan to HUD. With respect to a defaulted FHA-insured Single Family
Loan, the Master Servicer or any Sub-Servicer is limited in its ability to
initiate foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the mortgagor. Such
plans may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made up on or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or beyond the maturity date. In addition, when a default caused by such
circumstances is accompanied by certain other criteria, HUD may provide relief
by making payments to the Master Servicer or any Sub-Servicer in partial or full
satisfaction of amounts due under the Mortgage Loan (which payments are to be
repaid by the mortgagor to HUD) or by accepting assignment of the loan from the
Master Servicer or any Sub-Servicer. With certain exceptions, at least three
full monthly installments must be due and unpaid under the Mortgage Loan, and
HUD must have rejected any request for relief from the mortgagor before the
Master Servicer or any Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal to
the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When
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entitlement to insurance benefits results from foreclosure (or other acquisition
of possession) and conveyance to HUD, the Master Servicer or Sub-Servicer is
compensated for no more than two-thirds of its foreclosure costs, and is
compensated for interest accrued and unpaid prior to such date but in general
only to the extent it was allowed pursuant to a forbearance plan approved by
HUD. When entitlement to insurance benefits results from assignment of the
Mortgage Loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA-insured Single Family Loan, bears interest
from a date 30 days after the mortgagor's first uncorrected failure to perform
any obligation to make any payment due under the Mortgage and, upon assignment,
from the date of assignment, to the date of payment of the claim, in each case
at the same interest rate as the applicable HUD debenture interest rate as
described above.
Single Family Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's Readjustment
Act of 1944, as amended, permits a veteran (or in certain instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no Single Family Loan guaranteed by the VA
will have an original principal amount greater than five times the partial VA
guarantee for such Mortgage Loan.
The maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 3703(a), as
amended. As of January 1, 1993, the maximum guarantee that may be issued by the
VA under a VA-guaranteed mortgage loan of more than $144,000 is the lesser of
25% of the original principal amount of the mortgage loan and $46,000. The
liability on the guarantee is reduced or increased pro rata with any reduction
or increase in the amount of indebtedness, but in no event will the amount
payable on the guarantee exceed the amount of the original guarantee. The VA
may, at its option and without regard to the guarantee, make full payment to a
mortgage holder of unsatisfied indebtedness on a mortgage upon its assignment to
the VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the
Master Servicer or Sub-Servicer is, absent exceptional circumstances, authorized
to announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure mortgage loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of such mortgage loans made under Sections 221(d)(3)
and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of such
a mortgage loan may be up to 40 years and the ratio of loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, a dollar amount per apartment unit established from time to time by
HUD or, at the discretion of the Secretary of HUD, 25% of the value of the
property. In general the loan term may
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not exceed 35 years and a loan to value ratio of no more than 85% is required
for the purchase of a project and 70% for the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of interest
from the date of the default.
RESERVE ACCOUNTS
If specified in the Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the Prospectus Supplement will be deposited by the
Master Servicer or Seller on the date specified in the Prospectus Supplement in
one or more Reserve Accounts established with the Trustee. Such cash and the
principal and interest payments on such other instruments will be used to
enhance the likelihood of timely payment of principal of, and interest on, or,
if so specified in the Prospectus Supplement, to provide additional protection
against losses in respect of, the assets in the related Trust Fund, to pay the
expenses of the Trust Fund or for such other purposes specified in the
Prospectus Supplement. Whether or not the Master Servicer or Seller has any
obligation to make such a deposit, certain amounts to which the Subordinated
Certificateholders, if any, will otherwise be entitled may instead be deposited
into the Reserve Account from time to time and in the amounts as specified in
the Prospectus Supplement. Any cash in the Reserve Account and the proceeds of
any other instrument upon maturity will be invested, to the extent acceptable to
the applicable Rating Agency, in obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency ("Permitted Investments"). Unless otherwise specified in the
Prospectus Supplement, any instrument deposited in the Reserve Account will name
the Trustee, in its capacity as trustee for the holders of the Certificates, as
beneficiary and will be issued by an entity acceptable to the applicable Rating
Agency. Additional information with respect to such instruments deposited in the
Reserve Accounts will be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may
include in lieu of some or all of the foregoing or in addition thereto letters
of credit, financial guaranty insurance policies, third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on the assets included in such Trust Fund, paying
administrative expenses, or accomplishing such other purpose as may be described
in the Prospectus Supplement. The Trust Fund may include a guaranteed investment
contract or reinvestment agreement pursuant to which funds held in one or more
accounts will be invested at a specified rate. If any class of Certificates has
a floating interest rate, or if any of the Mortgage Assets has a floating
interest rate, the Trust Fund may include an interest rate swap contract, an
interest rate cap agreement or similar contract providing limited protection
against interest rate risks.
CROSS SUPPORT
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust Fund may be evidenced by separate
classes of the related Series of Certificates. In such case, credit support may
be provided by a cross-support feature which requires that distributions be made
with respect to Certificates evidencing a beneficial ownership interest in other
asset groups within the same Trust Fund. The Prospectus Supplement for a Series
which includes a cross-support feature will describe the manner and conditions
for applying such cross-support feature.
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If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trust Funds. If applicable, the Prospectus Supplement will identify the Trust
Funds to which such credit support relates and the manner of determining the
amount of the coverage provided hereby and of the application of such coverage
to the identified Trust Funds.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the
amount and timing of principal payments on or in respect of the Mortgage Assets
included in the related Trust Funds, the allocation of available funds to
various Classes of Certificates, the Pass-Through Rate for various Classes of
Certificates and the purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given
Mortgage Pool will vary depending upon the type of Mortgage Loans included
therein. Each Prospectus Supplement will contain information with respect to the
type and maturities of the Mortgage Loans in the related Mortgage Pool. Unless
otherwise specified in the related Prospectus Supplement, Single Family Loans,
Cooperative Loans and Contracts may be prepaid without penalty in full or in
part at any time. Multifamily Loans may prohibit prepayment for a specified
period after origination, may prohibit partial prepayments entirely, and may
require the payment of a prepayment penalty upon prepayment in full or in part.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Single Family Loans, Cooperative Loans and Contracts will contain
due-on-sale provisions permitting the mortgagee or holder of the Contract to
accelerate the maturity of the Mortgage Loan or Contract upon sale or certain
transfers by the mortgagor or obligor of the underlying Mortgaged Property. As
described in the related Prospectus Supplement, conventional Multifamily Loans
may contain due-on-sale provisions, due-on-encumbrance provisions, or both.
Mortgage Loans insured by the FHA, and Single Family Loans and Contracts
partially guaranteed by the VA, are assumable with the consent of the FHA and
the VA, respectively. Thus, the rate of prepayments on such Mortgage Loans may
be lower than that of conventional Mortgage Loans bearing comparable interest
rates. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the Mortgaged
Property and reasonably believes that it is entitled to do so under applicable
law; provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Pooling and Servicing Agreement-Collection
Procedures" and "Certain Legal Aspects of the Mortgage Loans" for a description
of certain provisions of each Agreement and certain legal developments that may
affect the prepayment experience on the Mortgage Loans.
When a full prepayment is made on a Single Family Loan or Cooperative
Loan, the Mortgagor is charged interest on the principal amount of the Mortgage
Loan so prepaid only for the number of days in the month actually elapsed up to
the date of the prepayment rather than for a full month. Similarly, upon
liquidation of a Mortgage Loan, interest accrues on the principal amount of the
Mortgage Loan only for the number of days in the month actually elapsed up to
the date of liquidation rather than for a full month. Unless otherwise specified
in the related Prospectus Supplement, the effect of prepayments in full and
liquidations will be to reduce the amount of interest passed through in the
following month to holders of Certificates because interest on the principal
amount of any Mortgage Loan so prepaid will be paid only to the date of
prepayment or liquidation. Interest shortfalls also could result from the
application of the Solders' and Sailors' Civil Relief Act of 1940, as amended,
as described under "Certain Legal Aspects of the Mortgage Loans- Soldiers' and
Sailors' Civil Relief Act" herein. Partial prepayments in a given month may be
applied to the outstanding principal balances of the Mortgage Loans so prepaid
on the first day of the month of receipt or the month following receipt. In the
latter case, partial prepayments will not reduce the amount of interest passed
through in such month. Prepayment penalties collected with respect to
Multifamily Loans will be distributed to the holders of Certificates, or to
other persons entitled thereto, as described in the related Prospectus
Supplement.
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Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or another person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust Fund
thereby effecting earlier retirement of the related Series of Certificates. See
"The Pooling and Servicing Agreement-Termination; Optional Termination."
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely, if
prevailing interest rates rise appreciably above the Mortgage Rates borne by the
Mortgage Loans, such Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below such Mortgage Rates. However,
there can be no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical,
social, tax, legal and additional factors. The rate of prepayment on Single
Family Loans, Cooperative Loans and Contracts may be affected by changes in a
mortgagor's housing needs, job transfers, unemployment, a borrower's net equity
in the mortgage properties, the enforcement of due-on-sale clauses and other
servicing decisions. Adjustable rate mortgage loans, bi-weekly mortgage loans,
graduated payment mortgage loans, growing equity mortgage loans, reverse
mortgage loans, buy-down mortgage loans and mortgage loans with other
characteristics may experience a rate of principal prepayments which is
different from that of fixed rate, monthly pay, fully amortizing mortgage loans.
The rate of prepayment on Multifamily Loans may be affected by other factors,
including Mortgage Loan terms (E.G., the existence of lockout periods,
due-on-sale and due-on-encumbrance clauses and prepayment penalties), relative
economic conditions in the area where the Mortgaged Properties are located, the
quality of management of the Mortgaged Properties and the relative tax benefits
associated with the ownership of income-producing real property.
The timing of payments on the Mortgage Assets may significantly affect
an investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Assets, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Certificates will not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Certificateholders will be slightly lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price,
because while interest generally will accrue on each Mortgage Loan from the
first day of the month, the distribution of such interest will not be made
earlier than a specified date in the month following the month of accrual.
In the case of any Certificates purchased at a discount, a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield. In the case of any Certificates purchased at a
premium, a faster than anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield. A discount or premium
would be determined in relation to the price at which a Certificate will yield
its Pass-Through Rate, after giving effect to any payment delay.
Factors other than those identified herein and in the Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Certificates. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the Mortgage Assets at any time or
over the lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments) on the yield, weighted average lives and
maturities of such Certificates.
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THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
ASSIGNMENT OF THE MORTGAGE LOANS. At the time of issuance of the
Certificates of a Series, the Seller will cause the Mortgage Loans comprising
the related Trust Fund to be sold and assigned to the Trustee, together with all
principal and interest received by or on behalf of the Seller on or with respect
to such Mortgage Loans after the Cut-off Date, other than principal and interest
due on or before the Cut-off Date and other than any Retained Interest specified
in the Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Seller in exchange for the Mortgage
Loans. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the related Agreement. Such schedule will include information as to
the outstanding principal balance of each Mortgage Loan after application of
payments due on the Cut-off Date, as well as information regarding the Mortgage
Rate or APR, the current scheduled monthly payment of principal and interest,
the maturity of the loan, the Loan-to-Value Ratio at origination and certain
other information.
In addition, unless otherwise specified in the Prospectus Supplement,
the Seller will deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Mortgage Loan, among other things,
(i) the mortgage note or Contract endorsed without recourse in blank or to the
order of the Trustee, (ii) in the case of Single Family Loans or Multifamily
Loans, the mortgage, deed of trust or similar instrument (a "Mortgage") with
evidence of recording indicated thereon (except for any Mortgage not returned
from the public recording office, in which case the Seller will deliver or cause
to be delivered a copy of such Mortgage together with a certificate that the
original of such Mortgage was or will be delivered to such recording office),
(iii) an assignment of the Mortgage or Contract to the Trustee, which assignment
will be in recordable form in the case of a Mortgage assignment, and (iv) such
other security documents as may be specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement, (i)
in the case of Single Family Loans or Multifamily Loans, the Seller or Master
Servicer will promptly cause the assignments of the related Mortgage Loans to be
recorded in the appropriate public office for real property records, except in
the discretion of the Seller in states in which, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in such loans against the claim of any subsequent transferee
or any successor to or creditor of the Seller or the originator of such loans,
and (ii) in the case of Contracts, the Seller or Master Servicer will promptly
make or cause to be made an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Trustee's ownership of the
Contracts.
With respect to any Mortgage Loans which are Cooperative Loans, the
Seller will cause to be delivered to the Trustee (or to the custodian
hereinafter referred to), the related original cooperative note endorsed without
recourse in blank or to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Seller will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Seller, and the Master Servicer will
notify the related Lender. Unless otherwise specified in the related Prospectus
Supplement, if the Lender or an entity which sold the Mortgage Loan to the
Lender cannot cure the omission or defect within 60 days after receipt of such
notice, the Lender or such entity will be obligated to purchase the related
Mortgage Loan from the Trustee at the Purchase Price. There can be no assurance
that a Lender or such entity will fulfill this purchase obligation. Although the
Master Servicer may be obligated to
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enforce such obligation to the extent described above under "Mortgage Loan
Program-Representations by Lenders; Repurchases," neither the Master Servicer
nor the Seller will be obligated to purchase such Mortgage Loan if the Lender or
such entity defaults on its purchase obligation, unless such breach also
constitutes a breach of the representations or warranties of the Master Servicer
or the Seller, as the case may be. Unless otherwise specified in the related
Prospectus Supplement, this purchase obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for omission of, or a
material defect in, a constituent document. Certain rights of substitution for
defective Mortgage Loans may be provided with respect to a Series in the related
Prospectus Supplement.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
ASSIGNMENT OF AGENCY SECURITIES. The Seller will cause Agency
Securities to be registered in the name of the Trustee or its nominee, and the
Trustee concurrently will execute, countersign and deliver the Certificates.
Each Agency Security will be identified in a schedule appearing as an exhibit to
the Agreement, which will specify as to each Agency Security the original
principal amount and outstanding principal balance as of the Cut-off Date, the
annual pass-through rate (if any) and the maturity date.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES. The Seller will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Mortgage-Backed Security. See "The Trust
Fund-Private Mortgage-Backed Securities" herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Mortgage-Backed Security conveyed to the
Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement or
provided in the Agreement, each Master Servicer and Sub-Servicer servicing the
Mortgage Loans will be required to establish and maintain for one or more Series
of Certificates a separate account or accounts for the collection of payments on
the related Mortgage Assets (the "Protected Account"), which must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of such holding company) are rated in one of
the two highest rating categories by each Rating Agency rating the Series of
Certificates, (ii) an account or accounts the deposits in which are fully
insured by the FDIC, (iii) an account or accounts the deposits in which are
insured by the FDIC (to the limits established by the FDIC), and the uninsured
deposits in which are invested in Permitted Investments held in the name of the
Trustee, or (iv) an account or accounts otherwise acceptable to each Rating
Agency. A Protected Account may be maintained as an interest bearing account or
the funds held therein may be invested pending each succeeding Distribution Date
in Permitted Investments. Unless otherwise specified in the related Prospectus
Supplement, the related Master Servicer or Sub-Servicer or its designee will be
entitled to receive any such interest or other income earned on funds in the
Protected Account as additional compensation and will be obligated to deposit in
the Protected Account the amount of any loss immediately as realized. The
Protected Account may be maintained with the Master Servicer or Sub-Servicer or
with a depository institution that is an affiliate of the Master Servicer or
Sub-Servicer, provided it meets the standards set forth above.
Each Master Servicer and Sub-Servicer will be required to deposit or
cause to be deposited in the Protected Account for each Trust Fund on a daily
basis, to the extent applicable and unless otherwise specified in the related
Prospectus Supplement or provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, prepayment
penalties, on the Mortgage Loans;
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(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
(iii) to the extent specified in the related Agreement, all proceeds
(net of unreimbursed payments of property taxes, insurance premiums and similar
items ("Insured Expenses") incurred, and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) of the title insurance
policies, the hazard insurance policies and any Primary Insurance Policies, to
the extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts (net of unreimbursed expenses incurred in connection with liquidation or
foreclosure ("Liquidation Expenses") and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) received and retained in
connection with the liquidation of defaulted Mortgage Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds received with
respect to any properties acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased as described under "Mortgage Loan Program-Representations by Lenders;
Repurchases" or"-Assignment of Mortgage Assets" above;
(v) all payments required to be deposited in the Protected Account with
respect to any deductible clause in any blanket insurance policy described
under"-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer or
Sub-Servicer in connection with losses realized on investments for the benefit
of the Master Servicer or Sub-Servicer of funds held in any Accounts; and
(vii) all other amounts required to be deposited in the Protected
Account pursuant to the Agreement.
If acceptable to each Rating Agency rating the Series of Certificates,
a Protected Account maintained by a Master Servicer or Sub-Servicer may
commingle funds from the Mortgage Loans deposited in the Trust Fund with similar
funds relating to other mortgage loans which are serviced or owned by the Master
Servicer or Sub-Servicer. The Agreement may require that certain payments
related to the Mortgage Assets be transferred from a Protected Account
maintained by a Master Servicer or Sub-Servicer into another Account maintained
under conditions acceptable to each Rating Agency.
The Trustee will be required to establish in its name as Trustee for
one or more Series of Certificates a trust account or another account acceptable
to each Rating Agency (the "Certificate Account"). The Certificate Account may
be maintained as an interest bearing account or the funds held therein may be
invested pending each succeeding Distribution Date in Permitted Investments. If
there is more than one Master Servicer for the rated Series of Certificates,
there may be a separate Certificate Account or a separate subaccount in a single
Certificate Account for funds received from each Master Servicer. Unless
otherwise specified in the Prospectus Supplement, the related Master Servicer or
its designee will be entitled to receive any interest or other income earned on
funds in the Certificate Account or subaccount of the Certificate Account as
additional compensation and will be obligated to deposit in the Certificate
Account or subaccount the amount of any loss immediately as realized. The
Trustee will be required to deposit into the Certificate Account on the business
day received all funds received from the Master Servicer for deposit into the
Certificate Account and any other amounts required to be deposited into the
Certificate Account pursuant to the Agreement. In addition to other purposes
specified in the Agreement, the Trustee will be required to make withdrawals
from the Certificate Account to make distributions to Certificateholders. If the
Series includes one Trust Fund which contains a beneficial ownership interest in
another Trust Fund, funds from the Mortgage Assets may be withdrawn from the
Certificate Account included in the latter Trust Fund and deposited into another
Account included in the former Trust Fund prior to transmittal to
Certificateholders with a beneficial ownership interest in the former Trust
Fund. If specified in the related Prospectus Supplement, the Protected Account
and the Certificate Account may be combined into a single Certificate Account.
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SUB-SERVICING BY LENDERS
Each Lender with respect to a Mortgage Loan or any other servicing
entity may act as the Master Servicer or the Sub-Servicer for such Mortgage Loan
pursuant to an agreement (each, a "Sub-Servicing Agreement"), which will not
contain any terms inconsistent with the related Agreement. While each
Sub-Servicing Agreement will be a contract solely between the Master Servicer
and the Sub-Servicer, the Agreement pursuant to which a Series of Certificates
is issued will provide that, if for any reason the Master Servicer for such
Series of Certificates is no longer the Master Servicer of the related Mortgage
Loans, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but, unless otherwise
specified in the Prospectus Supplement, such Sub-Servicer will remain obligated
under the related Sub-Servicing Agreement. Each Sub-Servicer will be required to
perform the customary functions of a servicer of mortgage loans. Such functions
generally include collecting payments from mortgagors or obligors and remitting
such collections to the Master Servicer; maintaining hazard insurance policies
as described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder, subject in certain cases to the right of the Master
Servicer to approve in advance any such settlement; maintaining escrow or
impoundment accounts of mortgagors or obligors for payment of taxes, insurance
and other items required to be paid by the mortgagor or obligor pursuant to the
related Mortgage Loan; processing assumptions or substitutions, although, unless
otherwise specified in the related Prospectus Supplement, the Master Servicer is
generally required to exercise due-on-sale clauses to the extent such exercise
is permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Mortgaged Properties under certain circumstances; maintaining
accounting records relating to the Mortgage Loans; and, to the extent specified
in the related Prospectus Supplement, maintaining additional insurance policies
or credit support instruments and filing and settling claims thereunder. A
Sub-Servicer will also be obligated to make advances in respect of delinquent
installments of principal and interest on Mortgage Loans, as described more
fully above under"-Payments on Mortgage Loans; Deposits to Accounts," and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Mortgage Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the mortgage note or related instruments. Each Sub-Servicer will be
reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Mortgage Loans if
the Sub-Servicer elects to release the servicing of such Mortgage Loans to the
Master Servicer. See"-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
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to the Master Servicer and the Seller. The Master Servicer will make reasonable
efforts to have the new Sub-Servicer assume liability for the representations
and warranties of the terminated Sub-Servicer, but no assurance can be given
that such an assumption will occur. In the event of such an assumption, the
Master Servicer may in the exercise of its business judgment release the
terminated Sub-Servicer from liability in respect of such representations and
warranties. Any amendments to a Sub-Servicing Agreement or new Sub-Servicing
Agreements may contain provisions different from those which are in effect in
the original Sub-Servicing Agreement. However, each Agreement will provide that
any such amendment or new agreement may not be inconsistent with or violate such
Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers,
will make reasonable efforts to collect all payments called for under the
Mortgage Loans and will, consistent with each Agreement and any Pool Insurance
Policy, Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard
Insurance Policy, Bankruptcy Bond or alternative arrangements, follow such
collection procedures as are customary with respect to mortgage loans that are
comparable to the Mortgage Loans. Consistent with the above, the Master Servicer
may, in its discretion, (i) waive any assumption fee, late payment or other
charge in connection with a Mortgage Loan and (ii) to the extent not
inconsistent with the coverage of such Mortgage Loan by a Pool Insurance Policy,
Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance
Policy, Bankruptcy Bond or alternative arrangements, if applicable, arrange with
a Mortgagor a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment or such other
period as is specified in the Agreement. Both the Sub-Servicer and the Master
Servicer remain obligated to make advances during any period of such an
arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a conventional Mortgage Loan has been, or is
about to be, conveyed by the mortgagor or obligor, the Master Servicer will, to
the extent it has knowledge of such conveyance or proposed conveyance, exercise
or cause to be exercised its rights to accelerate the maturity of such Mortgage
Loan under any due-on-sale clause applicable thereto, but only if the exercise
of such rights is permitted by applicable law and will not impair or threaten to
impair any recovery under any related Primary Insurance Policy. If these
conditions are not met or if such Mortgage Loan is insured by the FHA or
partially guaranteed by the VA, the Master Servicer will enter into or cause to
be entered into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Mortgage Loan and, to the extent permitted
by applicable law, the mortgagor remains liable thereon; provided, however, that
the Master Servicer will not enter into such an agreement if it would jeopardize
the tax status of the Trust Fund. Any fee collected by or on behalf of the
Master Servicer for entering into an assumption agreement will be retained by or
on behalf of the Master Servicer as additional servicing compensation. In the
case of Multifamily Loans, and unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will agree to exercise any right it
may have to accelerate the maturity of a Multifamily Loan to the extent it has
knowledge of any further encumbrance of the related Mortgaged Property effected
in violation of any due-on-encumbrance clause applicable thereto. See "Certain
Legal Aspects of the Mortgage Loans-Due-on-Sale Clauses." In connection with any
such assumption, the terms of the related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Loans." This approval is usually based on the purchaser's income and
net worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the Trust Fund's ability to sell and realize the value of those
shares.
In general, a "tenant-stockholder" (as defined in Code Section
216(b)(2)) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Code Section 216(b)(1) is allowed a deduction
for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Code Section 216(a) to the
corporation under Code Sections 163 and 164. In order for a corporation to
qualify under Code Section 216(b)(1) for its taxable year in
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which such items are allowable as a deduction to the corporation, such Section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholders (as defined in Code Section
216(b)(2)). By virtue of this requirement, the status of a corporation for
purposes of Code Section 216(b)(1) must be determined on a year-to-year basis.
Consequently, there can be no assurance that Cooperatives relating to the
Cooperative Loans will qualify under such Section for any particular year. In
the event that such a Cooperative fails to qualify for one or more years, the
value of the collateral securing any related Cooperative Loans could be
significantly impaired because no deduction would be allowable to
tenant-stockholders under Code Section 216(a) with respect to those years. In
view of the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Code Section 216(b)(1), the likelihood that
such a failure would be permitted to continue over a period of years appears
remote.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each
Single Family Loan, Multifamily Loan or Contract to maintain a hazard insurance
policy providing for no less than the coverage of the standard form of fire
insurance policy with extended coverage customary for the type of Mortgaged
Property in the state in which such Mortgaged Property is located. Such coverage
will be in an amount not less than the replacement value of the improvements or
Manufactured Home securing such Mortgage Loan or the principal balance owing on
such Mortgage Loan, whichever is less. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Protected Account. In the event that the Master
Servicer maintains a blanket policy insuring against hazard losses on all the
Mortgage Loans comprising part of a Trust Fund, it will conclusively be deemed
to have satisfied its obligation relating to the maintenance of hazard
insurance. Such blanket policy may contain a deductible clause, in which case
the Master Servicer will be required to deposit from its own funds into the
related Protected Account the amounts which would have been deposited therein
but for such clause. Any additional insurance coverage for Mortgaged Properties
in a Mortgage Pool of Multifamily Loans will be specified in the related
Prospectus Supplement.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements or Manufactured
Home securing a Mortgage Loan by fire, lightning, explosion, smoke, windstorm
and hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Although the policies relating to the
Mortgage Loans may have been underwritten by different insurers under different
state laws in accordance with different applicable forms and therefore may not
contain identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the Mortgaged Property
securing a Mortgage Loan is located in a federally designated special flood area
at the time of origination, the Master Servicer will require the mortgagor or
obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Mortgage
Loans typically contain a clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the insured property in order to recover the full
amount of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (i) the actual cash value (generally defined as replacement
cost at the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or (ii) such proportion of the loss, without
deduction for depreciation, as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements. Since
the amount of hazard insurance the Master Servicer may cause to be maintained on
the improvements securing the Mortgage Loans declines as the principal balances
owing thereon decrease, and since improved real estate generally has appreciated
in value over time in the past, the effect of this requirement in the event of
partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damaged property. If specified in the related Prospectus
Supplement, a special hazard insurance policy or an alternative form of credit
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enhancement will be obtained to insure against certain of the uninsured risks
described above. See "Credit Enhancement-Special Hazard Insurance Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
PRIMARY INSURANCE POLICIES. The Master Servicer will be required to
maintain or cause each Sub-Servicer to maintain, as the case may be, in full
force and effect, to the extent specified in the related Prospectus Supplement,
a Primary Insurance Policy with regard to each Single Family Loan for which such
coverage is required. The Master Servicer will be required not to cancel or
refuse to renew any such Primary Insurance Policy in effect at the time of the
initial issuance of a Series of Certificates that is required to be kept in
force under the applicable Agreement unless the replacement Primary Insurance
Policy for such canceled or nonrenewed policy is maintained with an insurer
whose claims-paying ability is sufficient to maintain the current rating of the
classes of Certificates of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Insurance Policy covering a
Mortgage Loan generally will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan, (iii) amounts expended but not approved by the issuer of the
related Primary Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Insurance Policies reimburse certain losses sustained by reason
of defaults in payments by borrowers. Primary Insurance Policies will not insure
against, and exclude from coverage, a loss sustained by reason of a default
arising from or involving certain matters, including (i) fraud or negligence in
origination or servicing of the Mortgage Loans, including misrepresentation by
the originator, borrower or other persons involved in the origination of the
Mortgage Loan; (ii) failure to construct the Mortgaged Property subject to the
Mortgage Loan in accordance with specified plans; (iii) physical damage to the
Mortgaged Property; and (d) the related Master Servicer not being approved as a
servicer by the Primary Insurer.
RECOVERIES UNDER A PRIMARY INSURANCE POLICY. As conditions precedent to
the filing of or payment of a claim under a Primary Insurance Policy covering a
Mortgage Loan, the insured generally will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Mortgaged Property in at least as
good a condition as existed at the effective date of such Primary Insurance
Policy, ordinary wear and tear excepted, (3) Mortgaged Property sales expenses,
(4) any outstanding liens (as defined in such Primary Insurance Policy) on the
Mortgaged Property and (5) foreclosure costs, including court costs and
reasonable attorneys' fees; (ii) in the event of any physical loss or damage to
the Mortgaged Property, have restored and repaired the Mortgaged Property to at
least as good a condition as existed at the effective date of such Primary
Insurance Policy, ordinary wear and tear excepted; and (iii) tender to the
Primary Insurer good and merchantable title to and possession of the Mortgaged
Property.
In those cases in which a Single Family Loan is serviced by a
Sub-Servicer, the Sub-Servicer, on behalf of itself, the Trustee and
Certificateholders, will present claims to the Primary Insurer, and all
collections thereunder will
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be deposited in the Protected Account maintained by the Sub-Servicer. In all
other cases, the Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to the Primary Insurer under each
Primary Insurance Policy, and will take such reasonable steps as are necessary
to receive payment or to permit recovery thereunder with respect to defaulted
Mortgage Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Primary Insurance Policy and, when the Mortgaged
Property has not been restored, the hazard insurance policy, are to be deposited
in the Protected Account, subject to withdrawal as heretofore described.
If the Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related hazard insurance policy are insufficient
to restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Insurance Policy, if any, the Master Servicer
is not required to expend its own funds to restore the damaged Mortgaged
Property unless it determines (i) that such restoration will increase the
proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Insurance Policy, the Master Servicer will be obligated to follow or cause to be
followed such normal practices and procedures as it deems necessary or advisable
to realize upon the defaulted Mortgage Loan. If the proceeds of any liquidation
of the Mortgaged Property securing the defaulted Mortgage Loan are less than the
principal balance of such Mortgage Loan plus interest accrued thereon that is
payable to Certificateholders, the Trust Fund will realize a loss in the amount
of such difference plus the aggregate of expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
the Agreement.
If the Master Servicer or its designee recovers Insurance Proceeds
which, when added to any related Liquidation Proceeds and after deduction of
certain expenses reimbursable to the Master Servicer, exceed the principal
balance of such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Protected Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Protected Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. See "Credit Enhancement."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a
Master Servicer's primary servicing compensation with respect to a Series of
Certificates will come from the monthly payment to it, out of each interest
payment on a Mortgage Loan, of an amount equal to the percentage per annum
described in the Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of the
outstanding principal balance of each Mortgage Loan, such amounts will decrease
as the Mortgage Loans amortize. In addition to primary compensation, the Master
Servicer or the Sub-Servicers will be entitled to retain all assumption fees and
late payment charges, to the extent collected from Mortgagors, and, unless
otherwise provided in the related Prospectus Supplement or Agreement, any
prepayment penalties and any interest or other income which may be earned on
funds held in any Accounts. Unless otherwise specified in the related Prospectus
Supplement, any Sub-Servicer will receive a portion of the Master Servicer's
primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, to the extent
specified in the related Agreement, the Master Servicer will pay from its
servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment in
certain cases of premiums for insurance policies, guarantees, sureties or other
forms of credit enhancement, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in connection
with distributions and reports to Certificateholders, and payment of certain
other expenses. The Master Servicer will be entitled to reimbursement of
expenses incurred in enforcing the obligations of Sub-Servicers and Sellers
under certain limited circumstances. In
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addition, as indicated in the preceding section, the Master Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
any defaulted Mortgage Loan as to which it has determined that all recoverable
Liquidation Proceeds and Insurance Proceeds have been received.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans, agency
securities or private mortgage-backed securities, under pooling and servicing
agreements substantially similar to each other (including the related Agreement)
was conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Uniform
single Audit Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC requires it to report. In rendering its statement such firm
may rely, as to matters relating to the direct servicing of mortgage loans,
agency securities or private mortgage-backed securities by Sub-Servicers, upon
comparable statements for examinations conducted substantially in compliance
with the Uniform Single Audit Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FHLMC or FNMA (rendered within one year of such
statement) of firms of independent public accountants with respect to the
related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by an
officer of each Master Servicer to the effect that such Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of each Master Servicer may be obtained by Certificateholders of the
related Series without charge upon written request to the Master Servicer at the
address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SELLER
One or more Master Servicers under each Agreement will be named in the
related Prospectus Supplement. Each entity serving as Master Servicer may have
normal business relationships with the Seller or the Seller's affiliates.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that a Master Servicer may not resign from its
obligations and duties under the Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
in certain instances, the Seller nor any director, officer, employee, or agent
of the Master Servicer or the Seller will be under any liability to the Trustee,
the related Trust Fund or Certificateholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the
Agreement, or for errors in judgment; provided, however, that neither the Master
Servicer, the Seller nor any such person will be protected against any breach of
warranties or representations made in the Agreement or any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. Each Agreement will further
provide that the Master Servicer, in certain instances, the Seller and any
director, officer, employee or agent of the Master Servicer or the Seller will
be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that neither the Master
Servicer nor, in certain instances, the Seller will be under any obligation to
appear
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in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Seller may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interests of the Certificateholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Master Servicer or the Seller, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to Certificateholders.
Any person into which the Master Servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Master Servicer is a party, or any person succeeding to the business of the
Master Servicer, will be the successor of the Master Servicer under each
Agreement, provided that such person is qualified to sell mortgage loans to, and
service mortgage loans on behalf of, FNMA or FHLMC and further provided that
such merger, consolidation or succession does not adversely affect the then
current rating or ratings of the class or classes of Certificates of such Series
that have been rated.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement or
Agreement, "Events of Default" under each Agreement will include (i) any failure
by the Master Servicer to cause to be deposited in the Certificate Account any
amount so required to be deposited pursuant to the Agreement, and such failure
continues unremedied for two business days or such other time period as is
specified in the Agreement; (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any of its other covenants or
agreements in the Agreement which continues unremedied for sixty days or such
other time period as is specified in the Agreement after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by the holders of Certificates of any class evidencing
not less than 25% of the aggregate principal amount or interests ("Percentage
Interests") evidenced by such class; and (iii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar proceeding
and certain actions by or on behalf of the Master Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
If specified in the Prospectus Supplement, the Agreement will permit
the Trustee to sell the Mortgage Assets and the other assets of the Trust Fund
in the event that payments in respect thereto are insufficient to make payments
required in the Agreement. The assets of the Trust Fund will be sold only under
the circumstances and in the manner specified in the Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
Except as otherwise specified in the related Agreement, so long as an
Event of Default under an Agreement remains unremedied, the Trustee may, and at
the direction of holders of Certificates evidencing Percentage Interests
aggregating not less than 25% of the principal of the related Trust Fund and
under such circumstances as may be specified in such Agreement, the Trustee
shall, terminate all of the rights and obligations of the Master Servicer under
the Agreement relating to such Trust Fund and in and to the Mortgage Loans,
whereupon, unless otherwise specified in the related Prospectus Supplement, the
Trustee will succeed to all of the responsibilities, duties and liabilities of
the Master Servicer under the Agreement, including, if specified in the
Prospectus Supplement, the obligation to make advances, and will be entitled to
similar compensation arrangements. In the event that the Trustee is unwilling or
unable so to act, it may appoint, or petition a court of competent jurisdiction
for the appointment of, a Mortgage Loan servicing institution with a net worth
of at least $10,000,000 to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
Except as otherwise specified in the related Agreement, no
Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
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Certificates of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
AMENDMENT
Unless otherwise specified in the Prospectus Supplement, each Agreement
may be amended by the Seller, each Master Servicer and the Trustee, without the
consent of any of the Certificateholders, (i) to cure any ambiguity; (ii) to
correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the Agreement which
are not inconsistent with the provisions thereof, provided that such action will
not adversely affect in any material respect the interests of any
Certificateholder. In addition, to the extent provided in the related Agreement,
an Agreement may be amended without the consent of any of the
Certificateholders, to change the manner in which the Certificate Account, the
Protected Account or any other Accounts are maintained, provided that any such
change does not adversely affect the then current rating on the class or classes
of Certificates of such Series that have been rated. In addition, if a REMIC
election is made with respect to a Trust Fund, the related Agreement may be
amended to modify, eliminate or add to any of its provisions to such extent as
may be necessary to maintain the qualification of the related Trust Fund as a
REMIC, provided that the Trustee has received an opinion of counsel to the
effect that such action is necessary or helpful to maintain such qualification.
Unless otherwise specified in the Prospectus Supplement, each Agreement may also
be amended by the Seller, each Master Servicer and the Trustee with consent of
holders of Certificates of such Series evidencing not less than 66% of the
aggregate Percentage Interests of each class affected thereby for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
holders of the related Certificates; provided, however, that no such amendment
may (i) reduce in any manner the amount of or delay the timing of, payments
received on Mortgage Assets which are required to be distributed on any
Certificate without the consent of the holder of such Certificate, or (ii)
reduce the aforesaid percentage of Certificates of any class of holders which
are required to consent to any such amendment without the consent of the holders
of all Certificates of such class covered by such Agreement then outstanding. If
a REMIC election is made with respect to a Trust Fund, the Trustee will not be
entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that such amendment will not
cause such Trust Fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Agreement, the obligations
created by each Agreement for each Series of Certificates will terminate upon
the payment to the related Certificateholders of all amounts held in any
Accounts or by the Master Servicer and required to be paid to them pursuant to
such Agreement following the later of (i) the final payment or other liquidation
of the last of the Mortgage Assets subject thereto or the disposition of all
property acquired upon foreclosure or deed in lieu of foreclosure of any such
Mortgage Assets remaining in the Trust Fund and (ii) the purchase by the Master
Servicer or other entity specified in the related Prospectus Supplement
including, if REMIC treatment has been elected, by the holder of the residual
interest in the REMIC (see "Certain Federal Income Tax Consequences" below),
from the related Trust Fund of all of the remaining Mortgage Assets and all
property acquired in respect of such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any
such purchase of Mortgage Assets and property acquired in respect of Mortgage
Assets evidenced by a Series of Certificates will be made at the option of the
Master Servicer or other entity at a price, and in accordance with the
procedures, specified in the Prospectus Supplement. The exercise of such right
will effect early retirement of the Certificates of that Series, but the right
of the Master Servicer or other entity to so purchase is subject to the
principal balance of the related Mortgage Assets being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Mortgage Assets at the Cut-off Date for the Series. The foregoing
is subject to the provision that if a REMIC election is made with respect to a
Trust Fund, any repurchase pursuant to clause (ii) above will be made only in
connection with a "qualified liquidation" of the REMIC within the meaning of
Section 860F(g)(4) of the Code.
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THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Seller, each Master Servicer and
any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Mortgage Loans. Because such
legal aspects are governed primarily by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete or to reflect
the laws of any particular state, or to encompass the laws of all states in
which the security for the Mortgage Loans is situated. The summaries are
qualified in their entirety by reference to the appropriate laws of the states
in which Mortgage Loans may be originated.
GENERAL
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. The Single Family Loans and
Multifamily Loans will be secured by mortgages, deeds of trust, security deeds
or deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to the loan is located. A mortgage creates a lien
upon the real property encumbered by the mortgage, which lien is generally not
prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. The mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
CONDOMINIUMS. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans.
The Cooperative (i) owns all the real property that comprises the project,
including the land and the apartment building comprised of separate dwelling
units and common areas or (ii) leases the land generally by a long-term ground
lease and owns the apartment building. The Cooperative is directly responsible
for project management and, in most cases, payment of real estate taxes and
hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupants under proprietary leases or occupancy
agreements to which the Cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding
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the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of a Trust Fund including Cooperative Loans,
the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-stockholder's
pro rata share of the Cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying rights is financed through
a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and a
financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
CONTRACTS. Each Contract evidences both (a) the obligation of the
obligor to repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such loan. The
Contracts generally are "chattel paper" as defined in the UCC in effect in the
states in which the Manufactured Homes initially were registered. Pursuant to
the UCC, the rules governing the sale of chattel paper are similar to those
governing the perfection of a security interest in chattel paper. Unless
otherwise specified in the Prospectus Supplement, under the Agreement, the
Seller will transfer or cause the transfer of physical possession of the
Contracts to the Trustee or its custodian. In addition the Seller will make or
cause to be made an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be required to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. If the Master Servicer
fails, due to clerical errors or otherwise, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Trustee
may not have a first priority security interest in the Manufactured Home
securing a Contract.
As manufactured homes have become larger and often have been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be
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rendered subordinate to the interests of other parties claiming an interest in
the home under applicable state real estate law. In order to perfect a security
interest in a Manufactured Home under real estate laws, the holder of the
security interest must file either a "fixture filing" under the provisions of
the UCC or a real estate mortgage under the real estate laws of the state where
the home is located. These filings must be made in the real estate records
office of the county where the home is located. Generally, Contracts will
contain provisions prohibiting the obligor from permanently attaching the
Manufactured Home to its site. So long as the obligor does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Seller and transferred to
the Seller.
The Seller will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Seller, the Master Servicer nor the Trustee will amend the certificates of title
to identify the Trustee, on behalf of the Certificateholders, as the new secured
party and, accordingly, the Seller or the Lender will continue to be named as
the secured party on the certificates of title relating to the Manufactured
Homes. In most states, such assignment is an effective conveyance of such
security interest without amendment of any lien noted on the related certificate
of title and the new secured party succeeds to the Seller's rights as the
secured party. However, in some states there exists a risk that, in the absence
of an amendment to the certificate of title, such assignment of the security
interest might not be held effective against creditors of the Seller or Lender.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest assigned to the Seller and the Trustee is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for value
of Manufactured Homes and holders of perfected security interests. There also
exists a risk in not identifying the Trustee, on behalf of the
Certificateholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Trustee could be
released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
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Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Seller will obtain the representation of the Lender that it has no knowledge of
any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises.
FORECLOSURE/REPOSSESSION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. Foreclosure of a deed of
trust is generally accomplished by a non-judicial sale under a specific
provision in the deed of trust which authorizes the trustee to sell the property
at public auction upon any default by the borrower under the terms of the note
or deed of trust. In some states, the trustee must record a notice of default
and send a copy to the borrower-trustor, to any person who has recorded a
request for a copy of any notice of default and notice of sale, to any successor
in interest to the borrower-trustor, to the beneficiary of any junior deed of
trust and to certain other persons. Before such non-judicial sale takes place,
typically a notice of sale must be posted in a public place and published during
a specific period of time in one or more newspapers, posted on the property, and
sent to parties having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties. When
the mortgagee's right to foreclosure is contested, the legal proceedings
necessary to resolve the issue can be time-consuming. After the completion of a
judicial foreclosure proceeding, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares in
the Cooperative when the building was so converted.
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COOPERATIVE LOANS. The Cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the Cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the Cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the Cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
CONTRACTS. The Master Servicer on behalf of the Trustee, to the extent
required by the related agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (I.E., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, generally varying from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be
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entitled to be paid out of the sale proceeds before such proceeds could be
applied to the payment of the claims of unsecured creditors or the holders of
subsequently perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the Manufactured Home securing such a debtor's loan.
However, some states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. In some states, after sale
pursuant to a deed of trust or foreclosure of a mortgage, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. In some states, redemption may occur only
upon payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption would defeat the title of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
CONTRACTS. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, it is
anticipated that in many instances the Master Servicer will not seek deficiency
judgments against defaulting mortgagors. Under the laws applicable in most
states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a Manufactured Home. However, some
states impose prohibitions or limitations on deficiency judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Mortgage Loans underlying a Series of Certificates and
possible reductions in the aggregate amount of such payments. Some states also
have homestead exemption laws which would protect a principal residence from a
liquidation in bankruptcy.
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Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state laws
impose specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Lender had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Lender to
repurchase the Contract because of a breach of its representation and warranty
that no claims or defenses exist which would affect the obligor's obligation to
make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan or contract may be accelerated by the mortgagor
or secured party. The Garn-St Germain Depository Institutions Act of 1982 (the
"Garn-St Germain Act"), subject to certain exceptions, preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence (which
would include a Manufactured Home), the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of Single Family Loans, Cooperative
Loans or Contracts with respect to prepayments on loans secured by liens
encumbering owner-occupied residential properties. Since many of the Mortgaged
Properties will be owner-occupied, it is anticipated that prepayment charges may
not be imposed with respect to many of the Single Family Loans, Cooperative
Loans and Contracts. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Single Family Loans, Cooperative Loans or Contracts
having higher Mortgage Rates or APR's, may increase the likelihood of
refinancing or other early retirement of such loans or contracts. Legal
restrictions, if any, on prepayment of Multifamily Loans will be described in
the related Prospectus Supplement.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels will be included in
any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's mortgage loan (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the mortgage loan and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Master
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
Unless otherwise provided in the applicable Prospectus Supplement, any shortfall
in interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Certificates. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted
alleging personal injury or property damage from the existence of certain
chemical substances which may be present in building materials. For example,
formaldehyde and asbestos have been and in some cases are incorporated into many
building materials utilized in manufactured and other housing. As a consequence,
lawsuits may arise from time to time asserting claims against manufacturers or
builders of the housing, suppliers of component parts, and related persons in
the distribution process. Plaintiffs have won such judgments in certain such
lawsuits.
Under the FTC Rule described above, the holder of any Contract secured
by a Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. Unless otherwise described in the related Prospectus
Supplement, the successful assertion of such claim constitutes a breach of a
representation or warranty of the Lender, and the Certificateholders would
suffer a loss only to the extent that (i) the
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Lender breached its obligation to repurchase the Contract in the event an
obligor is successful in asserting such a claim, and (ii) the Lender, the Seller
or the Trustee were unsuccessful in asserting any claim of contribution or
subrogation on behalf of the Certificateholders against the manufacturer or
other persons who were directly liable to the plaintiff for the damages. Typical
products liability insurance policies held by manufacturers and component
suppliers of manufactured homes may not cover liabilities arising from
formaldehyde and certain other chemicals in manufactured housing, with the
result that recoveries from such manufacturers, suppliers or other persons may
be limited to their corporate assets without the benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage
Loans may include installment sales contracts entered into with the builders of
the homes located on the Mortgaged Properties. The Mortgagors in some instances
may have claims and defenses against the builders which could be asserted
against the Trust Fund.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets
and give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of the Trust Fund and reduce the amounts
otherwise distributable to the Certificateholders if a Mortgaged Property
securing a Mortgage Loan became the property of the Trust Fund in certain
circumstances and if such Cleanup Costs were incurred. Moreover, certain states
by statute impose a lien for any Cleanup Costs incurred by such state on the
property that is the subject of such Cleanup Costs (a "Superlien"). All
subsequent liens on such property are subordinated to such Superlien and, in
some states, even prior recorded liens are subordinated to such Superliens. In
the latter states, the security interest of the Trustee in a property that is
subject to such a Superlien could be adversely affected.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain of the anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereby. The discussion, and the opinions referred to
below, are based on laws, regulations, rulings and decisions now in effect (or,
in the case of certain regulations, proposed), all of which are subject to
change or possibly differing interpretations. Because tax consequences may vary
based upon the status or tax attributes of the owner of a Certificate,
prospective investors should consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of Certificates. For purposes of this tax discussion
(except with respect to information reporting, or where the context indicates
otherwise), the terms "Certificateholder" and "holder" mean the beneficial owner
of a Certificate and the term "Mortgage Loan" includes Agency Securities and
Private Mortgage-Backed Securities.
REMIC ELECTIONS
Under the Code, an election may be made with respect to each Trust Fund
related to a series of Certificates to treat such Trust Fund or certain assets
of such Trust Fund as a REMIC. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election will be made with respect to
the related Trust Fund. To the extent provided in the Prospectus Supplement for
a series, Certificateholders may also have the benefit of a Reserve Account and
of certain agreements (each, a "Yield Supplement Agreement") under which payment
will be made from the Reserve Account in the event that interest accrued on the
Mortgage Loans at their Mortgage Rates is insufficient to pay interest on the
Certificates of such Series (a "Basis Risk Shortfall"). If a REMIC election is
to be made, the Prospectus Supplement will designate the Certificates of such
series or the interests composing such Certificates as "regular interests"
("REMIC Regular Certificates," which where the context so requires includes a
reference to each interest
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composing a Certificate where such interest has been designated as a regular
interest, in lieu of such Certificates) in the REMIC (within the meaning of
Section 860G(a)(l) of the Code) or as the REMIC Residual Certificates in the
REMIC (within the meaning of Section 860G(a)(2) of the Code). The terms "REMIC
Certificates" and "Non-REMIC Certificates" denote, respectively, Certificates
(or the interests composing Certificates) of a series with respect to which a
REMIC election will, or will not, be made. The discussion below is divided into
two parts, the first part applying only to REMIC Certificates and the second
part applying only to Non-REMIC Certificates.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will
agree in the Agreement to elect to treat the related Trust Fund or certain
assets of such Trust Fund as a REMIC. Qualification as a REMIC requires ongoing
compliance with certain conditions. Upon the issuance of each series of REMIC
Certificates, Stroock & Stroock & Lavan 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.
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TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of Certificates, Stroock & Stroock & Lavan 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.
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
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during one or more payment or accrual periods and different fixed or otherwise
permissible variable rates during other payment or accrual periods.
ORIGINAL ISSUE DISCOUNT. REMIC Regular Certificates of certain series
may be issued with "original issue discount" within the meaning of Section
1273(a) of the Code. Holders of REMIC Regular Certificates issued with original
issue discount generally must include original issue discount in gross income
for federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
Each Trust Fund will report original issue discount, if any, to the
holders of REMIC Regular Certificates based on the OID Regulations. OID
Regulations concerning contingent payment debt instruments do not apply to the
REMIC Regular Certificates.
The OID Regulations provide that, in the case of a debt instrument such
as a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations," and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this DE MINIMIS rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any DE MINIMIS original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the Closing Date) and ends on the next succeeding Distribution Date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
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The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
that were included in such REMIC Regular Certificate's stated redemption price
at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although not entirely free from doubt, such a holder may be entitled to
deduct a loss to the extent that its remaining basis would exceed the maximum
amount of future payments to which such holder is entitled. It is unclear
whether the Prepayment Assumption is taken into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued
with original issue discount at a cost that is less than its remaining stated
redemption price at maturity will also generally be required to include in gross
income, for each day on which it holds such REMIC Regular Certificate, the daily
portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of such
holder.
QUALIFIED STATED INTEREST. Interest payable on a REMIC Regular
Certificate which qualifies as "qualified stated interest" for purposes of the
OID Regulations will not be includable in the stated redemption price at
maturity of the REMIC Regular Certificate. Accordingly, if the interest on a
REMIC Regular Certificate does not constitute "qualified stated interest," the
REMIC Regular Certificate will have original issue discount. Interest payments
will not qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the terms
and conditions of the Mortgage Loans underlying the REMIC Regular Certificates
or the terms and conditions of the REMIC Regular Certificates are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered.
PREMIUM. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Certificate for this purpose. Except
as provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Certificate.
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PAYMENT LAG REMIC REGULAR CERTIFICATES; INITIAL PERIOD CONSIDERATIONS.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Certificates or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the DE
MINIMIS rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is DE MINIMIS, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
VARIABLE RATE REMIC REGULAR CERTIFICATES. Under the OID Regulations,
REMIC Regular Certificates paying interest at a variable rate (a "Variable Rate
REMIC Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified DE MINIMIS
amount; (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate, but which is subject to one or more restrictions such
as a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction is not reasonably expected as
of the issue date to significantly affect the yield of the Variable Rate REMIC
Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. An interest rate on a
REMIC Regular Certificate that is the weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC should constitute an
objective rate. Despite the foregoing, a variable rate of interest on a Variable
Rate REMIC Regular Certificate will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Variable Rate REMIC Regular Certificate's term will be either significantly
less than or significantly greater than the average value of the rate during the
final half of the Variable Rate REMIC Regular Certificate's term. Further, an
objective rate does not include a rate that is based on information that is
within the control of the issuer (or a party related to the issuer) or that is
unique to the circumstances of the issuer (or a party related to the issuer). An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Certificate provides for stated interest at a fixed
rate for an initial period of less than one
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year followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate REMIC Regular
Certificate's issue date is intended to approximate the fixed rate, then the
fixed rate and the variable rate together will constitute either a single
qualified floating rate or objective rate, as the case may be (a "Presumed
Single Variable Rate"). If the value of the variable rate and the initial fixed
rate are within 25 basis points of each other as determined on the Variable Rate
REMIC Regular Certificate's issue date, the variable rate will be conclusively
presumed to approximate the fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a
"variable rate debt instrument" under the OID Regulations and provide for
interest at either a single qualified floating rate, a single objective rate, a
Presumed Single Qualified Floating Rate or a Presumed Single Variable Rate
throughout the term (a "Single Variable Rate REMIC Regular Certificate"),
original issue discount is computed as described in "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates-Original Issue
Discount" based on the following: (i) stated interest on the Single Variable
Rate REMIC Regular Certificate which is unconditionally payable in cash or
property (other than debt instruments of the issuer) at least annually will
constitute qualified stated interest; (ii) by assuming that the variable rate on
the Single Variable Rate REMIC Certificate is a fixed rate equal to: (a) in the
case of a Single Variable Rate REMIC Regular Certificate with a qualified
floating rate or a qualified inverse floating rate, the value, as of the issue
date, of the qualified floating rate or the qualified inverse floating rate or
(b) in the case of a Single Variable Rate REMIC Regular Certificate with an
objective rate (other than a qualified inverse floating rate), a fixed rate
which reflects the reasonably expected yield for such Single Variable Rate REMIC
Regular Certificate; and (iii) the qualified stated interest allocable to an
accrual period is increased (or decreased) if the interest actually paid during
an accrual period exceeds (or is less than) the interest assumed to be paid
under the assumed fixed rate described in (ii), above.
In general, any Variable Rate REMIC Regular Certificate other than a
Single Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC
Regular Certificate") that qualifies as a "variable rate debt instrument" will
be converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. (A Multiple Variable Rate REMIC Regular
Certificate may not bear more than one objective rate.) In the case of a
Multiple Variable Rate REMIC Regular Certificate that qualifies as a "variable
rate debt instrument" and provides for stated interest at a fixed rate in
addition to either one or more qualified floating rates or a qualified inverse
floating rate, the fixed rate is initially converted into a qualified floating
rate (or a qualified inverse floating rate, if the Multiple Variable Rate REMIC
Regular Certificate provides for a qualified inverse floating rate). Under such
circumstances, the qualified floating rate or qualified inverse floating rate
that replaces the fixed rate must be such that the fair market value of the
Multiple Variable Rate REMIC Regular Certificate as of the Multiple Variable
Rate REMIC Regular Certificate's issue date is approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Multiple
Variable Rate REMIC Regular Certificate is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted
into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules,
the amounts of original issue discount and qualified stated interest, if any,
are determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates-Original Issue Discount". A holder of the Multiple Variable
Rate REMIC Regular Certificate will account for such original issue discount and
qualified stated interest as if the holder held the "equivalent" 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"
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fixed rate debt instrument in the event that such amounts differ from the actual
amount of interest accrued or paid on the Multiple Variable Rate REMIC Regular
Certificate during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. It is not clear under current law how a Variable Rate REMIC Regular
Certificate would be taxed if such REMIC Regular Certificate were treated as a
contingent payment debt obligation since the OID Regulations relating to
contingent payment debt obligations do not apply to REMIC regular interests.
INTEREST-ONLY REMIC REGULAR CERTIFICATES. The Trust Fund intends to
report income from interest-only REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Certificates will be treated as having original
issue discount.
MARKET DISCOUNT. A holder that acquires a REMIC Regular Certificate at
a market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includable in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued provide otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to stated interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion
of the holder's interest expense on any debt incurred or continued to purchase
or carry a REMIC Regular Certificate purchased with market discount. The
deferred portion of any interest deduction would not exceed the portion of the
market discount on the REMIC Regular Certificate that accrues during the taxable
year in which such interest would otherwise be deductible and, in general, would
be deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular
Certificates-Original Issue Discount"), taking into account distributions
(including prepayments) prior to the date of acquisition of such REMIC Regular
Certificate by the subsequent purchaser. If market discount on a REMIC Regular
Certificate is treated as zero under this rule, the actual amount of such
discount must be allocated to the remaining principal distributions on the REMIC
Regular Certificate in proportion to the amounts of such principal
distributions, and when each such distribution is made, gain equal to the
discount, if any, allocated to the distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Holders of REMIC Regular Certificates
should consult their own tax advisors regarding the availability or advisability
of such an election.
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SINGLE-CLASS REMICS. In the case of "single-class REMICs," certain
expenses of the REMIC will be allocated to the holders of the REMIC Regular
Certificates. The deductibility of such expenses may be subject to certain
limitations. See "Deductibility of Trust Fund Expenses" below.
SALES OF REMIC REGULAR CERTIFICATES. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includable in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includable in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includable in income under the rules described above
under "Current Income on REMIC Regular Certificates-Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within
the meaning of Section 582(c)(1) of the Code, so that gain or loss recognized
from a sale of a REMIC Regular Certificate by a bank or other financial
institution to which such section applies would be ordinary income or loss.
TERMINATION. The REMIC will terminate, if not earlier, shortly
following the REMIC's receipt of the final payment in respect of the underlying
qualified mortgages. The last distribution on a REMIC Regular Certificate should
be treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a
separate contractual right to payments under a Yield Supplement Agreement, and
the tax treatment of such payments, if any, will be addressed in the related
Prospectus Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
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The taxable income of the REMIC, for purposes of determining the
amounts taken into account by holders of REMIC Residual Certificates, is
determined in the same manner as in the case of an individual, with certain
exceptions. The accrual method of accounting must be used and the taxable year
of the REMIC must be the calendar year. The basis of property contributed to the
REMIC in exchange for regular or residual interests is its fair market value
immediately after the transfer. The REMIC Regulations determine the fair market
value of the contributed property by deeming it equal to the aggregate issue
prices of all regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the
REMIC. Market discount on any of the Mortgage Loans held by the REMIC must be
included in the income of the REMIC as it accrues, rather than being included in
income only upon sale of the Mortgage Loans or as principal on the Mortgage
Loans is paid. The REMIC is not entitled to any personal exemptions or to
deductions for taxes paid to foreign countries and U.S. possessions, charitable
contributions or net operating losses, or to certain other deductions to which
individuals are generally entitled. Income or loss in connection with a
"prohibited transaction" is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the related REMIC taxable income is also
uncertain. Although not entirely free from doubt, the related REMIC taxable
income may be recognized when the adjusted issue price of such REMIC Regular
Certificate would exceed the maximum amount of future payments with respect to
such REMIC Regular Certificate. It is unclear whether the Prepayment Assumption
is taken into account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that
is distinct from the REMIC's basis in its assets. The tax basis of a REMIC
Residual Certificate in its holder's hands will be its cost (I.E., the purchase
price of the REMIC Residual Certificate), and will be reduced (but not below
zero) by the holder's share of cash distributions and losses and increased by
its share of taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC
Residual Certificate in any quarter may not exceed the holder's basis in its
REMIC Residual Certificate. Any excess losses may be carried forward
indefinitely to future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
MISMATCHING OF INCOME AND DEDUCTIONS; EXCESS INCLUSIONS. The taxable
income recognized by the holder of a REMIC Residual Certificate in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and discount income (or deductions for
amortization of premium) with respect to qualified mortgages, on the one hand,
and the timing of deductions for interest (including original issue discount) on
the REMIC Regular Certificates, on the other. In the case of multiple classes of
REMIC Regular Certificates issued at different yields, and having different
weighted average lives, taxable income recognized by the holders of REMIC
Residual Certificates may be greater than cash flow in earlier years of the
REMIC (with a corresponding taxable loss or less taxable income than cash flow
in later years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Mortgage Loans may not increase over time as a percentage of the
outstanding principal amount of the Mortgage Loans.
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In the case of Tiered REMICs, the OID Regulations provide that the
regular interests in the REMIC which directly owns the Mortgage Loans (the
"Lower Tier REMIC") will be treated as a single debt instrument for purposes of
the original issue discount provisions. Therefore, the Trust Fund will calculate
the taxable income of Tiered REMICs by treating the Lower Tier REMIC regular
interests as a single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate
will be subject to certain special rules. The excess inclusions with respect to
a REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily accruals
for such quarterly period. The daily accrual for any day on which the REMIC
Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Certificates prior to
the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset
by other deductions, including net operating loss carryforwards, on a holder's
return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective for tax years beginning after December
31, 1986, a taxpayer may elect to have these provisions apply only with respect
to tax years beginning after August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization
subject to the tax on unrelated business income imposed by Code Section 511, the
excess inclusions will be treated as unrelated business taxable income of such
holder for purposes of Code Section 511. In addition, the Code provides that
under Treasury regulations, if a real estate investment trust ("REIT") owns a
REMIC Residual Certificate, to the extent excess inclusions of the REIT exceed
its real estate investment trust taxable income (excluding net capital gains),
the excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income
it derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a qualified mortgage other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a qualified mortgage or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the qualified mortgages pending distribution on the
REMIC Certificates. In addition, a tax is imposed on the REMIC equal to 100
percent of the value of certain property contributed to the REMIC after its
"startup day." No REMIC in which interests are offered hereunder will accept
contributions that would cause it to be subject to such tax. This provision will
not affect a REMIC's ability in accordance with the Agreement to accept
substitute Mortgage Loans or to sell defective Mortgage Loans.
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A REMIC is subject to a tax (deductible from its income) on any "net
income from foreclosure property" (determined in accordance with Section
857(b)(4)(B) of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed
on the Trust Fund initially would be borne by the REMIC Residual Certificates in
the related REMIC rather than by the REMIC Regular Certificates, unless
otherwise specified in the Prospectus Supplement.
DEALERS' ABILITY TO MARK TO MARKET REMIC RESIDUAL CERTIFICATES.
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 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
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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 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
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(ii) above. A different formulation of this rule applies to transfers of REMIC
Residual Certificates by or to foreign transferees. See "Foreign Investors"
below.
DEDUCTIBILITY OF TRUST FUND EXPENSES
A holder of REMIC Certificates that is an individual, estate or trust
will be subject to the limitation with respect to certain itemized deductions
described in Code Section 67, to the extent that such deductions, in the
aggregate, do not exceed two percent of the holder's adjusted gross income, and
such holder may not be able to deduct such fees and expenses to any extent in
computing such holder's alternative minimum tax liability. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the Master Servicer of the
Mortgage Loans. These deductions will be allocated entirely to the holders of
the REMIC Residual Certificates in the case of REMIC Trust Funds with multiple
classes of REMIC Regular Certificates that do not pay their principal amounts
ratably. As a result, the REMIC will report additional taxable income to holders
of REMIC Residual Certificates in an amount equal to their allocable share of
such deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC," the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Certificates
and the REMIC Residual Certificates on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
the case of a holder of a REMIC Regular Certificate who is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including REITs), the deductibility of such expenses will be subject to the
limitations described above. The reduction or disallowance of these deductions
may have a significant impact on the yield of REMIC Regular Certificates to such
a holder. In general terms, a single-class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income purposes) or (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the
single-class REMIC rules.
FOREIGN INVESTORS
REMIC REGULAR CERTIFICATES. Except as discussed below, a holder of a
REMIC Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise subject to federal income tax as a result
of any direct or indirect connection to the United States other than through its
ownership of a REMIC Regular Certificate. For these purposes, the term "United
States person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
whose income is includable in gross income for United States federal income
taxation regardless of its source, and (iv) a trust for which one or more United
States fiduciaries have the authority to control all substantial decisions and
for which a court of the United States can exercise primary supervision over the
trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (iv) above, unless the trust elects to have its United
States status determined under the criteria set forth in (iv) above for tax
years ending after August 20, 1996. Recently issued Treasury regulations (the
"Final Withholding Regulations"), which are generally effective with respect to
payments
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made after December 31, 1998, consolidate and modify the current
certification requirements and means by which a holder of REMIC Certificates 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 transferor to a
domestic transferee will likewise be disregarded under the REMIC Regulations if
the transfer would have the effect of allowing the foreign transferor to avoid
the tax on accrued excess inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale
of REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowable as a credit
against the holder's federal income tax.
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REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust Fund (Form 1066 and
Schedules Q thereto) must be filed as if the Trust Fund were a partnership for
federal income tax purposes. Information on Schedule Q must be provided to
holders of REMIC Residual Certificates with respect to every calendar quarter.
Each holder of a REMIC Residual Certificate will be required to treat items on
its federal income tax returns consistently with their treatment on the Trust
Fund's information returns unless the holder either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from an incorrect schedule received from the Trust Fund. The Trust Fund also
will be subject to the procedural and administrative rules of the Code
applicable to partnerships, including the determination of any adjustments to,
among other things, items of REMIC taxable income by the Internal Revenue
Service. Holders of REMIC Residual Certificates will have certain rights and
obligations with respect to any administrative or judicial proceedings involving
the Internal Revenue Service. Under the Code and Regulations, a REMIC generally
is required to designate a tax matters person. Generally, subject to various
limitations, the tax matters person has authority to act on behalf of the REMIC
and the holders of the REMIC Residual Certificates in connection with
administrative determinations and judicial review respecting returns of taxable
income of the REMIC. Treasury regulations exempt from certain of these
procedural rules REMICs having no more than one residual interest holder.
Unless otherwise indicated in the Prospectus Supplement, and to the
extent allowable, the Seller or its designee will act as the tax matters person
for each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance
of its interest in the REMIC Residual Certificate, agrees that the Seller or its
designee will act as the holder's fiduciary in the performance of any duties
required of the holder in the event that the holder is the tax matters person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of
Certificates with respect to which a REMIC election is not made.
TAX STATUS OF THE TRUST FUND. Upon the issuance of each series of
Non-REMIC Certificates, Stroock & Stroock & Lavan 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.
A holder of a Non-REMIC Certificate that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of such holder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. A holder of a Non-REMIC Certificate
that is not a corporation cannot deduct such expenses for purposes of the
alternative minimum tax (if applicable). Such deductions will include servicing,
guarantee and administrative fees paid to the servicer of the Mortgage Loans. As
a result, individuals, estates, or trusts holding Non-REMIC Certificates may
have taxable income in excess of the cash received.
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STATUS OF THE NON-REMIC CERTIFICATES. 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 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
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basis of the Non-REMIC Certificate (see "Sales of Non-REMIC Certificates" below)
that is allocable to the Mortgage Loan.
Non-REMIC Certificates of certain series ("Variable Rate Non-REMIC
Certificates") may provide for a Pass-through Rate based on the weighted average
of the interest rates of the Mortgage Loans held by the Trust Fund, which
interest rates may be fixed or variable. In the case of a Variable Rate
Non-REMIC Certificate that is subject to the original issue discount rules, the
daily portions of original issue discount generally will be calculated in the
same manner as discussed above except the principles discussed in "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates-Original Issue
Discounts-Variable Rate REMIC Regular Certificates" will be applied.
TAXATION OF NON-REMIC CERTIFICATES IF STRIPPED BOND RULES DO NOT APPLY.
If the stripped bond rules do not apply to a Non-REMIC Certificate, then the
holder will be required to include in income its share of the interest payments
on the Mortgage Loans in accordance with its tax accounting method. In addition,
if the holder purchased the Non-REMIC Certificate at a discount or premium, the
holder will be required to account for such discount or premium in the manner
described below, as if it had purchased the Mortgage Loans directly. The
treatment of any discount will depend on whether the discount with respect to
the Mortgage Loans is original issue discount as defined in the Code and, in the
case of discount other than original issue discount, whether such other discount
exceeds a DE MINIMIS amount. In the case of original issue discount, the holder
(whether a cash or accrual method taxpayer) will be required to report as
additional interest income in each month the portion of such discount that
accrues in that month, calculated based on a constant yield method. In general
it is not anticipated that the amount of original issue discount to be accrued
in each month, if any, will be significant relative to the interest paid
currently on the Mortgage Loans. However, original issue discount could arise
with respect to a Mortgage Loan ("ARM") that provides for interest at a rate
equal to the sum of an index of market interest rates and a fixed number. The
original issue discount for ARMs generally will be determined under the
principals discussed in "REMIC Regular Certificates-Current Income on REMIC
Regular Certificates-Original Issue Discount-Variable Rate REMIC Regular
Certificates."
If discount on the Mortgage Loans other than original issue discount
exceeds a DE MINIMIS amount (described below), the holder will also generally be
required to include in income in each month the amount of such discount accrued
through such month and not previously included in income, but limited, with
respect to the portion of such discount allocable to any Mortgage Loan, to the
amount of principal on such Mortgage Loan received by the Trust Fund in that
month. Because the Mortgage Loans will provide for monthly principal payments,
such discount may be required to be included in income at a rate that is not
significantly slower (and, under certain circumstances, faster) than the rate at
which such discount accrues (and therefore at a rate not significantly slower
than the rate at which such discount would be included in income if it were
original issue discount). The holder may elect to accrue such discount under a
constant yield method based on the yield of the Non-REMIC Certificate to such
holder. In the absence of such an election, it may be necessary to accrue such
discount under a more rapid straight-line method. Under the DE MINIMIS rule,
market discount with respect to a Non-REMIC Certificate will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Mortgage Loans allocable to the Non-REMIC Certificate and (ii) the weighted
average life (determined using complete years) of the Mortgage Loans remaining
at the time of purchase of the Non-REMIC Certificate. See "REMIC Regular
Certificates-Current Income on REMIC Regular Certificates-Market Discount."
If a holder purchases a Non-REMIC Certificate at a premium, such holder
may elect under Section 171 of the Code to amortize, as an offset to interest
income, the portion of such premium that is allocable to a Mortgage Loan under a
constant yield method based on the yield of the Mortgage Loan to such holder,
provided that such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before that date 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.
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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 of Non-REMIC Certificates 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.
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
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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 /section/2510.3-101 (the "Regulation"), the U.S.
Department of Labor has defined what constitutes Plan assets for purposes of
ERISA and Section 4975 of the Code. The Regulation provides that if a Plan makes
an investment in an "equity interest" in an entity, the assets of the entity
will be considered the assets of such Plan unless certain exceptions apply. The
Seller can give no assurance that the Certificates will qualify for any of the
exceptions under the Regulation. As a result, the Mortgage Assets may be
considered the assets of any Plan which acquires a Certificate, unless some
administrative exemption is available.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass-through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. A "mortgage pool pass-through certificate" is defined as a
certificate which represents a beneficial undivided interest in a mortgage pool
which entitles the holder to pass-through payments of principal and interest
from the Mortgage Loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Seller and
the Trustee maintain a system of insurance or other protection for the Mortgage
Loans and the property securing such Mortgage Loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the Mortgage Loans, or 1% of
the principal balance of the largest covered pooled Mortgage Loan; (ii) the
Trustee may not be an
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affiliate of the Seller; and (iii) the payments made to
and retained by the Seller in connection with the Trust Fund, together with all
funds inuring to its benefit for administering the Trust Fund, represent no more
than "adequate consideration" for selling the Mortgage Loans, plus reasonable
compensation for services provided to the Trust Fund.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a
Plan with respect to which the Seller, the Special Hazard Insurer, the Pool
Insurer, the Master Servicer, or other servicer, or the Trustee is a party in
interest if the Plan does not pay more than fair market value for such
Certificate and the rights and interests evidenced by such Certificate are not
subordinated to the rights and interests evidenced by other Certificates of the
same pool. PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the Mortgage
Pool, provided that any payments made to the Master Servicer in connection with
the servicing of the Trust Fund are made in accordance with a binding agreement,
copies of which must be made available to prospective investors.
In the case of any Plan with respect to which the Seller, the Master
Servicer, the Special Hazard Insurer, the Pool Insurer, or the Trustee is a
fiduciary, PTCE 83-1 will only apply if, in addition to the other requirements:
(i) the initial sale, exchange or transfer of Certificates is expressly approved
by an independent fiduciary who has authority to manage and control those plan
assets being invested in Certificates; (ii) the Plan pays no more for the
Certificates than would be paid in an arm's length transaction; (iii) no
investment management, advisory or underwriting fee, sale commission, or similar
compensation is paid to the Seller with regard to the sale, exchange or transfer
of Certificates to the Plan; (iv) the total value of the Certificates purchased
by such Plan does not exceed 25% of the amount issued; and (v) at least 50% of
the aggregate amount of Certificates is acquired by persons independent of the
Seller, the Trustee, the Master Servicer, and the Special Hazard Insurer or Pool
Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm
that the Trust Fund is a "mortgage pool," that the Certificates constitute
"mortgage pool pass-through certificates," and that the conditions set forth in
PTCE 83-1 would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in PTCE 83-1, the Plan
fiduciary should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary also should consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates on
behalf of a Plan.
In addition to PTCE 83-1, the U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction Exemption 90-30 ("PTE 90-30"), to
Bear, Stearns & Co. Inc., which is applicable to Certificates which meet its
requirements whenever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate, or is the
selling or placement agent. PTE 90-30 generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that certain conditions set forth in PTE 90-30 are
satisfied. The exempted transactions include certain transactions relating to
the servicing and operation of investment trusts holding assets of the following
general categories: single and multifamily residential or commercial mortgages,
motor vehicle receivables, consumer or commercial receivables and guaranteed
government mortgage pool certificates and the purchase, sale and holding of
mortgage-backed or asset- backed pass-through certificates representing
beneficial ownership interests in the assets of such investment trusts.
PTE 90-30 sets forth seven general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Certificates
to be eligible for exemptive relief thereunder. First, the acquisition of
Certificates by certain Plans must be on terms that are at least as favorable to
the Plan as they would be in an arm's length transaction with an unrelated
party. Second, the rights and interests evidenced by the Certificates must not
be subordinated to the rights and interests evidenced by other certificates of
the same trust. Third, the Certificates at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by Standard
& Poor's Structured Rating Group, Moody's Investors Service Inc., Duff & Phelps
Credit Rating Co. or Fitch Investors Services, L.P. ("National Credit Rating
Agencies"). Fourth, the Trustee cannot be an affiliate of any member of the
"Restricted Group" which consists of any underwriter as defined in PTE 90-30,
the Seller, the Master Servicer, each servicer, the Pool Insurer, the Special
Hazard Insurer and any obligor with respect to obligations or receivables
constituting more than 5% of the aggregate unamortized principal balance of the
obligations or receivables as of the date of initial issuance of the
Certificates. Fifth, the sum of all payments made to and retained by such
underwriters must represent
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not more than reasonable compensation for underwriting the Certificates; the sum
of all payments made to and retained by the Seller pursuant to the assignment of
the obligations or receivables to the related Trust Fund must represent not more
than the fair market value of such obligations; and the sum of all payments made
to and retained by the Master Servicer and any servicer must represent not more
than reasonable compensation for such person's services under the Trust
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. Sixth, (i) the investment pool consists only of assets of the type
enumerated in the exemption and which have been included in other investment
pools; (ii) certificates evidencing interests in such other investment pools
have been rated in one of the three highest generic rating categories by one of
the National Credit Rating Agencies for at least one year prior to a Plan's
acquisition of certificates; and (iii) certificates evidencing interests in such
other investment pools have been purchased by investors other than Plans for at
least one year prior to a Plan's acquisition of certificates. Finally, the
investing Plan must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act of 1933, as amended. The
Seller assumes that only Plans which are accredited investors under the federal
securities laws will be permitted to purchase the Certificates.
If the general conditions of PTE 90-30 are satisfied, such exemption
may provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of the
Certificates by Plans. However, no exemption is provided from the restrictions
of ERISA for the acquisition or holding of a Certificate on behalf of an
"Excluded Plan" by any person who is a fiduciary with respect to the assets of
such Excluded Plan. For purposes of the Certificates, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group. In addition, each Plan's
investment in each class of Certificates cannot exceed 25% of the outstanding
Certificates in the class, and after the Plan's acquisition of the Certificates,
no more than 25% of the assets over which the fiduciary has investment authority
are invested in Certificates of a trust containing assets which are sold or
serviced by the same entity. Finally, in the case of initial issuance (but not
secondary market transactions), at least 50% of each class of Certificates, and
at least 50% of the aggregate interests in the trust, must be acquired by
persons independent of the Restricted Group.
Before purchasing a Certificate in reliance on any of these exemptions
or any other exemption, a fiduciary of a Plan should itself confirm that
requirements set forth in such exemption would be satisfied.
One or more exemptions may be available, with respect to certain
prohibited transactions to which neither PTCE 83-1 nor PTE 90-30 is applicable,
depending in part upon the type of Plan fiduciary making the decision to acquire
Certificates and the circumstances under which such decision is made, including,
but not limited to PTCE 90-1 (regarding investments by insurance company pooled
separate accounts), PTCE 91-38 (regarding investments by bank collective
investments funds), PTCE 84-14 (regarding transactions effected by "qualified
professional asset managers"), PTCE 95-60 (regarding investments by insurance
company general accounts) and PTCE 96-23 (regarding transactions effected by
"in-house asset managers"). However, even if the conditions specified in either
of these exemptions are met, the scope of the relief provided by these
exemptions might or might not cover all acts which might be construed as
prohibited transactions.
Any Plan fiduciary considering whether to purchase a Certificate on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment.
Each Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to the related
Certificates.
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LEGAL INVESTMENT
SMMEA
Unless otherwise indicated in the related Prospectus Supplement and for
so long as they are rated in one of the two highest rating categories by a least
one nationally recognized statistical rating organization, the Certificates will
constitute "mortgage related securities" for purposes of SMMEA, and as such,
absent state legislation described below, will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to the same extent
that under applicable law obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities,"
the Certificates will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Certain states adopted
legislation which limits the ability of insurance companies domiciled in these
states to purchase mortgage-related securities, such as the Certificates.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with Certificates without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in Certificates, and
national banks may purchase Certificates for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. ss. 24 (Seventh), subject in each case to such regulations as the
applicable federal regulatory authority may prescribe. In this connection,
federal credit unions should review the National Credit Union Administration
("NCUA") Letter to Credit Unions No. 96, as modified by Letter to Credit Unions
No. 108, which included guidelines to assist federal credit unions in making
investment decisions for mortgage related securities, and the NCUA's regulation
"Investment and Deposit Activities" (12 C.F.R. Part 703), (whether or not the
class of Certificates under consideration for purchase constitutes a "mortgage
related security").
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency and the Office of
Thrift Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Certificates by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
The Policy Statement provides that a "high-risk mortgage security" is
not suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate liquidity
that has a closely supervised trading department is not precluded from acquiring
high-risk mortgage securities for trading purposes.
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A depository institution must ascertain and document prior to purchase
and no less frequently than annually thereafter that a nonhigh-risk mortgage
security held for investment remains outside the high-risk category. If an
institution is unable to make these determinations through internal analysis, it
must use information derived from a source that is independent of the party from
whom the product is being purchased. The institution is responsible for ensuring
that the assumptions underlying the analysis and resulting calculations are
reasonable. Reliance on analyses and documentation from a securities dealer or
other outside party without internal analyses by the institution is
unacceptable.
In general, a high-risk mortgage security is a mortgage derivative
product possessing greater price volatility than a benchmark fixed rate 30-year
mortgage-backed pass-through security. Mortgage derivative products include
CMOs, REMICs, CMO and REMIC residuals and stripped mortgage-backed securities. A
mortgage derivative product that, at the time of purchase or at a subsequent
testing date, meets any one of three tests will be considered a high-risk
mortgage security. When the characteristics of a mortgage derivative product are
such that the first two tests cannot be applied (such as interest-only strips),
the mortgage derivative product remains subject to the third test.
The three tests of a high-risk mortgage security are as follows: (i)
the mortgage derivative product has an expected weighted average life greater
than 10.0 years; (ii) the expected weighted average life of the mortgage
derivative product: (a) extends by more than 4.0 years, assuming an immediate
and sustained parallel shift in the yield curve of plus 300 basis points, or (b)
shortens by more than 6.0 years, assuming an immediate and sustained parallel
shift in the yield curve of minus 300 basis points; and (iii) the estimated
change in the price of the mortgage derivative product is more than 17%, due to
an immediate and sustained parallel shift in the yield curve of plus or minus
300 basis points.
When performing the price sensitivity test, the same prepayment
assumptions and same cash flows that were used to estimate average life
sensitivity must be used. The discount rate assumptions should be determined by
(i) assuming that the discount rate for the security equals the yield on a
comparable average life U.S. Treasury security plus a constant spread, (ii)
calculating the spread over Treasury rates from the bid side of the market for
the mortgage derivative product, and (iii) assuming the spread remains constant
when the Treasury curve shifts up or down 300 basis points. Discounting the cash
flows by their respective discount rates estimates a price in the plus or minus
300 basis point environments. The initial price must be determined by the offer
side of the market and used as the base price from which the 17% price
sensitivity test will be measured.
Generally, a floating-rate debt class will not be subject to the
average life and average life sensitivity tests described above if it bears a
rate that, at the time of purchase or at a subsequent testing date, is below the
contractual cap on the instrument. An institution may purchase interest rate
contracts that effectively uncap the instrument. For purposes of the Policy
Statement, a CMO floating-rate debt class is a debt class whose rate adjusts at
least annually on a one-for-one basis with the debt class's index. The index
must be a conventional, widely-used market interest rate index such as the
London Interbank Offered Rate ("LIBOR"). Inverse floating rate debt classes are
not included in the definition of a floating rate debt class.
Securities and other products, whether carried on or off balance sheet
(such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total investment portfolio or total
capital of a depository institution are considered an imprudent investment
practice. Long-maturity generally means a remaining maturity exceeding 10 years.
GENERALLY
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates, to purchase
Certificates representing more than a specified percentage of the investor's
assets, or to purchase certain types of Certificates, such as residual interests
or stripped mortgage-backed securities. Investors
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should consult their own legal advisors in determining whether and to what
extent the Certificates constitute legal investments for such investors and
comply with any other applicable requirements.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplements will
be offered in Series. The distribution of the Certificates may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Certificates will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Bear, Stearns & Co. Inc. ("Bear, Stearns"), an affiliate of the Seller,
acting as underwriter with other underwriters, if any, named therein. In such
event, the Prospectus Supplement may also specify that the underwriters will not
be obligated to pay for any Certificates agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Seller. In connection with the
sale of the Certificates, underwriters may receive compensation from the Seller
or from purchasers of the Certificates in the form of discounts, concessions or
commissions. The Prospectus Supplement will describe any such compensation paid
by the Seller.
Alternatively, the Prospectus Supplement may specify that the
Certificates will be distributed by Bear, Stearns acting as agent or in some
cases as principal with respect to Certificates that it has previously purchased
or agreed to purchase. If Bear, Stearns acts as agent in the sale of
Certificates, Bear, Stearns will receive a selling commission with respect to
each Series of Certificates, depending on market conditions, expressed as a
percentage of the aggregate principal balance of the Certificates sold hereunder
as of the Cut-off Date. The exact percentage for each Series of Certificates
will be disclosed in the related Prospectus Supplement. To the extent that Bear,
Stearns elects to purchase Certificates as principal, Bear, Stearns may realize
losses or profits based upon the difference between its purchase price and the
sales price. The Prospectus Supplement with respect to any Series offered other
than through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the Seller and purchasers
of Certificates of such Series.
The Seller will indemnify Bear, Stearns and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Bear, Stearns and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Bear, Stearns and the Seller may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Seller's Mortgage Loans pending
the sale of such Mortgage Loans or interests therein, including the
Certificates.
The Seller anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Certificates of each Series, including certain
federal income tax consequences with respect thereto, will be passed upon for
the Seller by Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038.
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FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates under certain scenarios might fail to recoup
their underlying investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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GLOSSARY
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
TERM PAGE
- ---- ----
Accounts.......................................................................8
Accrual Certificates..........................................................32
accrual period................................................................33
Agency Securities..............................................................1
Agreement......................................................................4
Applicable Amount.............................................................77
APR...........................................................................17
ARM...........................................................................81
Available Funds...............................................................31
Bankruptcy Bond...............................................................12
Basis Risk Shortfall..........................................................64
Bear, Stearns.................................................................27
Buydown Funds.................................................................65
Buydown Loans..................................................................5
Capitalized Interest Account...................................................9
Cash Flow Investments.........................................................65
Cede..........................................................................35
Certificate Account...........................................................11
Certificate Register..........................................................31
Certificateholders.............................................................1
Certificates..................................................................31
Charter Act...................................................................22
Cleanup Costs.................................................................64
CMO............................................................................7
Code..........................................................................14
Collateral Value..............................................................18
Commission.....................................................................2
Contracts......................................................................1
Cooperative Loans..............................................................1
Cooperatives...................................................................4
Current Principal Amount......................................................32
Cut-off Date..................................................................10
Definitive Certificates.......................................................36
Detailed Description..........................................................16
Determination Date............................................................31
Distribution Date..............................................................2
DTC...........................................................................35
ERISA.........................................................................15
Events of Default.............................................................54
Excluded Plan.................................................................85
FDIC..........................................................................28
FHA............................................................................4
FHA Insurance.................................................................12
FHA Loans.....................................................................20
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FHLMC..........................................................................1
FHLMC Act.....................................................................23
FHLMC Certificate group.......................................................23
FHLMC Certificates.............................................................7
Final Withholding Regulations.................................................77
FNMA...........................................................................1
FNMA Certificates..............................................................6
FTC Rule......................................................................62
Garn-St Germain Act...........................................................62
GNMA...........................................................................1
GNMA Certificates..............................................................6
GNMA Issuer...................................................................20
Guaranty Agreement............................................................20
Housing Act...................................................................20
HUD...........................................................................25
Indirect Participant..........................................................35
Insurance Proceeds............................................................31
Insured Expenses..............................................................47
Lender.........................................................................1
LIBOR.........................................................................87
Liquidation Expenses..........................................................47
Liquidation Proceeds..........................................................31
Loan-to-Value Ratio...........................................................16
Lockout Periods................................................................6
Lower Tier REMIC..............................................................74
Manufactured Homes.............................................................6
Manufacturer's Invoice Price..................................................18
Master Servicer................................................................1
Mortgage Assets................................................................1
Mortgage Loans.................................................................4
Mortgage Pool..................................................................4
Mortgage Pool Pass-Through Certificate........................................83
Mortgage Rate..................................................................5
Mortgaged Properties..........................................................16
Mortgagors....................................................................32
Multifamily Loans..............................................................1
Multiple Variable Rate REMIC Regular Certificate..............................70
National Credit Rating Agencies...............................................84
NCUA..........................................................................86
Non-REMIC Certificates........................................................15
Objective Rate................................................................69
OID Regulations...............................................................66
Participants..................................................................35
Passthrough entity............................................................76
Passthrough Rate..............................................................81
Percentage Interests..........................................................54
Permitted Investments.........................................................42
Plan..........................................................................83
PMBS Agreement................................................................25
PMBS Issuer....................................................................8
PMBS Servicer..................................................................8
PMBS Trustee...................................................................8
Policy Statement..............................................................86
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<PAGE>
Pool Insurance Policy.........................................................12
Pool Insurer..................................................................37
Pre-Funded Amount..............................................................8
Pre-Funding Account............................................................8
Pre-Funding Period.............................................................8
Prepayment Assumption.........................................................67
Presumed Single Qualified Floating Rate.......................................69
Presumed Single Variable Rate.................................................70
Primary Insurance Policy......................................................16
Primary Insurer...............................................................51
Principal Prepayments.........................................................31
Private Mortgage-Backed Securities.............................................1
Protected Account.............................................................30
PTCE 83-1.....................................................................83
PTE 90-30.....................................................................84
Purchase Price................................................................29
Qualified Inverse Floating Rate...............................................69
Qualifying Assets.............................................................65
Rating Agency.................................................................12
Record Date...................................................................31
Refinance Loan................................................................18
Regular Interests..............................................................2
Regulation....................................................................83
REIT..........................................................................74
Relief Act....................................................................63
REMIC..........................................................................1
REMIC Certificates............................................................65
REMIC Qualified Floating Rate.................................................66
REMIC Regular Certificates....................................................14
REMIC Regulations.............................................................65
Reserve Account................................................................2
Restricted Group..............................................................84
Retained Interest.............................................................30
RICs..........................................................................74
Seller.........................................................................1
Senior Certificates............................................................9
Single Family Loans............................................................1
Single Variable Rate REMIC Regular Certificate................................70
SMMEA.........................................................................13
Special Hazard Insurance Policy...............................................12
Special Hazard Insurer........................................................38
Stripped Bond Rules.......................................................15, 80
Stripped Coupon...............................................................80
Subordinated Certificates......................................................9
Sub-Servicer..................................................................13
Sub-Servicing Agreement.......................................................48
Superlien.....................................................................64
Taxable Mortgage Pools........................................................82
Tiered REMICs.................................................................66
Title V.......................................................................20
Trust Fund.....................................................................1
Trustee........................................................................1
UCC...........................................................................35
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<PAGE>
Underwriters..................................................................88
United States person..........................................................77
VA.............................................................................4
VA Guarantees.................................................................30
VA Loans......................................................................20
Variable Rate Non-REMIC Certificates..........................................81
Variable Rate REMIC Regular Certificate.......................................69
Yield Supplement Agreement....................................................64
<PAGE>
<TABLE>
========================================================== ==================================================================
<S> <C>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER $338,789,900
THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND (Approximate)
THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY BSMSI.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 ANY BEAR STEARNS
JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE MORTGAGE SECURITIES INC.
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING DEPOSITOR
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. BEAR STEARNS MORTGAGE
SECURITIES TRUST 1998-3
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE MORTGAGE PASS-THROUGH
CERTIFICATES OFFERED HEREBY, WHETHER OR NOT PARTICIPATING CERTIFICATES,
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A SERIES 1998-3
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 PROSPECTUS SUPPLEMENT
PAGE
----
Summary of Terms.......................................S-4
Description of the Mortgage Loans.....................S-19
The Master Servicer...................................S-22
Description of the Certificates.......................S-25
Yield and Prepayment Considerations...................S-35
The Pooling and Servicing Agreement...................S-40
Federal Income Tax Considerations.....................S-52
ERISA Considerations..................................S-53
Legal Investment......................................S-53
Restrictions on Purchase and Transfer of
the Residual Certificate...........................S-53 BEAR, STEARNS & CO. INC.
Method of Distribution................................S-54
Legal Matters.........................................S-54
Rating................................................S-54
Index of Principal Definitions........................S-56 MARCH 11, 1998
Annex A - Certain Characteristics of the
Mortgage Loans......................................A-1
</TABLE>
PROSPECTUS
Prospectus Supplement....................................2
Available Information....................................2
Incorporation of Certain Documents By Reference..........2
Reports to Certificateholders............................3
Summary of Terms.........................................4
The Trust Fund..........................................16
Use of Proceeds.........................................26
The Seller..............................................27
Mortgage Loan Program...................................27
Description of the Certificates.........................30
Credit Enhancement......................................36
Yield and Prepayment Considerations.....................43
The Pooling and Servicing Agreement.....................45
Certain Legal Aspects of the Mortgage Loans.............56
Certain Federal Income Tax Consequences.................64
ERISA Considerations....................................83
Legal Investment........................................86
Method of Distribution..................................88
Legal Matters...........................................88
Financial Information...................................89
Rating..................................................89
Glossary................................................90
