PROSPECTUS SUPPLEMENT
(To Prospectus dated October 28, 1998)
$225,128,187
(Approximate)
Structured Asset Mortgage Investments Inc.
Seller
Structured Asset Mortgage Investments Trust 1998-10
Issuer
Liberty Lending Services, Inc.
Master Servicer
Mortgage Pass-Through Certificates, Series 1998-10
The Seller will form Structured Asset Mortgage Investments Trust
1998-10 (the "Issuer" or the "Trust"), and the Trust will issue the Certificates
which will represent the entire beneficial interest in the Trust. The assets of
the Trust will be primarily fixed rate mortgage loans secured by first liens on
one- to four-family residential properties. Cashflow from the mortgage loans
will pay the Certificates. Only the Certificates identified below are offered
hereby.
Capitalized terms used herein are defined where indicated in the Index
of Principal Definitions.
Consider carefully the risk factors beginning on page S-13 of this
Prospectus Supplement and on page 19 of the Prospectus before purchasing any
Certificates. In addition, if you are purchasing a class that pays only
principal, you should consider the risk that a slower than anticipated rate of
principal payments on the applicable mortgage loans will result in an actual
yield that is lower than you anticipate. If you are purchasing a class that pays
only interest, you should consider the risk that a faster than anticipated rate
of principal payments on the applicable mortgage loans will result in a yield
that is lower than you anticipate and a rapid rate of such payments could result
in a failure to fully recover your initial investment.
The Certificates are obligations only of the Trust. Neither the
Certificates nor the mortgage loans are insured or guaranteed by any person.
Distributions on the Certificates will be payable solely from the assets
transferred to the Trust for the benefit of Certificateholders.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved the Certificates or determined if this Prospectus
Supplement or the Prospectus is accurate or complete. Any representation to the
contrary is a criminal offense.
------------------------
$ 211,895,600 6.90% Class A Certificates
$ 90,487 (1) Class PO Certificates
$ 222,864,136
(2) (2) Class X Certificates
$ Class B-1 Certificates
6,856,700 6.90% (3)
$ Class B-2 Certificates
3,999,700 6.90% (3)
$ Class B-3 Certificates
2,285,600 6.90% (3)
$ 100 6.90% Class R Certificate
- -------------
(1) This class pays only principal.
(2) Notional amount. This class pays only interest, calculated on a notional
amount which is not paid, at a variable rate described under "Summary of
Terms--The Certificates--Offered Certificates" herein.
(3) This class is a subordinate certificate.
----------
Bear, Stearns & Co. Inc. (the "Underwriter") will offer the
Certificates set forth above (other than the Class X Certificates), subject to
certain conditions, from time to time in negotiated transactions at varying
prices to be determined at the time of sale. See "Method of Distribution"
herein.
The Underwriter and the Issuer will deliver to purchasers the Class R
Certificate and the Class X Certificates, respectively, in physical form, and
the Underwriter will deliver the remaining Certificates set forth above in
book-entry form, through The Depository Trust Company, in each case on or about
November 30, 1998.
----------
Bear, Stearns & Co. Inc.
The date of this Prospectus Supplement is November 19, 1998
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
The Issuer provides information to you about the Certificates in two
separate documents that progressively provide more detail: (a) the accompanying
Prospectus, which provides general information, some of which may not apply to
your Certificates and (b) this Prospectus Supplement, which describes the
specific terms of your Certificates.
If the terms of your Certificates vary between this Prospectus
Supplement and the accompanying Prospectus, you should rely on the information
in this Prospectus Supplement.
The Issuer includes cross-references in this Prospectus Supplement and
the accompanying Prospectus to captions in these materials where you can find
further related discussions. The following Tables of Contents provide the pages
on which these captions are located.
The Issuer may have filed preliminary information regarding the Trust's
assets and the Certificates with the SEC. If so, the information contained in
this document supersedes all of that preliminary information, which was prepared
by the Underwriter for prospective investors.
Statements contained herein which do not relate to historic or current
information may be deemed to contain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the "1933
Act"). Actual results could differ materially from those contained in such
statements as a result of the matters set forth under "Summary of Terms - Yield
and Prepayment Considerations" and "Yield and Prepayment Considerations" and
elsewhere in this Prospectus Supplement.
The Seller's principal offices are located at 245 Park Avenue, New
York, New York 10167 and its telephone number is (212) 272-2000.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Caption Page
- ------- ----
Summary of Terms.....................................S-4
Risk Factors.........................................S-13
Geographic Concentration..........................S-13
Other Risks.......................................S-13
Description of the Mortgage Loans....................S-13
Underwriting Standards............................S-14
The Master Servicer..................................S-17
General...........................................S-17
Delinquency and Foreclosure Experience............S-17
Description of the Certificates......................S-19
General...........................................S-19
Book-Entry Registration...........................S-20
Available Funds...................................S-20
Distributions on the Certificates.................S-21
Allocation of Available Funds...................S-21
Allocation of Losses; Subordination ..............S-28
Subordination.....................................S-30
Yield and Prepayment Considerations..................S-31
General...........................................S-31
Assumed Final Distribution Date...................S-33
Weighted Average Lives............................S-33
Prepayment Model..................................S-33
Pricing Assumptions...............................S-33
Decrement Tables..................................S-34
Yield on Class PO Certificates....................S-38
Yield on Class X Certificates.....................S-38
The Pooling and Servicing Agreement..................S-39
General..........................................S-39
Caption Page
- ------- ----
Voting Rights....................................S-39
Assignment of Mortgage Loans.....................S-39
Representations and Warranties...................S-40
Collection and Other Servicing Procedures........S-42
Hazard Insurance.................................S-43
Realization Upon Defaulted Mortgage Loans;
Purchases of Defaulted Mortgage Loans .....S-44
Servicing Compensation and Payment of Expenses...S-45
Protected Account................................S-45
Certificate Account..............................S-46
Certain Matters Regarding the Master Servicer....S-48
Events of Default................................S-48
Monthly Advances.................................S-49
Reports to Certificateholders....................S-50
Termination......................................S-50
The Trustee......................................S-50
Year 2000 Issue..................................S-51
Federal Income Tax Considerations....................S-51
ERISA Considerations.................................S-52
Legal Investment.....................................S-53
Restrictions on Purchase and Transfer
of the Residual Certificate........................S-53
Method of Distribution...............................S-54
Legal Matters........................................S-54
Rating...............................................S-54
Index of Principal Definitions.......................S-56
Schedule A - Certain Characteristics of the
Mortgage Loans .................................A-1
S-2
<PAGE>
PROSPECTUS
Caption Page
- ------- ----
Prospectus Supplement.................................2
Available Information.................................2
Incorporation of Certain Documents By Reference.......3
Reports to Securityholders............................3
Summary of Terms......................................4
Risk Factors..........................................19
The Trust Fund........................................21
The Mortgage Loans - General.....................22
Single Family and Cooperative Loans..............24
Multi-family Loans...............................25
Contracts........................................25
Agency Securities................................26
Private Mortgage-Backed Securities...............30
U.S. Government Securities.......................32
FASITs...........................................32
Substitution of Mortgage Assets..................32
Use of Proceeds.......................................32
The Seller............................................32
The Mortgage Loans....................................33
Underwriting Standards...........................33
Qualifications of Lenders........................34
Representations by Lenders; Repurchases..........34
Optional Purchase of Defaulted Loans.............35
Description of the Securities.........................36
General..........................................36
Distributions on Securities......................37
Advances.........................................39
Reports to Securityholders.......................39
Book-Entry Registration..........................40
Exchangeable Securities...............................43
General..........................................43
Exchanges........................................44
Procedures and Exchange Proportions..............47
Credit Enhancement....................................48
General..........................................48
Subordination....................................48
Pool Insurance Policies..........................49
Special Hazard Insurance Policies................50
Bankruptcy Bonds.................................51
FHA Insurance; VA Guarantees.....................51
FHA Insurance on Multi-family Loans..............53
Reserve and Other Accounts.......................53
Other Insurance, Guarantees and Similar
Instruments or Agreements ..................54
Cross Support....................................54
Yield and Prepayment Considerations...................54
Administration........................................56
Assignment of Mortgage Assets....................56
Payments on Mortgage Loans; Deposits to
Accounts...................................58
Sub-Servicing by Lenders.........................59
Collection Procedures............................60
Hazard Insurance.................................61
Realization Upon Defaulted Mortgage Loans........62
Servicing and Other Compensation and Payment
of Expenses..................................63
Evidence as to Compliance........................64
Certain Matters Regarding the Master Servicer
and the Seller...............................64
Events of Default; Rights Upon Event of
Default......................................65
Caption Page
- ------- ----
The Trustee.....................................67
Duties of the Trustee...........................67
Resignation of Trustee..........................68
Amendment.......................................68
Termination; Optional Termination...............68
Legal Aspects of the Mortgage Loans..................69
General.........................................69
Foreclosure/Repossession........................72
Rights of Redemption............................74
Anti-Deficiency Legislation and Other
Limitations on Lenders......................74
Due-on-Sale Clauses.............................75
Prepayment Charges..............................76
Applicability of Usury Laws.....................76
Soldiers' and Sailors' Civil Relief Act.........76
Product Liability and Related Litigation........76
Environmental Considerations....................77
Federal Income Tax Consequences......................77
General.........................................77
REMIC and FASIT Elections.......................78
REMIC Securities................................78
Tiered REMIC Structures.........................79
REMIC Regular Securities........................79
Tax Treatment of Yield Supplement
Agreements..................................85
REMIC Residual Certificates.....................86
Transfers of REMIC Residual Certificates........88
Deductibility of Trust Fund Expenses............90
Foreign Investors in REMIC Securities...........90
Backup Withholding on REMIC Securities..........91
REMIC Administrative Matters....................92
FASIT Securities................................92
Qualification as a FASIT........................92
Tiered FASIT Structures.........................93
FASIT Regular Securities........................94
Tax Treatment of Yield Supplement
Agreements..................................95
FASIT Ownership Certificate.....................95
Grantor Trusts..................................96
Tax Characterization of the Trust as a
Partnership................................100
Tax Consequences to Holders of Debt
Securities Issued by a Partnership.........100
Tax Consequences to Holders of Notes Issued
by a Partnership...........................102
Tax Consequences to Holders of Certificates
Issued by a Partnership....................102
Taxation of Classes of Exchangeable
Securities.................................106
Callable Classes...............................108
State Tax Consequences..............................108
ERISA Considerations................................108
Legal Investment....................................113
SMMEA..........................................113
FFIEC Policy Statement.........................113
Generally......................................114
Method of Distribution..............................115
Legal Matters.......................................115
Financial Information...............................116
Rating..............................................116
Glossary............................................117
S-3
<PAGE>
SUMMARY OF TERMS
This summary highlights selected information appearing in greater
detail elsewhere in this Prospectus Supplement and in the accompanying
Prospectus. To understand the offering, you should carefully read the entire
Prospectus Supplement and Prospectus. You can find the location of the meaning
assigned to capitalized terms used but not defined in this summary in the Index
of Principal Definitions herein.
<TABLE>
<CAPTION>
<S> <C>
Issuer.................................. Structured Asset Mortgage Investments Trust 1998-10 (also called the
"Trust")
Seller.................................. Structured Asset Mortgage Investments Inc. ("SAMI") (formerly known as
Bear Stearns Mortgage Securities Inc.). See "Structured Asset
Mortgage Investments Inc." in the Prospectus.
Master Servicer......................... Liberty Lending Services, Inc. ("LLSI")
Trustee................................. Bankers Trust Company of California, N.A.
Cut-off Date............................ November 1, 1998.
Closing Date............................ On or about November 30, 1998.
The Certificates
Title.............................. Mortgage Pass-Through Certificates, Series 1998-10 (the "Certificates").
The Trust will issue the Certificates pursuant to a Pooling and
Servicing Agreement (the "Agreement") to be dated as of the Cut-off
Date among SAMI, the Master Servicer and the Trustee.
Offered Certificates............... The Classes of Certificates in the approximate principal or notional
amounts set forth, and bearing interest, if applicable, at the rates
set forth on the cover page hereto and as follows:
o the Class X Certificates bear interest on their notional amount
(equal to the aggregate Scheduled Principal Balance of the
Mortgage Loans with Net Rates equal to or greater than 6.90% per
annum) at a variable pass-through rate equal to the weighted
average of the excess of (a) the Net Rate on each Mortgage Loan
over (b) 6.90% per annum. The initial notional amount for the
Class X Certificates is $222,864,136 and the pass-through rate for
the initial interest accrual period is approximately 0.8648% per
annum.
Other Certificates................. The Trust also will issue the following Classes of "Other Certificates,"
in the indicated approximate original principal amounts and bearing
the indicated rates of interest, which will provide credit support to
the Offered Certificates, but which are not offered by this Prospectus
Supplement:
Class B-4 Certificates $1,599,900 6.90%
Class B-5 Certificates $ 685,700 6.90%
Class B-6 Certificates $1,142,814 6.90%
S-4
<PAGE>
The information contained herein with respect to the Other Certificates is
provided only to permit you to better understand the Offered
Certificates.
Other Designations
Certificates.................... Offered Certificates and Other Certificates.
Senior Certificates............. The Class A, Class PO, Class X and Class R Certificates.
Subordinate Certificates........ The Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class B-6
Certificates.
Offered Subordinate Certificates. The Class B-1, Class B-2 and Class B-3 Certificates.
Senior P&I Certificates......... All Senior Certificates (other than the Class PO Certificates).
Interest Only Certificates...... The Class X Certificates.
Principal Only Certificates..... The Class PO Certificates.
Regular Certificates............ All Classes of Certificates other than the Residual Certificate.
Residual Certificate............ The Class R Certificate.
Physical Certificates........... The Class X Certificates, the Other Certificates and the Residual
Certificate.
Book-Entry Certificates......... All Certificates other than the Physical Certificates.
Denominations...................... Senior Certificates (other than the Class R Certificate), $1,000 and
increments of $1.00 in excess thereof; Class R, a single Certificate
of $100; and Offered Subordinate Certificates, $25,000 and increments
of $1.00 in excess thereof.
Registration....................... Each investor in a Class of Book-Entry Certificates will hold beneficial
interests in such Certificates through DTC. The Class X and Class R
Certificates will be issued in certificated fully-registered form.
Distribution Dates................. The 25th day of each month, or if such day is not a business day, then the
next succeeding Business Day, beginning in December 1998 (each, a
"Distribution Date").
Record Date........................ The "Record Date" for each Distribution Date will be the close of business
on the last Business Day of the month preceding the month in which the
related Distribution Date occurs.
Interest Accrual Period............ With respect to each Distribution Date, the calendar month preceding the
month in which the Distribution Date occurs, beginning in November.
The Mortgage Pool....................... Primarily conventional first lien, fixed rate mortgage loans secured by
one- to four-family residences and individual condominium units
located primarily in California.
S-5
<PAGE>
The Mortgage Loans were originated in 1997 and 1998. They were originated
or acquired by Headlands Mortgage Company ("Headlands") and were
initially serviced by Headlands. On September 1, 1998, the servicing
was transferred to Wilshire Funding Corporation and on November 20,
1998, the servicing will be transferred to LLSI. The Mortgage Loans
have original terms to maturity of 15 to 30 years.
All but one of the Mortgage Loans with Loan-to-Value Ratios in excess of
80% have primary mortgage insurance.
Approximately 24.22% of the Mortgage Loans by aggregate principal balance as
of the Cut-off Date have a larger payment (a "balloon payment") due at
maturity. Such Mortgage Loans have fifteen year original terms but
amortize as if they had a term of thirty years, with their outstanding
principal balances due at maturity. All other Mortgage Loans are fully
amortizing Mortgage Loans.
The Issuer has set forth below certain information regarding the Mortgage
Loans and the related Mortgaged Properties as of the Cut-off Date. All
such information is provided on an approximate basis. The assumptions
made and the bases of the calculations are set forth together with the
more detailed statistical information relating to the Mortgage Loans in
Schedule A which is attached hereto and is a part of this Prospectus
Supplement. You should also refer to "Description of the Mortgage
Loans" herein.
Number of Mortgage Loans.................... 1,393
Aggregate
Scheduled Principal Balance............... $228,556,602
Minimum Scheduled Principal Balance......... $19,147
Maximum Scheduled Principal Balance......... $784,586
Average Scheduled Principal Balance......... $164,075
Minimum Mortgage Rate....................... 6.750% per annum
Maximum Mortgage Rate....................... 10.625% per annum
Weighted Average Mortgage Rate.............. 8.144% per annum
Weighted Average Net Rate................... 7.741% per annum
Minimum Remaining Term
to Stated Maturity ....................... 171 months
Maximum Remaining Term
to Stated Maturity ....................... 357 months
Weighted Average Remaining
Term to Stated Maturity................... 304 months
Weighted Average Original Loan-to-Value
Ratio..................................... 76.16%
Location of Mortgaged Property
California............................... 60.32%
Other.................................... 39.68%
S-6
<PAGE>
Distributions on the Certificates....... General. The Issuer will make distributions with respect to each Class of
Certificates primarily from certain collections and other recoveries
on the Mortgage Loans. On each Distribution Date with respect to
either payments of interest or principal: (i) the Senior Certificates
will be entitled to receive all amounts distributable to them for such
Distribution Date before any distributions are made to the Subordinate
Certificates on such date, and (ii) the Subordinate Certificates will
be entitled to receive all amounts distributable to them for such
Distribution Date before any distributions are made on such date on
any Class of Subordinate Certificates with a higher numerical class
designation.
The Master Servicer will collect monthly payments of principal and interest
on the Mortgage Loans. After retaining fees due to it and amounts that
reimburse it for reimbursable expenses and advances, the Master
Servicer will forward all such collections, together with any advances
that it makes for delinquent mortgage payments, to the Trustee. The
aggregate amount of such monthly collections and advances is described
under the heading "Description of the Certificates -- Available Funds"
in this Prospectus Supplement.
Distributions to Certificateholders will be made as follows:
-----------------------------------------------------------
Step 1
Distribution of interest to the Senior P&I Certificates
-----------------------------------------------------------
-----------------------------------------------------------
Step 2
Distribution of principal to the Senior P&I Certificates
-----------------------------------------------------------
-----------------------------------------------------------
Step 3
Distribution of principal to the Class PO Certificates(1)
-----------------------------------------------------------
-----------------------------------------------------------
Step 4
Distribution of certain deferred amounts to the Class PO
Certificates(2)
-----------------------------------------------------------
-----------------------------------------------------------
Step 5
Distribution to the Offered Subordinate Certificates as
follows:
o Interest to the Class B-1 Certificates
o Principal to the Class B-1 Certificates
o Interest to the Class B-2 Certificates
o Principal to the Class B-2 Certificates
o Interest to the Class B-3 Certificates
o Principal to the Class B-3 Certificates
-----------------------------------------------------------
-----------------------------------------------------------
Step 6
Distribution of interest and principal to the
Other Certificates
-----------------------------------------------------------
-----------------------------------------------------------
Step 7
Any remaining funds to the Class R Certificate (3)
-----------------------------------------------------------
- ------------------
(1) The Class PO Certificates receive only a certain portion of the principal
received in respect of each Mortgage Loan that has a Net Rate of less than
6.90%, as described under "Description of the Certificates--Distributions
on the Certificates--Principal" herein.
(2) Subject to limitations described under "Description of the
Certificates--Allocation of Losses; Subordination" herein.
(3) It is very unlikely that any distributions will be made to the Class R
Certificate under Step 7.
S-7
<PAGE>
As a Certificateholder, you will generally be entitled to receive on each
Distribution Date interest on the Certificates of each Class you hold
(other than the Class PO Certificates), which will accrue during the
preceding Interest Accrual Period, in an amount equal to:
o 1/12th
multiplied by
o the pass-through rate for such Class set forth herein
multiplied by
o the Current Principal
Amount or Notional
Amount of such Class
immediately prior to
such Distribution
Date.
You will also be entitled to receive any previously accrued and unpaid
interest on such Classes.
Interest distributions may be reduced by shortfalls of interest incurred on
the Mortgage Loans. Certain interest shortfalls will be made up by
compensating interest payments made by the Master Servicer from its
master servicing fee. See "The Pooling and Servicing Agreement
Servicing Compensation and Payment of Expenses." Interest will be
calculated on the basis of a 360-day year comprised of twelve 30-day
months.
The Class PO Certificates are principal only Certificates and will not bear
interest.
Principal distributions on Certificates entitled to principal distributions
will be allocated among the various classes of Certificates as more
fully described under "Description of the Certificates--Distributions
on the Certificates" in the Prospectus Supplement. Not all Classes of
Offered Certificates will receive principal on each Distribution Date.
Credit Enhancement --
General.............................. The Subordinate Certificates will provide credit enhancement for the
Senior Certificates. Each Class of Subordinate Certificates with a
higher numerical Class designation will provide credit enhancement for
each Class of Certificates with a lower numerical Class designation.
Credit Enhancement --
Subordination; Allocation
of Losses............................ The Issuer will make distributions to Senior Certificates prior to
distributions to the related Subordinate Certificates and as among the
Subordinate Certificates, to such Classes in numerical order.
So long as the Subordinate Certificates are outstanding, the Issuer will
allocate losses first to the Subordinate Certificates, in reverse
numerical order beginning with the Class with the highest numerical
designation, before allocating them to the
S-8
<PAGE>
Senior Certificates. A loss is allocated to a Certificate by reducing
its principal balance by the amount of the loss. Losses occur if:
o the Trust cannot dispose of a Mortgaged Property upon liquidation
for an amount at least equal to the total amount owed by the
Mortgagor plus expenses of liquidation and any unreimbursed
advances; or
o the Mortgagor's monthly payments are reduced or the principal
balance of the Mortgage Loan is reduced following a bankruptcy
proceeding or default modification.
If no Subordinate Certificates remain outstanding, losses will be
allocated among the related Senior Certificates in proportion to their
remaining principal balances.
A portion of losses on each Mortgage Loan having a Net Rate of less than
6.90% that are allocated to the Senior Certificates will be allocated
first to the Class PO Certificates in an amount based on the percentage
of each such Mortgage Loan represented by the Class PO Certificates.
The remainder of such losses will be allocated as described above.
Such subordination will increase the likelihood of timely receipt by the
holders of the Certificates with higher relative payment priority of
the maximum amount to which they are entitled on any Distribution Date
and will provide such holders protection against losses resulting from
defaults on Mortgage Loans to the extent described herein. See
"Description of the Certificates - Distributions on the Certificates,"
"--Allocation of Losses; Subordination" and " - Subordination" herein.
As of the Closing Date, the aggregate Current Principal Amounts of the
Subordinate Certificates and of the Other Certificates which are part
of the Subordinate Certificates will equal approximately 7.25% and
1.50% of the aggregate Current Principal Amounts of all of the
Certificates.
In addition, to extend the period during which the Subordinate
Certificates remain available as credit enhancement to the Senior
Certificates, the Issuer will allocate the entire amount of any
prepayments and certain other unscheduled recoveries of principal with
respect to the Mortgage Loans to the Senior Certificates to the extent
described herein during the first five years after the Cut-off Date
(with such allocation being subject to reduction over an additional
five year period thereafter as described herein). This will accelerate
the amortization of the Senior Certificates as a whole while, in the
absence of losses in respect of the Mortgage Loans, increasing the
percentage interest in the principal balance of the Mortgage Loans
evidenced by the Subordinate Certificates. 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 the Mortgage Loans under
S-9
<PAGE>
certain circumstances. See "The Pooling and Servicing Agreement -
Monthly Advances" herein.
Yield and Prepayment
Considerations....................... The yield to maturity of each Class of Certificates will be affected by
the following:
o the amount and timing of principal payments on the Mortgage Loans,
o the allocation of Available Funds to such Class of Certificates,
o the applicable Pass-Through Rate for such Class of Certificates,
o the purchase price paid for such Class of Certificates, and
o losses and net interest shortfalls allocated to such Class of
Certificates.
The interaction of the foregoing factors may have different effects on the
various Classes of Certificates and the effects on any Class may vary
at different times during the life of such Class. No one can currently
determine the actual rate of prepayments on the Mortgage Loans, the
amount and timing of losses or net interest shortfalls or the yield to
maturity of any Certificates. You are urged to consider your own
estimates as to the anticipated rate of future prepayments on the
Mortgage Loans and the suitability of the Certificates to your
investment objectives. You should carefully review the discussion under
"Yield and Prepayment Considerations" herein and in the Prospectus.
Liquidity............................... There is currently no secondary market for the Certificates, and you
cannot be assured that one will develop. Bear, Stearns & Co. Inc.
intends to establish a market in the Offered Certificates, but it is
not obligated to do so. Even if such a market is established, it may
not continue. Each Certificateholder will receive monthly reports
pertaining to the Certificates as described under "Administration -
Reports to Certificateholders" in the Prospectus. There are a limited
number of sources which provide certain information about mortgage
pass-through certificates in the secondary market, and they may not
provide information about the Certificates. Investors should consider
the effect of limited information on the liquidity of the Certificates.
Assumed Final Distribution Date......... July 25, 2028. It is likely that the actual final Distribution Date will
occur earlier due to prepayments or the exercise of the optional
termination right described below. See "Yield and Prepayment
Considerations - Assumed Final Distribution Date" herein.
Optional Termination.................... SAMI or its designee may repurchase from the Trust all Mortgage Loans at
the purchase price set forth in the Agreement when the Scheduled
Principal Balance of the Mortgage Loans is less than 10% of their
Scheduled Principal Balance on the Cut-off Date. Any such repurchase
will result in the retirement of the Certificates. The Trust may also
be terminated and the Certificates retired if
S-10
<PAGE>
SAMI determines, based upon an opinion of counsel, that the REMIC
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. See
"The Pooling and Servicing Agreement - Termination" herein.
Federal Income Tax
Consequences......................... An election will be made to treat the Mortgage Loans and certain other
assets owned by the Trust as a real estate mortgage investment conduit
("REMIC") for federal income tax purposes. The Certificates (other
than the Residual Certificates) are the regular interests in the
REMIC. The Class R Certificate will be the residual interest in the
REMIC. See "Federal Income Tax Considerations" herein and "Federal
Income Tax Consequences" in the Prospectus and "Restrictions on
Purchase and Transfer of the Residual Certificates" herein for further
information regarding the federal income tax consequences of investing
in the Certificates.
ERISA Considerations....................... Subject to the conditions and considerations set forth under "ERISA
Considerations" herein and in the Prospectus, the Senior
Certificates (other than the Class X Certificates) may be purchased
by pension, profit-sharing or other employee benefit plans as well
as individual retirement accounts and certain types of Keogh Plans.
The Class X Certificates and the Subordinate Certificates generally may
be purchased only if a prohibited transaction class exemption issued by
the U.S. Department of Labor based on the identity of the fiduciary
making the decision to so acquire such Certificates is applicable as
further described under "ERISA Considerations" herein.
Restrictions on Purchase and
Transfer of the Residual
Certificates......................... If you wish to purchase or subsequently transfer the Residual Certificate,
you are required to obtain the consent of the Seller and you may not
be, or transfer to, a "disqualified organization" or a person who is
not a "United States person" under the Code.
Rating.................................. The Issuer will issue the Offered Certificates only if the respective
Classes receive the ratings set forth below from Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P") and Fitch IBCA,
Inc. ("Fitch"). S&P and Fitch are referred to herein as the "Rating
Agencies."
Rating
------------------------
Class S&P Fitch
----- --- -----
Class A AAA AAA
Class PO AAAr AAA
Class X AAAr AAA
Class B-1 - AA
Class B-2 - A
Class B-3 - BBB
Class R AAA AAA
S-11
<PAGE>
You should evaluate the ratings of the Offered Certificates of any Class
independently from similar ratings on other types of securities. A
rating is not a recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time by the Rating
Agencies. The "r" symbol of the "AAAr" rating of certain Classes of
Certificates by S&P is attached to highlight certain obligations that
S&P believes may experience volatility or variability in expected
returns due to non-credit risks, including principal only and interest
only mortgage securities which provide for payment of only principal or
only interest. See "Rating" herein.
Legal Investment........................ The Senior Certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") so long as they are rated in
one of the two highest rating categories by a nationally recognized
statistical rating organization. It is not anticipated that the
remaining Classes of Certificates will constitute "mortgage related
securities" under SMMEA.
If your investment activities are subject to legal investment laws and
regulations or to review by certain regulatory authorities, you should
consult your own legal advisors to determine whether and to what extent
there may be restrictions on your ability to invest in the
Certificates. See "Legal Investment" herein and in the Prospectus.
</TABLE>
S-12
<PAGE>
RISK FACTORS
Geographic Concentration. Approximately 60.32% of the Mortgage Loans as
of the Cut-off Date are secured by property in California. Property in
California may be more susceptible than properties located in other parts of the
country to certain types of uninsurable hazards, such as earthquakes, floods,
mudslides and other natural disasters.
In addition:
o economic conditions in California (which may or may not affect
real property values) may affect the ability of borrowers to repay
their loans on time;
o declines in the California residential real estate market may
reduce the values of properties located in California, which would
result in an increase in the loan-to-value ratios; and
o any increase in the market value of properties located in
California would reduce the loan-to-value ratios and could,
therefore, make alternative sources of financing available to the
borrowers at lower interest rates, which could result in an
increased rate of prepayment of the mortgage loans.
Other Risks. You should also review the risk factors beginning on page
19 of the Prospectus.
DESCRIPTION OF THE MORTGAGE LOANS
All the Mortgage Loans will be acquired by SAMI on the date of issuance
of the Certificates from Liberty Savings Bank, FSB ("Liberty"), pursuant to a
Mortgage Loan Purchase Agreement dated as of November 19, 1998. Liberty is an
affiliate of the Master Servicer. Liberty acquired the Mortgage Loans from Bear
Stearns Mortgage Capital Corporation ("BSMCC"), an affiliate of SAMI and the
Underwriter, pursuant to a Mortgage Loan Purchase Agreement dated as of November
19, 1998. As described under "--Underwriting Standards" below, all of the
Mortgage Loans were originated or acquired by Headlands Mortgage Company.
The Mortgage Loans in the aggregate (the "Mortgage Pool") will consist
of approximately 1,393 Mortgage Loans with a Scheduled Principal Balance as of
the Cut-off Date of approximately $228,556,602. The Mortgage Pool consists
primarily of conventional first lien, fixed rate, fully amortizing or balloon
payment, mortgage loans secured by one-to four-family residences and individual
condominium units located primarily in California. All of the Mortgage Loans as
of the Cut-off Date with Loan-to-Value Ratios in excess of 80% have primary
mortgage insurance, except one Mortgage Loan with a Loan-to-Value Ratio of
84.71%. All of the Mortgage Loans may be prepaid in full or in part at any time
and without penalty. The Cut-off Date Scheduled Principal Balance set forth
herein is subject to a permitted variance of up to 5%. The Mortgage Loans were
originated in 1997 and 1998. They were originated or acquired by Headlands
Mortgage Company ("Headlands") and were initially serviced by Headlands. On
September 1, 1998, the servicing was transferred to Wilshire Funding Corporation
and on November 20, 1998, the servicing will be transferred to LLSI. As of the
Cut-off Date, none of the Mortgage Loans were delinquent, except for 19 Mortgage
Loans representing less than 2.0% of the Cut-off Date Scheduled Principal
Balance of the Mortgage Loans, which were no more than 30 days delinquent. As of
the Closing Date, no more than three such Mortgage Loans representing less than
0.25% of the Cut-off Date Scheduled Principal Balance of the Mortgage Loans will
be 59 days or less delinquent. Increases in delinquency typically occur in
connection with servicing transfers. The following paragraphs and the tables set
forth in Schedule A set forth additional information with respect to the
Mortgage Loans.*
- ----------
* The description herein and in Schedule A hereto of the Mortgage Loans is based
upon estimates of the composition thereof as of the Cut-off Date, assuming that
all scheduled principal payments due on or before the Cut-off Date have been
received. Prior to the issuance of the certificates, Mortgage Loans may be
removed as a result of (i) Principal Prepayments thereof in full prior to
November 1, 1998, (ii) requirements of S&P or Fitch or (iii) delinquencies or
otherwise. In any such event, other mortgage loans may be included in the Trust.
All weighted average information reflects weighting of the Mortgage Loans by
their respective Scheduled Principal Balances as of the Cut-off Date. The
characteristics as of the Cut-off Date of the Mortgage Loans at the time the
Certificates are issued will not, however, differ by more than 5% from the
estimated information set forth herein with respect to the Mortgage Loans as
presently constituted, although certain characteristics of the Mortgage Loans
may vary.
S-13
<PAGE>
Approximately 24.22% of the Mortgage Loans by aggregate principal
balance as of the Cut-off Date have a balloon payment at maturity. Such Mortgage
Loans have fifteen year original terms and thirty year amortization schedules
with their outstanding principal balances due at maturity. All other Mortgage
Loans are fully amortizing Mortgage Loans.
The "Net Rate" for each Mortgage Loan is the rate of interest borne by
such Mortgage Loan (the "Mortgage Rate") less (i) the Master Servicing Fee
(which ranges from 0.375% to 1.257% per annum) and (ii) an amount to be paid to
the Trustee (the "Trustee's Fee"), in each case expressed as a per annum rate.
The Master Servicing Fee plus the Trustee's Fee is referred to as the "Aggregate
Expense Rate."
For any Distribution Date, the "Due Date" for a Mortgage Loan will be
the date in each month on which its Monthly Payment is due if such due date is
the first day of a month and otherwise is deemed to be the first day of the
following month.
The "Scheduled Principal Balance" of a Mortgage Loan with respect to a
Distribution Date is (i) the unpaid principal balance of such Mortgage Loan as
of the close of business on the related Due Date (i.e., taking account of the
principal payment to be made on such Due Date and irrespective of any
delinquency in its payment), as specified in the amortization schedule at the
time relating thereto (before any adjustment to such amortization schedule by
reason of any bankruptcy or similar proceeding occurring after the Cut-off Date
(other than a Deficient Valuation) or any moratorium or similar waiver or grace
period) less (ii) any Principal Prepayments and the principal portion of any Net
Liquidation Proceeds received during or prior to the immediately preceding
Prepayment Period; provided that the Scheduled Principal Balance of any
Liquidated Mortgage Loan is zero.
Underwriting Standards
All of the Mortgage Loans were originated or acquired by Headlands
Mortgage Company ("Headlands"). Headlands is a publicly held California
corporation which was organized in 1981. Headlands is engaged in the mortgage
banking business, which consists of the origination, acquisition, sale and
servicing of residential mortgage loans secured by one- to four-unit family
residences, and the purchase and sale of mortgage servicing rights. Headlands is
listed on NASDAQ under the symbol "HDLD".
Headlands is headquarted in northern California, and has production
branches in California, Washington, Oregon, New Mexico, Virginia, Pennsylvania,
Idaho, Florida, New Jersey and Arizona. Loans are originated primarily on a
wholesale basis, through a network of independent mortgage loan brokers approved
by Headlands.
Headland's executive offices are located at 1100 Larkspur Landing
Circle Suite 101, Larkspur, CA 94939.
Headlands originates and purchases "conventional non-conforming
mortgage loans" (i.e., loans which are not insured by the Federal Housing
Authority ("FHA") or partially guaranteed by the Veterans Administration ("VA")
or which do not qualify for sale to Fannie Mae or Freddie Mac) secured by first
liens on one- to four-family residential properties. These loans typically
differ from those underwritten to the guidelines established by Fannie Mae,
Freddie Mac Ginnie Mae primarily with respect to original principal balances,
loan-to-value ratios, borrower income, required documentation, interest rates,
borrower occupancy of the mortgaged property and/or property types. To the
extent that these programs reflect underwriting standards different from those
of Fannie Mae, Freddie Mac and Ginnie Mae, the performance of loans made
thereunder may reflect higher delinquency rates and/or credit losses.
All mortgage loans originated or acquired by Headlands are generally
underwritten by Headlands according to its credit, appraisal and underwriting
standards. Such underwriting standards (the "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. Exceptions to the Underwriting Standards are permitted where
compensating factors are present.
S-14
<PAGE>
Headlands' Underwriting Standards for purchase money or rate/term
refinance loans secured by one- to two-family primary residences generally allow
Loan-to-Value Ratios at origination of up to 95% for mortgage loans with
original principal balances of up to $300,000, up to 90% for mortgage loans
secured by one- to four-family, primary residences with original principal
balances of up to $400,000, up to 85% for mortgage loans with original principal
balances of up to $500,000 and up to 80% for mortgage loans with original
principal balances up to $650,000. Headlands may acquire mortgage loans with
principal balances up to $3,000,000 ("super jumbos") if the loan is secured by
the borrower's primary residence. The Loan-to-Value Ratio for super jumbos
generally may not exceed 60%. For cash-out refinance loans, the maximum
Loan-to-Value Ratio generally is 80%, and the maximum "cash out" amount
permitted is based in part on the original amount of the related mortgage loan.
Headlands' Underwriting Standards for mortgage loans secured by
investment properties generally allow Loan-to-Value Ratios at origination of up
to 90% for mortgage loans with original principal balances up to $250,000.
Headlands' Underwriting Standards permit mortgage loans secured by investment
properties to have higher original principal balances if they have lower
Loan-to-Value Ratios at origination.
For each mortgage loan with a Loan-to-Value Ratio at origination
exceeding 80%, Headlands generally requires a primary mortgage insurance policy
insuring a portion of the balance of the mortgage loan at least equal to the
product of the original principal balance of such mortgage loan and a fraction,
the numerator of which is the excess of the original principal balance of such
mortgage loan over 75% of the lesser of the appraised value and selling price of
the related mortgage property and the denominator of which is the original
principal balance of the related mortgage loan plus accrued interest thereon and
related foreclosure expenses. No such primary mortgage insurance policy will be
required with respect to any such mortgage loan after the date on which the
related Loan-to-Value Ratio decreases to 80% or less or, based upon a new
appraisal, the principal balance of such mortgage loan represents 80% or less of
the new appraised value. All of the insurers which have issued primary mortgage
insurance policies with respect to the Mortgage Loans meet Fannie Mae's or
Freddie Mac's standards or are acceptable to the Rating Agencies. In certain
circumstances, however, Headlands does not require primary mortgage insurance on
mortgage loans with principal balances up to $250,000 that have Loan-to-Value
Ratios exceeding 80% but less than or equal to 90%. All residences except
cooperatives and certain high-rise condominium dwellings are eligible for this
program. Each qualifying mortgage loan will be made at an interest rate that is
higher than the rate would be if the Loan-to-Value Ratio was 80% or less or if
primary mortgage insurance was obtained. Under such circumstances, the
Certificateholders will not have the benefit of primary mortgage insurance
coverage.
In determining whether a prospective borrower has sufficient monthly
income available (i) to meet the borrower's monthly obligation on the proposed
mortgage loan and (ii) to meet monthly housing expenses and other financial
obligations including the borrower's monthly obligations on the proposed
mortgage loan. Headlands generally considers, when required by the applicable
documentation program, the ratio of such amounts to the proposed borrower's
acceptable stable monthly gross income. Such ratios vary depending on a number
of underwriting criteria, including Loan-to-Value Ratios, and are determined on
a loan-by-loan basis.
Headlands also examines a prospective borrower's credit report.
Generally, each credit report provides a credit score for the borrower. Credit
scores generally range from 350 to 850 and are available from three major credit
bureaus: Experian (formerly TRW Information Systems and Services), Equifax and
Trans Union. Headlands attempts to obtain for each borrower a credit score from
each credit bureau. If three credit scores are obtained, Headlands applies the
middle score of the primary wage earner. If two scores are obtained, Headlands
applies the lower score of the primary wage earner. These scores estimate, on a
relative basis, which loans are most likely to default in the future. Lower
scores imply higher default risk relative to a high score. Credit scores are
empirically derived from historical credit bureau data and represent a numerical
weighing of a borrower's credit characteristics over a two-year period. A credit
score is generated through the statistical analysis of a number of
credit-related characteristics or variables. Common characteristics include
number of credit lines (trade lines), payment history, past delinquencies,
severity of delinquencies, current levels of indepbtedness, types of credit and
length of credit history. Attributes are the specific values of each
characteristic. A scorecard (the model) is created with weights or points
assigned to each attribute. An individual loan applicant's credit score is
derived by summing together the attribute weights for that applicant.
S-15
<PAGE>
Headlands originates and acquires loans which have been underwritten
under one of five documentation programs: full documentation, alternative
documentation, limited documentation, no ratio loan documentation and no
income/no asset verification.
Under full documentation, the prospective borrower's employment, income
and assets are verified through written and telephonic communications.
Alternative documentation provides for alternative methods of employment
verification generally using W-2 forms or pay stubs. Generally, under the full
documentation program, a prospective borrower is required to have a minimum
credit score of 620 and under the alternative documentation program, a minimum
credit score of 640.
Under the limited documentation program, more emphasis is placed on the
value and adequacy of the mortgaged property as collateral, credit history and
other assets of the borrower than on verified income of the borrower. Mortgage
loans underwritten using the limited documentation program are limited to
borrowers with credit histories that demonstrate an established ability to repay
indebtedness in a timely fashion. Under the limited documentation program, a
prospective borrower is required to have a minimum credit score of 640. Under
the limited documentation program, certain credit underwriting documentation
concerning income or income verification and/or employment verification is
waived. Loans originated and acquired with limited documentation include
cash-out refinance loans, super jumbos and mortgage loans secured by
investor-owned properties. Permitted maximum Loan-to-Value Ratios (including
secondary financing) under the limited documentation program, which range up to
80%, are more restrictive than mortgage loans originated with full documentation
or alternative documentation.
Under the no ratio loan documentation program, income ratios for the
prospective borrower are not calculated. Mortgage loans underwritten using the
no ratio loan documentation program have Loan-to-Value Ratios less than or equal
to 80% and meet the standards for the limited documentation program. A minimum
credit score of 680 is required for this program.
Under the no income/no asset verification program, emphasis is placed
on the value and adequacy of the mortgaged property as collateral and credit
history rather than on verified income and assets of the borrower. Mortgage
loans underwritten under no income/no asset verification are limited to
borrowers with excellent credit histories. A minimum credit score of 680 is
required for this program. Under the no income/no asset verification program,
credit underwriting documentation concerning income, employment verification and
asset verification is waived and income ratios are not calculated. The maximum
permitted Loan-to-Value Ratio under the no income/no asset verification program
is 75%.
Headlands generally performs a pre-funding audit on each mortgage loan.
This audit includes a review for compliance with applicable underwriting program
guidelines and accuracy of the credit report and phone verification of
employment. Headlands performs a post-funding quality control review on a
minimum of 4% of the mortgage loans originated or acquired for complete
re-verification of employment, income and liquid assets used to qualify for such
mortgage loan. Such review also includes procedures intended to detect evidence
of fraudulent documentation and/or imprudent activity during the processing,
funding, servicing or selling of the mortgage loan. Verification of occupancy
and applicable information is made by regular mail.
One- to four-family residential properties are appraised by qualified
independent appraisers who are approved by Headlands. All appraisals are
required to conform to the Uniform Standards of Professional Appraisal Practice
adopted by the Appraisal Standards Board of the Appraisal Foundation and must be
on forms acceptable to Fannie Mae and Freddie Mac. As part of Headlands'
pre-funding quality control procedures, either field or desk appraisal reviews
are obtained on 10% of all mortgage loans.
S-16
<PAGE>
THE MASTER SERVICER
General. Liberty Lending Services, Inc. ("LLSI" or the "Master
Servicer"), a wholly-owned subsidiary of Liberty, was established as a mortgage
banking company to facilitate the origination, purchase and servicing of whole
loan portfolios containing various levels of credit quality from "investment
grade" to varying degrees of "non-investment grade" up to and including
mortgaged property acquired through foreclosure or deed-in-lieu of foreclosure
(each such mortgaged property, an "REO Property"). The principal office of the
Master Servicer is located in Wilmington, Ohio. Liberty Capital, Inc. was formed
in 1985 as a holding company and owns, among other companies, 100% of Liberty
Savings Bank F.S.B.
The principal business of LLSI has been the origination and acquisition
of one- to four-family and small balance multifamily/commercial mortgage loans
and the resolution of non-performing residential mortgage loan portfolios
acquired from the Resolution Trust Company ("RTC"), the Federal Deposit
Insurance Corporation ("FDIC"), Wall Street dealers, and private investors.
LLSI's servicing portfolio consists primarily of two categories: (a) performing
one- to four-family and multifamily investment-quality loans serviced for
Liberty or for the account of Fannie Mae, Freddie Mac, private mortgage conduits
and various institutional investors; and (b) non-investment grade,
sub-performing and non-performing mortgage loans and REO Properties serviced for
Liberty or for the account of various institutional investors.
LLSI's operations resemble those of most mortgage banking companies,
except that a significant emphasis is placed on collections and due diligence
areas, due to the nature of the mortgage portfolios purchased. As of September
30, 1998, LLSI was servicing in excess of $3.4 billion of mortgage loans and REO
Property.
Delinquency and Foreclosure Experience. The following table sets forth
delinquency and foreclosure experience of mortgage loans serviced by LLSI as of
the dates indicated. LLSI's portfolio of mortgage loans may differ significantly
from the Mortgage Loans in terms of interest rates, principal balances,
geographic distribution, types of properties and other possibly relevant
characteristics. There can be no assurance, and no representation is made, that
the delinquency and foreclosure experience with respect to the Mortgage Loans
will be similar to that reflected in the table below, nor is any representation
made as to the rate at which losses may be experienced on liquidation of
defaulted Mortgage Loans. The actual delinquency experience on the Mortgage
Loans will depend, among other things, upon the value of the real estate
securing such Mortgage Loans and the ability of borrowers to make required
payments.
S-17
<PAGE>
<TABLE>
<CAPTION>
Delinquency and Foreclosure Experience
As of December 31, 1996 As of December 31, 1997
----------------------- -----------------------
% by % by
No. of Principal Principal No. of Principal Principal
Loans Balance(1) Balance Loans Balance (1) Balance
----- --------- ------- ----- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Current Loans 45,378 $2,363,883,719.36 90.76% 48,848 $3,160,524,743.98 92.33%
Period of Delinquency (2)
30-59 Days 2,569 100,010,409.24 3.84% 2,221 101,514,795.40 2.97%
60-89 Days 674 29,338,980.12 1.13% 421 21,754,516.08 0.64%
90 Days or more 539 32,505,462.44 1.25% 279 24,778,824.97 0.71%
--- ------------- ----- --- ------------- -----
Total Delinquencies 3,782 161,854,851.80 6.22% 2,921 148,048,136.45 4.32%
Foreclosure/Bankruptcies (3) 1,122 69,875,636.44 2.68% 1,320 96,362,248.74 2.82%
Real Estate Owned 218 8,845,673.19 0.34% 363 18,023,053.13 0.53%
--- ------------ ----- --- ------------- -----
Total Portfolio 50,500 $2,604,459,880.79 100.00% 53,452 $3,422,958,182.30 100.00%
====== ================= ======= ====== ================= =======
<CAPTION>
As of September 30, 1998
------------------------
% by
No. of Principal Principal
Loans Balance Balance
----- ------- -------
<S> <C> <C> <C>
Current Loans 49,760 $3,419,179,348.78 92.99%
Period of Delinquency (2)
30-59 Days 2,134 103,447,079.74 2.81%
60-89 Days 405 19,955,484.18 0.54%
90 Days or more 207 17,886,338.67 0.49%
--- ------------- -----
Total Delinquencies 2,746 141,288,902.59 3.84%
Foreclosure/Bankruptcies (3) 1,362 94,578,585.63 2.57%
Real Estate Owned 356 22,066,984.34 0.60%
--- ------------- -----
Total Portfolio 54,224 $3,677,113,821.34 100.00%
====== ================= =======
</TABLE>
1 For the Real Estate Owned properties, the Principal Balance is at the time
of foreclosure.
2 No Mortgage Loan is included in this table as delinquent until it is 30 days
past due.
3 Exclusive of the number of Loans and Principal Balance shown in Period of
Delinquency.
S-18
<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 1998-10 (the
"Certificates") will consist of the classes of Certificates offered hereby (the
"Offered Certificates") in addition to the other classes of Certificates (the
"Other Certificates"), which are not being offered hereby as described under
"Summary of Terms - Other Certificates."
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 accounts (each a "Protected Account")
established for the collection of payments on the Mortgage Loans serviced by the
Master Servicer and in the Certificate Account (as defined below) and belonging
to the Trust, (iii) property acquired by foreclosure of such Mortgage Loans or
by deed in lieu of foreclosure; (iv) any applicable Primary Insurance Policies
(as defined below) and standard hazard insurance policies; and (v) all proceeds
of the foregoing.
Each Class of Book-Entry Certificates will be represented initially by
a single certificate registered in the name of Cede & Co. ("Cede") as the
nominee of The Depository Trust Company ("DTC") and beneficial interests will be
held by investors through the book-entry facilities of DTC in the United States
or Cedel Bank, societe anonyme ("Cedel") or the Euroclear System ("Euroclear")
in Europe in minimum denominations of (i) in the case of the Senior Certificates
(other than the Class X and the Residual Certificates), $1,000 and increments of
$1.00 in excess thereof and (ii) in the case of the Offered Subordinate
Certificates, $25,000 and increments of $1.00 in excess thereof. One Certificate
of each such Class may be issued in a different principal (or notional) amount
to accommodate the remainder of the initial principal (or notional) amount of
the Certificates of such Class. The Class X Certificates will be issued in
certificated fully-registered form in minimum denominations of $1,000 and
increments of $1.00 in excess thereof. The Class R Certificate will be issued in
certificated fully-registered form in a single certificate of $100.
Distributions of principal and interest as set forth below initially
will be made by the Trustee to Cede, as the registered holder of the Book-Entry
Certificates, and to each holder of the Physical Certificates. Upon the issuance
of Definitive Certificates (as defined in "Description of the
Securities--Book-Entry Registration" in the Prospectus) the to persons other
than Cede, distributions will be made by the Trustee to the persons in whose
names such Certificates are registered at the close of business on each Record
Date, which will be the last Business Day of the month preceding the month in
which the related Distribution Date occurs. Such distributions will be made (i)
by check mailed to each Certificateholder entitled thereto at the address
appearing in the Certificate Register to be maintained in accordance with the
provisions of the Agreement or (ii) upon timely receipt by the Trustee of
written instructions from a Certificateholder holding Certificates representing
an initial aggregate Current Principal Amount or Notional Amount of not less
than $1,000,000, by wire transfer to a United States dollar account maintained
by the payee at any United States depository institution with appropriate
facilities for receiving such a wire transfer, provided, however, that the final
payment in respect of each Class of Certificates will be made only upon
presentation and surrender of such respective Certificates at the office or
agency of the Trustee specified in the notice to Certificateholders of such
final payment.
A "Business Day" is generally any day other than a Saturday, a Sunday
or a day on which the New York Stock Exchange is closed or on which banking
institutions in New York City, Wilmington, Ohio, or Irvine, California, are
authorized or obligated by law or executive order to be closed.
S-19
<PAGE>
The Certificates will not be listed on any securities exchange or
quoted in the automated quotation system of any registered securities
association. As a result, investors in the Certificates may experience limited
liquidity.
See " Risk Factors--Limited Liquidity" in the Prospectus.
Book-Entry Registration
The Book-Entry Certificates will be issued in one or more certificates
which equal the initial Current Principal Amount of the Offered Certificates
(other than the Physical Certificates) and will initially be registered in the
name of Cede. Cedel and Euroclear will hold omnibus positions on behalf of their
Participants through customers' securities account in Cedel's and Euroclear's
names on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC.
Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Book-Entry Certificates
will be Cede & Co. Beneficial owners of the Book-Entry Certificates will not be
Certificateholders, as that term is used in the Agreement. Beneficial owners are
only permitted to exercise the rights of Certificateholders indirectly through
Participants. Monthly and annual reports to the Trust provided to Cede, as
nominee of DTC, may be made available to beneficial owners upon request, in
accordance with the rules, regulations and procedures creating and affecting DTC
and to Participants to whose DTC accounts the Book-Entry Certificates are
credited. For a description of the features of the book-entry registration
system, see "Description of the Securities--Book-Entry Registration" in the
Prospectus.
Physical Certificates and Definitive Certificates will be transferable
and exchangeable on a "Certificate Register" to be maintained by the Trustee at
the office or agency of the Trustee maintained for that purpose. Physical
Certificates and Definitive Certificates surrendered to the Trustee for
registration or transfer or exchange must be accompanied by a written instrument
or transfer in form satisfactory to the Trustee. No service charge may be made
for any registration of transfer or exchange of Physical Certificates and
Definitive Certificates, but payment of a sum sufficient to cover any tax or
other governmental charge may be required. Such office or agency of the Trustee
is currently located at 123 Washington Street, New York, New York 10007. Certain
representations will be required in connection with the transfer of a REMIC
Residual Certificate. See "Restrictions on Purchase and Transfer of the Residual
Certificates."
Available Funds
Available funds for any Distribution Date ("Available Funds")
will be an amount equal to the aggregate of the following with respect to the
Mortgage Loans: (a) all previously undistributed payments on account of
principal (including the principal portion of Monthly Payments, Principal
Prepayments and the principal amount of Liquidation Proceeds) and all previously
undistributed payments on account of interest received 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 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;
S-20
<PAGE>
(v) amounts of Monthly Advances or Certificate Account Advances
determined to be nonrecoverable;
(vi) 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; and
(vii) amount permitted to be retained by the Master Servicer as
described under "Pooling and Servicing Agreement--Protected Accounts" 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 December 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 among the Certificates except as otherwise
noted:
first, to the interest-bearing Classes of Senior Certificates, the
Accrued Certificate Interest on each such Class for such Distribution
Date. As described below, Accrued Certificate Interest on each such
Class of Certificates is subject to reduction in the event of certain
Net Interest Shortfalls allocable thereto. Any Net Interest Shortfalls
shall be allocated among the Senior Certificates as described below;
second, to the interest-bearing Classes of Senior Certificates, 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 among such
Classes in proportion to the amount of such Accrued Certificate
Interest remaining undistributed for each such Class for such
Distribution Date;
third, to the Senior Certificates (other than the Class X Certificates)
in reduction of the Current Principal Amounts thereof:
(a) the Senior P&I Optimal Principal Amount, sequentially
to the Class R Certificate and then to the Class A
Certificates, until the respective Current Principal
Amounts thereof have been reduced to zero; and;
(b) the Class PO Principal Distribution Amount for such
Distribution Date, to the Class PO Certificates,
until the Current Principal Amount of the Class PO
Certificates has been reduced to zero;
fourth, the Class PO Deferred Amount for such Distribution Date, to the
Class PO Certificates; provided, that (i) on any Distribution Date,
distributions pursuant to this priority fourth shall not exceed the
excess, if any, of (x) the Available Funds remaining after giving
effect to distributions pursuant to clauses first through third above
over (y) the sum of the amount of Accrued Certificate Interest for such
Distribution Date and Accrued Certificate Interest remaining
undistributed from previous Distribution Dates on all Classes of
Subordinate Certificates then outstanding, (ii) such distributions
shall not reduce the Current Principal Amount of the Class PO
Certificates and (iii) no distribution will be made in respect of the
Class PO Deferred Amount after the Cross-Over Date; and
fifth, sequentially, in the following order, to the Class B-1, Class
B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates, in
each case up to an amount equal to and in the following order: (a) the
Accrued Certificate Interest thereon for such Distribution Date, (b)
any Accrued Certificate
S-21
<PAGE>
Interest thereon remaining undistributed from previous Distribution
Dates and (c) such Class's Allocable Share for such Distribution Date.
On each Distribution Date after the Distribution Date on which the
Current Principal Amounts of the Subordinate Certificates are reduced to zero
(the "Cross-Over Date"), distributions of principal on the outstanding Senior
Certificates (other than Class PO Certificates) will be made pro rata among all
such Senior Certificates, regardless of the allocation, or sequential nature, of
principal payments described in priority third above, based upon the then
Current Principal Amounts of such Senior Certificates.
If, after distributions have been made pursuant to priorities first and
second above on any Distribution Date, the remaining Available Funds are less
than the sum of the Senior P&I Optimal Principal Amount and the Class PO
Principal Distribution Amount for such Distribution Date, such amounts shall be
proportionately reduced, and such remaining Available Funds will be distributed
on the Senior Certificates (other than the Class X Certificates) on the basis of
such reduced amounts. Notwithstanding any reduction in principal distributable
to the Class PO Certificates pursuant to this paragraph, the principal balance
of the Class PO Certificates shall be reduced not only by principal so
distributed but also by the difference between (i) principal distributable to
the Class PO Certificates in accordance with clause (b) of priority third above
and (ii) principal actually distributed to the Class PO Certificates after
giving effect to this paragraph (such difference, the "Class PO Cash
Shortfall"). The Class PO Cash Shortfall with respect to any Distribution Date
will be added to the Class PO Deferred Amount.
On each Distribution Date, any Available Funds remaining after payment
of interest and principal as described above with respect to the Certificates
will be distributed to the Class R 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 (other than the Class PO Certificates) at its then
applicable Pass-Through Rate on the Current Principal Amount or Notional 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 or in
"Summary of Terms--Offered Certificates" or " --Other Certificates". The
effective yield to the holders of Certificates will be lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price,
because interest will not be distributed to such Certificateholders until the
25th day (or if such day is not a Business Day, then on the next succeeding
Business Day) of the month following the month in which interest accrues on the
Mortgage Loans. See "Yield and Prepayment Considerations" herein.
The Class PO Certificates are principal only Certificates and will not
bear interest.
The "Accrued Certificate Interest" for any interest-bearing 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 (or in the case of an Interest Only Certificate, its Notional
Amount) of such Certificate immediately prior to such Distribution Date less (i)
in the case of an interest-bearing 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
such shortfalls. The interest portion of Realized Losses will be allocated first
to the Subordinate Certificates in reverse order of their numerical designations
commencing with the Class B-6 Certificates and following the Cross-Over Date,
such Realized Losses will be allocated pro rata to the Classes of
interest-bearing Senior Certificates. Accrued Certificate Interest is calculated
on the basis of a 360-day year consisting of twelve 30-day months. No Accrued
Certificate Interest will be payable with respect to any Class of Certificates
after the Distribution Date on which the outstanding Current Principal Amount or
Notional Amount of such Certificate has been reduced to zero.
S-22
<PAGE>
The "Current Principal Amount" of any Certificate (other than an
Interest Only 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 for previous Distribution Dates. With respect to any Class of
Certificates (other than the Interest Only 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 of all of the Certificates (after giving effect to the distribution of
principal and the allocation of Realized Losses and any Class PO Deferred
Payment Writedown Amount in reduction of the Current Principal Amounts of the
Certificates on such Distribution Date) exceeds (b) the Scheduled Principal
Balances of Mortgage Loans on the Due Date related to such Distribution Date.
For any Distribution Date, the "Class PO Deferred Payment Writedown Amount" in
respect of the Class PO Certificates will equal the amount, if any, distributed
on such date in respect of the Class PO Deferred Amount, pursuant to priority
fourth under "--Distributions on the Certificates -Allocation of Available
Funds" above. The Subordinate Certificate Writedown Amount and any Class PO
Deferred Payment Writedown Amount will be allocated to the Classes of
Subordinate Certificates in inverse order of their numerical Class designations,
until the Current Principal Amount of each such Class has been reduced to zero.
The Notional Amount of the Class X Certificates is equal to the
aggregate Scheduled Principal Balances of the Non-Discount Mortgage Loans.
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 the Mortgage Loans resulting from (a) prepayments
in full received during the related Prepayment Period, (b) partial prepayments
received during the related Prepayment Period to the extent applied prior to the
Due Date in the month of the Distribution Date and (c) interest payments on
certain of the Mortgage Loans being limited pursuant to the provisions of the
Soldiers' and Sailors' Civil Relief Act of 1940 (the "Relief Act"). Interest
Shortfalls will result because (i) obligors on each Mortgage Loan (each a
"Mortgagor") are obligated to pay interest on prepayments in full only to the
date of prepayment by such Mortgagor, (ii) (a) partial prepayments are generally
not required to be accompanied by interest on the amount of such partial
prepayment and (b) partial prepayments applied prior to the Due Date in the
month of the Distribution Date will result in a reduction of the 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 portion of
the Master Servicing Fee available therefor in connection with such Distribution
Date (see "The Pooling and Servicing Agreement--Servicing Compensation and
Payment of Expenses" herein). 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 the Senior
Certificates is less than the Accrued Certificate Interest on such Senior
Certificates for such Distribution Date prior to reduction for Net Interest
Shortfall and the interest portion of Realized Losses, the shortfall will be
allocated among the holders of each Class of interest-bearing 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 the Available Funds after
current interest distributions as required herein. Any such amounts so carried
forward will not bear interest. Shortfalls in interest payments will not be
offset by a reduction in the servicing compensation of the Master Servicer or
otherwise, except to the extent of Compensating Interest Payments.
S-23
<PAGE>
Principal
All payments and other amounts received in respect of the Scheduled
Principal Balance of the Mortgage Loans will be allocated between (i) the Senior
P&I Certificates and the Subordinate Certificates, on the one hand, and (ii) the
Class PO Certificates, on the other, in each case based on the Non-PO Percentage
and the PO Percentage, respectively, of such amounts.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net
Rate less than 6.90% per annum (each such Mortgage Loan, a "Discount Mortgage
Loan") will be equal to the Net Rate thereof divided by 6.90%. The "Non-PO
Percentage" with respect to any Mortgage Loan with a Net Rate equal to or
greater than 6.90% (each such Mortgage Loan, a "Non-Discount Mortgage Loan")
will be 100%. The "PO Percentage" with respect to any Discount Mortgage Loan
will be the fraction, expressed as a percentage, equal to 6.90%, minus the Net
Rate thereof divided by 6.90%.
Distributions in reduction of the Current Principal Amount of each
Class of Senior Certificates (other than the Class X Certificates) will be made
on each Distribution Date pursuant to priority third above under
"--Distributions on the Certificates--Allocation of Available Funds." In
accordance with such priority third, the Available Funds remaining after
distribution of interest on the interest-bearing Senior Certificates will be
allocated to such Certificates in an aggregate amount not to exceed the sum of
the Senior P&I Optimal Principal Amount and the Class PO Principal Distribution
Amount for such Distribution Date. Distributions in reduction of the Current
Principal Amounts of the Subordinate Certificates will be made pursuant to
priority fifth above. In accordance with such priority, the Available Funds, if
any, remaining after distributions of principal and interest on the Senior
Certificates and payments in respect of the Class PO Deferred Amount on such
Distribution Date will be allocated to the Subordinate Certificates in an amount
equal to each such Class's Allocable Share for such Distribution Date, provided
that no distribution of principal will be made on any such Class until any Class
ranking prior thereto has received distributions of interest and principal, and
such Class has received distributions of interest, on such Distribution Date.
The "Senior P&I Optimal Principal Amount" for the Senior Certificates
with respect to each Distribution Date will be an amount equal to the sum of the
following (but in no event greater than the aggregate Current Principal Amounts
of the Senior P&I Certificates immediately prior to such Distribution Date):
(i) the Senior Percentage of the Non-PO Percentage of all scheduled
payments of principal allocated to the Scheduled Principal Balance due
on each Mortgage Loan on the related Due Date, as specified in the
amortization schedule at the time applicable thereto (after adjustment
for previous principal prepayments 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 of the Non-PO 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
applicable Prepayment Period (as defined below);
(iii) the Senior Prepayment Percentage of the Non-PO Percentage of all
partial prepayments allocated to principal received during the
applicable Prepayment Period;
(iv) the lesser of (a) the Senior Prepayment Percentage of the Non-PO
Percentage of the sum of (A) all Net Liquidation Proceeds allocable to
principal received in respect of each Mortgage Loan which became a
Liquidated Mortgage Loan during the related Prepayment Period (other
than Mortgage Loans described in the immediately following clause (B))
and (B) the Scheduled Principal Balance of each such Mortgage Loan
purchased by an insurer from the Trustee during the related Prepayment
Period pursuant to the related Primary Mortgage Insurance Policy, if
any, or otherwise; and (b) the Senior Percentage of the Non-PO
Percentage of the sum of (A) the Scheduled Principal Balance of each
Mortgage Loan which became a Liquidated Mortgage Loan during the
related Prepayment Period (other than the Mortgage Loans described in
the immediately following clause (B)) and (B) the Scheduled Principal
Balance of each such Mortgage
S-24
<PAGE>
Loan that was purchased by an insurer from the Trustee during the
related Prepayment Period pursuant to the related Primary Mortgage
Insurance Policy, if any or otherwise; and
(v) the Senior Prepayment Percentage of the Non-PO Percentage of the
sum of (a) the Scheduled Principal Balance of each Mortgage Loan which
was repurchased pursuant to the Agreement in connection with such
Distribution Date and (b) the excess, if any, of the Scheduled
Principal Balance of a Mortgage Loan that has been replaced with a
substitute Mortgage Loan pursuant to the Agreement in connection with
such Distribution Date over the Scheduled Principal Balance of such
substitute Mortgage Loan.
The "Senior Percentage" for the Senior Certificates on any Distribution
Date will equal the lesser of (i) 100% and (ii) the percentage (carried to six
places rounded up) obtained by dividing the aggregate Current Principal Amount
of all the Senior P&I Certificates immediately preceding such Distribution Date
by the aggregate Scheduled Principal Balance of the Mortgage Loans (other than
the PO Percentage thereof) as of the beginning of the related Due Period. The
initial Senior Percentage is expected to be approximately 92.75%.
With respect to any Distribution Date, the "Due Period" is 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.
The "Senior Prepayment Percentage" for the Senior Certificates on any
Distribution Date occurring during the periods set forth below will be as
follows:
<TABLE>
<CAPTION>
Period (dates inclusive) Senior Prepayment Percentage
<S> <C>
December 25, 1998 - November 25, 2003............................ 100%
December 25, 2003 - November 25, 2004............................ Senior Percentage plus 70% of the Subordinate
Percentage
December 25, 2004 - November 25, 2005............................ Senior Percentage plus 60% of the Subordinate
Percentage
December 25, 2005 - November 25, 2006............................ Senior Percentage plus 40% of the Subordinate
Percentage
December 25, 2006 - November 25, 2007............................ Senior Percentage plus 20% of the Subordinate
Percentage
December 25, 2007 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 the Senior Prepayment Percentage shall
occur on any Distribution Date (such limitation being the "Senior Prepayment
Percentage Stepdown Limitation") unless, as of the last day of the month
preceding such Distribution Date, either (A) (i) (x) the aggregate Scheduled
Principal Balance of Mortgage Loans delinquent 60 days or more (including for
this purpose any such Mortgage Loans in foreclosure and Mortgage Loans with
respect to which the related Mortgaged Property has been acquired by the Trust),
averaged over the last six months, as a percentage of the sum of the aggregate
Current Principal Amount of the Subordinate Certificates does not exceed 50%, or
(y) the aggregate Scheduled Principal Balance of Mortgage Loans delinquent 60
days or more (including for this purpose any such Mortgage loans in foreclosure
and Mortgage Loans with respect to which the related Mortgaged Property has been
acquired by the Trust), averaged over the last six months, as a percentage of
the aggregate Scheduled Principal Balances of the Mortgage Loans averaged over
the last six months, does not exceed 2.0%; and (ii) cumulative Realized Losses
on such Mortgage Loans do not exceed (a) 30% of the aggregate Current
S-25
<PAGE>
Principal Amounts of the Subordinate Certificates as of the Cut-off Date (the
"Original Subordinate Principal Balance") if such Distribution Date occurs
between and including December 2003 and November 2004, (b) 35% of the Original
Subordinate Principal Balance if such Distribution Date occurs between and
including December 2004 and November 2005, (c) 40% of the Original Subordinate
Principal Balance if such Distribution Date occurs between and including
December 2005 and November 2006, (d) 45% of the Original Subordinate Principal
Balance if such Distribution Date occurs between and including December 2006 and
November 2007, and (e) 50% of the Original Subordinate Principal Balance if such
Distribution Date occurs during or after December 2007; or (B) (i) the aggregate
Scheduled Principal Balance of Mortgage Loans delinquent 60 days or more
(including for this purpose any such Mortgage Loans in foreclosure and Mortgage
Loans with respect to which the related Mortgaged Property has been acquired by
the Trust), averaged over the last six months, does not exceed 4.0%; and (ii)
cumulative Realized Losses on such Mortgage Loans do not exceed (a) 10% of the
aggregate Current Principal Amounts of the Original Subordinate Principal
Balance if such Distribution Date occurs between and including December 2003 and
November 2004, (b) 15% of the Original Subordinate Principal Balance if such
Distribution Date occurs between and including December 2004 and November 2005,
(c) 20% of the Original Subordinate Principal Balance if such Distribution Date
occurs between and including December 2005 and November 2006, (d) 25% of the
Original Subordinate Principal Balance if such Distribution Date occurs between
and including December 2006 and November 2007, and (e) 30% of the Original
Subordinate Principal Balance if such Distribution Date occurs during or after
December 2007.
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 "Class PO Principal Distribution Amount" with respect to each
Distribution Date will be an amount equal to the sum of:
(i) the PO Percentage of all scheduled payments of principal due on
each Discount 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 PO Percentage of the Scheduled Principal Balance of each
Discount Mortgage Loan which was the subject of a prepayment in full
received by the Master Servicer during the applicable Prepayment
Period;
(iii) the PO Percentage of all partial prepayments of principal of each
Discount Mortgage Loan received by the Master Servicer during the
applicable Prepayment Period;
(iv) the lesser of (a) the PO Percentage of the sum of (A) all Net
Liquidation Proceeds allocable to principal on each Discount Mortgage
Loan which became a Liquidated Mortgage Loan during the related
Prepayment Period (other than a Discount Mortgage Loan described in the
immediately following clause (B)) and (B) the Scheduled Principal
Balance of each such Discount Mortgage Loan purchased by an insurer
from the Trustee during the related Prepayment Period pursuant to the
related Primary Mortgage Insurance Policy, if any, or otherwise; and
(b) the PO Percentage of the sum of (A) the Scheduled Principal Balance
of each Discount Mortgage Loan which became a Liquidated Mortgage Loan
during the related Prepayment Period (other than a Discount Mortgage
Loan described in the immediately following clause (B)) and (B) the
Scheduled Principal Balance of each such Mortgage Loan that was
purchased by an insurer from the Trustee during the related Prepayment
Period pursuant to the related Primary Mortgage Insurance Policy, if
any, or otherwise; and
(v) the PO Percentage of the sum of (a) the Scheduled Principal Balance
of each Discount Mortgage Loan which was repurchased pursuant to the
Agreement in connection with such Distribution Date and (b) the
difference, if any, between the Scheduled Principal Balance of a
Discount Mortgage Loan that has been replaced with a substitute
Discount Mortgage Loan pursuant to the Agreement in connection with
such Distribution Date and the Scheduled Principal Balance of such
substitute Discount Mortgage Loan.
S-26
<PAGE>
The "Subordinate Percentage" for the Subordinate Certificates on any
Distribution Date will equal 100% minus the Senior Percentage. The "Subordinate
Prepayment Percentage" for the Subordinate Certificates on any Distribution Date
will equal 100% minus the Senior Prepayment Percentage, except that on any
Distribution Date after the Current Principal Amounts of the Senior Certificates
have each been reduced to zero, the Subordinate Prepayment Percentage will equal
100%. The initial Subordinate Percentage is expected to be approximately 7.25%.
The "Subordinate Optimal Principal Amount" for the Subordinate
Certificates with respect to each Distribution Date will be an amount equal to
the sum of the following (but in no event greater than the aggregate Current
Principal Amounts of the Subordinate Certificates immediately prior to such
Distribution Date):
(i) the Subordinate Percentage of the Non-PO Percentage of the
principal portion of all Monthly Payments due on each Mortgage Loan on
the related Due Date, as specified in the amortization schedule at the
time applicable thereto (after adjustment for previous principal
prepayments 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 Subordinate Prepayment Percentage of the Non-PO 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 applicable Prepayment Period;
(iii) the Subordinate Prepayment Percentage of the Non-PO Percentage of
all partial prepayments of principal received during the Prepayment
Period;
(iv) the excess, if any, of the Non-PO Percentage of (a) the Net
Liquidation Proceeds allocable to principal received during the related
Prepayment Period in respect of each Liquidated Mortgage Loan over (b)
the sum of the amounts distributable to Senior Certificateholders
pursuant to clause (iv) of each of the definitions of "Senior P&I
Optimal Principal Amount" and "Class PO Principal Distribution Amount"
on such Distribution Date;
(v) the Subordinate Prepayment Percentage of the Non-PO Percentage of
the sum of (a) the Scheduled Principal Balance of each Mortgage Loan
which was repurchased pursuant to the Agreement 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 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 P&I Certificates have all been reduced to zero, 100% of any
Senior P&I Optimal Principal Amount.
The "Allocable Share" with respect to any Class of Subordinate
Certificates on any Distribution Date will generally equal such Class's pro
rata share (based on the Current Principal Amount of each Class entitled
thereto) of the sum of each of the components of the definition of the
Subordinate Optimal Principal Amount; provided, that, except as described in
the second succeeding sentence, no Class of Subordinate Certificates (other
than the Class of Subordinate Certificates outstanding with the lowest
numerical designation) shall be entitled on any Distribution Date to receive
distributions pursuant to clauses (ii), (iii) and (v) of the definition of the
Subordinate Optimal Principal Amount unless the Class Prepayment Distribution
Trigger for the related Class is satisfied for such Distribution Date. The
"Class Prepayment Distribution Trigger" for a Class of Subordinate
Certificates for any Distribution Date is satisfied if the fraction (expressed
as a percentage), the numerator of which is the aggregate Current Principal
Amount of such Class and each Class subordinated thereto, if any, and the
denominator of which is the Scheduled Principal Balances of all of the
Mortgage Loans as of the related Due Date, equals or exceeds such percentage
calculated as of the Closing Date. If on any Distribution Date the Current
Principal Amount of any Class of Subordinate Certificates for which the
related Class Prepayment Distribution Trigger was satisfied on such
Distribution Date is reduced to zero, any amounts distributable to such Class
pursuant to clauses (ii), (iii) and (v) of the definition of "Subordinate
Optimal Principal Amount," to the extent of such Class's remaining Allocable
Share,
S-27
<PAGE>
shall be distributed to the remaining Classes of Subordinate Certificates in
reduction of their respective Current Principal Amounts, sequentially, in the
order of their numerical Class designations. If the Class Prepayment
Distribution Trigger is not satisfied for any Class of Subordinate
Certificates on any Distribution Date, this may have the effect of
accelerating the amortization of more senior Classes of Subordinate
Certificates.
"Determination Date" means, the 18th day of the month of the
Distribution Date, or if such day is not a Business Day, the following Business
Day (but in no event less than two Business Days prior to the related
Distribution Date).
"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
BSMCC or Liberty 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 Bankruptcy
Loss (as defined below) or (ii) as to any Liquidated Mortgage Loan, the unpaid
principal balance thereof plus accrued and unpaid interest thereon at the
Mortgage Rate through the last day of the month of liquidation less the Net
Liquidation Proceeds with respect to such Mortgage Loan and the related
Mortgaged Property. A "Liquidated Mortgage Loan" is any defaulted Mortgage Loan
as to which the 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 unreimbursed advances by the Master Servicer,
Monthly Advances and 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,
S-28
<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.
A "Fraud Loss" is any Realized Loss attributable to fraud in the
origination of the related Mortgage Loan.
A "Special Hazard Loss" is a Realized Loss attributable to damage or a
direct physical loss suffered by a Mortgaged Property (including any Realized
Loss due to the presence or suspected presence of hazardous wastes or substances
on a Mortgaged Property) other than any such damage or loss covered by a hazard
policy or a flood insurance policy required to be maintained in respect of such
Mortgaged Property under the Agreement or any loss due to normal wear and tear
or certain other causes.
Realized Losses with respect to a Mortgage Loan will be allocated on a
pro rata basis between the PO Percentage of the Scheduled Principal Balance of
such Mortgage Loan and the Non-PO Percentage of such Scheduled Principal
Balance.
On each Distribution Date, the applicable PO Percentage of the
principal portion of any Realized Loss on a Discount Mortgage Loan will be
allocated to the Class PO Certificates until the Current Principal Amount
thereof is reduced to zero. With respect to any Distribution Date through the
Cross-Over Date, the aggregate of all amounts so allocable to the Class PO
Certificates on such date in respect of any Realized Losses and Class PO Cash
Shortfalls and all amounts previously allocated in respect of such Realized
Losses or Class PO Cash Shortfalls and not distributed on prior Distribution
Dates will be the "Class PO Deferred Amount" with respect to the Class PO
Certificates. To the extent funds are available therefor on any Distribution
Date through the Cross-Over Date, distributions in respect of the Class PO
Deferred Amount will be made in accordance with priority fourth under
"--Distributions on the Certificates--Allocation of Available Funds" above. No
interest will accrue on any Class PO Deferred Amount. On each Distribution Date
through the Cross-Over Date, the Current Principal Amount of the lowest ranking
Class of Subordinate Certificates then outstanding will be reduced by the amount
of any distributions in respect of the Class PO Deferred Amount on such
Distribution Date in accordance with the priorities set forth above, through the
operation of the Class PO Deferred Payment Writedown Amount. After the
Cross-Over Date no more distributions will be made in respect of, and applicable
Realized Losses and Class PO Cash Shortfalls allocable to the Class PO
Certificates will not be added to, the Class PO Deferred Amount.
On any Distribution Date, the Non-PO Percentage of the principal
portion of Realized Losses ("Non-PO Realized Losses") occuring during the
related Prepayment Period will not be allocated to any Senior Certificates until
the Cross-Over Date. Prior to the Cross-Over Date (or on such dates under
certain circumstances) the Non-PO Percentage of the principal portion of
Realized Losses will be allocated among the outstanding classes of Subordinate
Certificates in inverse order of priority, until the Current Principal Amount of
each such Class has been reduced to zero (i.e., such Realized Losses will be
allocated first to the Class B-6 Certificates, while such Certificates are
outstanding, second, to the Class B-5 Certificates, and so on). Commencing on
the Cross-Over Date, the Non-PO Percentage of the principal portion of Realized
Losses will be allocated among the outstanding Classes of Senior P&I
Certificates, pro rata based upon their respective Current Principal Amounts.
No reduction of the Current Principal Amount of any Class shall be made
on any Distribution Date on account of Realized Losses to the extent that such
reduction would have the effect of reducing the aggregate Current Principal
Amount of all of the Classes as of such Distribution Date to an amount less than
the Scheduled Principal Balances of the Mortgage Loans as of the related Due
Date (such limitation being the "Loss Allocation Limitation").
The principal portion of Debt Service Reductions will not be allocated
in reduction of the Current Principal Amount of any Certificate. However, after
the Cross-Over Date, the amounts distributable under clause (i) of the
definitions of Senior P&I Optimal Principal Amount and Subordinate Optimal
Principal Amount and the Class PO Principal Distribution Amount will be reduced
by the amount of any Debt Service Reductions. Regardless of when they occur,
Debt Service Reductions may reduce the amount of Available Funds that would
otherwise be available for distribution on a Distribution Date. As a result of
the subordination of the Subordinate Certificates in right of distribution, any
Debt Service Reductions prior to the Cross-Over Date will be borne by the
Subordinate Certificates (to the extent then outstanding) in inverse order of
priority.
S-29
<PAGE>
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, except that the
aggregate amount of the principal portion of any Realized Losses to be allocated
to the Class PO Certificates, on any Distribution Date through the Cross-Over
Date will also be taken into account in determining distributions in respect of
the Class PO Deferred Amount for such Distribution Date.
The interest portion of Realized Losses will be allocated among the
outstanding Classes of Certificates offered hereby to the extent described under
"Distributions on the Certificates--Interest" above.
Subordination
Priority of Senior Certificates. As of the Closing Date, (i) the
aggregate Current Principal Amounts of the Subordinate Certificates and of the
Other Certificates will equal approximately 7.25% and 1.50%, respectively, of
the aggregate Current Principal Amounts of the Certificates.
The rights of the holders of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the holders of the Senior Certificates and to each Class of
Subordinate Certificates having a lower numerical designation than such Class.
The subordination of the Subordinate Certificates to the Senior Certificates and
the further subordination among the Subordinate Certificates is each intended to
increase the likelihood of timely receipt by the holders of the Certificates
with higher relative payment priority of the maximum amount to which they are
entitled on any Distribution Date and to provide such holders protection against
losses resulting from defaults on Mortgage Loans to the extent described above.
However, in certain circumstances, the amount of available
subordination may be exhausted and shortfalls in distributions on the Offered
Certificates could result. Holders of Senior Certificates will bear their
proportionate share of Realized Losses in excess of the total subordination
amount. The allocation of Non-PO Realized Losses and the Class PO Deferred
Payment Writedown Amount to the Subordinate Certificates on any Distribution
Date will decrease the protection provided to the Senior Certificates then
outstanding on future Distribution Dates by reducing the aggregate Current
Principal Amount of the Subordinate Certificates then outstanding.
In addition, in order to extend the period during which the Subordinate
Certificates remain available as credit enhancement for the Senior Certificates,
the entire amount of any prepayment or other unscheduled recovery of principal
with respect to a Mortgage Loan will be allocated to the Senior Certificates to
the extent described herein during the first five years after the Closing Date
(with such allocation being subject to reduction thereafter as described
herein). This allocation has the effect of accelerating the amortization of the
Senior Certificates while, in the absence of losses in respect of the 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 any particular Class of Subordinate Certificates will have a
preferential right to receive the amounts due them on such Distribution Date out
of Available Funds, prior to any distribution being made on such date on each
Class of Certificates subordinated to such Class. In addition, except as
described herein, Non-PO Realized Losses for all Certificate Groups and the
Class PO Deferred Payment Writedown Amount 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
S-30
<PAGE>
effect of the allocation of such Non-PO Realized Losses and any Class PO
Deferred Payment Writedown Amount to a Class of Subordinate Certificates will be
to reduce future distributions allocable to such Class and increase the relative
portion of distributions allocable to more senior Classes of Subordinate
Certificates.
In order to maintain the relative levels of subordination among the
Classes of Subordinate Certificates, the Non-PO Percentage of prepayments and
certain other unscheduled recoveries of principal in respect of the Mortgage
Loans (which generally will not be distributable to such Certificates for at
least the first five years after the Cut-Off Date) will not be distributable to
the holders of any Class of Subordinate Certificates on any Distribution Date
for which the Class Prepayment Distribution Trigger is not satisfied, except as
described above. See "Description of the Certificates--Distributions on the
Certificates--Principal." If the Class Prepayment Distribution Trigger is not
satisfied with respect to any Class of Subordinate Certificates, the
amortization of more senior Classes of Subordinate Certificates may occur more
rapidly than would otherwise have been the case and, in the absence of losses in
respect of the Mortgage Loans, the percentage interest in the principal balance
of the Mortgage Loans evidenced by such Subordinate Certificates may increase.
As a result of the subordination of any Class of Subordinate
Certificates, such Class of Certificates will be more sensitive than more senior
Classes of Certificates to the rate of delinquencies and defaults on the
Mortgage Loans, and under certain circumstances investors in such Certificates
may not recover their initial investment.
YIELD AND PREPAYMENT CONSIDERATIONS
General
The yield to maturity and weighted average life of each Class of
Certificates will be affected by the amount and timing of principal payments on
the Mortgage Loans, the allocation of Available Funds to such Class of
Certificates, the applicable Pass-Through Rate for such Class of Certificates
and the purchase price paid for such Certificates. In addition, the yields to
investors in the Certificates will be adversely affected by Realized Losses and
Net Interest Shortfalls. The interaction of the foregoing factors may have
different effects on the various Classes of Certificates and the effects on any
Class may vary at different times during the life of such Class. No
representation is made as to the anticipated rate of prepayments on the Mortgage
Loans, the amount and timing of Realized Losses or Net Interest Shortfalls or as
to the anticipated yield to maturity of any Certificates. Prospective investors
are urged to consider their own estimates as to the anticipated rate of future
prepayments on the Mortgage Loans and the suitability of the Certificates to
their investment objectives. Investors should carefully consider the associated
risks discussed below and under the heading "Legal Investment" herein and under
the headings "Yield and Prepayment Considerations" and "Legal Investment" in the
Prospectus.
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 addition, the rates of prepayments will be affected by the rate and
timing of the sale of Mortgaged Properties to the extent that the Mortgage Loans
contain due-on sale clause. The Mortgage Loans may be prepaid at any time and
without penalty.
Timing of Payments and Distributions. Unlike certain corporate bonds, the timing
and amount of principal payments on the Certificates are not fixed because they
are generally determined by the timing and amount of principal payments on the
Mortgage Loans. The timing of payments on the Mortgage Loans may significantly
affect an investor's yield. In general, the earlier a prepayment of principal on
the Mortgage Loans, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Certificates will not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments. Furthermore, the effective yield to
Certificateholders will be slightly lower than the yield otherwise
S-31
<PAGE>
produced by the applicable Pass-Through Rate and purchase price because, while
interest generally will accrue on each such Certificate from the first day of
the month, the distribution of such interest will not be made earlier than the
25th day of the month following the month of accrual. Moreover, to the extent
any Net Interest Shortfall or the interest portion of any Realized Loss is
allocated to a Class of Certificates the yield to investors in such Class will
be reduced.
Discounts and Premiums. In the case of any Certificates purchased at a discount
(including the PO Certificates), a slower than anticipated rate of principal
payments on the applicable Mortgage Loans could result in an actual yield that
is lower than the anticipated yield. In the case of any Certificates purchased
at a premium (including the Class X Certificates), a faster than anticipated
rate of principal payments on the applicable Mortgage Loans 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.
Additional Yield Considerations for Specific Classes
Weighted Average Interest Rates. Because the Pass-Through Rate applicable to the
Class X Certificates will equal or be based upon the weighted average of the
excess of the Net Rates of the Non-Discount Mortgage Loans over a specified
percentage, disproportionate prepayments of Mortgage Loans with higher Net Rates
will adversely affect the yield on such Class. Mortgage Loans with higher Net
Rates will have higher Mortgage Rates as well, and such Mortgage Loans are
likely to prepay at rates that are faster than those applicable to Mortgage
Loans with lower Mortgage Rates with adverse effects on the yields on the
Certificates.
Interest Only Certificates. Because the Notional Amounts of the Class X
Certificates will be based upon the Scheduled Principal Balances of the
Non-Discount Mortgage Loans, the yield on such Certificates will be sensitive to
the rate and timing of principal payments of such Mortgage Loans. A rapid rate
of principal payments on such Mortgage Loans will have a materially negative
effect on the yield to investors in the Interest Only Certificates. Moreover, as
a result of the method of calculation of the Pass-Through Rate of the Class X
Certificates, to the extent the Non-Discount Mortgage Loans with relatively
higher Net Rates prepay faster than those with relatively lower Net Rates the
yield on the Interest Only Certificates will be reduced. Investors should fully
consider the associated risks, including the risk that a rapid rate of principal
payments could result in the failure of investors in the Class X Certificates to
recover fully their initial investments.
Principal Only Certificates. The amounts payable with respect to the Class PO
Certificates derive only from principal payments on the Discount Mortgage Loans.
As a result, the yield on the Class PO Certificates will be adversely affected
by slower than expected payments of principal (including prepayments, defaults
and liquidations) on the Discount Mortgage Loans. Because Discount Mortgage
Loans have lower Net Rates than the Non-Discount Mortgage Loans, and because
Mortgage Loans with lower Net Rates are likely to have lower Mortgage Rates, the
Discount Mortgage Loans are generally likely to prepay at a slower rate than the
Non-Discount Mortgage Loans.
Residual Certificate. Holders of the Residual Certificate are entitled to
receive distributions of principal and interest as described herein. However,
holders of such Certificate may have tax liabilities with respect to their
Certificate during the early years of the REMIC that substantially exceed the
principal and interest payable thereon during such periods.
S-32
<PAGE>
Assumed Final Distribution Date
The "Assumed Final Distribution Date" for distributions on the
Certificates is July 25, 2028. The Assumed Final Distribution Date is the
Distribution Date in the month following the latest scheduled maturity date of
all of the Mortgage Loans. Since the rate of payment (including prepayments) of
principal on the Mortgage Loans can be expected to exceed the scheduled rate 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,
SAMI or its designee may, at its option, repurchase all the Mortgage Loans from
the Trust on or after any Distribution Date on which the aggregate unpaid
principal balances of the Mortgage Loans are less than 10% of the Cut-off Date
Scheduled Principal Balance of the Mortgage Loans. 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 (or Notional Amount) of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate amount of the
reductions in the principal balance or Notional Amount of such Certificate
referred to in clause (a). The weighted average lives of the Certificates will
be influenced by, among other factors, the rate at which principal is paid on
Mortgage Loans. Principal payments of Mortgage Loans may be in the form of
scheduled amortization or prepayments including as a result of foreclosure
proceedings or by virtue of the purchase of a Mortgage Loan in advance of its
stated maturity as required or permitted by the Agreement. In general, the
Mortgage Loans may be prepaid by the Mortgagors at any time and without payment
of any prepayment fee or penalty. The actual weighted average life and term to
maturity of each Class of Certificates, in general, will be shortened if the
level of such prepayments of principal increases.
Prepayment Model
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model ("SPA") used in this Prospectus
Supplement represents an assumed rate of prepayment each month of the then
outstanding principal balance of a pool of new mortgage loans. SPA does not
purport to be either a historical description of the prepayment experience of
any pool of mortgage loans or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the Mortgage Loans. 100% SPA assumes
prepayment rates of 0.2% per annum of the then outstanding principal balance of
such mortgage loans in the first month of the life of the mortgage and an
additional 0.2% per annum in each month thereafter (for example, 0.4% per annum
in the second month) until the thirtieth month. Beginning in the thirtieth month
and in each month thereafter during the life of the mortgage loans, 100% SPA
assumes a constant prepayment rate of 6% per annum. Multiples will be calculated
from this prepayment rate series; for example, 275% SPA assumes prepayment rates
will be approximately 0.55% per annum in month one, approximately 1.1% per annum
in month two, reaching approximately 16.5% per annum in month 30 and remaining
constant at approximately 16.5% per annum thereafter. 0% SPA assumes no
prepayments.
Pricing Assumptions
The Certificates were structured assuming, among other things, a 275%
SPA. The prepayment assumptions to be used for pricing purposes for the
respective Classes may vary as determined at the time of sale. The actual rate
of prepayment may vary considerably from the rate used for any prepayment
assumption.
S-33
<PAGE>
Decrement Tables
The following tables entitled "Percent of Initial Principal Amount or
Notional Amount Outstanding" indicate the percentages of the initial principal
amount or notional amount of each Class of Offered Certificates that would be
outstanding after each of the dates shown at various constant percentages of SPA
and the corresponding weighted average lives of such Classes of Offered
Certificates.
The following tables have been prepared based on the assumptions that:
(i) the Mortgage Loans have the characteristics set forth below:
<TABLE>
<CAPTION>
Cut-off Date
Scheduled Remaining
Principal Remaining Term
Amortizing Term to Maturity Loan Age Mortgage Net
Balance (in months) (in months) (in months) Rate Rate
------- ----------- ----------- ----------- ---- ----
<S> <C> <C> <C> <C> <C>
$ 167,517,618.93 345 345 6 8.164765612% 7.765569331%
24,971,617.48 351 174 6 8.175062184 7.766997416
29,223,102.84 354 175 5 8.190479597 7.765187876
5,692,465.53 290 290 6 7.177817459 6.790317459
201,955.75 352 172 8 7.875000000 7.487500000
949,841.26 351 173 7 8.010490423 7.622990423
</TABLE>
(ii) the Mortgage Loans prepay at the specified percentages of SPA, (iii) no
defaults in the payment by Mortgagors of principal of and interest on the
Mortgage Loans are experienced, (iv) scheduled payments on the Mortgage Loans
are received on the first day of each month commencing in December 1998 and are
computed prior to giving effect to prepayments received on the last day of the
prior month, (v) prepayments are allocated as described herein without giving
effect to loss and delinquency tests, (vi) there are no Net Interest Shortfalls
and prepayments represent prepayments in full of individual Mortgage Loans and
are received on the last day of each month, commencing in November 1998, (vii)
scheduled Monthly Payments of principal and interest on the Mortgage Loans are
calculated on their respective principal balances (prior to giving effect to
prepayments received thereon during the preceding calendar month), Mortgage Rate
and remaining amortizing terms such that the Mortgage Loans will fully amortize
over such terms, (viii) the initial principal amounts or Notional Amounts of the
Certificates are as set forth on the cover page hereof and under "Summary of
Terms--Other Certificates," (ix) distributions in respect of the Certificates
are received in cash on the 25th day of each month, commencing in December 1998,
(x) the Offered Certificates are purchased on November 30, 1998 and (xi) SAMI
does not exercise the option to repurchase the Mortgage Loans described under
the caption "The Pooling and Servicing Agreement--Termination." While it is
assumed that each of the Mortgage Loans prepays at the specified constant
percentages of the SPA, this is not likely to be the case.
Discrepancies will exist between the characteristics of the actual
Mortgage Loans which will be delivered to the Trustee and characteristics of the
Mortgage Loans assumed in preparing the tables. To the extent that the Mortgage
Loans have characteristics which differ from those assumed in preparing the
tables, the Certificates may mature earlier or later than indicated by the
tables.
Based on the foregoing assumptions, the tables below indicate the
weighted average life of each Class of Offered Certificates and set forth the
percentages of the initial Current Principal Amount or Notional Amount of each
such Class that would be outstanding after the Distribution Date in November of
each of the years indicated, assuming that the Mortgage Loans prepay at the
percentage of SPA indicated therein. Neither SPA nor any other prepayment model
or assumption purports to be an historical description of prepayment experience
or a prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Mortgage Loans. Variations in the actual prepayment
experience and the balance of the Mortgage Loans that prepay may increase or
decrease the percentage of initial Current Principal Amount or Notional Amount
(and weighted average life) shown in the following tables. Such variations may
occur even if the average prepayment experience of all such Mortgage Loans
equals any of the specified percentages of SPA.
S-34
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OR NOTIONAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A CERTIFICATES CLASS PO CERTIFICATES
--------------------------------------------- ---------------------------------------------
% OF SPA % OF SPA
--------------------------------------------- ---------------------------------------------
0% 125% 275% 425% 550% 0% 125% 275% 425% 550%
--------- -------- -------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL PERCENTAGE .................. 100 100 100 100 100 100 100 100 100 100
November, 1999 ...................... 99 96 92 88 84 98 95 92 88 85
November, 2000 ...................... 98 89 78 67 59 97 88 78 68 61
November, 2001 ...................... 97 80 63 48 37 95 80 64 50 40
November, 2002 ...................... 96 73 51 33 22 93 72 52 36 26
November, 2003 ...................... 95 66 41 22 12 91 65 43 27 17
November, 2004 ...................... 93 60 33 15 6 88 59 35 19 11
November, 2005 ...................... 92 54 26 10 3 86 53 28 14 7
November, 2006 ...................... 90 49 21 7 1 83 47 23 10 5
November, 2007 ...................... 88 44 17 5 1 81 42 18 7 3
November, 2008 ...................... 87 40 14 4 * 77 38 15 5 2
November, 2009 ...................... 85 36 11 3 * 74 33 12 4 1
November, 2010 ...................... 82 33 9 2 * 71 29 9 3 1
November, 2011 ...................... 80 29 7 1 * 67 26 7 2 1
November, 2012 ...................... 77 26 6 1 * 63 22 6 1 *
November, 2013 ...................... 56 18 4 1 * 58 19 5 1 *
November, 2014 ...................... 54 16 3 * * 54 16 3 1 *
November, 2015 ...................... 51 14 2 * * 49 14 3 * *
November, 2016 ...................... 48 12 2 * * 43 11 2 * *
November, 2017 ...................... 45 10 1 * * 38 9 1 * *
November, 2018 ...................... 42 9 1 * * 31 7 1 * *
November, 2019 ...................... 39 8 1 * * 25 5 1 * *
November, 2020 ...................... 35 6 1 * * 17 3 * * *
November, 2021 ...................... 31 5 * * * 10 2 * * *
November, 2022 ...................... 26 4 * * * 1 * * * *
November, 2023 ...................... 21 3 * * * 0 0 0 0 0
November, 2024 ...................... 16 2 * * * 0 0 0 0 0
November, 2025 ...................... 11 1 * * * 0 0 0 0 0
November, 2026 ...................... 5 1 * * * 0 0 0 0 0
November, 2027 ...................... 0 0 0 0 0 0 0 0 0 0
November, 2028 ...................... 0 0 0 0 0 0 0 0 0 0
--- --- --- --- --- --- --- --- --- ---
Weighted Average Life to Maturity
(in years)** ....................... 17.9 9.4 5.4 3.6 2.8 15.4 8.9 5.5 3.9 3.1
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ----------
* Less than 0.50% and greater than 0.00%.
** 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 results and (c) dividing the sum by the aggregate amount
of the reductions in the principal balance (or notional amount) of such
Certificate referred to in clause (a).
S-35
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OR NOTIONAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS X CERTIFICATES + CLASS B-1, CLASS B-2 AND CLASS B-3 CERTIFICATES
--------------------------------------------- -----------------------------------------------
% OF SPA % OF SPA
--------------------------------------------- -----------------------------------------------
0% 125% 275% 425% 550% 0% 125% 275% 425% 550%
--------- -------- -------- -------- -------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL PERCENTAGE ......... 100 100 100 100 100 100 100 100 100 100
November, 1999 ............. 99 96 92 89 86 99 99 99 99 99
November, 2000 ............. 98 89 79 70 62 98 98 98 98 98
November, 2001 ............. 97 82 65 51 41 97 97 97 97 97
November, 2002 ............. 96 75 54 38 27 96 96 96 96 96
November, 2003 ............. 95 68 44 28 18 95 95 95 95 95
November, 2004 ............. 93 62 37 20 12 93 91 88 85 83
November, 2005 ............. 92 57 30 15 8 92 87 81 75 70
November, 2006 ............. 90 52 25 11 5 90 82 71 62 54
November, 2007 ............. 89 47 20 8 3 88 75 61 48 38
November, 2008 ............. 87 42 17 6 2 87 68 50 35 25
November, 2009 ............. 85 38 13 4 1 85 61 40 25 16
November, 2010 ............. 83 34 11 3 1 82 55 33 18 11
November, 2011 ............. 80 31 9 2 1 80 50 27 13 7
November, 2012 ............. 78 28 7 2 * 77 44 22 10 5
November, 2013 ............. 56 18 4 1 * 56 30 13 5 2
November, 2014 ............. 54 16 3 1 * 54 26 10 4 1
November, 2015 ............. 51 14 3 * * 51 23 8 3 1
November, 2016 ............. 48 13 2 * * 48 20 7 2 1
November, 2017 ............. 46 11 2 * * 45 18 5 1 *
November, 2018 ............. 42 9 1 * * 42 15 4 1 *
November, 2019 ............. 39 8 1 * * 39 13 3 1 *
November, 2020 ............. 35 7 1 * * 35 11 2 * *
November, 2021 ............. 31 5 1 * * 31 9 2 * *
November, 2022 ............. 27 4 * * * 26 7 1 * *
November, 2023 ............. 22 3 * * * 21 5 1 * *
November, 2024 ............. 17 2 * * * 16 4 1 * *
November, 2025 ............. 11 1 * * * 11 2 * * *
November, 2026 ............. 5 1 * * * 5 1 * * *
November, 2027 ............. 0 0 0 0 0 0 0 0 0 0
November, 2028 ............. 0 0 0 0 0 0 0 0 0 0
--- --- --- --- --- --- --- --- --- ---
Weighted Average Life to
Maturity (in years)** ..... 18.0 9.7 5.8 4.0 3.2 17.9 13.3 10.7 9.2 8.5
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ----------
* Less than 0.50% and greater than 0.00%.
** 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 results and (c) dividing the sum by the aggregate amount
of the reductions in the principal balance (or notional amount) of such
Certificate referred to in clause (a).
+ Notional Amount.
S-36
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OR NOTIONAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS R CERTIFICATE
----------------------------------------------------
% OF SPA
----------------------------------------------------
0% 125% 275% 425% 550%
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INITIAL PERCENTAGE ..................................... 100 100 100 100 100
November, 1999 ......................................... 0 0 0 0 0
November, 2000 ......................................... 0 0 0 0 0
November, 2001 ......................................... 0 0 0 0 0
November, 2002 ......................................... 0 0 0 0 0
November, 2003 ......................................... 0 0 0 0 0
November, 2004 ......................................... 0 0 0 0 0
November, 2005 ......................................... 0 0 0 0 0
November, 2006 ......................................... 0 0 0 0 0
November, 2007 ......................................... 0 0 0 0 0
November, 2008 ......................................... 0 0 0 0 0
November, 2009 ......................................... 0 0 0 0 0
November, 2010 ......................................... 0 0 0 0 0
November, 2011 ......................................... 0 0 0 0 0
November, 2012 ......................................... 0 0 0 0 0
November, 2013 ......................................... 0 0 0 0 0
November, 2014 ......................................... 0 0 0 0 0
November, 2015 ......................................... 0 0 0 0 0
November, 2016 ......................................... 0 0 0 0 0
November, 2017 ......................................... 0 0 0 0 0
November, 2018 ......................................... 0 0 0 0 0
November, 2019 ......................................... 0 0 0 0 0
November, 2020 ......................................... 0 0 0 0 0
November, 2021 ......................................... 0 0 0 0 0
November, 2022 ......................................... 0 0 0 0 0
November, 2023 ......................................... 0 0 0 0 0
November, 2024 ......................................... 0 0 0 0 0
November, 2025 ......................................... 0 0 0 0 0
November, 2026 ......................................... 0 0 0 0 0
November, 2027 ......................................... 0 0 0 0 0
November, 2028 ......................................... 0 0 0 0 0
--- --- --- --- ---
Weighted Average Life to Maturity (in years)** ......... 0.1 0.1 0.1 0.1 0.1
==== ==== ==== ==== ====
</TABLE>
- ----------
* Less than 0.50% and greater than 0.00%.
** 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 results and (c) dividing the sum by the aggregate amount
of the reductions in the principal balance (or notional amount) of such
Certificate referred to in clause (a).
S-37
<PAGE>
Yield on Class PO Certificates
The Class PO Certificates will be "principal only" certificates, will
not bear interest and will be offered at a substantial discount to their
original principal amount. As indicated in the table below a low rate of
principal payments (including prepayments) will have a material negative effect
on the yield to investors in the Class PO Certificates.
The significance of the effects of prepayments on the Class PO
Certificates is illustrated in the following table entitled "Sensitivity of the
Class PO Certificates to Prepayments," which shows the pre-tax yield (on a
corporate bond equivalent basis) to the holders of such Certificates under
different constant percentages of SPA. The yields of such Certificates set forth
in the following table were calculated using the assumptions specified above
under "--Decrement Tables" and assuming that the purchase price of the Class PO
Certificates is approximately 62% and such Certificates are purchased on
November 30, 1998.
It is not likely that the Discount Mortgage Loans will prepay at a
constant rate until maturity or that all such Mortgage Loans will prepay at the
same rate or that they will have the characteristics assumed. There can be no
assurance that the Discount Mortgage Loans will prepay at any of the rates shown
in the table or at any other particular rate. The timing of changes in the rate
of prepayments may affect significantly the yield realized by a holder of a
Class PO Certificate and there can be no assurance that the pre-tax yield to an
investor in the Class PO Certificates will correspond to any of the pre-tax
yields shown herein. Each investor must make its own decision as to the
appropriate prepayment assumptions to be used in deciding whether or not to
purchase a Class PO Certificate.
Sensitivity of the Class PO Certificates to Prepayments
<TABLE>
<CAPTION>
% of SPA
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
0% 125% 275% 425% 550%
-- ---- ---- ---- ----
Pre-Tax Yields to Maturity..... 3.3% 6.2% 10.5% 14.9% 18.4%
</TABLE>
The yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the assumed stream
of cash flows to be paid on the Class PO Certificates would cause the discounted
present value of such assumed stream of cash flows to equal the assumed purchase
price of the Class PO Certificates indicated above and converting such monthly
rates to corporate bond equivalent rates. Such calculation does not take into
account variations that may occur in the interest rates at which investors may
be able to reinvest funds received by them as payments on the Class PO
Certificates and consequently does not purport to reflect the return on any
investment in the Class PO Certificates when such reinvestment rates are
considered.
Yield on Class X Certificates
The significance of the effects of prepayments on the Class X
Certificates is illustrated in the following table entitled "Sensitivity of the
Class X Certificates to Prepayments," which shows the pre-tax yield (on a
corporate bond equivalent basis) to holders of such Certificates under different
constant percentages of SPA. The yields of such Certificates set forth in the
following table were calculated using the assumptions specified above under
"--Decrement Tables" and assuming that the purchase price of the Class X
Certificates is approximately 1.75% (plus accrued interest) for 100% of such
Class of Certificates and such Certificates are purchased on November 30, 1998.
As indicated in the following table the yield to investors in the Class
X Certificates will be highly sensitive to the rate of principal payments
(including prepayments) on the Non-Discount Mortgage Loans (especially those
with high Net Rates), which generally can be prepaid at any time generally
without penalty. On the basis of the assumptions described above, the yield to
maturity on the Class X Certificates would be 0% if prepayments were to occur at
a constant rate of approximately 887% SPA.
S-38
<PAGE>
It is not likely that the Non-Discount Mortgage Loans will prepay at a
constant rate until maturity or that all of the Mortgage Loans will prepay at
the same rate or that they will have the characteristics assumed. There can be
no assurance that the Mortgage Loans will prepay at any of the rates shown in
the tables or at any other particular rate. The timing of changes in the rate of
prepayments may affect significantly the yield realized by a holder of the Class
X Certificates and there can be no assurance that the pre-tax yield to an
investor in the Class X Certificates will correspond to any of the pre-tax
yields shown herein. Each investor must make its own decision as to the
appropriate prepayment assumptions to be used in deciding whether or not to
purchase a Class X Certificate.
Sensitivity of the Class X Certificates to Prepayments
<TABLE>
<CAPTION>
% of SPA
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
0% 125% 275% 425% 550%
-- ---- ---- ---- ----
Pre-Tax Yields to Maturity.... 51.6% 44.9% 36.6% 28.1% 20.8%
</TABLE>
The yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed stream
of cash flows to be paid on the Class X Certificates would cause the discounted
present value of such assumed stream of cash flows to equal the assumed purchase
price of such Certificates indicated above and converting such monthly rates to
corporate bond equivalent rates. Such calculation does not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as payments of interest on the Class X
Certificates and consequently does not purport to reflect the return on any
investment in the Class X Certificates when such reinvestment rates are
considered.
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.
SAMI 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 Structured Asset Mortgage Investments Inc., 245 Park
Avenue, New York, New York 10167.
Voting Rights
Voting rights of the Trust in general will be allocated among the
Classes of Certificates based upon their respective Current Principal Amounts;
provided that voting rights equal to 1% each will be allocated to the Class X
Certificates and the Class R Certificate.
Assignment of Mortgage Loans
At the time of issuance of the Certificates, SAMI will cause the
Mortgage Loans, together with all principal and interest due on or with respect
to such Mortgage Loans after the Cut-off Date, to be sold to the Trustee. The
Mortgage Loans will be identified in a separate schedule appearing as an exhibit
to the Agreement. Such schedule will include information as to the principal
balance of each Mortgage Loan as of the Cut-off Date, as well as information
including, among other things, the Mortgage Rate, the applicable Net Rate, the
Monthly Payment, the maturity date of each Mortgage Note, the applicable Master
Servicing Fee and the Loan-to-Value Ratio.
In addition, SAMI will deposit with the Trustee, with respect to each
Mortgage Loan, the original Mortgage Note, endorsed without recourse to the
order of the Trustee and showing to the extent available to SAMI 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
S-39
<PAGE>
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 to SAMI, if any,
with evidence of recording thereon; originals of all assumption and modification
agreements; provided, however, that in lieu of the foregoing, SAMI may deliver
certain other documents, under the circumstances set forth in the Agreement. The
documents delivered to the Trustee with respect to each Mortgage Loan are
referred to collectively as the "Mortgage File." SAMI 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 Trustee will review each item of the Mortgage File within 45 days
of the Closing Date (and will review each document permitted to be delivered to
the Trustee after the Closing Date, if received by the Trustee after the initial
45-day period, promptly after its delivery to the Trustee). If, as a result of
its review, the Trustee determines that any document is missing, does not appear
regular on its face, or appears to be unrelated to the Mortgage Loans identified
in the Mortgage Loan schedules (a "Material Defect"), the Trustee shall notify
SAMI of such Material Defect. SAMI shall correct or cure (or shall cause a prior
transferor of the Mortgage Loan to correct or cure) any such Material Defect
within 90 days from the date of notice from the Trustee of the Material Defect
and if such Material Defect is not corrected or cured within such period and
such defect materially and adversely affects the interests of the
Certificateholders in the related Mortgage Loan, SAMI will, within 90 days of
the date of notice, provide (or cause a prior transferor of the Mortgage Loan to
provide) the Trustee with a substitute Mortgage Loan (if within two years of the
Closing Date) or purchase (or cause a prior transferor of the Mortgage Loan to
purchase) the related Mortgage Loan at the applicable Repurchase Price.
The Trustee also will review the Mortgage Files within 180 days of the
Closing Date. If the Trustee discovers a Material Defect, the Trustee shall
notify SAMI of such Material Defect. SAMI shall correct or cure (or shall cause
a prior transferor of the Mortgage Loan to correct or cure) any such Material
Defect within 90 days from the date of notice from the Trustee of the Material
Defect and if such Material Defect is not corrected or cured within such period
and such defect materially and adversely affects the interests of the
Certificateholders in the related Mortgage Loan, SAMI will, within 90 days of
the date of notice, provide (or cause a prior transferor of the Mortgage Loan to
provide) the Trustee with a substitute Mortgage Loan (if within two years of the
Closing Date) or purchase (or cause a prior transferor of the Mortgage Loan to
purchase) the related Mortgage Loan at the applicable Repurchase Price.
The "Repurchase Price" means, with respect to any Mortgage Loan
required to be repurchased, an amount equal to (i) 100% of the Outstanding
Principal Balance of such Mortgage Loan plus accrued but unpaid interest on the
Outstanding Principal Balance at the related Mortgage Rate through and including
the last day of the month of repurchase reduced by (ii) any portion of the
Master Servicing Fee or advances payable to the purchaser of the Mortgage Loan.
As of any time of determination the "Outstanding Principal Balance" of
a Mortgage Loan is the principal balance of such Mortgage Loan remaining to be
paid by the Mortgagor or, in the case of an REO Property, the principal balance
of the related Mortgage Loan remaining to be paid by the Mortgagor at the time
such property was acquired by the Trust.
Representations and Warranties
SAMI will make certain representations and warranties concerning the
Mortgage Loans in the Agreement. Such representations and warranties 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;
S-40
<PAGE>
(c) The Mortgage Loan has not been delinquent 30 days or more on more
than one occasion in the 12 months prior to the Cut-off Date for such Mortgage
Loan. As of the Closing Date, the Mortgage Loan has not been dishonored and is
not delinquent in payment more than 30 days, except for no more than three
Mortgage Loans representing less than 0.25% of the Cut-off Date Scheduled
Principal Balance of the Mortgage Loans which will be 59 days or less
delinquent; there are no defaults under the terms of the Mortgage Loan; and
neither SAMI nor any prior mortgagee has advanced funds, or induced, solicited
or knowingly received any advance of funds from a party other than the owner of
the Mortgage Property subject to the Mortgage, directly or indirectly, for the
payment of any amount required by the Mortgage Loan;
(d) There are no delinquent taxes, 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, 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 Mortgage 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 the Purchaser,
the Mortgage Note and the Mortgage were not subject to an assignment or pledge,
and SAMI had good and marketable title to and was the sole owner thereof and had
full right to transfer and sell the Mortgage Loan to the Trustee 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 SAMI 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 Fannie Mae 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 and
currently is free of damage and waste and at origination of the Mortgage Loan
and currently there 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, except for one Mortgage Loan, the excess over 80.00% is insured as to
payments defaults by a Primary Mortgage Insurance Policy issued by a primary
mortgage insurer acceptable to Fannie Mae and Freddie Mac until the
Loan-to-Value Ratio of such Mortgage Loan is reduced to 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 SAMI, the Master Servicer or the
Trustee of a breach of any representation or warranty set forth above which
materially and adversely affects the value of the interests of
Certificateholders or the Trustee in any of the Mortgage Loans, the party
discovering or receiving notice of such breach shall give prompt written notice
to the others. In the case of any such breach, within 90 days from the date of
S-41
<PAGE>
discovery by SAMI, or the date SAMI is notified by the party discovering or
receiving notice of such breach (whichever occurs earlier), SAMI will (or will
cause a prior transferor of the Mortgage Loans 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
SAMI to cure, purchase or substitute (or to cause such cure, purchase or
substitution of) a qualifying substitute Mortgage Loan shall constitute the
Trustee'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 through liquidation of the Mortgaged
Property as described herein to the same extent as if such installment were due,
owing and delinquent and had not been deferred, but the obligation of the 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 the due-on-sale clause cannot be enforced under applicable law,
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 "Legal Aspects
of Mortgage Loans -- Due-on-Sale Clauses" in the Prospectus. In connection with
any such assumption, the Mortgage Rate borne by the related Mortgage Note may
not be changed. No Mortgage Loan may be assumed unless coverage under any
existing Primary Mortgage Insurance Policy continues as to that Mortgage Loan
after such assumption.
The 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 Federal Deposit Insurance Corporation (the "FDIC")
to the maximum extent permitted by law or such other account as may be
acceptable to the Rating Agencies. 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. Amounts in any Servicing Account may
relate to mortgage loans in more than one mortgage pool or to mortgage loans not
yet included in a mortgage pool. Each Servicing Account 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
each of the Rating Agencies for the maintenance of the ratings on the
Certificates. Withdrawals of amounts from the Servicing Accounts may be made
only to effect timely payment of taxes, assessments, insurance premiums, or
comparable items, to reimburse the Master Servicer for any advances made with
respect to such items, to refund to
S-42
<PAGE>
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 for which the Master Servicer acts as master
servicer, 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 law, the Master Servicer may be required to permit the Primary
Mortgage Insurance Policy to be terminated if the ratio of the then outstanding
principal balance of the Mortgage Loan to the value of the Mortgaged Property
declines below a prescribed percentage. Primary 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.
Pursuant to the Agreement, the Master Servicer may enter into
subservicing agreements with subservicers for the servicing and administration
of the Mortgage Loans subject, however, to the prior approval of such
subservicers by the Rating Agencies.
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. In the case of a
condominium unit, required hazard insurance will take the form of a multiperil
policy covering the entire condominium project, in an amount equal to at least
100% of the insurable value based on replacement cost. Any amounts collected by
the 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%)
S-43
<PAGE>
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 each such Mortgage Loan flood insurance to the extent available
and in accordance with industry practices to be maintained. Such flood insurance
will be in an amount equal to the lesser of (i) the Outstanding Principal
Balance of the related Mortgage Loan and (ii) the minimum amount required under
the terms of coverage to compensate for any damage or loss on a replacement cost
basis, but not more than the maximum amount of such insurance available for the
related Mortgaged Property under either the regular or emergency programs of the
National Flood Insurance Program (assuming that the area in which such Mortgaged
Property is located is participating in such program). Unless applicable state
law requires a higher deductible, the deductible on such flood insurance may not
exceed $1,000 or 1% of the applicable amount of coverage, whichever is less.
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 such
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 Master Servicer
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").
Any such purchase will be for a price equal to the Repurchase Price of such
Mortgage Loan. The purchase 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.
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Servicing Compensation and Payment of Expenses
The Master Servicer will be entitled to receive a fee of between 0.375%
and 1.257% per annum of the Outstanding Principal Balance of each Mortgage Loan
as set forth on the Mortgage Loan Schedule, with such amounts in excess of
0.375% per annum to be set aside to cover lender funded primary mortgage
insurance premiums (the "Master Servicing Fee"), from full payments of accrued
interest on each such Mortgage Loan as compensation for its activities under the
Agreement. However, Interest Shortfalls on Mortgage Loans 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"). The 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, with respect to each Mortgage Loan, all prepayment
charges, if any, assumption fees, tax service fees, fees for statement of
account payoff and late payment charges, all to the extent collected from
Mortgagors. The Master Servicer will also be entitled to retain, as additional
servicing compensation, 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 an account (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 the
Mortgage Loans repurchased, and advances made from such 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. Certain payments may be required to be
transferred into noncommingled accounts on an accelerated basis.
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 the portion of the servicing fees due the Master Servicer in
excess of Compensating Interest Payments;
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(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 the portion of the servicing fees due the Master
Servicer in excess of the related Compensating Interest Payments; 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 Account prior to
deposit in the Certificate Account.
Certificate Account
The Trustee shall establish and maintain a segregated Account in the
name of the Trustee, for the benefit of the Certificateholders (the "Certificate
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;
(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 to the
maximum coverage provided thereby or (ii) invested, in the name of the Trustee,
in such Permitted Investments as the Trustee may select or deposited in demand
deposits with such depository institutions as selected by the Trustee, provided
that time deposits of such depository institutions would be a Permitted
Investment.
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 Account 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
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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;
(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 Master Servicer 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 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, 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."
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Certain Matters Regarding the Master Servicer
The Agreement will provide that 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 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 Fannie Mae or Freddie Mac, (ii) is reasonably satisfactory to the
Trustee, (iii) has a net worth of not less than $10,000,000 and (iv) executes
and delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such purchaser or
transferee of the 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 any specific Mortgage Loans (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 Fannie
Mae or Freddie Mac.
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 two Business Days, (ii) failure by the
Master Servicer to observe or perform in any material respect any other material
covenants and agreements set forth in the 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
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continuance of any such decree or order unstayed and in effect for a period of
60 consecutive days, or the commencement of an involuntary case against the
Master Servicer under any applicable insolvency or reorganization statute which
case is not dismissed within 60 days, (iv) consent by the Master Servicer to the
appointment of a conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings of or relating to the Master Servicer or substantially all of its
property, 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 Agencies,
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 and to bankruptcy insolvency or similar laws, if applicable,
automatically and without further action pass to and be vested in the Trustee.
Upon the receipt by the Master Servicer of a notice of termination or
an opinion of counsel to the effect that the Master Servicer is legally unable
to act or to delegate its duties to a person which is legally able to act, the
Trustee shall automatically become the successor in all respects to the Master
Servicer in its capacity under the Agreement and the transactions set forth or
provided for therein and shall thereafter be subject to all the
responsibilities, duties, liabilities and limitations on liabilities relating
thereto placed on the Master Servicer by the terms and provisions hereof;
provided, however, that the Trustee (i) shall be under no obligation to
repurchase any Mortgage Loan; and (ii) shall have no obligation whatsoever with
respect to any liability incurred by the Master Servicer at or prior to the time
of receipt by the Master Servicer of such notice or of such opinion of counsel.
As compensation therefor, the Trustee shall be entitled to all funds relating to
the Mortgage Loans which the Master Servicer would have been entitled to retain
if the Master Servicer had continued to act as such, except for those amounts
due the Master Servicer as reimbursement for advances previously made.
Notwithstanding the above, the Trustee may, if it shall be unwilling so to act,
or shall, if it is legally unable so to act, appoint, or petition a court of
competent jurisdiction to appoint, any established housing and home finance
institution which is a Fannie Mae or Freddie Mac approved servicer having a net
worth of not less than $10,000,000, as the successor to the Master Servicer
under the 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 either 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. With respect to any balloon payment due on a Mortgage Loan that is
delinquent on its maturity date, the Master
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Servicer will not be required to advance the related balloon payment but will be
required to continue to make advances with respect to such Mortgage Loan, to the
extent the Master Servicer deems such amount to be recoverable, in an amount
equal to one month's interest on the unpaid principal balance at the applicable
Mortgage Rate less the Master Servicing Fee (expressed as a monthly rate) with
respect thereto. 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 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. Failure by the Master Servicer to deposit in
the Certificate Account any advance required to be deposited by the Master
Servicer under the Agreement, which failure goes unremedied for two business
days, would constitute an Event of Default with respect to the Master Servicer
as discussed under"--Events of Default" above.
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 or Notional
Amount of an individual Certificate following the payment and certain other
information relating to the Certificates and the Mortgage Loans.
Termination
The obligations of the Master Servicer and the Trustee created by the
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 Scheduled Principal
Balances of the Mortgage Loans is less than 10% of the aggregate Scheduled
Principal Balances as of the Cut-off Date of the Mortgage Loans, SAMI, or its
designee may repurchase from the Trust all Mortgage Loans remaining outstanding
and any REO Property remaining in the Trust at a purchase price equal to (a) the
unpaid principal balance of such Mortgage Loans (other than Mortgage Loans
related to REO Property), net of the principal portion of any unreimbursed
Monthly Advances made by the purchaser, plus accrued but unpaid interest thereon
at the applicable Mortgage Rate to the next Due Date, plus (b) the appraised
value of any REO Property, less the good faith estimate of the Master Servicer
of liquidation expenses to be incurred in connection with its disposal thereof
(but not more than the unpaid principal balance of the related Mortgage Loan,
together with accrued but unpaid interest on that balance at the applicable
Mortgage Rate to the next Due Date). Any such repurchase will result in the
retirement of the Certificates. The Trust may also be terminated and the
Certificates retired on any Distribution Date upon SAMI'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 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
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public officer takes charge of the Trustee or its property. Upon becoming aware
of such circumstances, the Master Servicer will be entitled to appoint a
successor Trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing ownership of not less than 51% of the Trust. In the
event that the Certificateholders remove the Trustee, the compensation of any
successor Trustee shall be paid by the Certificateholders to the extent that
such compensation exceeds the amount agreed to by the Master Servicer and the
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.
Year 2000 Issue
The "Year 2000 Issue" relates to the fact that many existing computer
programs and applications use only two digits to identify a year in the date
field. A failure to modify such programs and applications to be Year 2000
compliant may adversely impact the operations at the turn of the century of the
Master Servicer and the Trustee. SAMI will seek to obtain representations and
warranties from the Master Servicer and the Trustee with respect to their plans
to modify or replace computer programs and applications in order to deal with
the Year 2000 Issue. There can be no assurance that any planned modification or
replacement will be timely completed.
FEDERAL INCOME TAX CONSIDERATIONS
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 for
federal income tax purposes. The Certificates (other than the Class R
Certificate) will be designated as regular interests in a 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"). All
Certificateholders are advised to see "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. The
Class PO and Class X Certificates will be issued with original issue discount.
Some or all of the other Classes of Regular Certificates may also be subject to
the original issue discount provisions. See "Federal Income Tax
Consequences--REMIC Regular Securities--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 275% SPA. The prepayment assumption
represents a rate of payment of unscheduled principal on a pool of mortgage
loans, expressed as an annualized percentage of the outstanding principal
balance of such mortgage loans at the beginning of each period. See "Yield and
Prepayment Considerations--Prepayment Model" for a description of the prepayment
assumption model used herein. However, no representation is made as to the rate
at which prepayments actually will occur. In addition, other Classes of Regular
Certificates may be treated as having been issued at a premium. See "Federal
Income Tax Consequences--REMIC Regular Securities--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
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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 "Federal Income Tax
Consequences--REMIC Securities--Status of REMIC Securities" 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 "Federal Income Tax Consequences--REMIC
Securities--Status of REMIC Securities" in the Prospectus.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") should
consider the ERISA fiduciary investment standards before authorizing an
investment by a plan in the Certificates. In addition, fiduciaries of employee
benefit plans subject to Title I of ERISA, as well as certain plans or other
retirement arrangements not subject to ERISA, but which are subject to Section
4975 of the Code (such as individual retirement accounts and Keogh plans
covering only a sole proprietor, or partners), or any entity whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, including an insurance company general account (collectively, "Plan(s)",
should consult with their legal counsel to determine whether an investment in
the Certificates will cause the assets of the Trust ("Trust Assets") to be
considered plan assets pursuant to the plan asset regulations set forth at 29
C.F.R. ss. 2510.3-101 (the "Plan Asset Regulations"), thereby subjecting the
Plan to the prohibited transaction rules with respect to the Trust Assets and
the Trustee or the Master Servicer to the fiduciary investments standards of
ERISA, or cause the excise tax provisions of Section 4975 of the Code to apply
to the Trust Assets, unless an exemption granted by the Department of Labor
applies to the purchase, sale, transfer or holding of the Certificates. In
particular, investors that are insurance companies should consult with their
legal counsel with respect to the United States Supreme Court case, John Hancock
Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 114 S. Ct. 517
(1993). In John Hancock, the Supreme Court ruled that assets held in an
insurance company's general account may be deemed to be plan assets under
certain circumstances. Investors should analyze whether that decision, federal
legislation enacted affecting insurance company general accounts (see Section
1460 of the Small Job Protection Act of 1996) or related regulations, if any,
may have an impact with respect to purchases of Certificates.
Prohibited Transaction Exemption 90-30 (the "Exemption") will generally
be met with respect to the Senior Certificate (other than the Class X
Certificates), except for those conditions which are dependent on facts unknown
to SAMI or which it cannot control, such as those relating to the circumstances
of the Plan purchaser or the Plan fiduciary making the decision to purchase such
Class of Senior Certificates. However, before purchasing such a Senior
Certificate, a fiduciary of a Plan should make its own determination as to the
availability of exemptive relief provided by the Exemption or the availability
of any other prohibited transaction exemptions, and whether the conditions of
any such exemption will be applicable to such Senior Certificates. See "ERISA
Considerations" in the Prospectus.
The Exemption does not apply to the Subordinate Certificates because
the rights and interests evidenced by such Certificates are subordinated to the
rights and interests evidenced by other Classes of Certificates issued by the
Trust. The Exemption does not apply to the Class X Certificates because they are
not being underwritten by the Underwriter. However, if at any time in the
future, the Class X Certificates are underwritten, placed by an entity which has
been granted an underwriter's exemption similar to the Exemption or such an
entity acts as a selling agent, the Class X Certificates would be eligible for
exemption relief under such exemption.
The Class X Certificates and the Subordinate Certificates may be
acquired for or on behalf of a purchaser which is acquiring such Certificates
directly or indirectly for or on behalf of a Plan, provided that neither the
proposed transfer and/or holding of a Certificate nor the servicing, management
and operation of the Trust (i) will result in a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code which will not be covered under
an individual or class prohibited transaction exemption including but not
limited to Department of Labor Prohibited Transaction Exemption ("PTE") 84-14
(Class Exemption for Plan Asset Transactions Determined by
S-52
<PAGE>
Independent Qualified Professional Asset Managers); PTE 91-38 (Class Exemption
for Certain Transactions Involving Bank Collective Investment Funds); PTE 90-1
(Class Exemption for Certain Transactions Involving Insurance Company Pooled
Separate Accounts), PTE 95-60 (Class Exemption for Certain Transactions
Involving Insurance Company General Accounts), and PTCE 96-23 (Class Exemption
for Plan Asset Transactions Determined by In-House Asset Managers) or (ii) will
give rise to any additional fiduciary duties under ERISA on the part of the
Master Servicer or the Trustee, which will be deemed represented by an owner of
a Book-Entry Certificate and will be evidenced by a representation to such
effect by or on behalf of a holder of a Physical Certificate.
Any Plan fiduciary which proposes to cause a Plan to purchase Offered
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
the Offered Certificates. Assets of a Plan should not be invested in the Offered
Certificates unless it is clear that the Exemption or any other prohibited
transaction exemption will apply and exempt all potential prohibited
transactions.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such governmental plan may be subject
to Federal, state and local law, which is, to a material extent, similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of such
investment under applicable fiduciary or other investment standards, and the
need for and the availability of any exemptive relief under any Similar Law.
LEGAL INVESTMENT
The Senior Certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") so long as they are rated in one of the two
highest rating categories by a nationally recognized statistical rating
organization 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. It
is not anticipated that the remaining Classes of Certificates will be so rated
in one of the two highest rating categories and therefore 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 "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 who is a "Tax Matters Person" as defined in the Code and by SAMI.
SAMI will not give its consent to any proposed transfer to a disqualified
organization. As a prerequisite to such consent to any other transfer, the
proposed transferee must provide the Tax Matters Person, the Trustee and SAMI
with an affidavit that the proposed transferee is not a disqualified
organization (and, unless the Tax Matters Person and SAMI consent to the
transfer to a person who is not a U.S. Person (as defined below), an affidavit
that it is a U.S. Person). Notwithstanding the fulfillment of the prerequisites
described above, the Tax Matters Person or SAMI may withhold its consent to a
transfer, but only to the extent necessary to avoid a risk of REMIC
S-53
<PAGE>
disqualification or REMIC-level tax. In the event that legislation is enacted
which would subject the Trust to tax (or disqualify the REMIC as a REMIC) on the
transfer of an interest in the Residual Certificate to any other person or
persons, the Tax Matters Person and SAMI may, without action on the part of
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 "Federal Income Tax
Consequences--REMIC Residual Certificates--Transfers of REMIC Residual
Certificates--Tax on Disposition of REMIC Residual Certificates" and
"--Restrictions on Transfer; Holding by Pass-Through Entities" in the
Prospectus. Moreover, certain transfers of a Residual Certificate that are
effective to transfer legal ownership may nevertheless be ineffective to
transfer ownership for federal income tax purposes, if at the time of the
transfer the Residual Certificate represents a "non-economic residual interest"
as defined in the REMIC Regulations and if avoiding or impeding the assessment
or collection of tax is a significant purpose of the transfer. See "Federal
Income Tax Consequences--REMIC Residual Certificates--Transfers of REMIC
Residual Certificates" and "--Restrictions on Transfer; Holding by Pass-Through
Entities" in the Prospectus. Further, unless the Tax Matters Person and SAMI
consent in writing (which consent may be withheld in the Tax Matters Person's or
SAMI's sole discretion), 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 (a "U.S. Person").
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Offered Certificates (other than the Class X Certificates) are
being purchased from SAMI by the Underwriter upon issuance. The Underwriter is
an affiliate of SAMI and BSMCC. Such Offered Certificates will be offered by the
Underwriter (only as and if issued and delivered to and accepted by the
Underwriter) from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. Proceeds to SAMI are
expected to be approximately 100.7% of the aggregate principal balance of the
Offered Certificates, as of the Cut-off Date, plus accrued interest thereon, but
before deducting expenses payable by SAMI in connection with the Offered
Certificates which are estimated to be $350,000. In connection with the purchase
and sale of such Offered Certificates, the Underwriter may be deemed to have
received compensation from SAMI in the form of an underwriting discount.
SAMI will indemnify the Underwriter against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments the Underwriter may be required to make in respect
thereof.
There is currently no secondary market for the Certificates and no
assurances are made that such a market will develop. The Underwriter intends to
establish a market in the Offered Certificates, but is not obligated to do so.
Any such market, even if established, may or may not continue.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon
for SAMI and the Underwriter by Stroock & Stroock & Lavan LLP, New York, New
York.
RATING
It is a condition to the issuance of each Class of Offered Certificates
that it receives the ratings set forth below from S&P and Fitch.
<TABLE>
<CAPTION>
Rating
------------------------------------
Class S&P Fitch
- ----- --- -----
<S> <C> <C>
Class A AAA AAA
Class PO AAAr AAA
Class X AAAr AAA
Class B-1 -- AA
Class B-2 -- A
Class B-3 -- BBB
Class R AAA AAA
</TABLE>
S-54
<PAGE>
The ratings assigned by S&P and Fitch to mortgage pass-through
certificates address the likelihood of the receipt of all distributions on the
mortgage loans by the related certificateholders under the agreements pursuant
to which such certificates were issued. S&P's and Fitch's ratings take into
consideration the credit quality of the related mortgage pool, structural and
legal aspects associated with such certificates, and the extent to which the
payment stream in the mortgage pool is adequate to make payments required under
such certificates. S&P's and Fitch's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
mortgages. The "r" symbol of the "AAAr" rating of certain Classes of the
Certificates by S&P is attached to highlight certain obligations that S&P
believes may experience volatility in expected returns due to non-credit risks,
including principal only and interest only mortgage securities.
The ratings of the Rating Agencies do not address the possibility that,
as a result of principal prepayments or recoveries (i) Certificateholders might
suffer a lower than anticipated yield and (ii) if there is a rapid rate of
principal payments (including principal prepayments) on the Mortgage Loans
investors in the Interest Only Certificates could fail to fully recover their
initial investment. The ratings on the Class PO Certificates only address the
return of their principal balance. The rating on the Residual Certificate
addresses only the return of its principal balance and interest thereon at its
Pass-Through Rates.
The ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A rating is not
a recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the Rating Agencies.
SAMI has not requested a rating of the Offered Certificates by any
rating agency other than the Rating Agencies. However, there can be no assurance
as to whether any other rating agency will rate the Offered Certificates or, in
such event, what rating would be assigned to the Offered Certificates by such
other rating agency. The ratings assigned by such other rating agency to the
Offered Certificates may be lower than the ratings assigned by the Rating
Agencies.
S-55
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
1933 Act....................................................................S-2
Accrued Certificate Interest...............................................S-22
Agreement...................................................................S-4
Allocable Share............................................................S-27
Assumed Final Distribution Date............................................S-33
Available Funds............................................................S-20
Balloon Payment.............................................................S-6
Bankruptcy Loss............................................................S-29
BSMCC......................................................................S-13
Business Day...............................................................S-19
Cede.......................................................................S-19
Certificate Account........................................................S-46
Certificate Account Advance................................................S-50
Certificate Register.......................................................S-20
Certificateholder..........................................................S-20
Certificates................................................................S-4
Class PO Cash Shortfall....................................................S-22
Class PO Deferred Amount...................................................S-29
Class PO Deferred Payment Writedown Amount.................................S-23
Class PO Principal Distribution Amount.....................................S-26
Class Prepayment Distribution Trigger......................................S-27
Closing Date................................................................S-4
Code.......................................................................S-51
Compensating Interest Payments.............................................S-23
Cross-Over Date............................................................S-22
Current Principal Amount...................................................S-23
Cut-off Date................................................................S-4
Debt Service Reduction.....................................................S-29
Defaulted Mortgage Loan....................................................S-44
Deficient Valuation........................................................S-28
Definitive Certificates....................................................S-19
Determination Date.........................................................S-28
Discount Mortgage Loan.....................................................S-24
Distribution Date...........................................................S-5
DTC........................................................................S-19
Due Date...................................................................S-14
Due Period.................................................................S-25
ERISA......................................................................S-52
Events of Default..........................................................S-48
Exemption..................................................................S-52
FDIC.......................................................................S-42
Fitch......................................................................S-11
Fraud Loss.................................................................S-29
Headlands...................................................................S-6
Insurance Proceeds.........................................................S-28
Interest Shortfall.........................................................S-23
Issuer......................................................................S-4
Liquidated Mortgage Loan...................................................S-28
Liquidation Proceeds.......................................................S-28
LLSI........................................................................S-4
Loss Allocation Limitation.................................................S-29
S-56
<PAGE>
Master Servicer.............................................................S-4
Master Servicing Fees......................................................S-44
Material Defect............................................................S-40
Monthly Advance............................................................S-10
Monthly Payment............................................................S-28
Mortgage File..............................................................S-40
Mortgage Pool..............................................................S-13
Mortgage Property..........................................................S-42
Mortgage Rate..............................................................S-14
Mortgagor..................................................................S-23
Net Interest Shortfalls....................................................S-23
Net Liquidation Proceeds...................................................S-28
Net Rate...................................................................S-14
Non-Discount Mortgage Loan.................................................S-24
Non-PO Percentage..........................................................S-24
Non-PO Realized Losses.....................................................S-29
Non-SMMEA Certificates.....................................................S-53
Offered Certificates........................................................S-4
Original Subordinate Principal Balance.....................................S-26
Other Certificates..........................................................S-4
Outstanding Principal Balance..............................................S-40
Permitted Investments......................................................S-42
Plan Asset Regulations.....................................................S-52
Plan(s)....................................................................S-52
PO Percentage..............................................................S-24
Prepayment Period..........................................................S-26
Principal Prepayment.......................................................S-28
Protected Account..........................................................S-19
PTE........................................................................S-52
Rating Agencies............................................................S-11
Realized Loss..............................................................S-28
Record Date.................................................................S-5
Regular Certificates.......................................................S-51
REITs......................................................................S-51
Relief Act.................................................................S-23
REMIC Regular Certificates.................................................S-51
REMIC Residual Certificate.................................................S-51
REO Property...............................................................S-28
Repurchase Price...........................................................S-40
Repurchase Proceeds........................................................S-28
Residual Certificates......................................................S-51
S&P........................................................................S-11
Scheduled Principal Balance................................................S-14
Seller......................................................................S-4
Senior P&I Optimal Principal Amount........................................S-24
Senior Percentage..........................................................S-25
Senior Prepayment Percentage...............................................S-25
Senior Prepayment Percentage Stepdown Limitation...........................S-25
Servicing Account..........................................................S-42
Similar Law................................................................S-53
SMMEA......................................................................S-12
Special Hazard Loss........................................................S-29
Subordinate Certificate Writedown Amount...................................S-23
Subordinate Optimal Principal Amount.......................................S-27
Subordinate Percentage.....................................................S-27
S-57
<PAGE>
Subordinate Prepayment Percentage..........................................S-27
Tax Matters Person.........................................................S-53
Trust.......................................................................S-4
Trust Assets...............................................................S-52
Trustee.....................................................................S-4
U.S. Person................................................................S-54
Underwriter.................................................................S-1
</TABLE>
S-58
<PAGE>
SCHEDULE A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
The description herein of the Mortgage Loans is based upon estimates of
the composition of the Mortgage Loans as of the Cut-off Date, assuming that all
scheduled principal payments due on or before the Cut-off Date have been
received. Prior to the issuance of the Certificates, Mortgage Loans may be
removed as a result of (i) Principal Prepayments thereof in full prior to
November 1, 1998, (ii) requirements of S&P or Fitch or (iii) delinquencies or
otherwise. In any such event, other mortgage loans may be included in the
Trust. All weighted average information reflects weighting of the Mortgage
Loans by their respective Scheduled Principal Balances as of the Cut-off Date.
The characteristics as of the Cut-off Date of the Mortgage Loans at the time
the Certificates are issued will not, however, differ by more than 5% from the
estimated information set forth herein with respect to the Mortgage Loans as
presently constituted, although certain characteristics of the Mortgage Loans
may vary.
ORIGINAL PRINCIPAL BALANCES OF MORTGAGE LOANS
AVERAGE: $164,965
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL PRINCIPAL BALANCE LOANS CUT-OFF DATE POOL
- ------------------------------ ----------- ------------------- -----------
<S> <C> <C> <C>
Less than $100,000............ 411 $ 28,879,226 12.64%
$100,000 -- $149,999.......... 388 47,376,632 20.73
$150,000 -- $199,999.......... 204 35,066,676 15.34
$200,000 -- $249,999.......... 156 34,724,511 15.19
$250,000 -- $299,999.......... 83 22,233,332 9.73
$300,000 -- $349,999.......... 67 21,382,067 9.36
$350,000 -- $399,999.......... 27 10,135,860 4.43
$400,000 -- $449,999.......... 24 10,074,275 4.41
$450,000 -- $499,999.......... 10 4,648,654 2.03
$500,000 -- $599,999.......... 11 5,918,672 2.59
$600,000 -- $699,999.......... 8 5,130,287 2.24
Greater than $700,000......... 4 2,986,412 1.31
--- ------------ ------
Total ..................... 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
UNPAID PRINCIPAL BALANCES OF MORTGAGE LOANS
AVERAGE: $164,075
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
UNPAID PRINCIPAL BALANCE LOANS CUT-OFF DATE POOL
- ------------------------------ ----------- ------------------- -----------
<S> <C> <C> <C>
Less than $100,000............ 428 $ 30,567,902 13.37%
$100,000 -- $149,999.......... 381 47,180,872 20.64
$150,000 -- $199,999.......... 203 35,357,704 15.47
$200,000 -- $249,999.......... 155 34,931,518 15.28
$250,000 -- $299,999.......... 84 22,924,857 10.03
$300,000 -- $349,999.......... 60 19,397,355 8.49
$350,000 -- $399,999.......... 30 11,431,111 5.00
$400,000 -- $449,999.......... 21 8,975,155 3.93
$450,000 -- $499,999.......... 9 4,253,222 1.86
$500,000 -- $599,999.......... 10 5,420,208 2.37
$600,000 -- $699,999.......... 9 5,827,359 2.55
Greater than $700,000......... 3 2,289,340 1.00
--- ------------ ------
Total ..................... 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
A-1
<PAGE>
MORTGAGE INTEREST RATES AS OF THE CUT-OFF DATE OF MORTGAGE LOANS
WEIGHTED AVERAGE: 8.144%
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
MORTGAGE INTEREST RATE LOANS CUT-OFF DATE POOL
- ----------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
7.000% or less .............. 9 $ 1,041,788 0.46%
7.001% -- 7.250% ........... 28 4,650,677 2.03
7.251% -- 7.500% ........... 64 9,407,603 4.12
7.501% -- 7.750% ........... 185 34,117,534 14.93
7.751% -- 8.000% ........... 323 56,465,655 24.71
8.001% -- 8.250% ........... 296 52,658,534 23.04
8.251% -- 8.500% ........... 280 42,964,747 18.80
8.501% -- 8.750% ........... 110 13,284,163 5.81
8.751% -- 9.000% ........... 60 8,144,737 3.56
9.001% -- 9.250% ........... 8 1,173,718 0.51
9.251% -- 9.500% ........... 5 560,417 0.25
Greater than 9.500% ......... 25 4,087,028 1.79
--- ------------ ------
Total .................... 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
LOAN-TO-VALUE RATIOS AT ORIGINATION OF MORTGAGE LOANS
WEIGHTED AVERAGE: 76.16%
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL LOAN-TO-VALUE RATIOS LOANS CUT-OFF DATE POOL
- ------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
50.00% or less ................ 68 $ 7,381,767 3.23%
50.01% -- 55.00% ............. 26 2,835,754 1.24
55.01% -- 60.00% ............. 36 5,317,743 2.33
60.01% -- 65.00% ............. 68 9,401,958 4.11
65.01% -- 70.00% ............. 126 17,682,510 7.74
70.01% -- 75.00% ............. 253 42,581,574 18.63
75.01% -- 80.00% ............. 664 122,020,554 53.39
80.01% -- 85.00% ............. 8 1,139,757 0.50
85.01% -- 90.00% ............. 73 9,880,359 4.32
90.01% -- 95.00% ............. 71 10,314,624 4.51
--- ------------ ------
Total ...................... 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
PROPERTY TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
PROPERTY TYPE LOANS CUT-OFF DATE POOL
- ----------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
Single Family ..................... 1,112 $187,235,080 81.92%
Two-Family to Four-Family ......... 142 22,601,551 9.89
Condo ............................. 139 18,719,970 8.19
----- ------------ ------
Total .......................... 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
A-2
<PAGE>
LOAN PURPOSES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE POOL
- ------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
Purchase ...................... 681 $113,242,130 49.55%
Rate / Term Refinance ......... 272 46,213,118 20.22
Cash Out Refinance ............ 440 69,101,354 30.23
--- ------------ ------
Total ...................... 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
OCCUPANCY STATUS OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
OCCUPANCY STATUS LOANS CUT-OFF DATE POOL
- --------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
Primary Residence ......... 967 $180,067,943 78.78%
Second Home ............... 38 6,608,552 2.89
Investor Property ......... 388 41,880,107 18.32
--- ------------ ------
Total .................. 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
ORIGINAL TERMS OF MORTGAGE LOANS
WEIGHTED AVERAGE: 309 MONTHS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ORIGINAL TERMS LOANS CUT-OFF DATE POOL
- -------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
180 Months ......... 404 $ 65,286,553 28.56%
360 Months ......... 989 163,270,048 71.44
--- ------------ ------
Total ........... 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
STATED REMAINING TERMS TO MATURITY OF MORTGAGE LOANS
WEIGHTED AVERAGE: 304 MONTHS*
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
STATED REMAINING TERM TO MATURITY LOANS CUT-OFF DATE POOL
- ----------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
121 -- 180 Months ................. 404 $ 65,286,553 28.56%
301 -- 360 Months ................. 989 163,270,048 71.44
--- ------------ ------
Total .......................... 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
- ----------
* Weighted Average Stated Remaining Term to Maturity takes into account an
original term of 180 months for $55,346,517 Mortgage Loans having an
amortization term of 360 months.
AMORTIZATION TYPES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
AMORTIZATION TYPES LOANS CUT-OFF DATE POOL
- ------------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
Fixed Rate Fully Amortizing ......... 1076 $173,210,084 75.78%
Fixed Rate Balloon .................. 317 55,346,517 24.22
---- ------------ ------
Total ............................ 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
A-3
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES*
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
STATE LOANS CUT-OFF DATE POOL
- --------------------------------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
California .............................................. 699 $137,863,114 60.32%
Washington .............................................. 155 21,790,285 9.53
Arizona ................................................. 118 14,401,485 6.30
Oregon .................................................. 98 12,591,476 5.51
Utah .................................................... 65 8,217,662 3.60
Colorado ................................................ 57 8,108,814 3.55
Nevada .................................................. 46 5,942,537 2.60
Florida ................................................. 36 4,189,550 1.83
Idaho ................................................... 32 3,347,182 1.46
Montana ................................................. 23 2,597,416 1.14
Virginia ................................................ 14 2,434,655 1.07
Other (no more than 1% in any one of 14 states) ......... 50 7,072,426 3.09
--- ------------ ------
Total ................................................ 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
- ----------
* No more than 1.29% (92109 - San Diego, CA) of the Mortgage Loans by Unpaid
Principal Balance will be secured by Mortgaged Properties located in any one
zip code area in California and no more than 0.68% (85259 - Scottsdale, AZ)
of the Mortgage Loans will be secured by Mortgaged Properties located in any
one zip code area outside of California.
DOCUMENTATION TYPES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
DOCUMENTATION TYPE LOANS CUT-OFF DATE POOL
- ------------------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
Full/Alternative Documentation ............ 430 $ 61,821,783 27.05%
Reduced -- No Ratio ....................... 155 23,979,563 10.49
Reduced -- No Income Verification ......... 746 131,692,316 57.62
No Income / No Asset ...................... 52 8,735,515 3.82
Streamline ................................ 10 2,327,425 1.02
--- ------------ ------
Total .................................. 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
MONTHLY PAYMENTS DELINQUENT AS OF THE CUT-OFF DATE OF MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
DELINQUENCY LOANS CUT-OFF DATE POOL
- ----------------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
None (0-29 days past due) ............... 1,374 $224,533,581 98.24%
1 Payment (30-59 days past due) ......... 19 4,023,021 1.76
----- ------------ ------
Total ................................ 1,393 $228,556,602 100.00%
===== ============ ======
</TABLE>
ZIP CODE CONCETRATION (OVER 1%) OF MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PRINCIPAL BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ZIP CODE CONCENTRATION LOANS CUT-OFF DATE POOL
- -------------------------------- ----------- ------------------- ---------
<S> <C> <C> <C>
92109 -- San Diego, CA ......... 11 $2,943,433 1.29%
</TABLE>
A-4
<PAGE>
MORTGAGE-BACKED CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
STRUCTURED ASSET MORTGAGE INVESTMENTS INC.
SELLER
This Prospectus relates to Mortgage-Backed Certificates (the
"Certificates") and Mortgage-Backed Notes (the "Notes" and, collectively with
the Certificates, the "Securities") which may be sold from time to time in one
or more series (each, a "Series") on terms determined at the time of sale and
described in the related Prospectus Supplement for the Series. The Securities of
a Series will evidence either beneficial ownership of one or more trusts (each a
"Trust Fund") or the debt obligations of a Trust Fund. As specified in the
related Prospectus Supplement, a Trust Fund for a Series of Securities will
include certain mortgage-related assets (the "Mortgage Assets") consisting of
(i) mortgage loans or participations therein secured by one-to four-family
residential properties ("Single Family Loans"), (ii) mortgage loans or
participations therein secured by multifamily residential properties
("Multifamily Loans"), (iii) loans or participations therein secured by security
interests or similar liens on shares in cooperative housing corporations and the
related proprietary leases or occupancy agreements ("Cooperative Loans"), (iv)
conditional sales contracts and installment sales or loan agreements or
participations therein secured by manufactured housing ("Contracts"), (v)
mortgage pass-though securities (the "Agency Securities") issued or guaranteed
by the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("Fannie Mae"), Freddie Mac (formerly, the Federal Home
Loan Mortgage Corporation) ("Freddie Mac") or other government agencies or
government-sponsored agencies or (vi) privately issued mortgage-backed
securities ("Private Mortgage-Backed Securities"). If specified in the related
Prospectus Supplement, certain Securities will evidence the entire beneficial
ownership interest in, or the debt obligations of, a Trust Fund that will
contain a beneficial ownership interest in another Trust Fund which will contain
the Mortgage Assets. The Mortgage Assets will be acquired by Structured Asset
Mortgage Investments Inc. (formerly, Bear Stearns Mortgage Securities Inc.) (the
"Seller") from one or more institutions which may be affiliates of the Seller
(each, a "Lender") and conveyed by the Seller to the related Trust Fund. In
addition to Mortgage Assets, a Trust Fund may include United States Treasury
securities and other securities issued by the U.S. Government, any of its
agencies or other issuers established by federal statute (collectively, "U.S.
Government Securities"), insurance policies, cash accounts, letters of credit,
financial guaranty insurance policies, third party guarantees or other assets to
the extent described in the related Prospectus Supplement (collectively, the
"Trust Assets").
Each Series of Securities will include either one or more classes of
Certificates or, if Notes are issued as part of a Series, one or more classes of
Notes and one or more classes of Certificates, as set forth in the related
Prospectus Supplement. Each class of Securities of a Series will evidence
beneficial ownership of a specified percentage (which may be 0%) or portion of
future interest payments and a specified percentage (which may be 0%) or portion
of future principal payments on the Trust Assets in the related Trust Fund or
will evidence the obligations of the related Trust Fund to make payments from
amounts received on the Trust Assets in the related Trust Fund. A Series of
Securities may include one or more senior classes that receive certain
preferential treatment with respect to one or more other classes of Securities
of such Series. One or more classes of Securities of a Series may be entitled to
receive distributions of principal, interest or any combination thereof prior to
one or more other classes of Securities of such Series or after the occurrence
of specified events or may be required to absorb one or more types of losses
prior to one or more other classes of Securities, in each case as specified in
the related Prospectus Supplement. Certain Series will provide for the issuance
of one or more classes of "Exchangeable Securities," or "Callable Securities"
and "Call Securities," as provided in this Prospectus. See "Summary of
Terms--Description of the Securities."
Distributions to holders of Securities ("Securityholders") will be
made monthly, quarterly, semi-annually or at such other intervals and on the
dates specified in the related Prospectus Supplement. Distributions on the
Securities of a Series will be made only from the assets of the related Trust
Fund and any other assets specified in the related Prospectus Supplement.
The Securities will not represent an obligation of or interest in the
Seller or any affiliate thereof and will not be insured or guaranteed by any
governmental agency or instrumentality and will be insured or guaranteed by
another person only if specified in the related Prospectus Supplement. In
general, with respect to a Series of Securities, the Seller will obtain certain
representations and warranties from the Lender or Lenders from which it acquired
the Mortgage Assets or other third parties and will assign its rights with
respect to such representations and warranties to the Trust Fund for the related
Series of Securities. The Seller will have obligations with respect to a Series
only to the extent specified in the related Prospectus Supplement. The principal
obligations of one or more master servicers (each, a "Master Servicer") named in
the Prospectus Supplement with respect to the related Series of Securities will
be limited to its or their contractual servicing obligations, including any
obligation to advance delinquent payments on the Mortgage Assets in the related
Trust Fund.
(CONTINUED ON NEXT PAGE)
--------------------
FOR A DISCUSSION OF SIGNIFICANT FACTORS AFFECTING INVESTMENTS IN THE
SECURITIES, SEE "RISK FACTORS" ON PAGE 19 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
--------------------
<PAGE>
Prior to issuance there will have been no market for the Securities of
any Series and there can be no assurance that a secondary market for any
Securities will develop. This Prospectus may not be used to consummate sales of
a Series of Securities unless accompanied by a Prospectus Supplement.
Offers of the Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Method of Distribution" herein and in the related Prospectus Supplement. To the
extent Securities are underwritten, Securities will be distributed by, or sold
by underwriters managed by:
BEAR, STEARNS & CO. INC.
The date of this Prospectus is October 28, 1998.
<PAGE>
The yield on each class of Securities of a Series will be affected by
the rate of payment of principal (including prepayments) on the Mortgage Assets
in the related Trust Fund and the timing of receipt of such payments as
described herein and in the related Prospectus Supplement. Certain classes of
Securities may be subject to call and a Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement. See "Administration--Termination; Optional Termination."
If specified in a Prospectus Supplement, one or more elections may be
made to treat each Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") or a "financial asset securitization
investment trust" ("FASIT") for federal income tax purposes. See "Federal Income
Tax Consequences."
Until 90 days after the date of each Prospectus Supplement, all
dealers effecting transactions in the securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Securities of each Series to
be offered hereunder will, among other things, set forth with respect to such
Securities, as appropriate: (i) a description of the class or classes of
Securities; (ii) the rate of interest or method of determining the amount of
interest, if any, to be paid to each such class; (iii) the aggregate principal
amount, if any, relating to each such class; (iv) the distribution dates (each a
"Distribution Date") for interest and principal distributions and, if
applicable, the initial and final scheduled Distribution Dates for each class;
(v) if applicable, the aggregate original percentage ownership interest in the
Trust Fund to be evidenced by each class of Securities; (vi) information as to
the nature and extent of subordination with respect to any class of Securities
that is subordinate to any other class; (vii) information as to the assets
comprising the Trust Fund, including the general characteristics of the Mortgage
Assets included therein and, if applicable, the amount and source of any reserve
fund (a "Reserve Account"), and the insurance, letters of credit, guarantees, or
other instruments or agreements included in the Trust Fund; (viii) the
circumstances, if any, under which the Trust Fund may be subject to early
termination; (ix) additional information with respect to the plan of
distribution of such Securities; (x) whether one or more REMIC or FASIT
elections will be made and designation of the regular interests and residual
interests; (xi) information as to the Trustee; and (xii) information as to any
Master Servicer.
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus and the Prospectus
Supplement relating to each Series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement of which
this Prospectus is a part. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement and
exhibits can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: 500 West Madison Street, Chicago, Illinois 60661; and Seven World
Trade Center, New York, New York 10048. The Commission maintains an Internet Web
site that contains reports, proxy and information statements and other
information regarding the registrants that file electronically with the
Commission, including the Seller. The address of such Internet Web site is
(http://www.sec.gov).
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by Structured Asset Mortgage Investments Inc.
(formerly, Bear Stearns Mortgage Securities Inc.) (the "Seller") pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, with respect to a Series of Securities subsequent to the date of this
Prospectus and the related Prospectus Supplement and prior to the termination of
the offering of such Series of Securities shall be deemed to be incorporated by
reference in this Prospectus as supplemented by the related Prospectus
Supplement from the date of filing of such documents. If so specified in any
such documents, such document shall also be deemed to be incorporated by
reference in the Registration Statement of which this Prospectus forms a part.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
) or in the accompanying Prospectus Supplement) or in any other subsequently
filed document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus and the related Prospectus Supplement.
The Seller will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and the related Prospectus
Supplement is delivered, on the written or oral request of any such person, a
copy of any and all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the President, Structured Asset Mortgage Investments Inc.,
245 Park Avenue, New York, New York 10167. Telephone requests for such copies
should be directed to the President at (212) 272-2000.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund will be
provided to the Securityholders. See "Description of the Securities-Reports to
Securityholders."
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE RELATED PROSPECTUS
SUPPLEMENT WHICH WILL BE PREPARED IN CONNECTION WITH EACH SERIES OF SECURITIES.
Title of Securities............. Mortgage-Backed Certificates (the
"Certificates") and Mortgage-Backed Notes
(the "Notes" and, together with the
Certificates, the "Securities"), issuable
from time to time in Series.
Seller.......................... Structured Asset Mortgage Investments Inc., a
Delaware corporation and a wholly-owned
subsidiary of Bear Stearns Mortgage Capital
Corporation. See "The Seller."
Issuer.......................... The trust created pursuant to the Pooling and
Servicing Agreement (each, a "Pooling and
Servicing Agreement") among the Seller, the
Master Servicer(s), if applicable, and the
Trustee for the related Series or the owner
trust created pursuant to the Deposit Trust
Agreement (each, a "Trust Agreement") among
the Seller, the Master Servicer(s), if
applicable, and the Trustee for the related
Series, as applicable.
Trustee......................... The trustee under the applicable Pooling and
Servicing Agreement, Trust Agreement or
Indenture (as herein defined) and named as
such in the related Prospectus Supplement.
Master Servicer................. One or more entities named as a Master
Servicer in the related Prospectus
Supplement, which may be an affiliate of the
Seller. See "Administration-Certain Matters
Regarding the Master Servicer and the
Seller."
Trust Fund Assets............... A Trust Fund for a Series of Securities will
include the Mortgage Assets consisting of (i)
a pool (a "Mortgage Pool") of Single Family
Loans, Multifamily Loans, Cooperative Loans
or Contracts (collectively, the "Mortgage
Loans"), (ii) Agency Securities or (iii)
Private Mortgage-Backed Securities, together
with payments in respect of such Mortgage
Assets and certain other accounts,
obligations or agreements, such as United
States Treasury securities and other
securities issued by the U.S. Government, any
of its agencies or other issuers established
by federal statute (collectively, "U.S.
Government Securities"), in each case as
specified in the related Prospectus
Supplement. The assets of a Trust Fund will
be purchased by such Trust Fund under the
terms of the related Pooling and Servicing
Agreement or the related Trust Agreement, as
applicable.
A. Single Family, Cooperative
and Multifamily Loans....... Single Family Loans will be secured by
mortgage liens on one-to four-family
residential properties or by other liens
specified in the related Prospectus
Supplement. Cooperative Loans generally will
be secured by security interests in shares
issued by private, nonprofit, cooperative
housing corporations ("Cooperatives") and
in the related proprietary leases or
occupancy agreements granting exclusive
rights to occupy specific dwelling units in
such Cooperatives' buildings. Single Family
Loans and Cooperative Loans may be
conventional loans (I.E., loans that are not
insured or guaranteed by any governmental
agency), insured by the Federal Housing
Authority ("FHA") or partially guaranteed by
the Veterans Administration ("VA") as
specified in the related Prospectus
Supplement. Single Family Loans and
Cooperative Loans will all have individual
principal balances at origination of not less
than $25,000 and not more than $1,000,000,
and original terms to stated maturity of 15
to 40 years, or such other individual
principal balances at origination and/or
original terms to stated maturity as are
specified in the related Prospectus
Supplement.
Multifamily Loans will be secured by mortgage
liens on rental apartment buildings or
projects containing five or more residential
units, including apartment buildings owned by
Cooperatives. Such loans may be conventional
loans or insured by the FHA, as specified in
the related Prospectus Supplement.
Multifamily Loans will all have individual
principal balances at origination of not less
than $25,000 and original terms to stated
maturity of not more than 40 years, or such
other individual principal balances at
origination and/or original terms to stated
maturity as are specified in the related
Prospectus Supplement.
The payment terms of the Mortgage Loans to be
included in a Trust Fund will be described in
the related Prospectus Supplement and may
include any of the following features or
combinations thereof or other features
described in the related Prospectus
Supplement:
(a) Interest may be payable at a fixed rate,
a rate adjustable from time to time in
relation to an index, a rate that is
fixed for a period of time or under
certain circumstances and is followed by
an adjustable rate, a rate that
otherwise varies from time to time, or a
rate that is convertible from an
adjustable rate to a fixed rate. Changes
to an adjustable rate may be subject to
periodic limitations, maximum rates,
minimum rates or a combination of such
limitations. Accrued interest may be
deferred and added to the principal of a
Mortgage Loan for such periods and under
such circumstances as may be specified
in the related Prospectus Supplement.
Mortgage Loans may provide for the
payment of interest at a rate lower than
the specified interest rate on the
Mortgage Loan (the "Mortgage Rate") for
a period of time or for the life of the
Mortgage Loan, and the amount of any
difference may be contributed from funds
supplied by the seller of the Mortgaged
Property or another source ("Buydown
Loans") or may be treated as accrued
interest and added to the principal of
the Mortgage Loan.
(b) Principal may be payable on a level debt
service basis to fully amortize the
Mortgage Loan over its term, may be
calculated on the basis of an assumed
amortization schedule that is
significantly longer than the original
term to maturity or on an interest rate
that is different from the interest rate
on the Mortgage Loan or may not be
amortized during all or a portion of the
original term. Payment of all or a
substantial portion of the principal may
be due on maturity ("balloon payments").
Principal may include interest that has
been deferred and added to the principal
balance of the Mortgage Loan.
(c) Payments of principal and interest may
be fixed for the life of the Mortgage
Loan, may increase over a specified
period of time or may change from period
to period. Mortgage Loans may include
limits on periodic increases or
decreases in the amount of monthly
payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject
to a prepayment fee, which may be fixed
for the life of the Mortgage Loan or may
decline over time, and may be prohibited
for the life of the Mortgage Loan or for
certain periods ("lockout periods").
Certain Mortgage Loans may permit
prepayments after expiration of the
applicable lockout period and may
require the payment of a prepayment fee
in connection with any such subsequent
prepayment. Other Mortgage Loans may
permit prepayments without payment of a
fee unless the prepayment occurs during
specified time periods. The Mortgage
Loans may include due-on-sale clauses
which permit the mortgagee to demand
payment of the entire Mortgage Loan in
connection with the sale or certain
transfers of the related Mortgaged
Property. Other Mortgage Loans may be
assumable by persons meeting the then
applicable underwriting standards of the
Lender.
Certain Mortgage Loans may be originated or
acquired in connection with employee
relocation programs. The real property
constituting security for repayment of a
Mortgage Loan may be located in any one of
the fifty states, the District of Columbia,
Guam, Puerto Rico or any other territory of
the United States. The Mortgage Loans
generally will be covered by standard hazard
insurance policies insuring against losses
due to fire and various other causes. The
Mortgage Loans will be covered by primary
mortgage insurance policies to the extent
provided in the related Prospectus
Supplement. All Mortgage Loans will have been
purchased by the Seller, either directly or
through an affiliate, from Lenders.
B. Contracts.................... Contracts will consist of conditional sales
and installment sales or loan agreements
secured by new or used Manufactured Homes (as
defined herein). Contracts may be
conventional loans, insured by the FHA or
partially guaranteed by the VA, as specified
in the related Prospectus Supplement. Each
Contract will be fully amortizing and will
bear interest at a fixed accrual percentage
rate ("APR") or will amortize on another
basis, and bear interest at another APR, as
specified in the related Prospectus
Supplement. Contracts will all have
individual principal balances at origination
of not less than $10,000 and not more than
$1,000,000 and original terms to stated
maturity of 5 to 30 years, or such other
individual principal balances at origination
and/or original terms to stated maturity as
are specified in the related Prospectus
Supplement.
C. Agency Securities.......... The Agency Securities will consist of (i)
fully modified pass-through mortgage-backed
certificates guaranteed as to timely payment
of principal and interest by the Government
National Mortgage Association ("GNMA
Certificates"), (ii) Guaranteed Mortgage
Pass-Through Certificates issued and
guaranteed as to timely payment of principal
and interest by the Federal National Mortgage
Association ("Fannie Mae Certificates"),
(iii) Mortgage Participation Certificates
issued and guaranteed as to timely payment of
interest and ultimate (but generally not
timely) payment of principal by Freddie Mac
(formerly, the Federal Home Loan Mortgage
Corporation) ("Freddie Mac Certificates"),
(iv) stripped mortgage-backed securities
representing an undivided interest in all or
a part of either the principal distributions
(but not the interest distributions) or the
interest distributions (but not the principal
distributions) or in some specified portion
of the principal and interest distributions
(but not all of such distributions) on
certain GNMA, Fannie Mae, Freddie Mac or
other government agency or
government-sponsored agency certificates and
generally guaranteed to the same extent as
the underlying securities, (v) another type
of guaranteed pass-through certificate issued
or guaranteed by GNMA, Fannie Mae, Freddie
Mac or another government agency or
government-sponsored agency and described in
the related Prospectus Supplement, or (vi) a
combination of such Agency Securities. All
GNMA Certificates will be backed by the full
faith and credit of the United States. No
Fannie Mae or Freddie Mac Certificates will
be backed, directly or indirectly, by the
full faith and credit of the United States.
However, to the extent any Fannie Mae or
Freddie Mac Certificates are backed by GNMA
Certificates, such Fannie Mae or Freddie Mac
Certificates benefit from the backing of the
underlying GNMA Certificates by the full
faith and credit of the United States. The
Agency Securities may consist of pass-through
securities issued under the GNMA I Program,
the GNMA II Program, Freddie Mac's Cash or
Guarantor Program or another program
specified in the related Prospectus
Supplement. The payment characteristics of
the Mortgage Loans underlying the Agency
Securities will be described in the related
Prospectus Supplement.
D. Private Mortgage-Backed
Securities................ Private Mortgage-Backed Securities may
include (i) mortgage participation or
pass-through certificates representing
beneficial interests in certain Mortgage
Loans or (ii) Collateralized Mortgage
Obligations ("CMOs") secured by such Mortgage
Loans. Private Mortgage-Backed Securities may
include stripped mortgage-backed securities
representing an undivided interest in all or
a part of any of the principal distributions
(but not the interest distributions) or the
interest distributions (but not the principal
distributions) or in some specified portion
of the principal and interest distributions
(but not all of such distributions) on
certain mortgage loans. Although individual
Mortgage Loans underlying a Private
Mortgage-Backed Security may be insured or
guaranteed by the United States or an agency
or instrumentality thereof, they need not be,
and the Private Mortgage-Backed Securities
themselves will not be so insured or
guaranteed. See "The Trust Fund-Private
Mortgage-Backed Securities." Payments on the
Private Mortgage-Backed Securities will be
distributed directly to the Trustee as
registered owner of such Private
Mortgage-Backed Securities or as otherwise
specified in the related Prospectus
Supplement. See "The Trust Fund-Private
Mortgage-Backed Securities."
The Prospectus Supplement for a Series will
specify (i) the aggregate approximate
principal amount, if any, and type of any
Private Mortgage-Backed Securities to be
included in the Trust Fund for such Series;
(ii) certain characteristics of the Mortgage
Loans which comprise the underlying assets
for the Private Mortgage-Backed Securities
including to the extent available (A) the
payment features of such Mortgage Loans, (B)
the approximate aggregate principal amount,
if known, of the underlying Mortgage Loans
which are insured or guaranteed by a
governmental entity, (C) the servicing fee or
range of servicing fees with respect to the
Mortgage Loans, (D) the minimum and maximum
stated maturities of the Mortgage Loans at
origination and (E) delinquency experience
with respect to the Mortgage Loans; (iii) the
pass-through or certificate rate or ranges
thereof for the Private Mortgage-Backed
Securities and the method of determination
thereof; (iv) the issuer of the Private
Mortgage-Backed Securities (the "PMBS
Issuer"), the servicer of the Private
Mortgage-Backed Securities (the "PMBS
Servicer") and the trustee of the Private
Mortgage-Backed Securities (the "PMBS
Trustee"); (v) certain characteristics of
credit support, if any, such as
subordination, reserve funds, insurance
policies, letters of credit, financial
guaranty insurance policies or third party
guarantees, relating to the Mortgage Loans
underlying the Private Mortgage-Backed
Securities, or to such Private
Mortgage-Backed Securities themselves; (vi)
the terms on which underlying Mortgage Loans
for such Private Mortgage-Backed Securities,
or such Private Mortgage-Backed Securities
themselves, may, or are required to, be
repurchased prior to stated maturity; and
(vii) the terms on which substitute Mortgage
Loans or substitute Private Mortgage-Backed
Securities may be delivered to replace those
initially deposited with the PMBS Trustee or
the Trustee. See "The Trust Fund." Such
securities will (i) either (a) have been
previously registered under the Securities
Act of 1933, as amended or (b) will at the
time be eligible for sale under Rule 144(k)
under such act; and (ii) will be acquired in
bona fide secondary market transactions not
from an issuer or seller that is an affiliate
of the Seller.
E. U.S. Government
Securities.................. If specified in the related Prospectus
Supplement, United States Treasury securities
and other securities issued by the U.S.
Government, any of its agencies or other
issuers established by federal statute
(collectively, "U.S. Government Securities")
may be included in the Trust Assets. Such
securities will be backed by the full faith
and credit of the United States or will
represent the obligations of the U.S.
Government or such agency or such other
issuer or obligations payable from the
proceeds of U.S. Government Securities, as
specified in the related Prospectus
Supplement.
F. Pre-Funding and
Capitalized Interest
Accounts................... If specified in the related Prospectus
Supplement, a Trust Fund will include one or
more segregated trust accounts (each, a "Pre-
Funding Account") established and maintained
with the Trustee for the related Series. If
so specified, on the closing date for such
Series, a portion of the proceeds of the sale
of the Securities of such Series (such amount
to be equal to the excess of (x) the
principal amounts of Securities being sold
over (y) the principal balance (as of the
related Cut-off Date) of the Trust Assets on
the Closing Date, the "Pre-Funded Amount")
will be deposited in the Pre-Funding Account
and may be used to purchase additional
Mortgage Loans during the period of time, not
to exceed six months, specified in the
related Prospectus Supplement (the "Pre-
Funding Period"). The Mortgage Loans to be so
purchased will be required to have certain
characteristics specified in the related
Prospectus Supplement. Each additional
Mortgage Loan so purchased must conform to
the representations and warranties set forth
in the applicable Agreement. Therefore, the
characteristics of the Trust Assets at the
end of the Pre-Funding Period will conform in
all material respects to the characteristics
of the Trust Assets on the Closing Date. If
any Pre-Funded Amount remains on deposit in
the Pre-Funding Account at the end of the
Pre-Funding Period, such amount will be
applied in the manner specified in the
related Prospectus Supplement to prepay the
Securities of the applicable Series. Pending
the acquisition of additional assets during
the Pre-Funding Period, all amounts in the
Pre-Funding Account will be invested in
Permitted Investments, as defined under
"Credit Enhancement--Reserve and other
Accounts" herein. It is expected that
substantially all of the funds deposited in
the Pre-Funding Account will be used during
the related Pre-Funding Period to purchase
additional assets as described above. If,
however, amounts remain in the Pre-Funding
Account at the end of the Pre-Funding Period,
such amounts will be distributed to the
Securityholders, as described in the related
Prospectus Supplement.
If a Pre-Funding Account is established, one
or more segregated trust accounts (each, a
"Capitalized Interest Account") may be
established and maintained with the Trustee
for the related Series. On the closing date
for such Series, a portion of the proceeds of
the sale of the Securities of such Series
will be deposited in the Capitalized Interest
Account and used to fund the excess, if any,
of (x) the sum of (i) the amount of interest
accrued on the Securities of such Series and
(ii) if specified in the related Prospectus
Supplement, certain fees or expenses during
the Pre-Funding Period such as trustee fees
and credit enhancement fees, over (y) the
amount of interest available therefor from
the Mortgage Assets or other assets in the
Trust Fund. Any amounts on deposit in the
Capitalized Interest Account at the end of
the Pre-Funding Period that are not necessary
for such purposes will be distributed to the
person specified in the related Prospectus
Supplement.
Description of the
Securities................ A Series will include either one or more
classes of Certificates or, if Notes are
issued as part of a Series, one or more
classes of Notes and one or more classes of
Certificates. Each Certificate will represent
a beneficial ownership interest in a trust (a
"Trust Fund") created by the Seller pursuant
to a Pooling and Servicing Agreement or a
Trust Agreement for the related Series. Each
Note will represent a debt obligation of a
Trust Fund created pursuant to an Indenture
for such Notes. The Securities of any Series
may be issued in one or more classes as
specified in the related Prospectus
Supplement. A Series of Securities may
include one or more classes of senior
Securities (collectively, the "Senior
Securities") which receive certain
preferential treatment specified in the
related Prospectus Supplement with respect to
one or more classes of subordinate Securities
(collectively, the "Subordinated
Securities"). Certain Series or classes of
Securities may be covered by U.S. Government
Securities, insurance policies, cash
accounts, letters of credit, financial
guaranty insurance policies, third party
guarantees or other forms of credit
enhancement as described herein and in the
related Prospectus Supplement.
One or more classes of Securities of each
Series (i) may be entitled to receive
distributions allocable only to principal,
only to interest or to any combination
thereof; (ii) may be entitled to receive
distributions only of prepayments of
principal throughout the lives of the
Securities or during specified periods; (iii)
may be subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal, interest
or any combination thereof to one or more
other classes of Securities of such Series
throughout the lives of the Securities or
during specified periods or may be
subordinated with respect to certain losses
or delinquencies; (iv) may be entitled to
receive such distributions only after the
occurrence of events specified in the related
Prospectus Supplement; (v) may be entitled to
receive distributions in accordance with a
schedule or formula or on the basis of
collections from designated portions of the
assets in the related Trust Fund; (vi) as to
Securities entitled to distributions
allocable to interest, may be entitled to
receive interest at a fixed rate or a rate
that is subject to change from time to time;
and (vii) as to Securities entitled to
distributions allocable to interest, may be
entitled to such distributions only after the
occurrence of events specified in the related
Prospectus Supplement and may accrue interest
until such events occur, in each case as
specified in the related Prospectus
Supplement. The timing and amounts of such
distributions may vary among classes, over
time, or otherwise as specified in the
related Prospectus Supplement.
In addition, certain Series may provide for
the issuance of one or more classes of
exchangeable certificates (each an "ES Class"
or "Exchangeable Security") as provided in
the related Prospectus Supplement. The
holders of such ES Classes will be entitled
to exchange all or a portion of such ES
Classes for proportionate interests in other
related classes of Exchangeable Securities.
See "Exchangeable Securities--General."
Further, if so provided in the related
Prospectus Supplement, one or more classes of
Securities (each, a "Callable Class") may be
callable at the option of one or more other
classes of securities (each, a "Call Class").
A Call Class and its related Callable Class
or Classes will be issued pursuant to a
separate trust agreement. A Callable Class
generally will not be called unless the
market value of the assets in the trust fund
for such Callable Class exceeds the
outstanding principal balance of such assets.
If so provided in the related Prospectus
Supplement, after the issuance of the
Callable Class, there may be a specified
"lockout period" during which such Securities
could not be called. It is anticipated that
Call Classes generally will be offered only
on a private basis. See "Description of the
Securities--General."
The related Prospectus Supplement will
specify whether application will be made to
list any Securities on a securities exchange
or to quote the Securities in the automated
quotation system of a registered securities
association.
Distributions on the
Securities................ Distributions on the Securities entitled
thereto will be made monthly, quarterly,
semi-annually or at such other intervals and
on such other Distribution Dates specified in
the related Prospectus Supplement solely out
of the payments received in respect of the
assets of the related Trust Fund or other
assets pledged for the benefit of the
Securities as specified in the related
Prospectus Supplement. The amount allocable
to distributions of principal and interest on
any Distribution Date will be determined as
specified in the related Prospectus
Supplement. All distributions will be made
pro rata to Securityholders of the class
entitled thereto or as otherwise specified in
the related Prospectus Supplement, and the
aggregate original principal balance of the
Securities will equal the aggregate
distributions allocable to principal that
such Securities will be entitled to receive.
If specified in the related Prospectus
Supplement, the Securities will have an
aggregate original principal balance equal to
or less than the aggregate unpaid principal
balance of the Trust Assets (plus amounts
held in a Pre-Funding Account) as of a date
specified in the Prospectus Supplement
related to the creation of the Trust Fund
(the "Cut-off Date") and will bear interest
in the aggregate at a rate (the "Interest
Rate") equal to the interest rate borne by
the underlying Mortgage Loans, Agency
Securities or Private Mortgage-Backed
Securities, net of the aggregate servicing
fees and any other amounts specified in the
related Prospectus Supplement. If specified
in the related Prospectus Supplement, the
aggregate original principal balance of the
Securities and interest rates on the classes
of Securities will be determined based on the
cash flow on the Trust Assets. The Interest
Rate at which interest will be paid to
holders of Securities entitled thereto may be
a fixed rate or a rate that is subject to
change from time to time from the time and
for the periods, in each case as specified in
the related Prospectus Supplement. Any such
rate may be calculated on a loan-by-loan,
weighted average or other basis, in each case
as described in the related Prospectus
Supplement.
Credit Enhancement ........ The assets in a Trust Fund or the Securities
of one or more classes in the related Series
may have the benefit of one or more types of
credit enhancement described in the related
Prospectus Supplement. The protection against
losses afforded by any such credit support
will be limited. Such credit enhancement may
include one or more of the following types:
A. Subordination............... The rights of the holders of the Subordinated
Securities of a Series to receive
distributions with respect to the assets in
the related Trust Fund will be subordinated
to such rights of the holders of the Senior
Securities of the same Series to the extent
described in the related Prospectus
Supplement. This subordination is intended to
enhance the likelihood of regular receipt by
holders of Senior Securities of the full
amount of payments which such holders would
be entitled to receive if there had been no
losses or delinquencies. The protection
afforded to the holders of Senior Securities
of a Series by means of the subordination
feature may be accomplished by (i) the
preferential right of such holders to
receive, prior to any distribution being made
in respect of the related Subordinated
Securities, the amounts of principal and
interest due them on each Distribution Date
out of the funds available for distribution
on such date in the related Securities
Account and, to the extent described in the
related Prospectus Supplement, by the right
of such holders to receive future
distributions from the assets in the related
Trust Fund that would otherwise have been
payable to the Subordinated Securityholders;
(ii) reducing the ownership interest of the
related Subordinated Securities; (iii) a
combination of clauses (i) and (ii) above; or
(iv) as otherwise described in the related
Prospectus Supplement. The protection
afforded to the holders of Senior Securities
of a Series by means of the subordination
feature also may be accomplished by
allocating certain types of losses or
delinquencies to the Subordinated Securities
to the extent described in the related
Prospectus Supplement.
If so specified in the related Prospectus
Supplement, the same class of Securities may
be Senior Securities with respect to certain
types of payments or certain types of losses
or delinquencies and Subordinated Securities
with respect to other types of payments or
types of losses or delinquencies. If so
specified in the related Prospectus
Supplement, subordination may apply only in
the event of certain types of losses not
covered by other forms of credit support,
such as hazard losses not covered by standard
hazard insurance policies or losses due to
the bankruptcy of the borrower. If specified
in the related Prospectus Supplement, a
reserve fund may be established and
maintained by the deposit therein of
distributions allocable to the holders of
Subordinated Securities until a specified
level is reached. The related Prospectus
Supplement will set forth information
concerning the amount of subordination of a
class or classes of Subordinated Securities
in a Series, the circumstances in which such
subordination will be applicable, the manner,
if any, in which the amount of subordination
will decrease over time, the manner of
funding the related reserve fund, if any, and
the conditions under which amounts in any
such reserve fund will be used to make
distributions to holders of Senior Securities
or released from the related Trust Fund.
B. Reserve Accounts.......... One or more Reserve Accounts may be
established and maintained for each Series.
The related Prospectus Supplement will
specify whether or not any such Reserve
Account will be included in the corpus of the
Trust Fund for such Series and will also
specify the manner of funding the related
Reserve Account and the conditions under
which the amounts in any such Reserve Account
will be used to make distributions to holders
of Securities of a particular class or
released from the related Trust Fund.
C. Pool Insurance Policy......... A mortgage pool insurance policy or policies
(the "Pool Insurance Policy") may be obtained
and maintained for each Series pertaining to
Single Family Loans, Cooperative Loans or
Contracts, limited in scope, covering
defaults on the related Single Family Loans,
Cooperative Loans or Contracts in an initial
amount equal to a specified percentage of the
aggregate principal balance of all Single
Family Loans, Cooperative Loans or Contracts
included in the Mortgage Pool as of the
Cut-off Date or such other date as is
specified in the related Prospectus
Supplement.
D. Special Hazard Insurance
Policy....................... In the case of Single Family Loans,
Cooperative Loans or Contracts, certain
physical risks that are not otherwise insured
against by standard hazard insurance policies
may be covered by a special hazard insurance
policy or policies (the "Special Hazard
Insurance Policy"). Each Special Hazard
Insurance Policy generally will be limited in
scope and will cover losses in an initial
amount equal to the greatest of (i) a
specified percentage of the aggregate
principal balance of the Single Family Loans,
Cooperative Loans or Contracts as of the
related Cut-off Date, (ii) twice the unpaid
principal balance as of the related Cut-off
Date of the largest Single Family Loan,
Cooperative Loan or Contract in the related
Mortgage Pool, or (iii) the aggregate
principal balance of Single Family Loans,
Cooperative Loans or Contracts as of the
Cut-off Date secured by property in any
single zip code concentration.
E. Bankruptcy Bond............... A bankruptcy bond or bonds (the "Bankruptcy
Bond") may be obtained covering certain
losses resulting from action which may be
taken by a bankruptcy court in connection
with a Single Family Loan, Cooperative Loan
or Contract. The level of coverage of
each Bankruptcy Bond will be specified in the
related Prospectus Supplement.
F. FHA Insurance and VA
Guarantee.................... All or a portion of the Mortgage Loans in a
Mortgage Pool may be insured by FHA insurance
and all or a portion of the Single Family
Loans or Contracts in a Mortgage Pool may be
partially guaranteed by the VA.
G. Other Arrangements........... Other arrangements as described in the
related Prospectus Supplement including, but
not limited to, one or more U.S. Government
Securities, letters of credit, financial
guaranty insurance policies or third party
guarantees, interest rate or other swap
agreements, caps, collars or floors, may be
used to provide coverage for certain risks of
defaults or losses. These arrangements may be
in addition to or in substitution for any
forms of credit support described in the
Prospectus. Any such arrangement must be
acceptable to each nationally recognized
rating agency that rates the related Series
of Securities (the "Rating Agency").
H. Cross Support................ If specified in the related Prospectus
Supplement, separate groups of assets or
separate Trust Funds may be beneficially
owned by separate classes of the related
Series of Securities or separate groups of
assets or separate Trust Funds may be
available for the payment of principal and
interest on certain classes of Securities. In
any such case, credit support may be provided
by a cross-support feature which requires
that distributions be made with respect to
certain Securities relating to one or more
asset groups or Trust Funds out of funds
received with respect to other asset groups
or Trust Funds prior to distributions to
other Securities relating to such other asset
groups or Trust Funds or that losses be
allocated in such manner as to provide such
cross-support. If specified in the related
Prospectus Supplement, the coverage provided
by one or more forms of credit support may
apply concurrently to two or more separate
Trust Funds, without priority among such
Trust Funds, until the credit support is
exhausted. If specified in the related
Prospectus Supplement, one or more asset
groups or Trust Funds relating to certain
securities could be initially free of
cross-support but later might become subject
to cross-support. If applicable, the related
Prospectus Supplement will identify the asset
groups or Trust Funds to which such credit
support relates and the manner of determining
the amount of the coverage provided thereby
and of the application of such coverage to
the identified asset groups or Trust Funds.
Advances......................... Each Master Servicer and, if applicable, each
mortgage servicing institution that services
a Mortgage Loan in a Mortgage Pool on behalf
of a Master Servicer (a "Sub-Servicer")
generally will be obligated to advance
amounts corresponding to delinquent principal
and interest payments on such Mortgage Loan
until the date on which the related Mortgaged
Property is sold at a foreclosure sale or the
related Mortgage Loan is otherwise
liquidated. Any such obligation to make
advances may be limited to amounts due
holders of Senior Securities of the related
Series, to amounts deemed to be recoverable
from late payments or liquidation proceeds,
for specified periods or any combination
thereof, or as otherwise specified in the
related Prospectus Supplement. See
"Description of the Securities-Advances."
Advances will be reimbursable to the extent
described herein and in the related
Prospectus Supplement.
Optional Termination........ The Seller, a Master Servicer, the holders
of the residual interests in a REMIC, a FASIT
or any other entity specified in the related
Prospectus Supplement may have the option to
effect early retirement of a Series of
Securities through the purchase of the
Mortgage Assets and other assets in the
related Trust Fund under the circumstances
and in the manner described in
"Administration-Termination; Optional
Termination."
Legal Investment............ The related Prospectus Supplement for each
Series of Securities will specify which, if
any, of the classes of Securities offered
will constitute "mortgage-related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") and, as
such, will be legal investments for certain
types of institutional investors to the
extent provided in SMMEA, subject, in any
case, to any other regulations which may
govern investments by such institutional
investors. See "Legal Investment."
Institutions whose investment activities are
subject to legal investment laws and
regulations or to review by certain
regulatory authorities may be subject to
restrictions on investment in the Securities.
Any such institution should consult its own
legal advisors in determining whether and to
what extent there may be restrictions on its
ability to invest in the Securities. See
"Legal Investment" herein.
Federal Income Tax
Consequences................ The income tax consequences of the
purchase, ownership and disposition of the
Securities of each Series will depend on
whether an election is made to treat the
corresponding Trust Fund (or certain assets
of the Trust Fund) as either a REMIC or a
FASIT under the Internal Revenue Code of
1986, as amended (the "Code"), or whether the
Trust Fund will be treated as either a
grantor trust or a partnership for federal
income tax purposes.
REMIC. If an election is to be made to treat
the Trust Fund for a Series of Securities as
a REMIC for federal income tax purposes, the
related Prospectus Supplement will specify
which class or classes thereof will be
designated as regular interests in the REMIC
("REMIC Regular Securities") and which class
of Certificates will be designated as the
residual interest in the REMIC ("REMIC
Residual Certificates").
For federal income tax purposes, REMIC
Regular Securities generally will be treated
as debt obligations of the Trust Fund with
payment terms equivalent to the terms of such
Securities. Holders of REMIC Regular
Securities will be required to report income
with respect to such Securities under an
accrual method, regardless of their normal
tax accounting method. Original issue
discount, if any, on REMIC Regular Securities
will be includible in the income of the
holders thereof as it accrues, in advance of
receipt of the cash attributable thereto,
which rate of accrual will be determined
based on a reasonable assumed prepayment
rate. The REMIC Residual Certificates
generally will not be treated as evidences of
indebtedness for federal income tax purposes,
but instead, as representing rights to the
taxable income or net loss of the REMIC.
Each holder of a REMIC Residual Certificate
will be required to take into account
separately its pro rata portion of the
REMIC's taxable income or loss. Certain
income of a REMIC (referred to as "excess
inclusions") generally may not be offset by
such a holder's net operating loss carryovers
or other deductions, and in the case of a
tax-exempt holder of a REMIC Residual
Certificate will be treated as "unrelated
business taxable income". In certain
situations, particularly in the early years
of a REMIC, holders of a REMIC Residual
Certificate may have taxable income, and
possibly tax liabilities with respect to such
income, in excess of cash distributed to
them. Certain "disqualified organizations (as
defined under "Federal Income Tax
Consequences--Transfers of REMIC Residual
Certificates--Restrictions on Transfer;
Holding by Pass-Through Entities") are
prohibited from acquiring or holding any
beneficial interest in the REMIC Residual
Certificates. In certain cases, a transfer of
a REMIC Residual Certificate will not be
effective for federal income tax purposes.
FASIT. If an election is to be made to treat
the Trust Fund for a Series of Securities as
a FASIT for federal income tax purposes, the
related Prospectus Supplement will specify
which class or classes thereof will be
designated as regular interests in the FASIT
("FASIT Regular Securities"), which class or
classes of FASIT Regular Securities
constitute "High-Yield Interests" and which
class of Certificates will be designated as
the ownership interest in the FASIT ("FASIT
Ownership Certificate").
For federal income tax purposes, FASIT
Regular Securities generally will be treated
as debt obligations of the Trust Fund with
payment terms equivalent to the terms of such
Securities. Holders of FASIT Regular
Securities will be required to report income
with respect to such Securities under an
accrual method, regardless of their normal
tax accounting method. Original issue
discount, if any, on FASIT Regular Securities
will be includible in the income of the
holders thereof as it accrues, in advance of
receipt of the cash attributable thereto,
which rate of accrual will be determined
based on a reasonable assumed prepayment
rate. Holders of High-Yield Interests may not
use net operating losses to offset any
non-FASIT income derived from the High-Yield
Interest, and in certain cases, a transfer of
a High-Yield Interest will not be recognized
for federal income tax purposes. The FASIT
Ownership Certificate generally will not be
treated as an evidence of indebtedness for
federal income tax purposes, but instead, as
representing rights to the taxable income or
net loss of the FASIT. The holder of the
FASIT Ownership Certificate will be required
to take into account all of the income or
loss of the FASIT under an accrual method
regardless of its normal accounting method.
In certain situations, particularly in the
early years of a FASIT, the holder of the
FASIT Ownership Certificate may have taxable
income, and possibly tax liabilities with
respect to such income, in excess of cash
distributed to it. Certain "disqualified
holders" are prohibited from acquiring or
holding the FASIT Ownership Certificate.
GRANTOR TRUST. If a determination is to be
made to treat the Trust Fund for a Series of
Certificates as a grantor trust, the Trust
Fund will be classified as a grantor trust
for federal income tax purposes and not as an
association or taxable mortgage pool taxable
as a corporation. Holders of Certificates
issued by a grantor trust ("Non-Electing
Securities") will be treated for such
purposes, subject to the possible application
of the stripped bond rules, as owners of
undivided interests in the related Trust
Assets and generally will be required to
report as income their pro rata share of the
entire gross income (including amounts paid
as reasonable servicing compensation) from
the Trust Assets and will be entitled,
subject to certain limitations, to deduct
their pro rata share of expenses of the Trust
Fund.
PARTNERSHIPS. If a Prospectus Supplement for
a Series indicates that a Trust Fund is to be
treated as a partnership, assuming that all
the provisions of the applicable Agreement
are complied with, the Trust Fund will not be
treated as an association, taxable mortgage
pool, or a publicly traded partnership
taxable as a corporation. If a Prospectus
Supplement indicates that one or more classes
of Securities of the related Series are to be
treated as indebtedness for federal income
tax purposes, assuming that all of the
provisions of the applicable Agreement are
complied with, the Securities so designated
will be considered indebtedness for federal
income tax purposes. Each holder of a Note,
by the acceptance of a Note of a given
Series, will agree to treat such Note as
indebtedness, and each holder of a
Certificate, by the acceptance of a
Certificate of a given Series, will agree to
treat the related Trust Fund for federal tax
purposes as a partnership in which such
holder is a partner if there is more than one
holder of Certificates for federal income tax
purposes, or to disregard the Trust Fund as
an entity separate from the holder of
Certificates if there is only one such holder
for federal income tax purposes. Alternative
characterizations of such Trust Fund and such
Securities are possible, but would not result
in materially adverse tax consequences to
holders of Securities. See "Federal Income
Tax Consequences."
Generally, gain or loss will be recognized on
a sale of Securities in the amount equal to
the difference between the amount realized
and the seller's tax basis in the Securities
sold. The material federal income tax
consequences for investors associated with
the purchase, ownership and disposition of
the Securities are set forth herein under
"Federal Income Tax Consequences." The
material federal income tax consequences for
investors associated with the purchase,
ownership and disposition of Securities of
any particular Series will be set forth under
the heading "Federal Income Tax Consequences"
in the related Prospectus Supplement. See
"Federal Income Tax Consequences."
ERISA Considerations............ A fiduciary of any employee benefit plan or
other retirement plan or arrangement subject
to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and/or
Section 4975 of the Code should carefully
review with its legal advisors whether the
purchase, holding or disposition of
Securities could give rise to a prohibited
transaction under ERISA or the Code or
subject the assets of the Trust Fund to the
fiduciary investment standards of ERISA. See
"ERISA Considerations."
<PAGE>
RISK FACTORS
LIMITED LIQUIDITY. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Securities of such
Series. The market value of the Securities will fluctuate with changes in
prevailing rates of interest. Consequently, the sale of Securities in any market
that may develop may be at a discount from the Securities' par value or purchase
price. Owners of Securities generally have no right to request redemption of
Securities, and the Securities are subject to redemption only under the limited
circumstances, if any, described in the related Prospectus Supplement. It is not
intended to list any class of Securities on any securities exchange or to quote
the Securities in the automated quotation system of a regulated securities
association. However, if such listing or such quotation is intended with respect
to some or all of the Securities in a Series, relevant information will be
included in the related Prospectus Supplement. If the Securities are not so
listed or quoted, investors may experience more limited liquidity. The
Prospectus Supplement for a Series may indicate that an underwriter specified
therein intends to establish a secondary market in some or all of the Securities
of such Series. However, no underwriter will be obligated to do so.
BOOK-ENTRY SECURITIES. If Securities are issued in a book-entry form,
investors may experience delay in receipt of their payments and/or reports since
payments and reports will initially be made to the book-entry depository or its
nominee. In addition, the issuance of Securities in book-entry form may reduce
the liquidity of such Securities in the secondary trading market since some
investors may be unwilling to purchase Securities for which they cannot receive
physical certificates. See "The Securities--Book-Entry Registration".
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS. The yield to maturity
and weighted average life of the Securities of each series will depend on the
rate and timing of principal payments (including prepayments, liquidations due
to defaults, and repurchases due to conversion of adjustable rate loans to fixed
interest rate loans or breaches of representations and warranties) on the
Mortgage Loans and the price paid by Securityholders. Such yield may be
adversely affected by a higher or lower than anticipated rate of prepayments or
level of losses on the related Mortgage Loans. The yield to maturity on
Securities purchased at a discount to their principal amounts (including any
principal only Securities) will be lower than anticipated if prepayments occur
at a slower than anticipated rate and the yield to maturity on Securities
purchased at a premium to their principal amounts or on interest only
Securities, will be lower than anticipated if prepayments occur at a faster than
anticipated rate. In the case of certain interest only Securities, a faster rate
of prepayments may result in a loss of investment. In addition, the yield to
maturity on certain other types of classes of Securities, including accrual
Securities, Securities with a pass-through rate which fluctuates inversely with
an index or certain other classes in a series including more than one class of
Securities, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Securities. Prepayments are
influenced by a number of factors, including prevailing mortgage market interest
rates, local and regional economic conditions and homeowner mobility. Any losses
allocated to the Securities will have a negative effect on the yield to maturity
of such Securities. See "Yield and Prepayment Considerations" herein.
OPTIONAL TERMINATION MAY ADVERSELY AFFECT YIELD. As described under
"Administration--Termination; Optional Termination", a Trust Fund may be subject
to optional termination. Any such optional termination may adversely affect the
yield to maturity on the related Series of Securities. In addition, if the
Mortgage Assets include properties which have been acquired by the related Trust
Fund through foreclosure or deed-in-lieu of foreclosure, the purchase price paid
to exercise the optional termination may be less than the outstanding principal
balances of the related Series of Securities. In such event, the Holders of one
or more classes of Securities may incur a loss.
SUBORDINATION OF THE SUBORDINATED SECURITIES; EFFECT OF LOSSES ON THE
MORTGAGE ASSETS. The rights of Holders of Subordinated Securities to receive
distributions to which they would otherwise be entitled with respect to the
Mortgage Assets will be subordinated to the rights of the Holders of the Senior
Securities to the extent described in the related Prospectus Supplement. As a
result of the foregoing, investors must be prepared to bear the risk that they
may be subject to delays in payment and may not recover their initial
investments in the Subordinated Securities.
The yields on the Subordinated Securities may be extremely sensitive
to the loss experience of the Mortgage Assets and the timing of any such losses.
If the actual rate and amount of losses experienced by the Mortgage Assets
exceed the rate and amount of such losses assumed by an investor, the yields to
maturity on the Subordinated Securities may be lower than anticipated.
LIMITED OBLIGATIONS. The Securities will not represent an interest in
or obligation of the Seller, a Master Servicer or any of their affiliates. The
only obligations of the foregoing entities with respect to the Securities or any
Mortgage Assets will be the obligations (if any) of the Seller and a Master
Servicer pursuant to certain limited representations and warranties made with
respect to the Mortgage Assets, a Master Servicer's servicing obligations under
the related Pooling and Servicing Agreement (including its limited obligation to
make certain advances) and pursuant to the terms of any Mortgage Assets, and, if
and to the extent expressly described in the related Prospectus Supplement,
certain limited obligations of a Master Servicer in connection with a swap,
yield supplement agreement or purchase obligation. If an affiliate of the Seller
has originated any Mortgage Loan, such affiliate will only have an obligation
with respect to the representations and warranties of the Seller, as described
herein. Neither the Securities nor the underlying Mortgage Assets will be
guaranteed or insured by any governmental agency or instrumentality, or by the
Seller, a Master Servicer or any of their affiliates. Proceeds of the assets
included in the related Trust Fund (including the Mortgage Assets and any form
of credit enhancement) will be the sole source of payments on the Securities,
and there will be no recourse to the Seller, a Master Servicer or any other
entity in the event that such proceeds are insufficient or otherwise unavailable
to make all payments provided for under the Securities.
DECLINING REAL ESTATE MARKET; GEOGRAPHICAL CONCENTRATION. If the
residential real estate market in general or a regional or local area where real
property securing Mortgage Loans constituting or underlying the Mortgage Assets
for a Trust Fund are concentrated should experience an overall decline in
property values, or a significant downturn in economic conditions, rates of
delinquencies, foreclosures and losses could be higher than those then generally
experienced in the mortgage lending industry. See "The Trust Fund--The Mortgage
Loans-General".
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. Credit
enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of the related Series, a Pool Insurance Policy,
a Special Hazard Insurance Policy, Bankruptcy Bond, FHA Insurance, VA
Guarantees, Reserve Accounts, other insurance, guaranties and similar
instruments and agreements, or any combination thereof. See "Credit
Enchancement". Regardless of the credit enhancement provided, the coverage
provided may be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. Furthermore, such credit
enhancement may provide only very limited coverage as to certain types of losses
and may provide no coverage as to certain other types of losses. The Trustee may
be permitted to reduce, terminate or substitute all or a portion of the credit
enhancement for any Series of Securities, if the applicable rating agencies
indicate that the then-current rating thereof will not be adversely affected.
RISKS RELATED TO FINANCIAL INSTRUMENTS. A Trust Fund may include one
or more financial instruments such as interest rate or other swap agreements and
interest rate cap or floor agreements. See "Credit Enchancement". These
financial instruments provide protection against certain types of risks or
provide certain cashflow characteristics for one or more classes of a Series.
The protection or benefit to be provided by any such financial instrument will
be dependent on, among other things, the performance of the provider of such
financial instrument. If such provider were to be unable or unwilling to perform
its obligations under the related financial instrument, the Securityholders of
the applicable class or classes would bear the effects of such non-performance,
including the possibility of a material adverse effect on the yield to maturity,
the market price and liquidity for such class or Series. Even if the provider of
a financial instrument performs its obligations thereunder, a withdrawal or
reduction in a credit rating assigned to such provider may adversely affect the
market price and liquidity of the applicable class or classes of Securities. To
the extent that a financial instrument is intended to provide an approximate or
partial hedge for certain risks or cashflow characteristics, the Securityholders
of the applicable class or classes will bear the risk that such an imperfect
hedge may result in a material adverse effect on the yield to maturity, the
market price and liquidity for such class or classes.
ENVIRONMENTAL CONSIDERATIONS. Real property pledged as security for a
mortgage loan may be subject to certain environmental risks. There are many
federal and state environmental laws concerning hazardous waste and other
substances that may affect the property securing Mortgage Assets. Under certain
federal and state laws, a person who takes a deed in lieu of foreclosure or
purchases a mortgaged property in foreclosure may become liable for remedial
action to remove hazardous waste and other substances from such property. It is
possible that such costs could become a liability of the Trust Fund and reduce
the amounts otherwise distributable to the Securityholders if a Mortgaged
Property securing a Mortgage Loan constituting part of or underlying the
Mortgage Assets became the property of the Trust Fund in certain circumstances
and if the costs of such remediation were incurred. Moreover, certain states by
statute impose a priority lien for any such remediation costs incurred by such
state on such property. In such states, even prior recorded liens are
subordinated to such state liens. In these states, the security interest of the
Trustee in a property that is subject to such a state lien could be adversely
affected. See "Legal Aspects of the Mortgage Loans--Environmental
Considerations".
SECURITY INTERESTS IN MANUFACTURED HOMES MAY BE LOST. The method of
perfecting a security interest in a Manufactured Home depends on the laws of the
state in which the Manufactured Home is located and, in some cases, the facts
and circumstances surrounding the location of the Manufactured Home (for
example, whether the Manufactured Home has become permanently affixed to its
site). If a Manufactured Home is moved from one state to another, steps must be
taken to re-perfect the security interest under the laws of the new state.
Generally the Sub-Servicer would become aware of the need to take such steps
following notice due to the notation of the Lender's lien on the applicable
certificate of title. However, if through fraud or administrative error such
steps were not taken in a timely manner, the perfected status of the lien on the
related Manufactured Home could be lost.
Similarly, if a Manufactured Home were to become or be deemed to be
permanently affixed to its site, additional steps may have to be taken to
maintain the priority and/or perfection of the security interest granted by the
related Contract. Although the borrower will have agreed not to permit the
Manufactured Homes to become or to be deemed to be permanently affixed to the
site, there can be no assurance that the borrower will comply with this
agreement. In such cases, the Sub-Servicer would be unlikely to obtain knowledge
thereof which would permit the Sub-Servicer to take additional steps, if any,
required under applicable law to maintain the priority and/or perfection of the
lien on the Manufactured Home.
THE TRUST FUND
A Trust Fund for a Series of Securities will include the Mortgage
Assets consisting of (A) a Mortgage Pool* comprised of (i) Single Family Loans,
(ii) Multifamily Loans, (iii) Cooperative Loans or (iv) Contracts, (B) Agency
Securities, or (C) Private Mortgage-Backed Securities, in each case, as
specified in the related Prospectus Supplement, together with payments in
respect of such Mortgage Assets and certain other accounts, obligations or
agreements, such as U.S. Government Securities, in each case as specified in the
related Prospectus Supplement.
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* Whenever the terms "Mortgage Pool" and "Securities" are
used in this Prospectus, such terms will be deemed to apply, unless
the context indicates otherwise, to one specific Mortgage Pool and the
Securities representing certain undivided interests in, or the debt
obligations of, a single Trust Fund consisting primarily of the
Mortgage Loans in such Mortgage Pool. Similarly, the term "Interest
Rate" will refer to the Interest Rate borne by the Securities of one
specific Series and the term "Trust Fund" will refer to one specific
Trust Fund.
<PAGE>
The Securities will be entitled to payment only from the assets of the
related Trust Fund and any other assets specified in the related Prospectus
Supplement, but will not be entitled to payments in respect of the assets of any
other trust fund established by the Seller. If specified in the related
Prospectus Supplement, certain Securities in a Series will evidence the entire
beneficial ownership interest in, or the debt obligations of, a trust fund, and,
in turn the assets of such trust fund will consist of a beneficial ownership
interest in another trust fund which will contain the underlying trust assets,
as would be the case, for example, in a Series that includes Exchangeable
Securities. For a further discussion of such a structure, see "Exchangeable
Securities--General".
The Mortgage Assets will be acquired by the Seller, either directly or
through affiliates, from Lenders and conveyed by the Seller to the related Trust
Fund. The Lenders may have originated the Mortgage Assets or acquired the
Mortgage Assets from the originators or other entities. See "The Mortgage
Loans--Underwriting Standards."
As used herein, "Agreement" means, (i) with respect to the
Certificates of a Series, the Pooling and Servicing Agreement or the Trust
Agreement and (ii) with respect to the Notes of a Series, the Indenture or the
Master Servicing Agreement, as the context requires.
The following is a brief description of the Trust Assets expected to
be included in a Trust Fund. If specific information respecting the Trust Assets
is not known at the time the related Series of Securities initially is offered,
more general information of the nature described below will be provided in the
related Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Securities (the "Detailed Description"). A copy of the
Pooling and Servicing Agreement or the Trust Agreement and/or the Indenture, as
applicable, with respect to each Series of Securities will be attached to the
Form 8-K and will be available for inspection at the corporate trust office of
the Trustee specified in the related Prospectus Supplement. A schedule of the
Mortgage Assets relating to such Series will be attached to the Agreement
delivered to the Trustee upon delivery of the Securities.
THE MORTGAGE LOANS-GENERAL
The real property and Manufactured Homes, as the case may be, which
secure repayment of the Mortgage Loans (the "Mortgaged Properties") may be
located in any one of the fifty states or the District of Columbia, Guam, Puerto
Rico or any other territory of the United States. Certain Mortgage Loans may be
conventional loans (I.E., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the related Prospectus Supplement and described below. Mortgage
Loans with certain Loan-to-Value Ratios (as defined herein) or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the related Prospectus
Supplement.
Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly or bi-weekly or as specified in the related Prospectus Supplement. All
of the monthly-pay Mortgage Loans in a Mortgage Pool will have payments due on
the first day of each month or such other day as is specified in the related
Prospectus Supplement. The payment terms of the Mortgage Loans to be included in
a Trust Fund will be described in the related Prospectus Supplement and may
include any of the following features or combination thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an index, a rate that is
fixed for period of time or under certain circumstances and is
followed by an adjustable rate, a rate that otherwise varies from time
to time, or a rate that is convertible from an adjustable rate to a
fixed rate. Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the
principal of a Mortgage Loan for such periods and under such
circumstances as may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the payment of interest at
a rate lower than the Mortgage Rate for a period of time or for the
life of the Mortgage Loan, and the amount of any difference may be
contributed from funds supplied by the seller of the Mortgaged
Property or another source or may be treated as accrued interest added
to the principal of the Mortgage Loan.
(b) Principal may be payable on a level debt service basis
to fully amortize the Mortgage Loan over its term, may be calculated
on the basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate that
is different from the interest rate on the Mortgage Loan or may not be
amortized during all or a portion of the original term. Payment of all
or a substantial portion of the principal may be due on maturity
("balloon" payments). Principal may include interest that has been
deferred and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified
period of time or may change from period to period. Mortgage Loans may
include limits on periodic increases or decreases in the amount of
monthly payments and may include maximum or minimum amounts of monthly
payments. Certain Mortgage Loans, sometimes called graduated payment
mortgage loans, may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred
payment of a portion of the interest due monthly during such period,
and recoup the deferred interest through negative amortization whereby
the difference between the scheduled payment of interest and the
amount of interest actually accrued is added monthly to the
outstanding principal balance. Other Mortgage Loans, sometimes
referred to as growing equity mortgage loans, may provide for periodic
scheduled payment increases for a specified period with the full
amount of such increases being applied to principal. Other Mortgage
Loans, sometimes referred to as reverse mortgages, may provide for
monthly payments to the borrowers with interest and principal payable
when the borrowers move or die. Reverse mortgages typically are made
to older persons who have substantial equity in their homes.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage
Loans may permit prepayments after expiration of the applicable
lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other Mortgage Loans
may permit prepayments without payment of a fee unless the prepayment
occurs during specified time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to demand payment of
the entire Mortgage Loan in connection with the sale or certain
transfers of the related Mortgaged Property. Other Mortgage Loans may
be assumable by persons meeting the then applicable underwriting
standards of the Lender.
Each Prospectus Supplement will contain information, as of the date of
such Prospectus Supplement and to the extent then specifically known to the
Seller, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including, generally (i) the aggregate outstanding principal balance and
the average outstanding principal balance of the Mortgage Loans as of the
applicable Cut-off Date, (ii) the type of property securing the Mortgage Loans
(E.G., one-to four-family houses, vacation and second homes, Manufactured
Homes, multifamily apartments or other real property), (iii) the original terms
to maturity of the Mortgage Loans, (iv) the largest original principal balance
and the smallest original principal balance of any of the Mortgage Loans, (v)
the earliest origination date and latest maturity date of any of the Mortgage
Loans, (vi) the aggregate principal balance of Mortgage Loans having
Loan-to-Value Ratios at origination exceeding 80%, (vii) the Mortgage Rates or
APR's or range of Mortgage Rates or APR's borne by the Mortgage Loans, and
(viii) the geographical distribution of the Mortgage Loans on a state-by-state
basis. If specific information respecting the Mortgage Loans is not known to the
Seller at the time the related Securities are initially offered, more general
information of the nature described above will be provided in the related
Prospectus Supplement and specific information will be set forth in the Detailed
Description.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio, expressed as a percentage, of the then outstanding principal balance of
the Mortgage Loan to the Collateral Value of the related Mortgaged Property. The
"Collateral Value" of a Mortgaged Property, other than with respect to Contracts
and certain Mortgage Loans the proceeds of which were used to refinance an
existing mortgage loan (each, a "Refinance Loan"), generally is the lesser of
(a) the appraised value determined in an appraisal obtained by the originator at
origination of such Mortgage Loan and (b) the sales price for such property. In
the case of Refinance Loans, the Collateral Value of the related Mortgaged
Property generally is the appraised value thereof determined in an appraisal
obtained at the time of refinancing. For purposes of calculating the
Loan-to-Value Ratio of a Contract relating to a new Manufactured Home, the
Collateral Value generally is no greater than the sum of a fixed percentage of
the list price of the unit actually billed by the manufacturer to the dealer
(exclusive of freight to the dealer site) including "accessories" identified in
the invoice (the "Manufacturer's Invoice Price"), plus the actual cost of any
accessories purchased from the dealer, a delivery and set-up allowance,
depending on the size of the unit, and the cost of state and local taxes, filing
fees and up to three years prepaid hazard insurance premiums. The Collateral
Value of a used Manufactured Home generally is the least of the sales price,
appraised value, and National Automobile Dealer's Association book value plus
prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Pool. In the case of
Multifamily Loans, such other factors could include excessive building resulting
in an oversupply of rental housing stock or a decrease in employment reducing
the demand for rental units in an area; federal, state or local regulations and
controls affecting rents; prices of goods and energy; environmental
restrictions; increasing labor and material costs; and the relative
attractiveness to tenants of the Mortgaged Properties. To the extent that such
losses are not covered by credit enhancements, such losses will be borne, at
least in part, by the holders of the Securities of the related Series.
The Seller will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Pooling and Servicing Agreement or, if the Series includes Notes, pursuant to a
Master Servicing Agreement among the Seller, the Master Servicer and the related
Trust Fund (the "Master Servicing Agreement") and will receive a fee for such
services. See "The Mortgage Loans" and "Administration". With respect to
Mortgage Loans serviced by a Master Servicer through a Sub-Servicer, the Master
Servicer will remain liable for its servicing obligations under the applicable
Agreement, as if the Master Servicer alone were servicing such Mortgage Loans.
In general, the Seller with respect to a Series of Securities will
obtain certain representations and warranties from the Lenders or other third
parties and will assign its rights with respect to such representations and
warranties to the Trustee for such Series of Securities. The Seller will have
obligations with respect to a Series only to the extent specified in the related
Prospectus Supplement. See "Administration-Assignment of Mortgage Assets." The
obligations of each Master Servicer with respect to the Mortgage Loans will
consist principally of its contractual servicing obligations under the related
Agreement (including its obligation to enforce the obligations of the
Sub-Servicers, Lenders or other third parties as more fully described herein
under "The Mortgage Loans--Representations by Lenders; Repurchases" and
"Administration--Sub-Servicing by Lenders," "--Assignment of Mortgage Assets")
and its obligation to make certain cash advances in the event of delinquencies
in payments on or with respect to the Mortgage Loans in the amounts described
herein under "Description of the Securities-Advances." The obligations of a
Master Servicer to make advances may be subject to limitations, to the extent
provided herein and in the related Prospectus Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
Single Family Loans generally will consist of mortgage loans, deeds of
trust or participation or other beneficial interests therein, secured by liens
on one- to four-family residential properties. The Single Family Loans also may
include loans or participations therein secured by mortgages or deeds of trust
on condominium units in condominium buildings together with such condominium
unit's appurtenant interest in the common elements of the condominium building.
Cooperative Loans generally will be secured by security interests in or similar
liens on stock, shares or membership certificates issued by Cooperatives and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in such Cooperatives' buildings. Single Family
Loans and Cooperative Loans may be conventional loans (I.E., loans that are not
insured or guaranteed by any governmental agency), insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Single Family Loans and Cooperative Loans will all have individual
principal balances at origination of not less than $25,000 and not more than
$1,000,000, and original terms to stated maturity of 15 to 40 years or such
other individual principal balances at origination and/or original terms to
stated maturity as are specified in the related Prospectus Supplement.
The Mortgaged Properties relating to Single Family Loans will consist
of detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, and certain other dwelling units. Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold generally will exceed the scheduled maturity of the Mortgage
Loan by at least five years. Certain Mortgage Loans may be originated or
acquired in connection with employee relocation programs.
MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by liens on rental
apartment buildings or projects containing five or more residential units. Such
loans may be conventional loans or FHA-insured loans, as specified in the
related Prospectus Supplement. Multifamily Loans generally will have original
terms to stated maturity of not more than 40 years.
Mortgaged Properties which secure Multifamily Loans may include
high-rise, mid-rise and garden apartments. Certain of the Multifamily Loans may
be secured by apartment buildings owned by Cooperatives. The Cooperative owns
all the apartment units in the building and all common areas. The Cooperative is
owned by tenant-stockholders who, through ownership of stock, shares or
membership certificates in the corporation, receive proprietary leases or
occupancy agreements which confer exclusive rights to occupy specific apartments
or units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its mortgage loan, real property taxes,
maintenance expenses and other capital or ordinary expenses. Those payments are
in addition to any payments of principal and interest the tenant-stockholder
must make on any loans to the tenant-stockholder secured by its shares in the
Cooperative. The Cooperative will be directly responsible for building
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. A Cooperative's ability to meet debt service obligations on
a Multifamily Loan, as well as all other operating expenses, will be dependent
in large part on the receipt of maintenance payments from the tenant-
stockholders, as well as any rental income from units or commercial areas the
Cooperative might control. Unanticipated expenditures may in some cases have to
be paid by special assessments on the tenant-stockholders.
CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Each Contract generally will be fully amortizing and will bear
interest at its APR. Contracts will have individual principal balances at
origination of not less than $10,000 and not more than $1,000,000 and original
terms to stated maturity of 5 to 40 years, or such other individual principal
balances at origination and/or original terms to stated maturity as are
specified in the related Prospectus Supplement.
The "Manufactured Homes" securing the Contracts generally will consist
of manufactured homes within the meaning of 42 United States Code, Section
5402(6), which defines a "manufactured home" as "a structure, transportable in
one or more sections, which in the traveling mode, is eight body feet or more in
width or forty body feet or more in length, or, when erected on site, is three
hundred twenty or more square feet, and which is built on a permanent chassis
and designed to be used as a dwelling with or without a permanent foundation
when connected to the required utilities, and includes the plumbing, heating,
air conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of [this]
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust Fund among other things, the date of origination
of the Contracts; the APRs on the Contracts; the Contract Loan-to-Value Ratios;
the minimum and maximum outstanding principal balances as of the Cut-off Date
and the average outstanding principal balance; the outstanding principal
balances of the Contracts included in the related Trust Fund, and the original
maturities of the Contracts and the last maturity date of any Contract.
<PAGE>
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GNMA is a wholly-owned
corporate instrumentality of the United States with the United States Department
of Housing and Urban Development. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgage loans insured by FHA under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or Chapter 37 of Title 38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury in an amount which is at
any time sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
GNMA CERTIFICATES. Each GNMA Certificate held in a Trust Fund (which
may be issued under either the GNMA I Program or the GNMA II Program) will be a
"fully modified pass-through" mortgaged-backed certificate issued and serviced
by a mortgage banking company or other financial concern ("GNMA Issuer")
approved by GNMA or approved by Fannie Mae as a seller-servicer of FHA Loans
and/or VA Loans. The mortgage loans underlying the GNMA Certificates will
consist of FHA Loans and/or VA Loans. Each such mortgage loan is secured by a
one- to four-family residential property or a manufactured home. GNMA will
approve the issuance of each such GNMA Certificate in accordance with a guaranty
agreement (a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to
its Guaranty Agreement, a GNMA Issuer will be required to advance its own funds
in order to make timely payments of all amounts due on each such GNMA
Certificate, even if the payments received by the GNMA Issuer on the FHA Loans
or VA Loans underlying each such GNMA Certificate are less than the amounts due
on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties or manufactured homes and will provide for the payment by
or on behalf of the GNMA Issuer to the registered holder of such GNMA
Certificate of scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loan or VA Loan
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate
as it becomes due, it must promptly notify GNMA and request GNMA to make such
payment. Upon notification and request, GNMA will make such payments directly to
the registered holder of such GNMA Certificate. In the event no payment is made
by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make
such payment, the holder of such GNMA Certificate will have recourse only
against GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must
have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on such GNMA I
Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have
per annum interest rates that vary from each other by up to one percentage
point. The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in
a Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or Buydown Loans. No statistics comparable
to the FHA's prepayment experience on level payment, non-buydown loans are
available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Certificates may be held in book-entry form.
If specified in a related Prospectus Supplement, GNMA Certificates may
be backed by multifamily mortgage loans having the characteristics specified in
such Prospectus Supplement.
The GNMA Certificates included a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. Fannie Mae is a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act (the "Charter Act"). Fannie
Mae was originally established in 1938 as a United States government agency to
provide supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
Fannie Mae provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders, thereby replenishing their funds for
additional lending. Fannie Mae acquires funds to purchase mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding the total amount of funds available for housing. Operating
nationwide, Fannie Mae helps to redistribute mortgage funds from capital-surplus
to capital-short areas.
FANNIE MAE CERTIFICATES. Fannie Mae Certificates are Guaranteed
Mortgage Pass-Through Certificates representing fractional undivided interests
in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan must meet
the applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae Certificates held by a Trust Fund
will consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae Certificate are expected to be between either 8 to
15 years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a Fannie Mae Certificate may have annual
interest rates that vary by as much as two percentage points from each other.
The rate of interest payable on a Fannie Mae Certificate is equal to the lowest
interest rate of any mortgage loan in the related pool, less a specified minimum
annual percentage representing servicing compensation and Fannie Mae's guaranty
fee. Under a regular servicing option (pursuant to which the mortgagee or other
servicers assumes the entire risk of foreclosure losses), the annual interest
rates on the mortgage loans underlying a Fannie Mae Certificate will be between
50 basis points and 250 basis points greater than in its annual pass-through
rate and under a special servicing option (pursuant to which Fannie Mae assumes
the entire risk for foreclosure losses), the annual interest rates on the
mortgage loans underlying a Fannie Mae Certificate will generally be between 55
basis points and 255 basis points greater than the annual Fannie Mae Certificate
pass-through rate. If specified in the related Prospectus Supplement, Fannie Mae
Certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae
Certificate that it will distribute amounts representing such holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by such Fannie Mae Certificate on the
underlying mortgage loans, whether or not received, and such holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not such principal amount is
actually recovered. The obligations of Fannie Mae under its guarantees are
obligations solely of Fannie Mae and are not backed by, nor entitled to, the
full faith and credit of the United States. Although the Secretary of the
Treasury of the United States has discretionary authority to lend Fannie Mae up
to $2.25 billion outstanding at any time, neither the United States nor any
agency thereof is obligated to finance Fannie Mae's operations or to assist
Fannie Mae in any other manner. If Fannie Mae were unable to satisfy its
obligations, distributions to holders of Fannie Mae Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of Fannie Mae Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Fannie Mae Certificates evidencing interests in pools of mortgage
loans formed on or after May 1, 1985 (other than Fannie Mae Certificates backed
by pools containing graduated payment mortgage loans or mortgage loans secured
by multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each Fannie Mae Certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie Mae
Certificate is entered in the books of the Federal Reserve Banks (or registered
on the Fannie Mae Certificate register in the case of fully registered Fannie
Mae Certificates) as of the close of business on the last day of the preceding
month. With respect to Fannie Mae Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
Fannie Mae Certificates, distributions thereon will be made by check.
The Fannie Mae Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FREDDIE MAC. Freddie Mac is a publicly-held United States
government-sponsored enterprise created pursuant to the Federal Home Loan
Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). Freddie Mac was established primarily for the
purpose of increasing the availability of mortgage credit for the financing of
urgently needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of Freddie
Mac currently consists of the purchase of first lien conventional mortgage loans
or participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily Freddie Mac Certificates. Freddie Mac is confined to purchasing, so
far as practicable, mortgage loans that it deems to be of such quality, type and
class as to meet generally the purchase standards imposed by private
institutional mortgage investors.
<PAGE>
FREDDIE MAC CERTIFICATES. Each Freddie Mac Certificate represents an
undivided interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA Loans or VA Loans (a "Freddie Mac Certificate Group").
Freddie Mac Certificates are sold under the terms of a Mortgage Participation
Certificate Agreement. A Freddie Mac Certificate may be issued under either
Freddie Mac's Cash Program or Guarantor Program.
Mortgage loans underlying the Freddie Mac Certificates held by a Trust
Fund will consist of mortgage loans with original terms to maturity of between
10 and 30 years or such other period as provided in the related Prospectus
Supplement. Each such mortgage loan must meet the applicable standards set forth
in the FHLMC Act. A Freddie Mac Certificate group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and/or participations comprising another Freddie Mac Certificate group. Under
the Guarantor Program, any such Freddie Mac Certificate group may include only
whole loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable Certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans in the Freddie Mac Certificate group represented by such Freddie
Mac Certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac Certificate collection by such holder of all
principal on the underlying mortgage loans, without any offset or deduction, to
the extent of such holder's pro rata share thereof, but does not, except if and
to the extent specified in the Prospectus Supplement for a Series of
Certificates, guarantee the timely payment of scheduled principal. Under Freddie
Mac's Gold PC Program, Freddie Mac guarantees the timely payment of principal
based on the difference between the pool factor, published in the month
preceding the month of distribution and the pool factor published in such month
of distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of
Freddie Mac Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac Certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each mortgagor, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
Freddie Mac Certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
nor entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy such obligations, distributions to holders of Freddie Mac
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac Certificates would be affected by delinquent payments and defaults
on such mortgage loans.
Registered holders of Freddie Mac Certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac Certificateholder's
pro rata share of principal payments on the underlying mortgage loans, interest
at the Freddie Mac pass-through rate and any other sums such as prepayment fees,
within 60 days of the date on which such payments are deemed to have been
received by Freddie Mac.
Under Freddie Mac's cash program, there is no limitation on the amount
by which interest rates on the mortgage loans underlying a Freddie Mac
Certificate may exceed the pass-through rate on the Freddie Mac Certificate.
Under such program, Freddie Mac purchases groups of whole mortgage loans from
sellers at specified percentages of their unpaid principal balances, adjusted
for accrued or prepaid interest, which when applied to the interest rate of the
mortgage loans and participations purchased, results in the yield (expressed as
a percentage) required by Freddie Mac. The required yield, which includes a
minimum servicing fee retained by the servicer, is calculated using the
outstanding principal balance. The range of interest rates on the mortgage loans
and participations in a Freddie Mac Certificate group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a Freddie Mac Certificate group based upon their yield to Freddie Mac rather
than on the interest rate on the underlying mortgage loans. Under Freddie Mac's
Guarantor Program, the pass-through rate on a Freddie Mac Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of Freddie Mac's management
and guaranty income as agreed upon between the seller and Freddie Mac.
Freddie Mac Certificates duly presented for registration of ownership
on or before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a Freddie
Mac Certificate will be distributed so as to be received normally by the 15th
day of the second month following the month in which the purchaser became a
registered holder of the Freddie Mac Certificates. Thereafter, such remittance
will be distributed monthly to the registered holder so as to be received
normally by the 15th day of each month. The Federal Reserve Bank of New York
maintains book-entry accounts with respect to Freddie Mac Certificates sold by
Freddie Mac on or after January 2, 1985, and makes payments of principal and
interest each month to the registered holders thereof in accordance with such
holders' instructions.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of
one or more stripped mortgage-backed securities, each as described herein and in
the related Prospectus Supplement. Each such Agency 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 Freddie Mac, Fannie
Mae, GNMA or other government agency or government-sponsored agency
Certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae, GNMA or another government agency or government-
sponsored agency, each as trustee, or by another trustee named in the related
Prospectus Supplement. Freddie Mac, Fannie Mae, GNMA or another government
agency or government-sponsored agency generally will guarantee each stripped
Agency Security to the same extent as such entity guarantees the underlying
securities backing such stripped Agency Security.
OTHER AGENCY SECURITIES. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, Fannie Mae, Freddie Mac or other government
agencies or government-sponsored agencies. The characteristics of any such
mortgage pass-through certificates will be described in such related Prospectus
Supplement. If so specified, a combination of different types of Agency
Securities may be held in a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private Mortgage-Backed Securities may consist of (a)
mortgage pass-through certificates evidencing a direct or indirect undivided
interest in a pool of Mortgage Loans, or (b) collateralized mortgage obligations
secured by Mortgage Loans. Private Mortgage-Backed Securities will have been
issued pursuant to a pooling and servicing agreement (a "PMBS Agreement"). The
Private Mortgage-Backed Securities in a Trust Fund may include a class or
classes of securities that are callable at the option of another class or
classes of securities. The seller/servicer of the underlying Mortgage Loans will
have entered into the PMBS Agreement with the PMBS Trustee under the PMBS
Agreement. The PMBS Trustee or its agent, or a custodian, will possess the
Mortgage Loans underlying such Private Mortgage-Backed Security. Mortgage Loans
underlying a Private Mortgage-Backed Security will be serviced by the PMBS
Servicer directly or by one or more sub-servicers who may be subject to the
supervision of the PMBS Servicer. The PMBS Servicer will be a Fannie Mae or
Freddie Mac approved servicer and, if FHA Loans underlie the Private
Mortgage-Backed Securities, approved by the Department of Housing and Urban
Development ("HUD") as an FHA mortgagee, or such other servicer as specified in
the related Prospectus Supplement.
Such securities will (i) either (a) have been previously registered under the
Securities Act of 1933, as amended, or (b) will at the time be eligible for sale
under Rule 144(k) under such act; and (ii) will be acquired in bona fide
secondary market transactions not from the issuer or its affiliates. The PMBS
Issuer generally will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the related Prospectus Supplement, the PMBS Issuer may be an
affiliate of the Seller. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust or the assignment by it of the
representations and warranties of another entity from which it acquired the
assets. The PMBS Issuer generally will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Mortgage-Backed Securities
issued under the PMBS Agreement. Additionally, although the Mortgage Loans
underlying the Private Mortgage-Backed Securities may be guaranteed by an agency
or instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
UNDERLYING LOANS. The Mortgage Loans underlying the Private
Mortgage-Backed Securities may consist of fixed rate, level payment, fully
amortizing loans or graduated payment mortgage loans, buydown loans, adjustable
rate mortgage loans, or loans having balloon or other special payment features.
Such Mortgage Loans may be secured by single family property, multifamily
property, Manufactured Homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a Cooperative and the
related shares issued by such Cooperative. In general, (i) no Mortgage Loan will
have had a Loan-to-Value Ratio at origination in excess of 95%, (ii) each Single
Family Loan secured by a Mortgaged Property having a Loan-to-Value Ratio in
excess of 80% at origination will be covered by a primary mortgage insurance
policy until the principal balance is reduced to 80%, (iii) each Mortgage Loan
will have had an original term to stated maturity of not less than 5 years and
not more than 40 years, (iv) no Mortgage Loan that was more than 30 days
delinquent more than once in the past 12 months and will not be delinquent as of
the Cut-off Date as to the payment of principal or interest will have been
eligible for inclusion in the assets under the related PMBS Agreement, (v) each
Mortgage Loan (other than a Cooperative Loan) will be required to be covered by
a standard hazard insurance policy (which may be a blanket policy), and (vi)
each Mortgage Loan (other than a Cooperative Loan or a Contract secured by a
Manufactured Home) will be covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Mortgage Loans underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
ADDITIONAL INFORMATION. The related Prospectus Supplement for a Series
for which the Trust Fund includes Private Mortgage-Backed Securities will
specify (i) the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the Mortgage Loans which comprise the underlying assets for
the Private Mortgage-Backed Securities including to the extent available (A) the
payment features of such Mortgage Loans, (B) the approximate aggregate principal
balance, if known, of underlying Mortgage Loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Mortgage Loans, (D) the minimum and maximum stated maturities of
the underlying Mortgage Loans at origination and (E) delinquency experience with
respect to the Mortgage Loans, (iii) the pass-through or certificate rate of the
Private Mortgage-Backed Securities and the method of determination thereof, (iv)
the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS
Trustee for such Private Mortgage-Backed Securities, (v) certain characteristics
of credit support, if any, such as subordination, reserve funds, insurance
policies, letters of credit or guarantees relating to the Mortgage Loans
underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (vi) the terms on which the underlying
Mortgage Loans for such Private Mortgage-Backed Securities, or such Private
Mortgage-Backed Securities themselves, may, or are required to, be purchased
prior to their stated maturity or the stated maturity of the Private
Mortgage-Backed Securities and (vii) the terms on which Mortgage Loans or
Private Mortgage-Backed Securities may be substituted for those originally
deposited with the PMBS Trustee or the Trustee.
U.S. GOVERNMENT SECURITIES
If specified in the related Prospectus Supplement, United States
Treasury securities and other securities issued by the U.S. Government, any of
its agencies or other issuers established by federal statute (collectively,
"U.S. Government Securities") may be included in the Trust Assets. Such
securities will be backed by the full faith and credit of the United States or
will represent the obligations of the U.S. Government or such agency or such
other issuer or obligations payable from the proceeds of U.S. Government
Securities, as specified in the related Prospectus Supplement.
FASITS
Assets may be added to the Trust Fund if it has elected to be treated
as a FASIT for federal income tax purposes under the Code, subject to the
provisions of the Code restricting such additional assets to "permitted assets",
as defined in the Code, and so long as the FASIT does not engage in a
"prohibited transaction" under the Code. See "Federal Income Tax
Consequences--Qualification as a FASIT" and "--FASIT Ownership Certificate--
INCOME FROM PROHIBITED TRANSACTIONS". Subject to the foregoing, it is intended
that, in connection with a particular Trust Fund, assets will be chosen for a
FASIT on the basis of similarity of certain characteristics such as coupon and
market price, as provided in the related Prospectus Supplement. Assets would be
added to a FASIT upon the occurrence of certain events such as prepayment of
existing assets or removal of assets for credit or other reasons, as provided in
the related Prospectus Supplement. Any such addition or removal would be subject
to confirmation from the applicable rating agency or agencies that such actions
would not affect the ratings then assigned to the related Securities.
SUBSTITUTION OF MORTGAGE ASSETS
If so provided in the related Prospectus Supplement, substitution of
Mortgage Assets will be permitted in the event of breaches of representations
and warranties with respect to any original Mortgage Asset or in the event the
documentation with respect to any Mortgage Asset is determined by the Trustee or
other party identified in the related Prospectus Supplement to be incomplete.
The period during which such substitution will be permitted generally will be
indicated in the related Prospectus Supplement. The related Prospectus
Supplement will describe any other conditions upon which Mortgage Assets may be
substituted for Mortgage Assets initially included in the Trust Fund.
USE OF PROCEEDS
The Seller intends to use the net proceeds to be received from the
sale of the Securities of each Series to repay short-term loans incurred to
finance the purchase of the Trust Assets related to such Securities, to acquire
certain of the Trust Assets to be deposited in the related Trust Fund, and/or to
pay other expenses connected with pooling Trust Assets and issuing Securities.
Any amounts remaining after such payments may be used for general corporate
purposes. The Seller expects to sell Securities in Series from time to time.
THE SELLER
Structured Asset Mortgage Investments Inc. (formerly, Bear Stearns
Mortgage Securities Inc.), the Seller, is a Delaware corporation organized on
October 17, 1991. The Seller is engaged in the business of acquiring Mortgage
Assets and selling interests therein or bonds secured thereby. It is a wholly
owned subsidiary of Bear Stearns Mortgage Capital Corporation, a Delaware
corporation, and an affiliate of Bear, Stearns & Co. Inc. The Seller maintains
its principal office at 245 Park Avenue, New York, New York 10167. Its telephone
number is (212) 272-2000.
The Seller does not have, nor is it expected in the future to have,
any significant assets.
THE MORTGAGE LOANS
The Mortgage Loans will have been purchased by the Seller, either
directly or through affiliates, from Lenders. The Mortgage Loans so acquired by
the Seller will have been originated in accordance with the underwriting
criteria specified below under "Underwriting Standards" or such other
underwriting criteria as is specified in the related Prospectus Supplement.
UNDERWRITING STANDARDS
In general, each Lender will represent and warrant that all Mortgage
Loans originated and/or sold by it to the Seller or one of its affiliates will
have been underwritten in accordance with standards consistent with those
utilized by mortgage lenders or manufactured home lenders generally during the
period of origination. As to any Mortgage Loan insured by the FHA or partially
guaranteed by the VA, the Lender will represent that it has complied with
underwriting policies of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a Lender to
evaluate the borrower's credit standing and repayment ability, and the value and
adequacy of the Mortgaged Property as collateral. In general, a prospective
borrower applying for a Single Family Loan or a Cooperative Loan or for
financing secured by a Manufactured Home is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report which summarizes the borrower's credit history with
local merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained from an independent source (typically the
borrower's employer) which verification reports the length of employment with
that organization, the current salary, and whether it is expected that the
borrower will continue such employment in the future. If a prospective borrower
is self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
Underwriting standards which pertain to the creditworthiness of borrowers
seeking Multifamily Loans will be described in the related Prospectus
Supplement.
In determining the adequacy of the Mortgaged Property as collateral,
an appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. With respect to Single Family
Loans, the appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. With respect to Cooperative Loans, the appraisal is based
on the market value of comparable units. With respect to Contracts, the
appraisal is based on recent sales of comparable Manufactured Homes and, when
deemed applicable, a replacement cost analysis based on the cost of a comparable
Manufactured Home. With respect to a Multifamily Loan, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis, was
used. An appraisal employing the income approach to value analyzes a multifamily
project's cashflow, expenses, capitalization and other operational information
in determining the property's value. The market approach to value focuses its
analysis on the prices paid for the purchase of similar properties in the
multifamily project's area, with adjustments made for variations between these
other properties and the multifamily project being appraised. The cost approach
calls for the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued depreciation. In any
case, the value of the property being financed, as indicated by the appraisal,
must be such that it currently supports, and is anticipated to support in the
future, the outstanding loan balance.
In the case of Single Family Loans, Cooperative Loans and Contracts,
once all applicable employment, credit and property information is received, a
determination generally is made as to whether the prospective borrower has
sufficient monthly income available (i) to meet the borrower's monthly
obligations on the proposed mortgage loan (determined on the basis of the
monthly payments due in the year of origination) and other expenses related to
the Mortgaged Property (such as property taxes and hazard insurance) and (ii) to
meet monthly housing expenses and other financial obligations and monthly living
expenses. The underwriting standards applied by Lenders may be varied in
appropriate cases where factors such as low Loan-to-Value Ratios or other
favorable credit factors exist.
A Lender may originate Mortgage Loans under a reduced documentation
program with balances that exceed in size or other respects general agency
criteria. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the Lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain credit underwriting documentation concerning income and employment
verification is waived.
In the case of a Single Family or Multifamily Loan secured by a
leasehold interest in a real property, the title to which is held by a third
party lessor, the Lender will represent and warrant, among other things, that
the remaining term of the lease and any sublease is at least five years longer
than the remaining term of the Mortgage Loan.
Certain of the types of Mortgage Loans which may be included in the
Mortgage Pools are more recently developed and may involve additional
uncertainties not present in traditional types of loans. For example, certain of
such Mortgage Loans may provide for escalating or variable payments by the
mortgagor or obligor. These types of Mortgage Loans are underwritten on the
basis of a judgment that mortgagors or obligors will have the ability to make
monthly payments required initially. In some instances, however, a mortgagor's
or obligor's income may not be sufficient to permit continued loan payments as
such payments increase.
RE-UNDERWRITING. The Seller will acquire Mortgage Loans utilizing
re-underwriting criteria it believes are appropriate depending to some extent on
the Seller's or its affiliates' prior experience with the Lender and the
servicer, as well as the Seller's prior experience with a particular type of
loan or with loans relating to mortgaged properties in a particular geographical
region. A standard approach to re-underwriting will be to compare loan file
information and information that is represented to the Seller on a tape with
respect to a percentage of the Mortgage Loans deemed appropriate by the Seller
in the circumstances. No independent investigation of the creditworthiness of
particular obligors will be undertaken by the Seller.
QUALIFICATIONS OF LENDERS
Each Lender will be required to satisfy the qualifications set forth
herein or as otherwise set forth in the related Prospectus Supplement. Each
Lender must be an institution experienced in originating and servicing Mortgage
Loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those Mortgage Loans. In general, each
Lender must be a seller/servicer approved by either Fannie Mae or Freddie Mac,
and each Lender must be a mortgagee approved by the HUD or an institution the
deposit accounts in which are insured by the Federal Deposit Insurance
Corporation (the "FDIC").
REPRESENTATIONS BY LENDERS; REPURCHASES
Each Lender generally will have made representations and warranties in
respect of the Mortgage Loans sold by such Lender and included in the assets of
the Trust Fund. Such representations and warranties generally include, among
other things: (i) that title insurance (or in the case of Mortgaged Properties
located in areas where such policies are generally not available, an attorney's
certificate of title) in the case of Single Family Loans and Multifamily Loans
and any required hazard insurance policy was in effect on the date of purchase
of the Mortgage Loan from the Lender by or on behalf of the Seller; (ii) that
the Lender had title to each such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims; (iii) that each Mortgage Loan
constituted a valid first or other applicable lien on, or a perfected security
interest with respect to, the Mortgaged Property (subject only to permissible
title insurance exceptions, if applicable, and certain other exceptions
described in the Agreement) and that the Mortgaged Property was free from damage
and was in good repair; (iv) that there were no delinquent tax or assessment
liens against the Mortgaged Property, (v) that no required payment on a Mortgage
Loan was more than a specified number of days delinquent; and (vi) that each
Mortgage Loan was made in compliance with, and is enforceable under, all
applicable state and federal laws and regulations in all material respects.
All of the representations and warranties of a Lender in respect of a
Mortgage Loan will have been made as of the date on which such Lender sold the
Mortgage Loan to the Seller or one of its affiliates or as of such other date as
is specified in the related Prospectus Supplement. A substantial period of time
may have elapsed between such date and the date of initial issuance of the
Series of Securities evidencing an interest in, or secured by, such Mortgage
Loan. Since the representations and warranties of a Lender do not address events
that may occur following the sale of a Mortgage Loan by such Lender, its
repurchase obligation described below will not arise if the relevant event that
would otherwise have given rise to such an obligation with respect to a Mortgage
Loan occurs after the date of sale of such Mortgage Loan by such Lender to the
Seller or its affiliates. If the Master Servicer is also a Lender with respect
to a particular Series, such representations will be in addition to the
representations and warranties, if any, made by the Master Servicer in its
capacity as a Master Servicer.
In general, the Master Servicer or the Trustee, if the Master Servicer
is the Lender, will be required to promptly notify the relevant Lender of any
breach of any representation or warranty made by it in respect of a Mortgage
Loan which materially and adversely affects the interests of the Securityholders
with respect to such Mortgage Loan. If such Lender cannot cure such breach
generally within 60 days after notice from the Master Servicer or the Trustee,
as the case may be, then such Lender generally will be obligated to repurchase
such Mortgage Loan from the Trust Fund at a price (the "Purchase Price") equal
to the unpaid principal balance thereof as of the date of the repurchase plus
accrued interest thereon to the first day of the month following the month of
repurchase at the Mortgage Rate (less any amount payable as related servicing
compensation if the Lender is the Master Servicer) or such other price as may be
described in the related Prospectus Supplement. This repurchase obligation will
constitute the sole remedy available to holders of Securities or the Trustee for
a breach of representation by a Lender. Certain rights of substitution for
defective Mortgage Loans may be provided with respect to a Series in the related
Prospectus Supplement.
Neither the Seller nor the Master Servicer (unless the Master Servicer
is the Lender) will be obligated to purchase a Mortgage Loan if a Lender
defaults on its obligation to do so, and no assurance can be given that Lenders
will carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty of
a Lender may also constitute a breach of a representation made by the Seller or
the Master Servicer, the Master Servicer may have a repurchase obligation as
described below under "Administration-Assignment of Mortgage Assets."
If specified in the related Prospectus Supplement, the Lender may have
acquired the Mortgage Loans from a third party which made certain
representations and warranties to the Lender as of the time of the sale to the
Lender. In lieu of representations and warranties made by the Lender as of the
time of the sale to the Seller, the Lender may assign the representations and
warranties from the third party to the Seller, which will assign them to the
Trustee on behalf of the Securityholders. In such cases, the third party will be
obligated to purchase a Mortgage Loan upon a breach of such representations and
warranties, and the Lender will not be obligated to purchase a Mortgage Loan if
the third party defaults on its obligation to do so.
The Lender and any third party which conveyed the Mortgage Loans to
the Lender may experience financial difficulties and in some instances may enter
into insolvency proceedings. As a consequence, the Lender or such third party
may be unable to perform its repurchase obligations with respect to the Mortgage
Loans. Any arrangements for the assignment of representations and the repurchase
of Mortgage Loans must be acceptable to the Rating Agency rating the related
Securities.
OPTIONAL PURCHASE OF DEFAULTED LOANS
If specified in the related Prospectus Supplement, the Master Servicer
or another entity identified in such Prospectus Supplement may, at its option,
purchase from the Trust Fund any Mortgage Loan which is delinquent in payment by
91 days or more. Any such purchase shall be at such price as may be described in
the related Prospectus Supplement.
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DESCRIPTION OF THE SECURITIES
The Notes of a Series will be issued pursuant to an indenture (the
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Notes. The
Certificates will also be issued in Series pursuant to separate agreements (each
a "Pooling and Servicing Agreement" or a "Trust Agreement") among the Seller,
one or more Master Servicers, if applicable, and the Trustee. The provisions of
each such Agreement will vary depending upon the nature of the Securities to be
issued thereunder and the nature of the related Trust Fund. A form of Pooling
and Servicing Agreement, a form of a Trust Agreement and a form of Indenture are
exhibits to the Registration Statement of which this Prospectus is a part. The
following summaries describe certain provisions which may appear in each such
Agreement. The Prospectus Supplement for a Series of Securities will provide
additional information regarding each such Agreement relating to such Series.
The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
applicable Agreement or Agreements for each Series of Securities and the
applicable Prospectus Supplement. The Seller will provide a copy of the
applicable Agreement or Agreements (without exhibits) relating to any Series
without charge upon written request of a Securityholder of such Series addressed
to Structured Asset Mortgage Investments Inc., 245 Park Avenue, New York, New
York 10167; Attention: Mortgage Department.
GENERAL
The Securities of each Series will be issued in fully registered form,
in the denominations specified in the related Prospectus Supplement, will
evidence specified beneficial ownership interests in, or debt secured by the
assets of, the related Trust Fund and will not be entitled to distributions in
respect of the Trust Assets included in any other Trust Fund established by the
Seller. The Securities will not represent obligations of the Seller or any
affiliate of the Seller. The Mortgage Loans generally will not be insured or
guaranteed by any governmental entity or other person unless the Prospectus
Supplement provides that loans are included that have the benefit of FHA
insurance ("FHA Insurance"), VA guarantees ("VA Guarantees"), primary mortgage
insurance, pool insurance or another form of insurance or guarantees. Each Trust
Fund will consist of, to the extent provided in the Agreement, (i) the Mortgage
Assets, as from time to time are subject to the related Agreement (exclusive of
any amounts specified in the related Prospectus Supplement ("Retained
Interest")), (ii) such assets as from time to time are required to be deposited
in the related Protected Account, Securities Account or any other accounts
established pursuant to the Agreement (collectively, the "Accounts"); (iii)
property which secured a Mortgage Loan and which is acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure, (iv) U.S.
Government Securities; and (v) any Primary Insurance Policies, FHA Insurance, VA
Guarantees, other insurance policies or other forms of credit enhancement
required to be maintained pursuant to the Agreement. If so specified in the
related Prospectus Supplement, a Trust Fund may include one or more of the
following: reinvestment income on payments received on the Trust Assets, a
reserve fund, a mortgage pool insurance policy, a special hazard insurance
policy, a bankruptcy bond, one or more letters of credit, a financial guaranty
insurance policy, third party guarantees or similar instruments, U.S. Government
Securities designed to assure payment of the Securities or other agreements. If
provided in the related Agreement, a securities administrator may be obligated
to perform certain duties in connection with the administration of the
Securities. It is not intended to list any class of Securities on any securities
exchange or to quote the Securities in the automated quotation system of a
regulated securities association. However, if such listing or such quotation is
intended in a Series, relevant information will be included in the related
Prospectus Supplement.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the assets in the related Trust Fund or will evidence the
obligations of the related Trust Fund to make payments from amounts received on
the such assets in the related Trust Fund. A Series of Securities may include
one or more classes that receive certain preferential treatment with respect to
one or more other classes of Securities of such Series. Certain Series or
classes of Securities may he covered by insurance policies or other forms of
credit enhancement, in each case as described herein and in the related
Prospectus Supplement. Distributions on one or more classes of a Series of
Securities may be made prior to one or more other classes, after the occurrence
of specified events, in accordance with a schedule or formula, on the basis of
collections from designated portions of the assets in the related Trust Fund or
on a different basis, in each case, as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among classes
or over time as specified in the related Prospectus Supplement. If so provided
in the related Prospectus Supplement, the Securityholder of a class (a "Call
Class") of securities of a Series may have the right to direct the Trustee to
redeem a related Callable Class or Classes (as defined herein). A "Callable
Class" is a class of Securities of a Series that is redeemable, directly or
indirectly, at the direction of the holder of the related Call Class, as
provided in the related Prospectus Supplement. A Call Class and its related
Callable Class or Classes will be issued pursuant to a separate trust agreement.
A Callable Class generally will not be called unless the market value of the
assets in the trust fund for such Callable Class exceeds the outstanding
principal balance of such assets. If so provided in the related Prospectus
Supplement, after the issuance of the Callable Class, there may be a specified
"lock-out period" during which such Securities could not be called. It is
anticipated that Call Classes generally will be offered only on a private basis.
It is anticipated that Call Classes generally will be offered only on a private
basis.
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on the related Securities will be made by the
Trustee on each Distribution Date (I.E., monthly, quarterly, semi-annually or at
such other intervals and on the dates specified in the related Prospectus
Supplement) in the proportions specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Securities are
registered at the close of business on the dates specified in the related
Prospectus Supplement (each, a "Record Date"). Distributions will be made by
check or money order mailed to the persons entitled thereto at the address
appearing in the register maintained for holders of Securities (the "Securities
Register") or, if specified in the related Prospectus Supplement, in the case of
Securities that are of a certain minimum denomination, upon written request by
the Securityholder, by wire transfer or by such other means as are described
therein; provided, however, that the final distribution in retirement of the
Securities will be made only upon presentation and surrender of the Securities
at the office or agency of the Trustee or other person specified in the notice
to Securityholders of such final distribution.
Except with respect to REMIC Residual Securities and FASIT Ownership
Securities, the Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge. Certain
representations will be required in connection with the transfer of REMIC
Residual Securities and FASIT Ownership Securities, as provided in the related
Prospectus Supplement.
DISTRIBUTIONS ON SECURITIES
GENERAL. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Securities of a particular
Series. The Prospectus Supplement for each Series of Securities will describe
the method to be used in determining the amount of distributions on the
Securities of such Series.
Distributions allocable to principal and interest on the Securities
will be made by the Trustee out of, and only to the extent of, funds in the
related Securities Account, including any funds transferred from any Reserve
Account and funds received as a result of credit enhancement or from other
specified sources. As between Securities of different classes and as between
distributions of interest and principal and, if applicable, between
distributions of prepayments of principal and scheduled payments of principal,
distributions made on any Distribution Date will be applied as specified in the
related Prospectus Supplement. Distributions to any class of Securities will be
made pro rata to all Securityholders of that class or as specified in the
related Prospectus Supplement.
AVAILABLE FUNDS. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds in accordance with
the terms described in the related Prospectus Supplement and as specified in the
Agreement. "Available Funds" for each Distribution Date will generally equal the
amounts on deposit in the related Securities Account on a date specified in the
related Prospectus Supplement, net of related fees and expenses payable by the
related Trust Fund and other amounts to be held therein for distribution on
future Distribution Dates.
DISTRIBUTIONS OF INTEREST. Interest generally will accrue on the
aggregate Current Principal Amount (defined herein) (or, in the case of
Securities entitled only to distributions allocable to interest, the aggregate
notional principal balance) of each class of Securities entitled to interest
from the date, at the interest rate (the "Interest Rate") and for the periods
specified in the related Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on each
class of Securities entitled to interest (other than a class of Securities that
provides for interest that accrues, but is not currently payable, referred to
hereinafter as "Accrual Securities") will be distributable on the Distribution
Dates specified in the related Prospectus Supplement until the aggregate Current
Principal Amount of the Securities of such class has been distributed in full
or, in the case of Securities entitled only to distributions allocable to
interest, until the aggregate notional principal balance of such Securities is
reduced to zero or for the period of time designated in the related Prospectus
Supplement. The original Current Principal Amount of each Security will equal
the aggregate distributions allocable to principal to which such Security is
entitled. Distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated based on the
notional principal balance of such Security or on such other basis as is
specified in the related Prospectus Supplement. The notional principal balance
of a Security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing the
calculation of interest and for certain other purposes.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Current Principal
Amount of such class of Securities on that Distribution Date. Distributions of
interest on each class of Accrual Securities will commence only after the
occurrence of the events specified in the related Prospectus Supplement. Prior
to such time, the beneficial ownership interest of such class of Accrual
Securities in the Trust Fund, as reflected in the aggregate Current Principal
Amount of such class of Accrual Securities, generally will increase on each
Distribution Date by the amount of interest that accrued on such class of
Accrual Securities during the preceding interest accrual period but that was not
required to be distributed to such class on such Distribution Date. Any such
class of Accrual Securities will thereafter accrue interest on its outstanding
Current Principal Amount as so adjusted.
DISTRIBUTIONS OF PRINCIPAL. The aggregate "Current Principal Amount"
of any class of Securities entitled to distributions of principal generally will
be the aggregate original Current Principal Amount of such class of Securities
specified in the related Prospectus Supplement, reduced by all distributions and
losses reported to the holders of such Securities as allocable to principal,
and, in the case of Accrual Securities, generally will be increased by all
interest accrued but not then distributable on such Accrual Securities. The
related Prospectus Supplement will specify the method by which the amount of
principal to be distributed on the Securities on each Distribution Date will be
calculated and the manner in which such amount will be allocated among the
classes of Securities entitled to distributions of principal.
If so provided in the related Prospectus Supplement, one or more
classes of Senior Securities will be entitled to receive all or a
disproportionate percentage of the payments of principal which are received from
borrowers in advance of their scheduled due dates and are not accompanied by
amounts representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or for
the periods specified in the related Prospectus Supplement. Any such allocation
of Principal Prepayments to such class or classes of Securities will have the
effect of accelerating the amortization of such Senior Securities while
increasing the interests evidenced by the Subordinated Securities in the Trust
Fund. Increasing the interests of the Subordinated Securities relative to that
of the Senior Securities is intended to preserve the availability of the
subordination provided by the Subordinated Securities. See "Credit
Enhancement-Subordination."
UNSCHEDULED DISTRIBUTIONS. If specified in the related Prospectus
Supplement, the Securities will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the manner
described below and in the related Prospectus Supplement. If applicable, the
Trustee will be required to make such unscheduled distributions on the day and
in the amount specified in the related Prospectus Supplement if, due to
substantial payments of principal (including Principal Prepayments) on the
Mortgage Assets, low rates then available for reinvestment of such payments or
both, the Trustee or the Master Servicer determines, based on the assumptions
specified in the Agreement, that the amount anticipated to be on deposit in the
Securities Account on the next Distribution Date, together with, if applicable,
any amounts available to be withdrawn from any Reserve Account, may be
insufficient to make required distributions on the Securities on such
Distribution Date. The amount of any such unscheduled distribution that is
allocable to principal generally will not exceed the amount that would otherwise
have been required to be distributed as principal on the Securities on the next
Distribution Date. All unscheduled distributions generally will include interest
at the applicable Interest Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified in
the related Prospectus Supplement.
All distributions allocable to principal in any unscheduled
distribution generally will be made in the same priority and manner as
distributions of principal on the Securities would have been made on the next
Distribution Date, and with respect to Securities of the same class, unscheduled
distributions of principal generally will be made on a pro rata basis. Notice of
any unscheduled distribution will be given by the Trustee prior to the date of
such distribution.
ADVANCES
The Master Servicer or other person designated in the Prospectus
Supplement will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or funds held in any of the
Accounts for future distributions to the holders of such Securities), an amount
equal to the aggregate of payments of principal and interest that were
delinquent on the related Determination Date and were not advanced by any Sub-
Servicer, subject to the Master Servicer's determination that such advances will
be recoverable out of late payments by Mortgagors, Liquidation Proceeds,
Insurance Proceeds or otherwise with respect to the specific Mortgage Loan or,
if required by the applicable Rating Agency, with respect to any of the Mortgage
Loans.
In making advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If advances are
made by the Master Servicer from cash being held for future distribution to
Securityholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Account on
such Distribution Date would be less than the amount required to be available
for distributions to Securityholders on such date. Any Master Servicer funds
advanced will be reimbursable to the Master Servicer out of recoveries on the
specific Mortgage Loans with respect to which such advances were made (E.G.,
late payments made by the related Mortgagor, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Mortgage Loan purchased by a Lender
under the circumstances described herein). Advances by the Master Servicer (and
any advances by a Sub-Servicer) also will be reimbursable to the Master Servicer
(or Sub-Servicer) from cash otherwise distributable to Securityholders
(including the holders of Senior Securities) at such time as the Master Servicer
determines that any such advances previously made are not ultimately recoverable
from the proceeds with respect to the specific Mortgage Loan or, if required by
the applicable Rating Agency, at such time as a loss is realized with respect to
a specific Mortgage Loan. The Master Servicer also will be obligated to make
advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of certain taxes and insurance premiums not
paid by Mortgagors on a timely basis. Funds so advanced are reimbursable to the
Master Servicer to the extent permitted by the Agreement. If specified in the
related Prospectus Supplement, the obligations of the Master Servicer to make
advances may be supported by a cash advance reserve fund, a surety bond or other
arrangement, in each case as described in such Prospectus Supplement.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date
or at such other time as is specified in the related Prospectus Supplement or
Agreement, the Master Servicer or the Trustee will furnish to each
Securityholder of record of the related Series a statement setting forth, to the
extent applicable or material to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and if so specified in the related Prospectus Supplement,
prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any advance by the Master Servicer;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the
amounts distributed to the Senior Securityholders;
(v) the outstanding Current Principal Amount or notional
principal balance of such class after giving effect to the
distribution of principal on such Distribution Date;
(vi) the percentage of principal payments on the Mortgage
Loans, if any, which such class will be entitled to receive on the
following Distribution Date;
(vii) the percentage of Principal Prepayments on the
Mortgage Loans, if any, which such class will be entitled to receive
on the following Distribution Date;
(viii) unless the Interest Rate is a fixed rate, the
Interest Rate applicable to the distribution on the Distribution Date;
(ix) the number and aggregate principal balances of Mortgage
Loans in the related Mortgage Pool delinquent (a) one month, (b) two
months or (c) three or more months, and the number and aggregate
principal balances of Mortgage Loans in foreclosure;
(x) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure, and if such
real estate secured a Multifamily Loan, such additional information as
may be specified in the related Prospectus Supplement; and
(xi) if applicable, the amount remaining in any Reserve
Account or the amount remaining of any other credit support, after
giving effect to the distribution on the Distribution Date.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having a denomination or
interest specified in the related Prospectus Supplement or in the report to
Securityholders. The report to Securityholders for any Series of Securities may
include additional or other information of a similar nature to that specified
above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) for such calendar
year and (b) such other customary information as may be deemed necessary or
desirable for Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION
If specified in the related Prospectus Supplement, one or more classes
of Securities of any Series may be issued in book-entry form. Persons acquiring
beneficial ownership interests in the book-entry Securities ("Owners") will hold
their Securities through the Depository Trust Company ("DTC") in the United
States, or Cedel Bank, societe anonyme, ("Cedel") or the Euroclear System
("Euroclear") (in Europe) if they are participants of any of such systems
("Participants"), or indirectly through organizations which are Participants.
The book-entry Securities will be issued in one or more certificates or notes,
as the case may be, that equal the aggregate principal balance of the applicable
class or classes of Securities and will initially be registered in the name of
Cede & Co., the nominee of DTC. Cedel and Euroclear will hold omnibus positions
on behalf of their Participants through customers' securities accounts in
Cedel's and Euroclear's names on the books of their respective depositaries that
in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank N.A. will act as depositary
for Cedel and The Chase Manhattan Bank will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Except as described below, no person acquiring a
book-entry Security will be entitled to receive a physical certificate or note
representing such Security (a "Definitive Security"). Unless and until
Definitive Securities are issued, it is anticipated that the only
"Securityholder" will be Cede & Co., as nominee of DTC. Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Owner's ownership of a book-entry Security will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such book-entry Security will be recorded on the records of DTC (or
of a DTC Participant that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant and on the records of
Cedel or Euroclear, as appropriate).
Owners will receive all distributions allocable to principal and
interest with respect to the book-entry Securities from the Trustee through DTC
and DTC Participants. While the book-entry Securities are outstanding (except
under the circumstances described below), under the rules, regulations and
procedures creating, governing and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to the Securities and is required to receive
and transmit distributions allocable to principal and interest with respect to
the Securities. Participants and Financial Intermediaries with whom Owners have
accounts with respect to Securities are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Owners. Accordingly, although Owners will not possess physical
certificates or notes, the Rules provide a mechanism by which Owners will
receive distributions and will be able to transfer their beneficial ownership
interests in the Securities.
Owners will not receive or be entitled to receive Definitive
Securities, except under the limited circumstances described below. Unless and
until Definitive Securities are issued, Owners who are not Participants may
transfer ownership of Securities only through Participants and Financial
Intermediaries by instructing such Participants and Financial Intermediaries to
transfer beneficial ownership interests in the Securities by book-entry transfer
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants or Financial Intermediaries.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and Financial Intermediaries will make debits or credits, as the
case may be, on their records on behalf of the selling and purchasing Owners.
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
or Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC is a New York-chartered limited purpose trust company that
performs services for its Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the book-entry
Securities, whether held for its own account or as a nominee for another person.
In general, beneficial ownership of book-entry Securities will be subject to the
Rules as in effect from time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its Participants and facilitates the
clearance and settlement of securities transactions between Cedel Participants
through electronic book-entry changes in accounts of Cedel Participants, thereby
eliminating the need for movement of physical securities. Transactions may be
settled in Cedel in any of 28 currencies, including United States dollars. Cedel
provides to its Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedel interfaces with domestic markets in
several countries. As a professional depository, Cedel is subject to regulation
by the Luxembourg Monetary Institute. Cedel Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Indirect access to Cedel is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its Participants
and to clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for movement of physical securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear provides
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York (the "Euroclear Operator"), under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the book-entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payments to the Owners that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Owners that it
represents.
Under a book-entry format, Owners may experience some delay in their
receipt of payments, since such payments will be forwarded by the Trustee to
Cede & Co. Distributions with respect to Securities held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
DTC Participants that in turn can only act on behalf of Financial
Intermediaries, the ability of an Owner to pledge book-entry Securities to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such book-entry Securities, may be limited due to the lack
of physical certificates or notes for such book-entry Securities. In addition,
issuance of the book-entry Securities in book-entry form may reduce the
liquidity of such Securities in the secondary market since certain potential
investors may be unwilling to purchase Securities for which they cannot obtain
physical certificates or notes.
Monthly and annual reports on the applicable Trust Fund will be
provided to Cede & Co., as nominee of DTC, and may be made available by Cede &
Co. to Owners upon request, in accordance with the Rules, and to the DTC
Participants to whose DTC accounts the book-entry Securities of such Owners are
credited directly or are credited indirectly through Financial Intermediares.
DTC has advised the Trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the book-entry Securities under the Agreement only at the direction
of one or more DTC Participants to whose DTC accounts the book-entry Securities
are credited, to the extent that such actions are taken on behalf of such
Participants whose holdings include such book-entry Securities. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a holder under the Agreement on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Securities which conflict with actions taken
with respect to other Securities.
Definitive Securities will be issued to Owners only upon the events
specified in the related Agreement. Such events may include the following: (i)
the Seller advises the Trustee in writing that DTC is no longer willing or able
to properly discharge its responsibilities as depository with respect to the
Securities, and the Trustee or the Seller is unable to locate a qualified
successor, (ii) the Seller, at its option, elects to terminate the book-entry
system through DTC, or (iii) after the occurrence of an Event of Default
(defined herein), Securityholders representing not less than 50% of the
aggregate Current Principal Amount of the applicable Securities advise the
Trustee and DTC through Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interest of the Securityholders. Upon the occurrence of any of the events
specified in the related Agreement, DTC will be required to notify all
Participants of the availability through DTC of Definitive Securities. Upon
surrender by DTC of the certificates or notes representing the Securities and
instruction for re-registration, the Trustee will issue the Securities in the
form of Definitive Securities, and thereafter the Trustee will recognize the
holders of such Definitive Securities as Securityholders. Thereafter, payments
of principal of and interest on the Certificates will be made by the Trustee
directly to Securityholders in accordance with the procedures set forth herein
and in the Agreement. The final distribution of any Security (whether Definitive
Securities or Securities registered in the name of Cede & Co.), however, will be
made only upon presentation and surrender of such Securities on the final
Distribution Date at such office or agency as is specified in the notice of
final payment to Securityholders.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
None of the Seller, the Master Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry Securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
<PAGE>
EXCHANGEABLE SECURITIES
GENERAL
Certain Series will provide for the issuance of one or more classes of
Exchangeable Securities, as set forth in the relevant Prospectus Supplement. In
any such Series, the holders of one or more of the specified classes of
Exchangeable Securities will be entitled, upon notice and payment to the Trustee
of an administrative fee, to exchange all or a portion of such classes for
proportionate interests in one or more of the other specified classes of
Exchangeable Securities. The classes of Exchangeable Securities that are
exchangeable for one another will be referred to as being "related" to one
another, and related classes of Exchangeable Securities will be referred to as
"Combinations". The Combinations for the Exchangeable Securities in a Series, if
any, will be set forth in the Prospectus Supplement for the Series.
In each Series that includes Exchangeable Securities, all of the
classes of Securities that are shown on the cover page of the related Prospectus
Supplement will be issued, and those classes that are to be the basis for the
exchange arrangements will be deposited in a separate trust fund (an
"Exchangeable Security Trust Fund") established pursuant to a trust agreement
between the Seller and a trustee. The Trustee may serve as such trustee. The
Exchangeable Security Trust Fund initially will issue classes of Exchangeable
Securities that are identical in all respects to the classes of Securities
deposited in such trust fund. At any time after their issuance, including
immediately after such issuance, these classes of Exchangeable Securities may be
exchanged, in whole or in part, for other related classes of Exchangeable
Securities that are part of the same Combination, as specified in the related
Prospectus Supplement. When an exchange is effected, the Exchangeable Security
Trust Fund will cancel the relevant portion or portions of the class or classes
of Exchangeable Securities that are being exchanged and will issue the
corresponding portion or portions of the class or classes of other related
Exchangeable Securities into which such class or classes of securities are
exchangeable. Exchangeable Securities received in an exchange may subsequently
be exchanged for other Exchangeable Securities that are part of the same
Combination. This process may be repeated again and again. Each Exchangeable
Security issued by an Exchangeable Security Trust Fund will represent a
beneficial ownership interest in the class or classes of Securities deposited in
such trust fund.
In general, the descriptions in this Prospectus of classes of
Securities of a Series also apply to the ES Classes of that Series, except where
the context requires otherwise. For example, the ES Classes of a Series are
entitled to receive payments of principal and/or interest, are issued in
book-entry form or as Definitive Securities to Securityholders in prescribed
denominations, may be provided with credit enhancements, and are subject to
yield and prepayment considerations, in the same manner and to the same extent
as are the classes of Securities of such Series. Similarly, the discussions
under "ERISA Considerations" and "Legal Investment" apply to Exchangeable
Securities as well as Securities.
EXCHANGES
The ability of a holder of a class or classes of Exchangeable
Securities to exchange such class or classes for another related class or
classes of Exchangeable Securities within the same Combination will be subject
to three basic constraints, as follows:
* The aggregate principal amount (rounded to whole dollars) of
the Exchangeable Securities received in the exchange,
immediately after the exchange, must equal that of the
Exchangeable Securities surrendered for exchange immediately
before the exchange (for this purpose, the principal amount
of any interest only class will always equal $0).
* The aggregate amount of annual interest (rounded to whole
dollars) (the "Annual Interest Amount") payable with respect
to the Exchangeable Securities received in the exchange must
equal that of the Exchangeable Securities surrendered for
exchange.
* Such classes must be exchanged in the applicable exchange
proportions, if any, shown in the related Prospectus
Supplement, which, as described below, are based at all
times on the original principal amounts (or original
notional principal amounts, if applicable) of such classes.
<PAGE>
Within any particular Series, one or more types of Combinations may
exist. For example, a class of Exchangeable Securities with an Interest Rate
that varies directly with changes in an index (a "Floating Rate Class") and a
class of Exchangeable Securities with an Interest Rate that varies inversely
with changes in an index (an "Inverse Floating Rate Class") may be exchangeable
for a class of Exchangeable Securities with a fixed Interest Rate. Under another
Combination, a class of Exchangeable Securities that is a principal only class
and a class of Exchangeable Securities that is an interest only class may be
exchangeable for a class of Exchangeable Securities that pays both principal and
interest. Further, a class of Exchangeable Securities that accretes all of its
interest for a period (such accreted interest being added to the principal of
such class) (an "Accrual Class") and a class of Exchangeable Securities that
receives principal payments from such accretions on the Accrual Class may be
exchangeable for a class of Exchangeable Securities that receives payments of
principal continuously from the first Distribution Date on which it receives
principal until it is retired. Under another Combination, a class of
Exchangeable Securities that is designed to receive principal payments in
accordance with a predetermined schedule derived by assuming two constant
prepayment rates for the underlying Mortgage Loans ( a "Planned Amortization
Class") and a class of Exchangeable Securities that receives principal payments
on any Distribution Date only if scheduled payments have been made on the
Planned Amortization Class may be exchangeable for a class of Exchangeable
Securities that receives payments of principal continuously from the first
Distribution Date on which it receives principal until it is retired and that
also receives a coupon. The foregoing examples describe only some of the types
of Combinations that are possible.
Set forth below are additional examples that illustrate in simple
mathematical terms how certain possible Combinations might operate. The first
example shows a Combination in which Exchangeable Securities of a principal only
class and Exchangeable Securities of an interest bearing class are exchangeable
for Exchangeable Securities of a class that has the aggregate characteristics of
the two original classes of Exchangeable Securities:
<TABLE>
<CAPTION>
MAXIMUM
ORIGINAL ORIGINAL
PRINCIPAL INTEREST PRINCIPAL INTEREST
CLASS AMOUNT RATES CLASS AMOUNT RATE
<S> <C> <C> <C> <C> <C>
ES-1 $20,000,000 10% ES-2 $40,000,000 5%
ES-P* 20,000,000 0%
- --------------
* Class ES-P is a principal only class and will receive no interest.
</TABLE>
The following example illustrates a Combination of a Floating Rate
Exchangeable Security and an Inverse Floating Rate Exchangeable Security which
are exchangeable for a single class of Exchangeable Securities with a fixed
interest rate:
<TABLE>
<CAPTION>
MAXIMUM
ORIGINAL ORIGINAL
PRINCIPAL INTEREST PRINCIPAL INTEREST
CLASS AMOUNT RATES CLASS AMOUNT RATE
<S> <C> <C> <C> <C> <C>
ES-3 $9,333,330 LIBOR+ 0.75% ES-5 $11,333,330 7%
ES-4 2,000,000 36.16666 -
(LIBOR x
4.666667)
</TABLE>
In the following Combination, a Exchangeable Security that pays both
principal and interest is exchangeable for two Exchangeable Securities, one of
which pays only interest and the other pays only principal:
<TABLE>
<CAPTION>
MAXIMUM ORIGINAL
ORIGINAL PRINCIPAL OR
PRINCIPAL INTEREST NOTIONAL PRINCIPAL INTEREST
CLASS AMOUNT RATE CLASS AMOUNT RATES
<S> <C> <C> <C> <C> <C>
ES-5 $20,000,000 10% ES-P* $20,000,000 0%
ES-X** 20,000,000 10%
(notional)***
- --------------
* Class ES-P is a principal only class and will receive no interest.
** Class ES-X is an interest only class and will receive no principal.
*** Notional principal amount of ES-X Class being exchanged equals
principal amount of ES-P Class being exchanged.
</TABLE>
In some Series, a Combination may include a number of classes of
Exchangeable Securities that are exchangeable for one another and that will
enable a holder of one of the classes of Exchangeable Securities to exchange it
for another class of Exchangeable Securities with a higher or lower coupon. As
discussed below, any such exchange also will require the issuance of a third
class of Exchangeable Securities that will pay only principal or interest,
respectively. The following table illustrates such a Combination:
<TABLE>
<CAPTION>
ORIGINAL MAXIMUM ORIGINAL
PRINCIPAL INTEREST PRINCIPAL OR NOTIONAL INTEREST
CLASS AMOUNT RATE CLASS PRINCIPAL AMOUNT RATES
<S> <C> <C> <C> <C> <C>
ES-6 $20,000,000 7.00% ES-X* $20,000,000 7.00%
(notional)
ES-7 20,000,000 6.00
ES-8 20,000,000 6.25
ES-9 20,000,000 6.50
ES-10 20,000,000 6.75
ES-11 19,310,344 7.25
ES-12 18,666,666 7.50
ES-13 18,064,516 7.75
ES-14 17,500,000 8.00
ES-P** 20,000,000 0.00
- --------------
* Class ES-X is an interest only class and will receive no principal.
** Class ES-P is a principal only class and will receive no interest.
</TABLE>
The foregoing table shows the maximum amount of each other ES Class
that can be created from the related Class ES-6 Exchangeable Security. Such
amounts could not exist concurrently, as any combination is limited to the
amount of principal and interest distributable on the related Exchangeable
Security to be exchanged. One method of calculating the maximum amount that can
be created in a specific combination is to determine the Annual Interest Amount
applicable to the Exchangeable Security to be exchanged, and divide such
interest amount by the coupon of the desired Exchangeable Security. The
resulting principal amount can in no case be greater than the principal amount
of Exchangeable Securities to be exchanged. For example, using the foregoing
table, if Class ES-12 is desired, the maximum original principal amount of the
Class ES-12 Exchangeable Securities that could be created would be $18,666,666,
an amount arrived at by dividing the Annual Interest Amount of the Class ES-6
Securities ($1,400,000) by the Interest Rate of the Class ES-12 Exchangeable
Securities (7.50%). Since all of the available Annual Interest Amount with
respect to the Class ES-6 Exchangeable Securities would be used to create the
Class ES-12 Exchangeable Securities, principal only Class ES-P Exchangeable
Securities would be created to receive the remainder of the Class ES-6 principal
in the amount of $1,333,334 (calculated by subtracting the Class ES-12
Exchangeable Securities original principal amount from the Class ES-6
Exchangeable Securities original principal amount).
Similarly, if Class ES-9 Exchangeable Securities are desired, dividing
the Annual Interest Amount of the Class ES-6 Exchangeable Securities
($1,400,000) by the Interest Rate of the Class ES-9 Exchangeable Securities
(6.50%) would indicate an original principal amount of $21,538,461. However,
since the Class ES-6 Exchangeable Securities have a principal balance of
$20,000,000, only $20,000,000 of the Class ES-9 Exchangeable Securities could be
created. The Annual Interest Amount applicable to the Class ES-9 Exchangeable
Securities would be $20,000,000 multiplied by 6.50% or $1,300,000. Since the
Annual Interest Amount of the Class ES-6 Exchangeable Securities is $1,400,000,
the interest only Class ES-X Exchangeable Securities would be created to receive
the remaining $100,000 of interest. The notional amount of such securities would
be calculated by dividing the Annual Interest Amount ($100,000) by the Interest
Rate applicable to Class ES-X Exchangeable Securities (7.00%) to determine the
notional amount ($1,428,571).
Under the terms of this Combination, the Class ES-9 Exchangeable
Securities described in the preceding paragraph might also be exchangeable for
the Class ES-14 Exchangeable Securities. If the Annual Interest Amount of the
Class ES-9 Exchangeable Securities ($1,300,000) is divided by the Interest Rate
on the Class ES-14 Exchangeable Securities (8.00%), the maximum original
principal amount of the Class ES-14 Exchangeable Securities that can be created
is $16,250,000. Since all of the available Annual Interest Amount with respect
to the Class ES-9 Exchangeable Securities would be used to create the Class
ES-14 Exchangeable Securities, principal only Class ES-P Exchangeable Securities
would be created to receive the remainder of the Class ES-9 principal in the
amount of $3,750,000 (calculated by subtracting the Class ES-14 Exchangeable
Securities original principal amount from the Class ES-9 Exchangeable Securities
original principal amount).
The foregoing examples set forth various combinations of Exchangeable
Securities which differ in interest characteristics (i.e., interest only
classes, principal only classes and classes which have principal amounts and
bear interest). In certain Series, a Securityholder may also be able to exchange
its Exchangeable Securities for other Exchangeable Securities that have
different principal payment characteristics. For example, an exchange of two or
more classes of Exchangeable Securities for a single class of Exchangeable
Securities may result in an Exchangeable Security with the aggregate principal
payment characteristics of the multiple classes of Exchangeable Securities for
which it was exchanged. In addition, in certain Series, Exchangeable Securities
may be exchangeable for other Exchangeable Securities with different credit
characteristics. For example, a class that is senior in priority of payment may
be combined with a subordinated class, to create a new class with the aggregate
credit characteristics of the two classes that were combined.
At any given time, a Securityholder's ability to exchange Exchangeable
Securities for other Exchangeable Securities will be limited by a number of
factors. A Securityholder must, at the time of the proposed exchange, own the
class or classes which are permitted to be exchanged in the proportions
necessary in order to effect the desired exchange. A Securityholder that does
not own such class or classes or the necessary amounts of such class or classes
may not be able to obtain the desired class or classes of Exchangeable
Securities. The Securityholder of a needed class may refuse or be unable to sell
at a reasonable price or at any price, or certain classes may have been
purchased and placed into other financial structures. ERISA or other transfer
restrictions may apply to certain of the Exchangeable Securities in a
combination, but not to others. In addition, principal payments and prepayments
will, over time, diminish the amounts available for exchange.
<PAGE>
PROCEDURES AND EXCHANGE PROPORTIONS
A Securityholder proposing to effectuate an exchange must notify the
Trustee or follow other procedures as described in the related Prospectus
Supplement. Such notice must be given in writing or by telefax not later than
five business days before the proposed exchange date (which date, subject to the
Trustee's approval, can be any business day other than the first or last
business day of the month) or as otherwise specified in the related Prospectus
Supplement. The notice must include the outstanding principal (or notional
principal) amount of both the securities to be exchanged and the securities to
be received, and the proposed exchange date. Promptly after the Securityholder
has given the required notice, the Trustee will provide instructions for
delivering the securities and the payment of the administrative fee to the
Trustee by wire transfer. A Securityholder's notice becomes irrevocable on the
second business day before the proposed exchange date or as otherwise specified
in the related Prospectus Supplement.
An administrative fee will be payable to the Trustee in connection
with each exchange as specified in the related Prospectus Supplement. Any
exchanges will be subject to the rules, regulations and procedures applicable to
DTC's book-entry securities, in the case of ES Classes issued in book-entry
form.
Where exchange proportions are shown in the related Prospectus
Supplement for classes of Exchangeable Securities, the Issuer will follow the
convention of basing such proportions on the original, rather than on the
outstanding, principal or notional principal amounts of such classes. If such
classes receive principal payments pro rata with each other, the exchange
proportions also will apply to their outstanding principal amounts. If such
classes do not receive principal payments pro rata with each other, an investor
can calculate current exchange proportions for such classes, based on their
outstanding principal amounts, by (i) multiplying the exchange proportion shown
in the related Prospectus Supplement for each such class by its current Class
Factor (as defined below) and (ii) dividing each resulting percentage by the sum
of such percentages. The Trustee will include the Class Factor for each class of
outstanding Exchangeable Securities having a principal amount in the statements
it furnishes to Securityholders in connection with each Distribution Date. The
current Class Factor also will be available to Securityholders upon request from
the Trustee or the Seller as specified in the related Prospectus Supplement. The
"Class Factor" for any month will be a truncated seven-digit decimal which, when
multiplied by the original principal amount of that class, will equal its
remaining principal amount, after giving effect to any payment of (or addition
to) principal to be made on the Distribution Date in the following month. A
Class Factor for each interest only class having a notional principal amount
will be included in the statements the Trustee furnishes to Securityholders in
connection with each Distribution Date and also will be available to
Securityholders upon request from the Trustee or the Seller as specified in the
related Prospectus Supplement. Such a Class Factor will reflect the remaining
notional principal amount of the interest only class in an analogous manner.
The first payment on an Exchangeable Security received in an exchange
transaction will be made on the Distribution Date in the month following the
month of the exchange or as specified in the related Prospectus Supplement. Such
payment will be made to the Securityholder of record as of the applicable record
date.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the assets in the related Trust
Fund. Credit enhancement may be in the form of (i) the subordination of one or
more classes of the Securities of such Series, (ii) the use of a Pool Insurance
Policy, Special Hazard Insurance Policy, Bankruptcy Bond, FHA Insurance, VA
Guarantees, Reserve Accounts, a letter of credit, a limited financial guaranty
insurance policy, other third party guarantees, interest rate or other swap
agreements, caps, collars or floors, another method of credit enhancement
described in the related Prospectus Supplement, or the use of a cross-support
feature, or (iii) any combination of the foregoing. In general, any credit
enhancement will not provide protection against all risks of loss and generally
will not guarantee repayment of the entire principal balance of the Securities
and interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, holders of one
or more classes of Securities will bear their allocable share of deficiencies.
If a form of credit enhancement applies to several classes of Securities, and if
principal payments equal to the Current Principal Amounts of certain classes
will be distributed prior to such distributions to other classes, the classes
which receive such distributions at a later time are more likely to bear any
losses which exceed the amount covered by credit enhancement. Coverage under any
credit enhancement generally may be canceled or reduced by the Master Servicer
or the Seller if such cancellation or reduction would not adversely affect the
rating or ratings of the related Securities.
SUBORDINATION
If so specified in the related Prospectus Supplement, distributions in
respect of scheduled principal, Principal Prepayments, interest or any
combination thereof that otherwise would have been payable to one or more
classes of Subordinated Securities of a Series will instead be payable to
holders of one or more classes of Senior Securities under the circumstances and
to the extent specified in the related Prospectus Supplement. If specified in
the related Prospectus Supplement, delays in receipt of scheduled payments on
the Mortgage Loans and losses on defaulted Mortgage Loans will be borne first by
the various classes of Subordinated Securities and thereafter by the various
classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in the related Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Mortgage Loans over the
lives of the Securities or at any time, the aggregate losses in respect of
defaulted Mortgage Loans which must be borne by the Subordinated Securities by
virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Securityholders that will be distributable to
Senior Securityholders on any Distribution Date may be limited as specified in
the related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Mortgage Loans or aggregate losses in respect of such
Mortgage Loans were to exceed the total amounts payable and available for
distribution to holders of Subordinated Securities or, if applicable, were to
exceed the specified maximum amount, holders of Senior Securities would
experience losses on such Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee. If so specified in the related Prospectus Supplement, such deposits may
be made on each Distribution Date, on each Distribution Date for specified
periods or until the balance in the Reserve Account has reached a specified
amount and, following payments from the Reserve Account to holders of Senior
Securities or otherwise, thereafter to the extent necessary to restore the
balance in the Reserve Account to required levels, in each case as specified in
the related Prospectus Supplement. If so specified in the related Prospectus
Supplement, amounts on deposit in the Reserve Account may be released to the
holders of the class of Securities specified in the related Prospectus
Supplement at the times and under the circumstances specified in the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, the same class
of Securities may be Senior Securities with respect to certain types of payments
or certain types of losses or delinquencies and Subordinated Securities with
respect to other types of payment or types of losses or delinquencies. If
specified in the related Prospectus Supplement, various classes of Senior
Securities and Subordinated Securities may themselves be subordinate in their
right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
<PAGE>
POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to a Mortgage Pool
of Single Family Loans or Cooperative Loans, a separate Pool Insurance Policy
will be obtained for the Mortgage Pool and issued by the insurer (the "Pool
Insurer") named in such related Prospectus Supplement. Each Pool Insurance
Policy will, subject to the limitations described below, cover loss by reason of
default in payment on Single Family Loans or Cooperative Loans in the Mortgage
Pool in an amount specified in such Prospectus Supplement. As more fully
described below, the Master Servicer will present claims thereunder to the Pool
Insurer on behalf of itself, the Trustee and the holders of the Securities. The
Mortgage Pool Insurance Policies, however, are not blanket policies against
loss, since claims thereunder may only be made respecting particular defaulted
Mortgage Loans and only upon satisfaction of certain conditions precedent
described below. A Pool Insurance Policy generally will not cover losses due to
a failure to pay or denial of a claim under a Primary Insurance Policy.
In general, each Pool Insurance Policy will provide that no claims may
be validly presented unless (i) any required Primary Insurance Policy is in
effect for the defaulted Mortgage Loan and a claim thereunder has been submitted
and settled; (ii) hazard insurance on the related Mortgaged Property has been
kept in force and real estate taxes and other protection and preservation
expenses have been paid; (iii) if there has been physical loss or damage to the
Mortgaged Property, it has been restored to its physical condition (reasonable
wear and tear excepted) at the time of issuance of the policy; and (iv) the
insured has acquired good and merchantable title to the Mortgaged Property free
and clear of liens except certain permitted encumbrances. Upon satisfaction of
these conditions, the Pool Insurer will have the option either (a) to purchase
the Mortgaged Property at a price equal to the principal balance thereof plus
accrued and unpaid interest at the Mortgage Rate to the date of purchase and
certain expenses incurred by the Master Servicer on behalf of the Trustee and
Securityholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Mortgage Loan plus accrued and unpaid interest at the
Mortgage Rate to the date of payment of the claim and the aforementioned
expenses exceeds the proceeds received from an approved sale of the Mortgaged
Property, in either case net of certain amounts paid or assumed to have been
paid under the related Primary Insurance Policy. If any Mortgaged Property
securing a defaulted Mortgage Loan is damaged and proceeds, if any, from the
related hazard insurance policy or the applicable Special Hazard Insurance
Policy are insufficient to restore the damaged Mortgaged Property to a condition
sufficient to permit recovery under the Pool Insurance Policy, the Master
Servicer will not be required to expend its own funds to restore the damaged
Mortgaged Property unless it determines that (i) such restoration will increase
the proceeds to Securityholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) such expenses
will be recoverable by it through proceeds of the sale of the Mortgaged Property
or proceeds of the related Pool Insurance Policy or any related Primary
Insurance Policy.
A Pool Insurance Policy generally will not insure (and many Primary
Insurance Policies do not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. If
so specified in the Prospectus supplement, an endorsement to the Pool Insurance
Policy, a bond or other credit support may cover fraud in connection with the
origination of Mortgage Loans. If so specified in the related Prospectus
Supplement, a failure of coverage attributable to an event specified in clause
(i) or (ii) above might result in a breach of the related Lender's
representations described above and, in such event, might give rise to an
obligation on the part of such Lender to purchase the defaulted Mortgage Loan if
the breach cannot be cured by such Lender. No Pool Insurance Policy will cover
(and many Primary Insurance Policies do not cover) a claim in respect of a
defaulted Mortgage Loan occurring when the servicer of such Mortgage Loan, at
the time of default or thereafter, was not approved by the applicable insurer.
The original amount of coverage under each Pool Insurance Policy
generally will be reduced over the life of the related Securities by the
aggregate dollar amount of claims paid less the aggregate of the net dollar
amounts realized by the Pool Insurer upon disposition of all foreclosed
properties covered thereby. The amount of claims paid will include certain
expenses incurred by the Master Servicer as well as accrued interest on
delinquent Mortgage Loans to the date of payment of the claim. Accordingly, if
aggregate net claims paid under any Pool Insurance Policy reach the original
policy limit, coverage under that Pool Insurance Policy will be exhausted and
any further losses will be borne by the Securityholders.
<PAGE>
The terms of any pool insurance policy relating to a pool of Contracts
will be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the "Special Hazard Insurer") named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Securities from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located or under a flood
insurance policy if the Mortgaged Property is located in a federally designated
flood area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "Administration-Hazard
Insurance." Special Hazard Insurance Policies will not cover losses occasioned
by war, civil insurrection, certain governmental action, errors in design,
faulty workmanship or materials (except under certain circumstances), nuclear
reaction, flood (if the Mortgaged Property is located in a federally designated
flood area), chemical contamination and certain other risks. The amount of
coverage under any Special Hazard Insurance Policy will be specified in the
related Prospectus Supplement. Each Special Hazard Insurance Policy will provide
that no claim may be paid unless hazard and, if applicable, flood insurance on
the property securing the Mortgage Loan has been kept in force and other
protection and preservation expenses have been paid.
Subject to the foregoing limitations, each Special Hazard Insurance
Policy will provide that where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
the Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
Special Hazard Insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Master Servicer with respect to such property. If the
unpaid principal balance of a Mortgage Loan plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair of the property will further reduce coverage by such amount. So long
as a Pool Insurance Policy remains in effect, the payment by the Special Hazard
Insurer of the cost of repair or of the unpaid principal balance of the related
Mortgage Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to Securityholders, but will affect the relative
amounts of coverage remaining under the related Special Hazard Insurance Policy.
Collection of insurance proceeds under a Pool Insurance Policy is
generally not possible if the underlying property has been damaged and not
restored. A Special Hazard Insurance Policy permits full recovery under a Pool
Insurance Policy relating to the Mortgage Loans backing the Series of Securities
by providing insurance to restore damaged property. Each Agreement will provide
that, if the related Pool Insurance Policy shall have been terminated or been
exhausted through payment of claims, the Master Servicer will be under no
further obligation to maintain such Special Hazard Insurance Policy.
To the extent specified in the related Prospectus Supplement, the
Master Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Securities of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Special Hazard
Insurance Policy. The amount of any Special Hazard Insurance Policy or of the
deposit to the special trust account in lieu thereof relating to such Securities
may be reduced so long as any such reduction will not result in a downgrading of
the rating of such Securities by any such rating agency.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
<PAGE>
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond
for proceedings under the federal Bankruptcy Code will be issued by an insurer
named in such Prospectus Supplement. Each Bankruptcy Bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Securities of the related Series
in the Trust Fund to provide protection in lieu of or in addition to that
provided by a Bankruptcy Bond. See "Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
To the extent specified in the related Prospectus Supplement, the
Master Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Securities of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Bankruptcy Bond. The
amount of any Bankruptcy Bond or of the deposit to the special trust account in
lieu thereof relating to such Securities may be reduced so long as any such
reduction will not result in a downgrading of the rating of such Securities by
any such rating agency.
The terms of any Bankruptcy Bond relating to a pool of Contracts will
be described in the related Prospectus Supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Mortgage Loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Mortgage Loans insured by the
FHA generally require a minimum down payment of approximately 5% of the original
principal amount of the loan. No FHA-insured Mortgage Loan relating to a Series
may have an interest rate or original principal amount exceeding the applicable
FHA limits at the time of origination of such loan.
The insurance premiums for Mortgage Loans insured by the FHA are
collected by lenders approved by HUD or by the Master Servicer or any
Sub-Servicers and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or upon assignment of the defaulted
Mortgage Loan to HUD. With respect to a defaulted FHA-insured Mortgage Loan, the
Master Servicer or any Sub-Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master Servicer or
any Sub-Servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the Master Servicer or any Sub-Servicer is expected to
make an effort to avoid foreclosure by entering, if feasible, into one of a
number of available forms of forbearance plans with the mortgagor. Such plans
may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made up on or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or beyond the maturity date. In addition, when a default caused by such
circumstances is accompanied by certain other criteria, HUD may provide relief
by making payments to the Master Servicer or any Sub-Servicer in partial or full
satisfaction of amounts due under the Mortgage Loan (which payments are to be
repaid by the mortgagor to HUD) or by accepting assignment of the loan from the
Master Servicer or any Sub-Servicer. With certain exceptions, at least three
full monthly installments must be due and unpaid under the Mortgage Loan, and
HUD must have rejected any request for relief from the mortgagor before the
Master Servicer or any Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal to
the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or Sub-Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Single Family Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any obligation to make any payment due under the Mortgage
and, upon assignment, from the date of assignment, to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Mortgage Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's Readjustment
Act of 1944, as amended, permits a veteran (or in certain instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no Mortgage Loan guaranteed by the VA will
have an original principal amount greater than five times the partial VA
guarantee for such Mortgage Loan.
The maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 3703(a), as
amended. As of April, 1998, the maximum guarantee that may be issued by the VA
under a VA-guaranteed mortgage loan of more than $144,000 is the lesser of 25%
of the original principal amount of the mortgage loan and $50,750. The liability
on the guarantee is reduced or increased pro rata with any reduction or increase
in the amount of indebtedness, but in no event will the amount payable on the
guarantee exceed the amount of the original guarantee. The VA may, at its option
and without regard to the guarantee, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the
Master Servicer or Sub-Servicer is, absent exceptional circumstances, authorized
to announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure mortgage loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of such mortgage loans made under Sections 221(d)(3)
and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of such
a mortgage loan may be up to 40 years and the ratio of loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, a dollar amount per apartment unit established from time to time by
HUD or, at the discretion of the Secretary of HUD, 25% of the value of the
property. In general the loan term may not exceed 35 years and a loan to value
ratio of no more than 85% is required for the purchase of a project and 70% for
the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of interest
from the date of the default.
RESERVE AND OTHER ACCOUNTS
If specified in the related Prospectus Supplement, cash, U.S. Treasury
or comparable securities, instruments evidencing ownership of principal or
interest payments thereon, demand notes, certificates of deposit or a
combination thereof in the aggregate amount specified in the related Prospectus
Supplement will be deposited by the Master Servicer or Seller on the date
specified in the related Prospectus Supplement with the Trustee or in one or
more Reserve Accounts established with the Trustee. Such cash and the principal
and interest payments on such other instruments will be used to pay, or to
enhance the likelihood of timely payment of, principal of, and interest on, or,
if so specified in the related Prospectus Supplement, to provide additional
protection against losses in respect of, the assets of the related Trust Fund,
to pay the expenses of the Trust Fund or for such other purposes specified in
the related Prospectus Supplement. Whether or not the Master Servicer or Seller
has any obligation to make such a deposit, certain amounts to which the
Subordinated Securityholders, if any, will otherwise be entitled may instead be
deposited into a Reserve Account from time to time and in the amounts as
specified in the related Prospectus Supplement. Any cash in the Reserve Account
and the proceeds of any other instrument upon maturity will be invested, to the
extent acceptable to the applicable Rating Agency, in obligations of the United
States and certain agencies thereof, certificates of deposit, certain commercial
paper, time deposits and bankers acceptances sold by eligible commercial banks,
certain repurchase agreements of United States government securities with
eligible commercial banks and certain other instruments acceptable to the
applicable Rating Agency ("Permitted Investments"). Instruments held by the
Trustee and/or deposited in the Reserve Account generally will name the Trustee,
in its capacity as trustee for the holders of the Securities, as beneficiary and
generally will be issued by an entity acceptable to the applicable Rating
Agency. Additional information with respect to such instruments will be set
forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for distribution to the holders of Securities for the purposes, in
the manner and at the times specified in the related Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may
include in lieu of some or all of the foregoing or in addition thereto letters
of credit, financial guaranty insurance policies, third party guarantees, U.S.
Government Securities and other arrangements for providing for or maintaining
timely payments or providing additional protection against losses on the assets
included in such Trust Fund, paying administrative expenses, or accomplishing
such other purpose as may be described in the related Prospectus Supplement. The
Trust Fund may include a guaranteed investment contract or reinvestment
agreement pursuant to which funds held in one or more accounts will be invested
at a specified rate. If any class of Securities has a floating interest rate, or
if any of the Mortgage Assets has a floating interest rate, the Trust Fund may
include an interest rate swap contract, an interest rate cap agreement or
similar contract providing limited protection against interest rate risks.
<PAGE>
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust Fund may be evidenced
by separate classes of the related Series of Securities. In such case, credit
support may be provided by a cross-support feature which requires that
distributions be made with respect to Securities evidencing a beneficial
ownership interest in other asset groups within the same Trust Fund. The
Prospectus Supplement for a Series which includes a cross-support feature will
describe the manner and conditions for applying such cross-support feature.
If specified in the related Prospectus Supplement, the coverage
provided by one or more forms of credit support may apply concurrently to two or
more separate Trust Fund. If applicable, the related Prospectus Supplement will
identify the Trust Fund to which such credit support relates and the manner of
determining the amount of the coverage provided hereby and of the application of
such coverage to the identified Trust Fund.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity of the Securities will be affected by the
amount and timing of principal payments on or in respect of the Mortgage Assets
included in the related Trust Funds, the allocation of available funds to
various Classes of Securities, the Interest Rate for various Classes of
Securities and the purchase price paid for the Securities.
The original terms to maturity of the Mortgage Loans in a given
Mortgage Pool will vary depending upon the type of Mortgage Loans included
therein. Each Prospectus Supplement will contain information with respect to the
type and maturities of the Mortgage Loans in the related Mortgage Pool. Single
Family Loans, Cooperative Loans and Contracts generally may be prepaid without
penalty in full or in part at any time. Multifamily Loans may prohibit
prepayment for a specified period after origination, may prohibit partial
prepayments entirely, and may require the payment of a prepayment penalty upon
prepayment in full or in part.
Conventional Single Family Loans, Cooperative Loans and Contracts
generally will contain due-on-sale provisions permitting the mortgagee or holder
of the Contract to accelerate the maturity of the Mortgage Loan or Contract upon
sale or certain transfers by the mortgagor or obligor of the underlying
Mortgaged Property. As described in the related Prospectus Supplement,
conventional Multifamily Loans may contain due-on-sale provisions,
due-on-encumbrance provisions, or both. Mortgage Loans insured by the FHA, and
Single Family Loans and Contracts partially guaranteed by the VA, are assumable
with the consent of the FHA and the VA, respectively. Thus, the rate of
prepayments on such Mortgage Loans may be lower than that of conventional
Mortgage Loans bearing comparable interest rates. The Master Servicer generally
will enforce any due-on-sale or due-on-encumbrance clause, to the extent it has
knowledge of the conveyance or further encumbrance or the proposed conveyance or
proposed further encumbrance of the Mortgaged Property and reasonably believes
that it is entitled to do so under applicable law; provided, however, that the
Master Servicer will not take any enforcement action that would impair or
threaten to impair any recovery under any related insurance policy. See
"Administration-Collection Procedures" and "Legal Aspects of the Mortgage Loans"
for a description of certain provisions of each Agreement and certain legal
developments that may affect the prepayment experience on the Mortgage Loans.
When a full prepayment is made on a Single Family Loan or Cooperative
Loan, the Mortgagor is charged interest on the principal amount of the Mortgage
Loan so prepaid only for the number of days in the month actually elapsed up to
the date of the prepayment rather than for a full month. Similarly, upon
liquidation of a Mortgage Loan, interest accrues on the principal amount of the
Mortgage Loan only for the number of days in the month actually elapsed up to
the date of liquidation rather than for a full month. The effect of prepayments
in full and liquidations generally will be to reduce the amount of interest
passed through in the following month to holders of Securities because interest
on the principal amount of any Mortgage Loan so prepaid will be paid only to the
date of prepayment or liquidation. In connection with certain Series, as
described in the related Prospectus Supplement, the Master Servicer or a Lender
will be required to use some or all of its servicing compensation to pay
compensating interest to cover such shortfalls. Interest shortfalls also could
result from the application of the Solders' and Sailors' Civil Relief Act of
1940, as amended, as described under "Legal Aspects of the Mortgage
Loans-Soldiers' and Sailors' Civil Relief Act" herein. Partial prepayments
in a given month may be applied to the outstanding principal balances of the
Mortgage Loans so prepaid on the first day of the month of receipt or the month
following receipt. In the latter case, partial prepayments will not reduce the
amount of interest passed through in such month. Prepayment penalties collected
with respect to Multifamily Loans will be distributed to the holders of
Securities, or to other persons entitled thereto, as described in the related
Prospectus Supplement.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or a FASIT or another person specified in the
related Prospectus Supplement may have the option to purchase the assets of a
Trust Fund, thereby effecting earlier retirement of the related Series of
Securities. See "Administration-Termination; Optional Termination." The yield to
investors in a Callable Class will depend on whether and, if so, when a
redemption of such Securities occurs.
The rate of prepayments with respect to conventional mortgage loans
has fluctuated significantly in recent years. In general, if prevailing rates
fall significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely, if
prevailing interest rates rise appreciably above the Mortgage Rates borne by the
Mortgage Loans, such Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below such Mortgage Rates. However,
there can be no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical,
social, tax, legal and additional factors. The rate of prepayment on Single
Family Loans, Cooperative Loans and Contracts may be affected by changes in a
mortgagor's housing needs, job transfers, unemployment, a borrower's net equity
in the mortgage properties, the enforcement of due-on-sale clauses and other
servicing decisions. Adjustable rate mortgage loans, bi-weekly mortgage loans,
graduated payment mortgage loans, growing equity mortgage loans, reverse
mortgage loans, buy-down mortgage loans and mortgage loans with other
characteristics may experience a rate of principal prepayments which is
different from that of fixed rate, monthly pay, fully amortizing mortgage loans.
The rate of prepayment on Multifamily Loans may be affected by other factors,
including Mortgage Loan terms (E.G., the existence of lockout periods,
due-on-sale and due-on-encumbrance clauses and prepayment penalties), relative
economic conditions in the area where the Mortgaged Properties are located, the
quality of management of the Mortgaged Properties and the relative tax benefits
associated with the ownership of income-producing real property.
The timing of payments on the Mortgage Assets may significantly affect
an investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Assets, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Securities will not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments.
The effective yield to Securityholders generally will be slightly
lower than the yield otherwise produced by the applicable Pass-Through Rate and
purchase price, because while interest generally will accrue on each Mortgage
Loan from the first day of the month, the distribution of such interest will not
be made earlier than a specified date in the month following the month of
accrual.
In the case of any Securities purchased at a discount, a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield. In the case of any Securities purchased at a
premium, a faster than anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield. A discount or premium
would be determined in relation to the price at which a Security will yield its
Interest Rate, after giving effect to any payment delay.
Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Securities. The relative contribution of the
various factors affecting prepayment may also vary from time to time. There can
be no assurance as to the rate of payment of principal of the Mortgage Assets at
any time or over the lives of the Securities.
<PAGE>
The Prospectus Supplement relating to a Series of Securities will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments) on the yield, weighted average lives and
maturities of such Securities (including, but not limited to, any Exchangeable
Securities in such Series).
ADMINISTRATION
Set forth below is a summary of the material provisions of each
Agreement which are not described elsewhere in this Prospectus. Where particular
provisions or terms used in the Agreements are referred to, such provisions or
terms are as specified in the Agreements. Concurrently with the assignment of
the Trust Assets to the related Trust Fund, the Trustee will execute and deliver
the Securities.
ASSIGNMENT OF MORTGAGE ASSETS
ASSIGNMENT OF THE MORTGAGE LOANS. At the time of issuance of the
Securities of a Series, the Seller will cause the Mortgage Loans comprising the
Trust Fund to be sold and assigned to the Trustee, together with all principal
and interest received by or on behalf of the Seller on or with respect to such
Mortgage Loans after the Cut-off Date, other than principal and interest due on
or before the Cut-off Date and other than any Retained Interest specified in the
related Prospectus Supplement. If Notes are issued in a Series, such assets will
be pledged to the Trustee pursuant to the terms of the Indenture. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the related
Agreement. Such schedule will include information as to the outstanding
principal balance of each Mortgage Loan after application of payments due on the
Cut-off Date, as well as information regarding the Mortgage Rate or APR, the
current scheduled monthly payment of principal and interest, the maturity of the
loan, the Loan-to-Value Ratio at origination and certain other information.
In addition, the Seller generally will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) as to
each Mortgage Loan, among other things, (i) the mortgage note or Contract
endorsed without recourse in blank or to the order of the Trustee, (ii) in the
case of Single Family Loans or Multifamily Loans, the mortgage, deed of trust or
similar instrument (a "Mortgage") with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office, in which
case the Seller will deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was or will be
delivered to such recording office), (iii) an assignment of the Mortgage or
Contract to the Trustee, which assignment will be in recordable form in the case
of a Mortgage assignment, and (iv) such other security documents as may be
specified in the related Prospectus Supplement. In the case of Single Family
Loans or Multifamily Loans, the Seller or Master Servicer generally will
promptly cause the assignments of the related Mortgage Loans to be recorded in
the appropriate public office for real property records, except in the
discretion of the Seller in states in which, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in such loans against the claim of any subsequent transferee
or any successor to or creditor of the Seller or the originator of such loans.
In the case of Contracts, the Seller or Master Servicer generally will promptly
make or cause to be made an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Trustee's ownership of the
Contracts.
With respect to any Mortgage Loans which are Cooperative Loans, the
Seller will cause to be delivered to the Trustee (or to the custodian
hereinafter referred to), the related original cooperative note endorsed without
recourse in blank or to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Seller will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review
such Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Securityholders. In general, if any
such document is found to be missing or defective in any material respect, the
Trustee (or such custodian) will be required to notify the Master Servicer and
the Seller or in certain circumstances the related Lender, or the Master
Servicer will notify the related Lender. If the Lender or an entity which sold
the Mortgage Loan to the Lender cannot cure the omission or defect within 60
days after receipt of such notice (or such other period as is specified in the
related Prospectus Supplement), the Lender or such entity generally will be
obligated to purchase the related Mortgage Loan from the Trustee at the Purchase
Price. There can be no assurance that a Lender or such entity will fulfill this
purchase obligation. Although the Master Servicer may be obligated to enforce
such obligation to the extent described above under "The Mortgage
Loans-Representations by Lenders; Repurchases," neither the Master Servicer nor
the Seller will be obligated to purchase such Mortgage Loan if the Lender or
such entity defaults on its purchase obligation, unless such breach also
constitutes a breach of the representations or warranties of the Master Servicer
or the Seller, as the case may be. This purchase obligation generally will
constitute the sole remedy available to the Securityholders or the Trustee for
omission of, or a material defect in, a constituent document. Certain rights of
substitution for defective Mortgage Loans may be provided with respect to a
Series in the related Prospectus Supplement.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
ASSIGNMENT OF AGENCY SECURITIES. The Seller will cause Agency
Securities to be registered in the name of the Trustee or its nominee. Each
Agency Security will be identified in a schedule appearing as an exhibit to the
Agreement, which will specify as to each Agency Security the original principal
amount and outstanding principal balance as of the Cut-off Date, the annual
pass-through rate (if any) and the maturity date.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES. The Seller will
cause Private Mortgage-Backed Securities to be registered in the name of the
Trustee on behalf of the Trust Fund. The Trustee (or the custodian) will have
possession of any certificated Private Mortgage-Backed Securities. The Trustee
generally will not be in possession of or be assignee of record of any
underlying assets for a Private Mortgage-Backed Security. See "The Trust
Fund-Private Mortgage-Backed Securities" herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Mortgage-Backed Security conveyed to the
Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
In general, each Master Servicer and Sub-Servicer servicing the
Mortgage Loans will be required to establish and maintain for one or more Series
of Securities a separate account or accounts for the collection of payments on
the related Mortgage Loans (the "Protected Account"), which must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of such holding company) are rated in one of
the two highest rating categories by each Rating Agency rating the Series of
Securities, (ii) an account or accounts the deposits in which are fully insured
by the FDIC, (iii) an account or accounts the deposits in which are insured by
the FDIC (to the limits established by the FDIC), and the uninsured deposits in
which are invested in Permitted Investments held in the name of the Trustee, or
(iv) an account or accounts otherwise acceptable to each Rating Agency. A
Protected Account may be maintained as an interest bearing account or the funds
held therein may be invested pending each succeeding Distribution Date in
Permitted Investments. The related Master Servicer or Sub-Servicer or its
designee or another person specified in the Prospectus supplement will be
entitled to receive any such interest or other income earned on funds in the
Protected Account as additional compensation and will be obligated to deposit or
deliver for deposit in the Protected Account the amount of any loss immediately
as realized. The Protected Account may be maintained with the Master Servicer or
Sub-Servicer or with a depository institution that is an affiliate of the Master
Servicer or Sub-Servicer, provided it meets the standards set forth above.
Each Master Servicer and Sub-Servicer generally will be required to
deposit or cause to be deposited in the Protected Account for each Trust Fund on
a daily basis the following payments and collections received or advances made
by or on behalf of it subsequent to the Cut-off Date (other than payments due on
or before the Cut-off Date and exclusive of any amounts representing Retained
Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, prepayment
penalties, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
(iii) to the extent specified in the related Agreement, all proceeds
(net of unreimbursed payments of property taxes, insurance premiums and similar
items ("Insured Expenses") incurred, and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) of the title insurance
policies, the hazard insurance policies and any Primary Insurance Policies, to
the extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts (net of unreimbursed expenses incurred in connection with liquidation or
foreclosure ("Liquidation Expenses") and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) received and retained in
connection with the liquidation of defaulted Mortgage Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds received with
respect to any properties acquired on behalf of the Securityholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased as described under "The Mortgage Loans-Representations by Lenders;
Repurchases" or "-Assignment of Mortgage Assets" above;
(v) all payments required to be deposited in the Protected Account
with respect to any deductible clause in any blanket insurance policy described
under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer or
Sub-Servicer in connection with losses realized on investments for the benefit
of the Master Servicer or Sub-Servicer of funds held in any Accounts; and
(vii) all other amounts required to be deposited in the Protected
Account pursuant to the Agreement.
If acceptable to each Rating Agency rating the Series of Securities, a
Protected Account maintained by a Master Servicer or Sub-Servicer may commingle
funds from the Mortgage Loans deposited in the Trust Fund with similar funds
relating to other mortgage loans which are serviced or owned by the Master
Servicer or Sub-Servicer. The Agreement may require that certain payments
related to the Mortgage Assets be transferred from a Protected Account
maintained by a Master Servicer or Sub-Servicer into another account maintained
under conditions acceptable to each Rating Agency.
The Trustee will be required to establish in its name as Trustee for
one or more Series of Securities a trust account or another account acceptable
to each Rating Agency (the "Securities Account"). The Securities Account may be
maintained as an interest bearing account or the funds held therein may be
invested pending each succeeding Distribution Date in Permitted Investments. If
there is more than one Master Servicer for the rated Series of Securities, there
may be a separate Securities Account or a separate subaccount in a single
Securities Account for funds received from each Master Servicer. The related
Master Servicer or its designee or another person specified in the related
Prospectus Supplement may be entitled to receive any interest or other income
earned on funds in the Securities Account or subaccount of the Securities
Account as additional compensation and, if so entitled, will be obligated to
deposit or deliver for deposit in the Securities Account or subaccount the
amount of any loss immediately as realized. The Trustee will be required to
deposit into the Securities Account on the business day received all funds
received from the Master Servicer for deposit into the Securities Account and
any other amounts required to be deposited into the Securities Account pursuant
to the Agreement. In addition to other purposes specified in the Agreement, the
Trustee will be required to make withdrawals from the Securities Account to make
distributions to Securityholders. If the Series includes one Trust Fund which
contains a beneficial ownership interest in another Trust Fund, funds from the
Trust Assets may be withdrawn from the Securities Account included in the latter
Trust Fund and deposited into another Account included in the former Trust Fund
prior to transmittal to Securityholders with a beneficial ownership interest in
the former Trust Fund. If specified in the related Prospectus Supplement, the
Protected Account and the Securities Account may be combined into a single
Securities Account. With respect to a Series backed by Agency Securities and/or
Private Mortgage-Backed Securities there would only be one or more Securities
Accounts.
<PAGE>
SUB-SERVICING BY LENDERS
Each Lender with respect to a Mortgage Loan or any other servicing
entity may act as the Master Servicer or the Sub-Servicer for such Mortgage Loan
pursuant to an agreement (each, a "Sub-Servicing Agreement"), which will not
contain any terms inconsistent with the related Agreement. While in general each
Sub-Servicing Agreement will be a contract solely between the Master Servicer
and the Sub-Servicer, the Agreement pursuant to which a Series of Securities is
issued will provide that, if for any reason the Master Servicer for such Series
of Securities is no longer the Master Servicer of the related Mortgage Loans,
the Trustee or any successor Master Servicer must recognize the Sub-Servicer's
rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers. Such Sub-Servicer will
remain obligated, or will be released from its obligations, under the related
Sub-Servicing Agreement, as provided in the related Prospectus Supplement. Each
Sub-Servicer will be required to perform the customary functions of a servicer
of mortgage loans. Such functions generally include collecting payments from
mortgagors or obligors and remitting such collections to the Master Servicer;
maintaining hazard insurance policies as described herein and in the related
Prospectus Supplement, and filing and settling claims thereunder, subject in
certain cases to the right of the Master Servicer to approve in advance any such
settlement; maintaining escrow or impound accounts of mortgagors or obligors for
payment of taxes, insurance and other items required to be paid by the mortgagor
or obligor pursuant to the related Mortgage Loan; processing assumptions or
substitutions, although the Master Servicer is generally required to exercise
due-on-sale clauses to the extent such exercise is permitted by law and would
not adversely affect insurance coverage; attempting to cure delinquencies;
supervising foreclosures; inspecting and managing Mortgaged Properties under
certain circumstances; maintaining accounting records relating to the Mortgage
Loans; and, to the extent specified in the related Prospectus Supplement,
maintaining additional insurance policies or credit support instruments and
filing and settling claims thereunder. A Sub-Servicer will also be obligated to
make advances in respect of delinquent installments of principal and interest on
Mortgage Loans, as described more fully above under "-Payments on Mortgage
Loans; Deposits to Accounts," and in respect of certain taxes and insurance
premiums not paid on a timely basis by mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Mortgage Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer will generally be entitled to collect
and retain, as part of its servicing compensation, any prepayment or late
charges provided in the mortgage note or related instruments. Each Sub-Servicer
will be reimbursed by the Master Servicer for certain expenditures which it
makes, generally to the same extent the Master Servicer would be reimbursed
under the Agreement. The Master Servicer may purchase the servicing of Mortgage
Loans if the Sub-Servicer elects to release the servicing of such Mortgage Loans
to the Master Servicer. See "-Servicing and Other Compensation and Payment of
Expenses."
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer will be required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan
pursuant to the terms of the Sub-Servicing Agreement for the entire term of such
Mortgage Loan, unless the Sub-Servicing Agreement is earlier terminated by the
Master Servicer or unless servicing is released to the Master Servicer. The
Master Servicer generally may terminate a Sub-Servicing Agreement without cause,
upon written notice to the Sub-Servicer.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Mortgage Loans or enter into
new Sub-Servicing Agreements with other sub-servicers. If the Master Servicer
acts as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be a
Lender or meet the standards for becoming a Lender or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Seller. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an assumption
will occur. In the event of such an assumption, the Master Servicer may in the
exercise of its business judgment release the terminated Sub-Servicer from
liability in respect of such representations and warranties. Any amendments to a
Sub-Servicing Agreement or new Sub-Servicing Agreements may contain provisions
different from those which are in effect in the original Sub-Servicing
Agreement. However, each Agreement will provide that any such amendment or new
agreement may not be inconsistent with or violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers,
will make reasonable efforts to collect all payments called for under the
Mortgage Loans and will, consistent with each Agreement and any Pool Insurance
Policy, Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard
Insurance Policy, Bankruptcy Bond or alternative arrangements, follow such
collection procedures as are customary with respect to mortgage loans that are
comparable to the Mortgage Loans. Consistent with the above, the Master Servicer
may, in its discretion, (i) waive any assumption fee, late payment or other
charge in connection with a Mortgage Loan and (ii) to the extent not
inconsistent with the coverage of such Mortgage Loan by a Pool Insurance Policy,
Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance
Policy, Bankruptcy Bond or alternative arrangements, if applicable, arrange with
a Mortgagor a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment or such other
period as is specified in the Agreement. Both the Sub-Servicer and the Master
Servicer remain obligated to make advances during any period of such an
arrangement.
In any case in which property securing a conventional Mortgage Loan
has been, or is about to be, conveyed by the mortgagor or obligor, the Master
Servicer generally will, to the extent it has knowledge of such conveyance or
proposed conveyance, exercise or cause to be exercised its rights to accelerate
the maturity of such Mortgage Loan under any due-on-sale clause applicable
thereto, but only if the exercise of such rights is permitted by applicable law
and will not impair or threaten to impair any recovery under any related Primary
Insurance Policy. If these conditions are not met or if such Mortgage Loan is
insured by the FHA or partially guaranteed by the VA, the Master Servicer will
enter into or cause to be entered into an assumption and modification agreement
with the person to whom such property has been or is about to be conveyed,
pursuant to which such person becomes liable for repayment of the Mortgage Loan
and, to the extent permitted by applicable law, the mortgagor remains liable
thereon; provided, however, that the Master Servicer will not enter into such an
agreement if it would jeopardize the tax status of the Trust Fund. Any fee
collected by or on behalf of the Master Servicer for entering into an assumption
agreement will be retained by or on behalf of the Master Servicer as additional
servicing compensation. In the case of Multifamily Loans, the Master Servicer
generally will agree to exercise any right it may have to accelerate the
maturity of a Multifamily Loan to the extent it has knowledge of any further
encumbrance of the related Mortgaged Property effected in violation of any
due-on-encumbrance clause applicable thereto. See "Legal Aspects of the Mortgage
Loans--Due-on-Sale Clauses." In connection with any such assumption, the terms
of the related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Legal Aspects of the Mortgage
Loans." This approval is usually based on the purchaser's income and net worth
and numerous other factors. The necessity of acquiring such approval could limit
the number of potential purchasers for those shares and otherwise limit the
Trust Fund's ability to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section
216(b)(2)) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Code Section 216(b)(1) is allowed a deduction
for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Code Section 216(a) to the
corporation under Code Sections 163 and 164. In order for a corporation to
qualify under Code Section 216(b)(1) for its taxable year in which such items
are allowable as a deduction to the corporation, such Section requires, among
other things, that at least 80% of the gross income of the corporation be
derived from its tenant-stockholders (as defined in Code Section 216(b)(2)). By
virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Code Section 216(a) with respect to those years. In view of the significance of
the tax benefits accorded tenant-stockholders of a corporation that qualifies
under Code Section 216(b)(1), the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each
Single Family Loan, Multifamily Loan or Contract to maintain a hazard insurance
policy providing for no less than the coverage of the standard form of fire
insurance policy with extended coverage customary for the type of Mortgaged
Property in the state in which such Mortgaged Property is located. Such coverage
will be in an amount not less than the replacement value of the improvements or
Manufactured Home securing such Mortgage Loan or the principal balance owing on
such Mortgage Loan, whichever is less. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Protected Account. In the event that the Master
Servicer maintains a blanket policy insuring against hazard losses on all the
Mortgage Loans comprising part of a Trust Fund, it will conclusively be deemed
to have satisfied its obligation relating to the maintenance of hazard
insurance. Such blanket policy may contain a deductible clause, in which case
the Master Servicer will be required to deposit from its own funds into the
related Protected Account the amounts which would have been deposited therein
but for such clause. Any additional insurance coverage for Mortgaged Properties
in a Mortgage Pool of Multifamily Loans will be specified in the related
Prospectus Supplement.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements or Manufactured
Home securing a Mortgage Loan by fire, lightning, explosion, smoke, windstorm
and hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Although the policies relating to the
Mortgage Loans may have been underwritten by different insurers under different
state laws in accordance with different applicable forms and therefore may not
contain identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the Mortgaged Property
securing a Mortgage Loan is located in a federally designated special flood area
at the time of origination, the Master Servicer will require the mortgagor or
obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the
Mortgage Loans typically contain a clause which in effect requires the insured
at all times to carry insurance of a specified percentage (generally 80% to 90%)
of the full replacement value of the insured property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, then the insurer's liability in the event of partial loss
will not exceed the larger of (i) the actual cash value (generally defined as
replacement cost at the time and place of loss, less physical depreciation) of
the improvements damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance the Master Servicer may cause to be
maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, and since improved real estate
generally has appreciated in value over time in the past, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property. If specified in the
related Prospectus Supplement, a special hazard insurance policy or an
alternative form of credit enhancement will be obtained to insure against
certain of the uninsured risks described above. See "Credit Enhancement-Special
Hazard Insurance Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by other
credit support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
PRIMARY INSURANCE POLICIES. The Master Servicer will be required to
maintain or cause each Sub-Servicer to maintain, as the case may be, in full
force and effect, to the extent specified in the related Prospectus Supplement,
a Primary Insurance Policy with regard to each Single Family Loan for which such
coverage is required. The Master Servicer will be required not to cancel or
refuse to renew any such Primary Insurance Policy in effect at the time of the
initial issuance of a Series of Securities that is required to be kept in force
under the applicable Agreement unless the replacement Primary Insurance Policy
for such canceled or nonrenewed policy is maintained with an insurer whose
claims-paying ability is sufficient to maintain the current rating of the
classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Insurance Policy covering a
Mortgage Loan generally will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan, (iii) amounts expended but not approved by the issuer of the
related Primary Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary Insurance Policies will not
insure against, and exclude from coverage, a loss sustained by reason of a
default arising from or involving certain matters, including (i) fraud or
negligence in origination or servicing of the Mortgage Loans, including
misrepresentation by the originator, borrower or other persons involved in the
origination of the Mortgage Loan; (ii) failure to construct the Mortgaged
Property subject to the Mortgage Loan in accordance with specified plans; (iii)
physical damage to the Mortgaged Property; and (d) the related Master Servicer
not being approved as a servicer by the Primary Insurer.
RECOVERIES UNDER A PRIMARY INSURANCE POLICY. As conditions precedent
to the filing of or payment of a claim under a Primary Insurance Policy covering
a Mortgage Loan, the insured generally will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Mortgaged Property in at least as
good a condition as existed at the effective date of such Primary Insurance
Policy, ordinary wear and tear excepted, (3) Mortgaged Property sales expenses,
(4) any outstanding liens (as defined in such Primary Insurance Policy) on the
Mortgaged Property and (5) foreclosure costs, including court costs and
reasonable attorneys' fees; (ii) in the event of any physical loss or damage to
the Mortgaged Property, have restored and repaired the Mortgaged Property to at
least as good a condition as existed at the effective date of such Primary
Insurance Policy, ordinary wear and tear excepted; and (iii) tender to the
Primary Insurer good and merchantable title to and possession of the Mortgaged
Property.
In those cases in which a Single Family Loan is serviced by a
Sub-Servicer, the Sub-Servicer, on behalf of itself, the Trustee and
Securityholders, will present claims to the Primary Insurer, and all collections
thereunder will be deposited in the Protected Account maintained by the
Sub-Servicer. In all other cases, the Master Servicer, on behalf of itself, the
Trustee and the Securityholders, will present claims to the Primary Insurer
under each Primary Insurance Policy, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Mortgage Loans. As set forth above, all collections by or on behalf of
the Master Servicer under any Primary Insurance Policy and, when the Mortgaged
Property has not been restored, the hazard insurance policy, are to be deposited
in the Protected Account, subject to withdrawal as heretofore described.
If the Mortgaged Property securing a defaulted Mortgage Loan is
damaged and proceeds, if any, from the related hazard insurance policy are
insufficient to restore the damaged Mortgaged Property to a condition sufficient
to permit recovery under the related Primary Insurance Policy, if any, the
Master Servicer is not required to expend its own funds to restore the damaged
Mortgaged Property unless it determines (i) that such restoration will increase
the proceeds to Securityholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Insurance Policy, the Master Servicer will be obligated to follow or cause to be
followed such normal practices and procedures as it deems necessary or advisable
to realize upon the defaulted Mortgage Loan. If the proceeds of any liquidation
of the Mortgaged Property securing the defaulted Mortgage Loan are less than the
principal balance of such Mortgage Loan plus interest accrued thereon that is
payable to Securityholders, the Trust Fund will realize a loss in the amount of
such difference plus the aggregate of expenses incurred by the Master Servicer
in connection with such proceedings and which are reimbursable under the
Agreement.
If the Master Servicer or its designee recovers Insurance Proceeds
which, when added to any related Liquidation Proceeds and after deduction of
certain expenses reimbursable to the Master Servicer, exceed the principal
balance of such Mortgage Loan plus interest accrued thereon that is payable to
Securityholders, the Master Servicer will be entitled to withdraw or retain from
the Protected Account amounts representing its normal servicing compensation
with respect to such Mortgage Loan. In the event that the Master Servicer has
expended its own funds to restore the damaged Mortgaged Property and such funds
have not been reimbursed under the related hazard insurance policy, it will be
entitled to withdraw from the Protected Account out of related Liquidation
Proceeds or Insurance Proceeds an amount equal to such expenses incurred by it,
in which event the Trust Fund may realize a loss up to the amount so charged.
See "Credit Enhancement."
RECOVERIES UNDER FHA INSURANCE AND VA GUARANTEES. The Master Servicer,
on behalf of itself, the Trustee and the Securityholders, will present claims
under any FHA Insurance or VA Guarantees with respect to the Mortgage Loans. See
"Credit Enhancement--FHA Insurance; VA Guarantees."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
A Master Servicer's primary servicing compensation with respect to a
Series of Securities will come from the monthly payment to it, out of each
interest payment on a Mortgage Loan, of an amount equal to the percentage per
annum described in the related Prospectus Supplement of the outstanding
principal balance thereof or from such other source as is specified in the
related Prospectus Supplement. If the Master Servicer's primary compensation is
a percentage of the outstanding principal balance of each Mortgage Loan, such
amounts will decrease as the Mortgage Loans amortize. In addition to primary
compensation, the Master Servicer or the Sub-Servicers generally will be
entitled to retain all assumption fees and late payment charges, to the extent
collected from Mortgagors, and any prepayment penalties and, to the extent
provided in the related Prospectus Supplement, any interest or other income
which may be earned on funds held in any Accounts. Sub-Servicers generally will
receive a portion of the Master Servicer's primary compensation as its
sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, to the extent
specified in the related Agreement, the Master Servicer may pay from its
servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment in
certain cases of premiums for insurance policies, guarantees, sureties or other
forms of credit enhancement, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in connection
with distributions and reports to Securityholders, and payment of certain other
expenses. The Master Servicer will be entitled to reimbursement of expenses
incurred in enforcing the obligations of Sub-Servicers and Lenders under certain
limited circumstances. In addition, as indicated in the preceding section, the
Master Servicer will be entitled to reimbursement for certain expenses incurred
by it in connection with any defaulted Mortgage Loan as to which it has
determined that all recoverable Liquidation Proceeds and Insurance Proceeds have
been received.
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EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac or a
program certified by such firm to be comparable, the servicing by or on behalf
of the Master Servicer of mortgage loans, agency securities or private
mortgage-backed securities, under pooling and servicing agreements substantially
similar to each other (including the related Agreement) was conducted in
compliance with such agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Uniform single Audit Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or such comparable program requires it to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of mortgage
loans, agency securities or private mortgage-backed securities by Sub-
Servicers, upon comparable statements for examinations conducted substantially
in compliance with the Uniform Single Audit Program for Mortgage Bankers, the
Audit Program for Mortgages serviced for Freddie Mac or such comparable program
(rendered within one year of such statement) of firms of independent public
accountants with respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by an
officer of each Master Servicer to the effect that such Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of each Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at the
address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SELLER
One or more Master Servicers under each Agreement will be named in the
related Prospectus Supplement. Each entity serving as Master Servicer may have
normal business relationships with the Seller or the Seller's affiliates.
The Agreement will provide that a Master Servicer may not resign from
its obligations and duties under the Agreement except upon a determination that
its duties thereunder are no longer permissible under applicable law or as
otherwise specified in the related Prospectus Supplement. No such resignation
will become effective until the Trustee or a successor servicer has assumed the
Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
in certain instances, the Seller nor any director, officer, employee, or agent
of the Master Servicer or the Seller will be under any liability to the Trustee,
the related Trust Fund or Securityholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Agreement, or for
errors in judgment; provided, however, that neither the Master Servicer, the
Seller nor any such person will be protected against any breach of warranties or
representations made in the Agreement or any liability which would otherwise be
imposed by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. Each Agreement will further provide that the
Master Servicer, in certain instances, the Seller and any director, officer,
employee or agent of the Master Servicer or the Seller will be entitled to
indemnification by the related Trust Fund and will be held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the Agreement or the Securities, other than any loss, liability or expense
related to any specific Mortgage Loan or Mortgage Loans (except any such loss,
liability or expense otherwise reimbursable pursuant to the Agreement) and any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, each
Agreement will provide that neither the Master Servicer nor, in certain
instances, the Seller will be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. The Master Servicer or the Seller may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties thereto
and the interests of the Securityholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Trust Fund and the Master Servicer or the
Seller, as the case may be, will be entitled to be reimbursed therefor out of
funds otherwise distributable to Securityholders.
Any person into which the Master Servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Master Servicer is a party, or any person succeeding to the business of the
Master Servicer, will be the successor of the Master Servicer under each
Agreement, provided that such person is qualified to sell mortgage loans to, and
service mortgage loans on behalf of, Fannie Mae or Freddie Mac and further
provided that such merger, consolidation or succession does not adversely affect
the then current rating or ratings of the class or classes of Securities of such
Series that have been rated.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT; MASTER SERVICING
AGREEMENT, "Events of Default" under a Pooling and Servicing Agreement, a Trust
Agreement or a Master Servicing Agreement generally will include (i) any failure
by the Master Servicer to cause to be deposited in the Securities Account any
amount so required to be deposited pursuant to the Agreement, and such failure
continues unremedied for two business days or such other time period as is
specified in the Agreement; (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any of its other covenants or
agreements in the Agreement which continues unremedied for 60 days or such other
time period as is specified in the Agreement after the giving of written notice
of such failure to the Master Servicer by the Trustee, or to the Master Servicer
and the Trustee by the holders of Securities of any class evidencing not less
than 25% of the aggregate principal amount or interests ("Percentage Interests")
evidenced by such class; and (iii) certain events of insolvency, readjustment of
debt, marshaling of assets and liabilities or similar proceedings and certain
actions by or on behalf of the Master Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
If specified in the related Prospectus Supplement, the Pooling and
Servicing Agreement, the Trust Agreement or Master Servicing Agreement will
permit the Trustee to sell the assets of the Trust Fund in the event that
payments in respect thereto are insufficient to make payments required in the
Agreement. The assets of the Trust Fund will be sold only under the
circumstances and in the manner specified in the related Prospectus Supplement.
In general, so long as an Event of Default under an Agreement remains
unremedied, the Trustee may, and at the direction of holders of Securities
evidencing Percentage Interests aggregating not less than 25% of the principal
of the related Trust Fund and under such circumstances as may be specified in
such Agreement, the Trustee shall, terminate all of the rights and obligations
of the Master Servicer under the Agreement relating to such Trust Fund and in
and to the Mortgage Loans, whereupon the Trustee generally will succeed to all
of the responsibilities, duties and liabilities of the Master Servicer under the
Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a Mortgage Loan servicing institution with a net worth of at least
$10,000,000 to act as successor to the Master Servicer under the Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity. The
Trustee and any such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation payable to the
Master Servicer under the Agreement.
In general, no Securityholder, solely by virtue of such holder's
status as a Securityholder, will have any right under any Agreement to institute
any proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interest constituting such class have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
INDENTURE. "Events of Default" under the Indenture for each Series of
Notes will include: In general, (i) a default for 30 days or more in the payment
of any principal of or interest on any Note of such Series; (ii) failure to
perform any other covenant of the Trust Fund in the Indenture which continues
for a period of 60 days or such other time period as is specified in the
Indenture after notice thereof is given in accordance with the procedures
described in the related Prospectus Supplement; (iii) any representation or
warranty made by the Trust Fund in the Indenture or in any certificate or other
writing delivered pursuant thereto or in connection therewith with respect to or
affecting such Series having been incorrect in a material respect as of the time
made, and such breach is not cured within 60 days after notice thereof is given
in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Seller or the Trust Fund; or (v) any other Event of Default
provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series may declare the principal amount (or, if the Notes of that
Series are entitled to payment of principal only, such portion of the principal
amount as may be specified in the related Prospectus Supplement) of all the
Notes of such Series to be due and payable immediately. Such declaration may,
under certain circumstances, be rescinded and annulled by the Securityholders of
a majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for 30 days or more, unless
(a) the Securityholders of 100% of the then aggregate outstanding amount of the
Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of Securityholders of 66-2/3% of the then aggregate
outstanding amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for 30 days or more in the payment
of principal of or interest on the Notes of a Series, the Indenture provides
that the Trustee will have a prior lien on the proceeds of any such liquidation
for unpaid fees and expenses. As a result, upon the occurrence of such an Event
of Default, the amount available for distribution to the Securityholders of
Notes may be less than would otherwise be the case. However, the Trustee may not
institute a proceeding for the enforcement of its lien except in connection with
a proceeding for the enforcement of the lien of the Indenture for the benefit of
the Securityholders of Notes after the occurrence of such an Event of Default.
In the event the principal of the Notes of a Series is declared due
and payable, as described above, the Securityholder of any such Notes issued at
a discount from par may be entitled to receive no more than an amount equal to
the unpaid principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Securityholders of Notes of such Series, unless such
Securityholders have offered to the Trustee security or indemnity satisfactory
to it against the costs, expenses and liabilities which might be incurred by it
in complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority of the then aggregate outstanding amount of the Notes of such
Series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee with respect to the Notes of such Series, and
the holders of a majority of the then aggregate outstanding amount of the Notes
of such Series may, in certain cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a default in respect
of a covenant or provision of the Indenture that cannot be modified without
the waiver or consent of all the holders of the outstanding Notes of such Series
affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Securities will be set
forth in the related Prospectus Supplement. The entity serving as Trustee may
have normal banking relationships with the Seller and its affiliates. In
addition, for the purpose of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust Fund relating to a Series of
Securities. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the applicable Agreement
will be conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who will exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents will have any or all of the rights, powers, duties and obligations of the
Trustee conferred on them by such appointment; provided that the Trustee will
continue to be responsible for its duties and obligations under the Agreement.
In the event a Series includes both Notes and Certificates, a separate Trustee
identified in the related Prospectus Supplement will serve as Trustee for the
Certificates and for the Notes.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any assets or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Agreement. Upon receipt of the various certificates,
statements, reports or other instruments required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the
Securityholders or the Master Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that the Trustee will not
be personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the
Securityholders following an Event of Default. The Trustee is not required to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the Agreement, or in the exercise of any
of its rights or powers, if it has reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Seller, resign at any
time, in which event the Seller will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within the period specified in the Agreement after the
giving of such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for appointment of a successor Trustee. The
Trustee may also be removed at any time (i) if the Trustee ceases to be eligible
to continue as such under the Agreement, (ii) if the Trustee becomes insolvent
or (iii) by the Securityholders evidencing over 50% of the aggregate voting
rights of the Securities in the Trust Fund upon written notice to the Trustee
and to the Seller. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
<PAGE>
AMENDMENT
In general, each Agreement may be amended by the parties thereto,
without the consent of any of the Securityholders, (i) to cure any ambiguity;
(ii) to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the Agreement which
are not inconsistent with the provisions thereof, provided that such action will
not adversely affect in any material respect the interests of any
Securityholder. In addition, to the extent provided in the related Agreement, an
Agreement may be amended without the consent of any of the Securityholders, to
change the manner in which the Securities Account, the Protected Account or any
other Accounts are maintained, provided that any such change does not adversely
affect the then current rating on the class or classes of Securities of such
Series that have been rated. In addition, if a REMIC election is made with
respect to a Trust Fund, the related Agreement may be amended to modify,
eliminate or add to any of its provisions to such extent as may be necessary to
maintain the qualification of the related Trust Fund as a REMIC, provided that
the Trustee has received an opinion of counsel to the effect that such action is
necessary or helpful to maintain such qualification. In general, each Agreement
may also be amended by the parties thereto with consent of holders of Securities
of such Series evidencing not less than 51% of the aggregate Percentage
Interests of each class affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Agreement or of modifying in any manner the rights of the holders of the
related Securities; provided, however, that no such amendment may (i) reduce in
any manner the amount of or delay the timing of, payments received on Trust
Assets which are required to be distributed on any Security without the consent
of the holder of such Security, or (ii) reduce the aforesaid percentage of
Securities of any class of holders which are required to consent to any such
amendment without the consent of the holders of all Securities of such class
covered by such Agreement then outstanding. If a REMIC election is made with
respect to a Trust Fund, the Trustee will not be entitled to consent to an
amendment to the related Agreement without having first received an opinion of
counsel to the effect that such amendment will not cause such Trust Fund to fail
to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
The obligations created by each Agreement for a Series of Securities
generally will terminate upon the payment to the related Securityholders of all
amounts held in any Accounts or by the Master Servicer and required to be paid
to them pursuant to such Agreement following the later of (i) the final payment
or other liquidation of the last of the Trust Assets subject thereto or the
disposition of all property acquired upon foreclosure or deed in lieu of
foreclosure of any Mortgage Assets remaining in the Trust Fund and (ii) the
purchase by the Seller, the Master Servicer or other entity specified in the
related Prospectus Supplement including, if REMIC or FASIT treatment has been
elected, by the holder of the residual interest in the REMIC or FASIT (see
"Federal Income Tax Consequences" below), from the related Trust Fund of all of
the remaining Trust Assets and all property acquired in respect of Mortgage
Assets remaining in the Trust Fund.
Any such purchase of Trust Assets and property acquired in respect of
Mortgage Assets evidenced by a Series of Securities will be made at the option
of the Seller or other entity identified in the related Prospectus Supplement,
at a price, and in accordance with the procedures, specified in the related
Prospectus Supplement. Such purchase price may not in all cases equal the entire
unpaid principal and accrued unpaid interest on the Securities that are
outstanding at the time of the optional termination due to the fact that any
component of the purchase price based on existing REO property (i.e. real
property acquired following foreclosure and as to which a realized loss has not
yet been taken) will be equal to the fair market value of such property and not
necessarily the previously outstanding principal balance of the related loan.
There may not be sufficient proceeds to pay off the then current balance of and
accrued unpaid interest on Securities of such Series outstanding. The exercise
of such right will effect early retirement of the Securities, but the right of
the Seller or such other entity to so purchase will generally be subject to the
principal balance of the related Trust Assets being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Trust Assets at the Cut-off Date for the Series. The foregoing is
subject to the provision that if a REMIC or FASIT election is made with respect
to a Trust Fund, any repurchase pursuant to clause (ii) above will be made only
in connection with a "qualified liquidation" of the REMIC or the FASIT within
the meaning of Section 860F(g)(4) of the Code.
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LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of material legal matters relating to the Mortgage Loans. Because such
legal aspects are governed primarily by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete or to reflect
the laws of any particular state, or to encompass the laws of all states in
which the security for the Mortgage Loans is situated.
GENERAL
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. The Single Family Loans and
Multifamily Loans will be secured by mortgages, deeds of trust, security deeds
or deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to the loan is located. Deeds of trust are used
almost exclusively in California instead of mortgates. A mortgage creates a lien
upon the real property encumbered by the mortgage, which lien is generally not
prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. The mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary. The priority of the lien of the mortgage in a Single Family Loan or
Multifamily Loan will be specified in the related Prospectus Supplement.
CONDOMINIUMS. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the other individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans.
The Cooperative (i) owns all the real property that comprises the project,
including the land and the apartment building comprised of separate dwelling
units and common areas or (ii) leases the land generally by a long-term ground
lease and owns the apartment building. The Cooperative is directly responsible
for project management and, in most cases, payment of real estate taxes and
hazard and liability insurance. If there is a blanket mortgage on the property
and/or underlying land, as is generally the case, the Cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the Cooperative in connection with the
construction or purchase of the Cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
Cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the Cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of a Trust Fund including Cooperative Loans,
the collateral securing the Cooperative Loans.
<PAGE>
The Cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-stockholder's
pro rata share of the Cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying rights is financed through
a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and typically
a financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
CONTRACTS. Each Contract evidences both (a) the obligation of the
obligor to repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such loan. The
Contracts generally are "chattel paper" as defined in the UCC in effect in the
states in which the Manufactured Homes initially were registered. Pursuant to
the UCC, the rules governing the sale of chattel paper are similar to those
governing the perfection of a security interest in chattel paper. Under the
Agreement, the Seller generally will transfer or cause the transfer of physical
possession of the Contracts to the Trustee or its custodian. In addition the
Seller will make or cause to be made an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the Trustee's ownership of
the Contracts.
Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. The Master Servicer generally
will be required to effect such notation or delivery of the required documents
and fees, and to obtain possession of the certificate of title, as appropriate
under the laws of the state in which any Manufactured Home is registered. If the
Master Servicer fails, due to clerical errors or otherwise, to effect such
notation or delivery, or files the security interest under the wrong law (for
example, under a motor vehicle title statute rather than under the UCC, in a few
states), the Trustee may not have a first priority security interest in the
Manufactured Home securing a Contract.
As manufactured homes have become larger and often have been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a Manufactured Home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor does not violate this agreement, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or the filing of a
UCC financing statement will be effective to maintain the priority of the
security interest in the Manufactured Home. If, however, a Manufactured Home is
permanently attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained by
the Seller and transferred to the Seller.
The Seller will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Securityholders. In
general, neither the Seller, the Master Servicer nor the Trustee will amend the
certificates of title to identify the Trustee, on behalf of the Securityholders,
as the new secured party and, accordingly, the Seller or the Lender will
continue to be named as the secured party on the certificates of title relating
to the Manufactured Homes. In most states, such assignment is an effective
conveyance of such security interest without amendment of any lien noted on the
related certificate of title and the new secured party succeeds to the Seller's
rights as the secured party. However, in some states there exists a risk that,
in the absence of an amendment to the certificate of title, such assignment of
the security interest might not be held effective against creditors of the
Seller or Lender.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest assigned to the Seller and the Trustee is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for value
of Manufactured Homes and holders of perfected security interests. There also
exists a risk in not identifying the Trustee, on behalf of the Securityholders
as the new secured party on the certificate of title that, through fraud or
negligence, the security interest of the Trustee could be released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Seller will obtain the representation of the Lender that it has no knowledge of
any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Securityholders in the event such a lien
arises.
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FORECLOSURE/REPOSSESSION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. Foreclosure of a deed of
trust is generally accomplished by a non-judicial sale under a specific
provision in the deed of trust which authorizes the trustee to sell the property
at public auction upon any default by the borrower under the terms of the note
or deed of trust. In some states, such as California, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person who
has recorded a request for a copy of any notice of default and notice of sale.
In addition, the trustee must provide notice in some states to any other person
having an interest of record in the real property, including any junior
lienholders. Before such non-judicial sale takes place, typically a notice of
sale must be posted in a public place and, in most states, including California,
published during a specific period of time in one or more newspapers. In
addition, these notice provisions require that a copy of the notice of sale be
posted on the property and sent to parties having an interest of record in the
property. In California, the entire process from recording a notice of default
to recording a non-judicial sale usually takes four to five months.
In some states, including California, the borrower-trustor has the
right to reinstate the loan at any time following default until shortly before
the trustee's sale. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a reinstatement period, cure
the default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Certain state laws control the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recoverable by a lender.
Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
COOPERATIVE LOANS. The Cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the Cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics'liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the Cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the Cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws and existing shareholders
and tenants are entitled to remain in the building pursuant to such laws.
CONTRACTS. The Master Servicer on behalf of the Trustee, to the extent
required by the related Agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (I.E., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, generally varying from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the Manufactured Home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. In certain states, after
sale pursuant to a deed of trust or foreclosure of a mortgage, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. In certain other states, including
California, this right of redemption applies only to sales following judicial
foreclosure, and not to sales pursuant to a non-judicial power of sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.
CONTRACTS. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states, including California, have adopted statutory
prohibitions restricting the right of the beneficiary or mortgagee to obtain a
deficiency judgment against borrowers financing the purchase of their residence
or following sale under a deed of trust or certain other foreclosure
proceedings. A deficiency judgment is a personal judgment against the borrower
equal in most cases to the difference between the amount due to the lender and
the fair market value of the real property sold at the foreclosure sale. As a
result of these prohibitions, it is anticipated that in many instances the
Master Servicer will not seek deficiency judgments against defaulting
mortgagors. Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment for any deficiency following possession and resale
of a Manufactured Home. However, some states impose prohibitions or limitations
on deficiency judgments in such cases.
Some state statutes may require the beneficiary or mortgagee to
exhaust the security afforded under a deed of trust or mortgage by foreclosure
in an attempt to satisfy the full debt before bringing a personal action against
the borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
In some states, exceptions to the anti-deficiency statutes are
provided for in certain instances where the value of the lender's security has
been impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
<PAGE>
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Mortgage Loans underlying a Series of Securities and
possible reductions in the aggregate amount of such payments. Some states also
have homestead exemption laws which would protect a principal residence from a
liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state laws
impose specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Lender had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Lender to
repurchase the Contract because of a breach of its representation and warranty
that no claims or defenses exist which would affect the obligor's obligation to
make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
DUE-ON-SALE CLAUSES
Each conventional Mortgage Loan generally will contain a due-on-sale
clause which will generally provide that if the mortgagor or obligor sells,
transfers or conveys the Mortgaged Property, the loan or contract may be
accelerated by the mortgagor or secured party. The Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St Germain Act"), subject to certain
exceptions, preempts state constitutional, statutory and case law prohibiting
the enforcement of due-on-sale clauses. As to loans secured by an owner-occupied
residence (which would include a Manufactured Home), the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Act may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Mortgaged Property to
an uncreditworthy person, which could increase the likelihood of default or may
result in a Mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Mortgage Loan.
<PAGE>
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after
a certain period of time following origination of Single Family Loans,
Cooperative Loans or Contracts with respect to prepayments on loans secured by
liens encumbering owner-occupied residential properties. Since many of the
Mortgaged Properties will be owner-occupied, it is anticipated that prepayment
charges may not be imposed with respect to many of the Single Family Loans,
Cooperative Loans and Contracts. The absence of such a restraint on prepayment,
particularly with respect to fixed rate Single Family Loans, Cooperative Loans
or Contracts having higher Mortgage Rates or APR's, may increase the likelihood
of refinancing or other early retirement of such loans or contracts. Legal
restrictions, if any, on prepayment of Multifamily Loans will be described in
the related Prospectus Supplement.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels will be included in
any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's mortgage loan (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the mortgage loan and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Master
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
In general, any shortfall in interest collections resulting from the application
of the Relief Act could result in losses to the holders of the Securities. In
addition, the Relief Act imposes limitations which would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that such a Mortgage
Loan goes into default, there may be delays and losses occasioned by the
inability to realize upon the Mortgaged Property in a timely fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted
alleging personal injury or property damage from the existence of certain
chemical substances which may be present in building materials. For example,
formaldehyde and asbestos have been and in some cases are incorporated into many
building materials utilized in manufactured and other housing. As a consequence,
lawsuits may arise from time to time asserting claims against manufacturers or
builders of the housing, suppliers of component parts, and related persons in
the distribution process. Plaintiffs have won such judgments in certain such
lawsuits.
Under the FTC Rule described above, the holder of any Contract secured
by a Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. In general, the successful assertion of such claim
constitutes a breach of a representation or warranty of the Lender, and the
Securityholders would suffer a loss only to the extent that (i) the Lender
breached its obligation to repurchase the Contract in the event an obligor is
successful in asserting such a claim, and (ii) the Lender, the Seller or the
Trustee were unsuccessful in asserting any claim of contribution or subrogation
on behalf of the Securityholders against the manufacturer or other persons who
were directly liable to the plaintiff for the damages. Typical products
liability insurance policies held by manufacturers and component suppliers of
manufactured homes may not cover liabilities arising from formaldehyde and
certain other chemicals in manufactured housing, with the result that recoveries
from such manufacturers, suppliers or other persons may be limited to their
corporate assets without the benefit of insurance.
To the extent described in the related Prospectus Supplement, the
Mortgage Loans may include installment sales contracts entered into with the
builders of the homes located on the Mortgaged Properties. The Mortgagors in
some instances may have claims and defenses against the builders which could be
asserted against the Trust Fund.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets
and give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, petroleum
substances (including heating oil and gasoline), radon and other materials which
may affect the property securing the Mortgage Assets. For example, under the
Federal Comprehensive Environmental Response Compensation and Liability Act, as
amended, and possibly under state law in certain states, a secured party which
takes a deed in lieu of foreclosure or purchases a mortgaged property at a
foreclosure sale may become liable in certain circumstances for the costs of a
remedial action ("Cleanup Costs") if hazardous wastes or hazardous substances
have been released or disposed of on the property. Such Cleanup Costs may be
substantial. It is possible that such costs could become a liability of the
Trust Fund and reduce the amounts otherwise distributable to the Securityholders
if a Mortgaged Property securing a Mortgage Loan became the property of the
Trust Fund in certain circumstances and if such Cleanup Costs were incurred.
Moreover, certain states by statute impose a priority lien for any Cleanup Costs
incurred by such state on the property that is the subject of such Cleanup Costs
(a "Superlien"). In such states, even prior recorded liens are subordinated to
such Superliens. In these states, the security interest of the Trustee in a
property that is subject to such a Superlien could be adversely affected.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This section sets forth (i) the federal income tax opinions of Stroock & Stroock
& Lavan LLP, special counsel to the Seller ("Federal Tax Counsel"), described
below regarding the federal income tax status of the entity issuing the
Securities and the federal income tax characterization of such Securities, and
(ii) a summary, based on the advice of Federal Tax Counsel, of the material
federal income tax consequences of the purchase, ownership and disposition of
Securities. The summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended
(the "Code"), but much of the discussion is applicable to other investors as
well. Because tax consequences may vary based on the status or tax attributes
and the individual circumstances or special treatment under the income tax laws
of the owner of a Security, prospective investors are urged to consult their own
tax advisers concerning the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of Securities. For purposes
of this tax discussion (except with respect to information reporting, or where
the context indicates otherwise), any reference to the "holder" means the
beneficial owner of a Security.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences with respect to a Series of
Securities to holders will vary depending on whether: (i) an election is made to
treat the Trust Fund (or certain assets of the Trust Fund) relating to a
particular Series of Securities as a real estate mortgage investment conduit
("REMIC") under the Code; (ii) an election is made to treat the Trust Fund (or
certain assets of the Trust Fund) as a financial asset securitization investment
trust ("FASIT") under the Code; (iii) for federal income tax purposes the Trust
Fund is classified as a grantor trust; (iv) for federal income tax purposes the
Trust Fund is classified as a partnership or is disregarded as an entity
separate from its owner; (v) the Securities represent an ownership interest for
federal income tax purposes in some or all of the assets included in the Trust
Fund for a Series and/or (vi) the Securities of a Series are classified as
indebtedness for federal income tax purposes. The Prospectus Supplement for each
Series of Securities will specify how the Securities will be treated for federal
income tax purposes and will discuss whether a REMIC or FASIT election, if any,
will be made with respect to such Series.
REMIC AND FASIT ELECTIONS
Under the Code, an election may be made with respect to each Trust
Fund related to a Series of Securities to treat such Trust Fund or certain
assets of such Trust Fund as a REMIC or a FASIT. The Prospectus Supplement for
each Series of Securities will indicate whether a REMIC or a FASIT election will
be made with respect to the related Trust Fund. To the extent provided in the
Prospectus Supplement for a Series, holders may also have the benefit of a
Reserve Account and of certain agreements (each, a "Yield Supplement Agreement")
under which payment will be made from the Reserve Account or under the Yield
Supplement Agreement in the event that interest accrued on the Mortgage Loans at
their Mortgage Rates is insufficient to pay interest on the Securities of such
Series (a "Basis Risk Shortfall").
REMIC SECURITIES
GENERAL. The term "REMIC Securities" denotes Securities (or the
interests composing Securities) of a Series with respect to which a REMIC
election will be made. If a REMIC election with respect to a Trust Fund is to be
made, the Prospectus Supplement will designate the Securities of such Series or
the interests composing such Securities as "regular interests" ("REMIC Regular
Securities"), which where the context so requires includes a reference to each
interest composing a Security where such interest has been designated as a
regular interest, in lieu of such Securities, in the REMIC (within the meaning
of Section 860G(a)(l) of the Code) or as the REMIC Residual Certificates in the
REMIC (within the meaning of Section 860G(a)(2) of the Code). With respect to
each Series of REMIC Securities, the Trustee will agree in the Agreement to
elect to treat the related Trust Fund or certain assets of such Trust Fund as a
REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Upon the issuance of each Series of REMIC Securities, Federal Tax
Counsel will deliver its opinion that, with respect to each Series of REMIC
Securities for which a REMIC election is to be made, under then existing law,
and assuming a proper and timely REMIC election and ongoing compliance with the
provisions of the Agreement and applicable provisions of the Code and applicable
Treasury regulations, the related Trust Fund or certain assets of such Trust
Fund will be a REMIC and the REMIC Securities will be considered to evidence
ownership of "regular interests" or "residual interests" within the meaning of
the REMIC provisions of the Code.
ALLOCATION OF PURCHASE PRICE. To the extent provided in the Prospectus
Supplement for a Series, holders of REMIC Regular Securities who are entitled to
payments from the Reserve Account in the event of a Basis Risk Shortfall will be
required to allocate their purchase price between their beneficial ownership
interests in the related REMIC regular interests and Yield Supplement
Agreements, and will be required to report their income realized with respect
to each, calculated taking into account such allocation. In general, such
allocation would be based on the respective fair market values of the REMIC
regular interests and the related Yield Supplement Agreements on the date of
purchase of the related REMIC Regular Security. However, a portion of the
purchase price of a REMIC Regular Security should be allocated to accrued but
unpaid interest. No representation is or will be made as to the fair market
value of the Yield Supplement Agreements or the relative values of the REMIC
regular interests and the Yield Supplement Agreements, upon initial issuance of
the related REMIC Regular Securities or at any time thereafter. Holders of REMIC
Regular Securities are advised to consult their own tax advisors concerning the
determination of such fair market values. Under the applicable Agreement,
holders of applicable REMIC Regular Securities will agree that, for federal
income tax purposes, they will be treated as owners of the respective regular
interests and of the corresponding Yield Supplement Agreement.
STATUS OF REMIC SECURITIES. REMIC Securities will be "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets, but not to the extent that the
REMIC's assets consist of Yield Supplement Agreements. However, if at least 95
percent of the REMIC's assets are qualifying assets, then 100 percent of the
REMIC Securities will be qualifying assets. Similarly, income on the REMIC
Securities will be treated as "interest on obligations secured by mortgages on
real property" within the meaning of Section 856(c)(3)(B) of the Code, subject
to the limitations of the preceding two sentences. In addition to the Mortgage
Assets, the REMIC's assets will include payments on the Mortgage Assets held
pending distribution to holders of REMIC Securities, amounts in Reserve Accounts
(if any), other credit enhancements (if any), and possibly buydown funds
("Buydown Funds"). The Prospectus Supplement will indicate whether the Mortgage
Assets will be qualifying assets under the foregoing sections of the Code. The
regulations under Sections 860A through 860G of the Code (the "REMIC
Regulations") treat credit enhancements as part of the mortgages or pool of
mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on the Mortgage Assets and held pending
distribution to holders of REMIC Securities ("cash flow investments") will be
treated as qualifying assets. Treasury regulations do not address whether
amounts in a Reserve Account or Buydown Funds would also constitute qualifying
assets. The Prospectus Supplement for each Series will indicate (if applicable)
that it has Buydown Funds. The REMIC Securities will not be "residential loans"
for purposes of the residential loan requirement of Section 593(g)(4)(B) of the
Code.
TIERED REMIC STRUCTURES
For certain Series of Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
Series of Securities, Federal Tax Counsel will deliver its opinion that,
assuming compliance with all provisions of the related Agreement and applicable
provisions of the Code and applicable Treasury regulations and rulings, the
Tiered REMICs will each qualify under then existing law as a REMIC and the REMIC
Securities issued by the Tiered REMICs, respectively, will be considered to
evidence ownership of "regular interests" or "residual interests" in the related
REMIC within the meaning of the REMIC provisions of the Code.
Solely for purposes of determining whether the REMIC Securities will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code,
and assets described in Section 7701(a)(19)(C) of the Code, and whether the
income on such Securities is interest described in Section 856(c)(3)(B) of the
Code, the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR SECURITIES
CURRENT INCOME ON REMIC REGULAR SECURITIES-GENERAL. Except as
otherwise indicated herein, the REMIC Regular Securities will be treated for
federal income tax purposes (but not necessarily for accounting or other
purposes) as debt instruments that are issued by the REMIC on the date of
issuance of the REMIC Regular Securities and not as beneficial interests in the
REMIC or the REMIC's assets. Holders of REMIC Regular Securities who would
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Securities under an accrual method.
<PAGE>
Payments of interest on REMIC Regular Securities may be based on a
fixed rate, a variable rate as permitted by the REMIC Regulations, or may
consist of a specified portion of the interest payments on qualified mortgages
where such portion does not vary during the period the REMIC Regular Security is
outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "--Current Income on
REMIC Regular Securities--Original Issue Discount" and "--Variable Rate REMIC
Regular Securities" below, for a discussion of the definition of a qualified
floating rate for purposes of the OID Regulations. In contrast to the OID
Regulations, for purposes of the REMIC Regulations, a qualified floating rate
does not include any multiple of a qualified floating rate (also excluding
multiples of qualified floating rates that themselves would constitute qualified
floating rates under the OID Regulations), and the characterization of a
variable rate that is subject to a cap, floor or similar restriction as a
qualified floating rate for purposes of the REMIC Regulations will not depend
upon the OID Regulations relating to caps, floors, and similar restrictions. See
"--Current Income on REMIC Regular Securities--Original Issue Discount" and
"--Variable Rate REMIC Regular Securities" below for discussion of the OID
Regulations relating to caps, floors and similar restrictions. A qualified
floating rate, as defined above for purposes of the REMIC Regulations (a "REMIC
qualified floating rate"), qualifies as a variable rate for purposes of the
REMIC Regulations if such REMIC qualified floating rate is set at a "current
rate" as defined in the OID Regulations. In addition, a rate equal to the
highest, lowest or an average of two or more REMIC qualified floating rates
qualifies as a variable rate for REMIC purposes. A REMIC Regular Security may
also have a variable rate based on a weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC where each qualified
mortgage taken into account has a fixed rate or a variable rate that is
permissible under the REMIC Regulations. Further, a REMIC Regular Security may
have a rate that is the product of a REMIC qualified floating rate or a weighted
average rate and a fixed multiplier, is a constant number of basis points more
or less than a REMIC qualified floating rate or a weighted average rate, or is
the product, plus or minus a constant number of basis points, of a REMIC
qualified floating rate or a weighted average rate and a fixed multiplier. An
otherwise permissible variable rate for a REMIC Regular Security, described
above, will not lose its character as such because it is subject to a floor or a
cap, including a "funds available cap" as that term is defined in the REMIC
Regulations. Lastly, a REMIC Regular Security will be considered as having a
permissible variable rate if it has a fixed or otherwise permissible variable
rate during one or more payment or accrual periods and different fixed or
otherwise permissible variable rates during other payment or accrual periods.
ORIGINAL ISSUE DISCOUNT. REMIC Regular Securities of certain Series
may be issued with "original issue discount" within the meaning of Section
1273(a) of the Code. Holders of REMIC Regular Securities issued with original
issue discount generally must include original issue discount in gross income
for federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Security be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Securities.
Each Trust Fund will report original issue discount, if any, to the
holders of REMIC Regular Securities based on the OID Regulations. OID
Regulations concerning contingent payment debt instruments do not apply to the
REMIC Regular Securities.
The OID Regulations provide that, in the case of debt instruments such
as REMIC Regular Securities, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular Securities
will be the rate used in pricing the initial offering of the securities. The
Prospectus Supplement for each Series of REMIC Regular Securities will specify
the Prepayment Assumption, but no representation is made that the REMIC Regular
Securities will, in fact, prepay at a rate based on the Prepayment Assumption or
at any other rate.
In general, a REMIC Regular Security will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "--Payment Lag REMIC Regular
Securities; Initial Period Considerations," and "--Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Securities (as defined
below) and accrual Securities, the stated redemption price at maturity of a
REMIC Regular Security is its principal amount. The issue price of a REMIC
Regular Security is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Securities is sold. The issue price will be reduced if any portion of such price
is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Security on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Security apparently
is computed for purposes of this DE MINIMIS rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Security, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Security's stated redemption price at maturity. The OID Regulations provide that
holders will include any DE MINIMIS original issue discount ratably as payments
of stated principal are made on the REMIC Regular Securities.
The holder of a REMIC Regular Security issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Security. In the case of an original holder of a REMIC
Regular Security, the daily portions of original issue discount are determined
first by calculating the portion of the original issue discount that accrued
during each period (an "accrual period") that begins on the day following a
Distribution Date (or in the case of the first such period, begins on the
Closing Date) and ends on the next succeeding Distribution Date. The original
issue discount accruing during each accrual period is then allocated ratably to
each day during such period to determine the daily portion of original issue
discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Security, if any, in future periods and (B) the distributions
made on the REMIC Regular Security during the accrual period that are included
in such REMIC Regular Security's stated redemption price at maturity, over (ii)
the adjusted issue price of such REMIC Regular Security at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence will be calculated (i) assuming that the REMIC Regular
Securities will be prepaid in future periods at a rate computed in accordance
with the Prepayment Assumption and (ii) using a discount rate equal to the
original yield to maturity of the REMIC Regular Securities. For these purposes,
the original yield to maturity of the REMIC Regular Securities will be
calculated based on their issue price and assuming that the REMIC Regular
Securities will be prepaid in accordance with the Prepayment Assumption. The
adjusted issue price of a REMIC Regular Security at the beginning of any accrual
period will equal the issue price of such REMIC Regular Security, increased by
the portion of the original issue discount that has accrued during prior accrual
periods, and reduced by the amount of any distributions made on such REMIC
Regular Security in prior accrual periods that were included in such REMIC
Regular Security's stated redemption price at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Security in future accrual
periods. Such a holder may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
holder is entitled. However, Treasury regulations do not address this issue.
A subsequent holder that purchases a REMIC Regular Security issued
with original issue discount at a cost that is less than its remaining stated
redemption price at maturity will also generally be required to include in gross
income, for each day on which it holds such REMIC Regular Security, the daily
portions of original issue discount with respect to the REMIC Regular Security,
calculated as described above. However, if (i) the excess of the remaining
stated redemption price at maturity over such cost is less than (ii) the
aggregate amount of such daily portions for all days after the date of purchase
until final retirement of such REMIC Regular Security, then such daily portions
will be reduced proportionately in determining the income of such holder.
QUALIFIED STATED INTEREST. Interest payable on a REMIC Regular
Security which qualifies as "qualified stated interest" for purposes of the OID
Regulations will not be includable in the stated redemption price at maturity of
the REMIC Regular Security. Accordingly, if the interest on a REMIC Regular
Security does not constitute "qualified stated interest," the REMIC Regular
Security will have original issue discount. Interest payments will not qualify
as qualified stated interest unless the interest payments are "unconditionally
payable." The OID Regulations state that interest is unconditionally payable if
reasonable legal remedies exist to compel timely payment, or the debt instrument
otherwise provides terms and conditions that make the likelihood of late payment
(other than a late payment that occurs within a reasonable grace period) or
nonpayment of interest a remote contingency, as defined in the OID Regulations.
Treasury regulations do not address whether the terms and conditions of the
Mortgage Assets underlying the REMIC Regular Securities or the terms and
conditions of the REMIC Regular Securities are considered when determining
whether the likelihood of late payment or nonpayment of interest is a remote
contingency. Any terms or conditions that do not reflect arm's length dealing or
that the holder does not intend to enforce are not considered.
PREMIUM. A purchaser of a REMIC Regular Security that purchases such
REMIC Regular Security at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Security at a premium, and may, under Section 171 of the Code, elect to amortize
such premium under a constant yield method over the life of the REMIC Regular
Security. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Security for this purpose. Except as
provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Security.
PAYMENT LAG REMIC REGULAR SECURITIES; INITIAL PERIOD CONSIDERATIONS.
Certain REMIC Regular Securities will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Securities or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the DE
MINIMIS rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is DE MINIMIS, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
VARIABLE RATE REMIC REGULAR SECURITIES. Under the OID Regulations,
REMIC Regular Securities paying interest at a variable rate (a "Variable Rate
REMIC Regular Security") are subject to special rules. A Variable Rate REMIC
Regular Security will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Security by more than a specified DE MINIMIS
amount; (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Securities should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Security is denominated. A multiple of a qualified
floating rate will generally not itself constitute a qualified floating rate for
purposes of the OID Regulations. However, a variable rate equal to (i) the
product of a qualified floating rate and a fixed multiple that is greater than
0.65 but not more than 1.35 or (ii) the product of a qualified floating rate and
a fixed multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate REMIC Regular Security
will be treated as a single qualified floating rate (a "Presumed Single
Qualified Floating Rate"). Two or more qualified floating rates with values
within 25 basis points of each other as determined on the Variable Rate REMIC
Regular Security's issue date will be conclusively presumed to be a Presumed
Single Qualified Floating Rate. Notwithstanding the foregoing, a variable rate
that would otherwise constitute a qualified floating rate, but which is subject
to one or more restrictions such as a cap or floor, will not be a qualified
floating rate for purposes of the OID Regulations unless the restriction is
fixed throughout the term of the Variable Rate REMIC Regular Security or the
restriction is not reasonably expected as of the issue date to significantly
affect the yield of the Variable Rate REMIC Regular Security.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. An interest rate on a
REMIC Regular Security that is the weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC should constitute an
objective rate. Despite the foregoing, a variable rate of interest on a Variable
Rate REMIC Regular Security will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Variable Rate REMIC Regular Security's term will be either significantly
less than or significantly greater than the average value of the rate during the
final half of the Variable Rate REMIC Regular Security's term. Further, an
objective rate does not include a rate that is based on information that is
within the control of the issuer (or a party related to the issuer) or that is
unique to the circumstances of the issuer (or a party related to the issuer). An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Security provides for stated interest at a fixed
rate for an initial period of less than one year followed by a variable rate
that is either a qualified floating rate or an objective rate and if the
variable rate on the Variable Rate REMIC Regular Security's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis points
of each other as determined on the Variable Rate REMIC Regular Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate REMIC Regular Securities that qualify as a "variable
rate debt instrument" under the OID Regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a Presumed
Single Qualified Floating Rate or a Presumed Single Variable Rate throughout the
term (a "Single Variable Rate REMIC Regular Security"), original issue discount
is computed as described above in "--Current Income on REMIC Regular
Securities--Original Issue Discount" based on the following: (i) stated interest
on the Single Variable Rate REMIC Regular Security which is unconditionally
payable in cash or property (other than debt instruments of the issuer) at least
annually will constitute qualified stated interest; (ii) by assuming that the
variable rate on the Single Variable Rate REMIC Security is a fixed rate equal
to: (a) in the case of a Single Variable Rate REMIC Regular Security with a
qualified floating rate or a qualified inverse floating rate, the value, as of
the issue date, of the qualified floating rate or the qualified inverse floating
rate or (b) in the case of a Single Variable Rate REMIC Regular Security with an
objective rate (other than a qualified inverse floating rate), a fixed rate
which reflects the reasonably expected yield for such Single Variable Rate REMIC
Regular Security; and (iii) the qualified stated interest allocable to an
accrual period is increased (or decreased) if the interest actually paid during
an accrual period exceeds (or is less than) the interest assumed to be paid
under the assumed fixed rate described in (ii), above.
In general, any Variable Rate REMIC Regular Security other than a
Single Variable Rate REMIC Regular Security(a "Multiple Variable Rate REMIC
Regular Security") that qualifies as a "variable rate debt instrument" will be
converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Security. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Security be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Security with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Multiple Variable
Rate REMIC Regular Security's issue date. Any objective rate (other than a
qualified inverse floating rate) provided for under the terms of the Multiple
Variable Rate REMIC Regular Security is converted into a fixed rate that
reflects the yield that is reasonably expected for the Multiple Variable Rate
REMIC Regular Security. (A Multiple Variable Rate REMIC Regular Security may not
bear more than one objective rate.) In the case of a Multiple Variable Rate
REMIC Regular Security that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate REMIC Regular Security provides for
a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate REMIC
Regular Security as of the Multiple Variable Rate REMIC Regular Security's issue
date is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for either the qualified floating rate
or qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Multiple Variable Rate REMIC Regular Security is then
converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate REMIC Regular Security is converted
into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules,
the amounts of original issue discount and qualified stated interest, if any,
are determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described above in "--Current Income on REMIC Regular
Securities--Original Issue Discount." A holder of the Multiple Variable Rate
REMIC Regular Security will account for such original issue discount and
qualified stated interest as if the holder held the "equivalent" fixed rate debt
instrument. In each accrual period, appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Multiple Variable Rate REMIC Regular Security during the accrual
period.
If a Variable Rate REMIC Regular Security does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Security would be treated as a contingent payment debt
obligation. The manner in which a Variable Rate REMIC Regular Security would be
taxed if such REMIC Regular Security were treated as a contingent payment debt
obligation is not governed by the OID Regulations relating to contingent payment
debt obligations which do not apply to REMIC regular interests and Treasury
regulations do not otherwise address this point.
INTEREST-ONLY REMIC REGULAR SECURITIES. The Trust Fund intends to
report income from interest-only REMIC Regular Securities to the Internal
Revenue Service and to holders of interest-only REMIC Regular Securities based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Securities will be treated as having original
issue discount.
MARKET DISCOUNT. A holder that acquires a REMIC Regular Security at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the holder of a REMIC Regular Security will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Security that has accrued but has not previously been includable
in income, and will recognize ordinary income to that extent. In general terms,
unless Treasury regulations when issued provide otherwise, market discount on a
REMIC Regular Security may be treated, at the election of the holder of the
REMIC Regular Security, as accruing either (i) under a constant yield method,
taking into account the Prepayment Assumption, or (ii) in proportion to accruals
of original issue discount (or, if there is no original issue discount, in
proportion to stated interest at the Interest Rate).
In addition, a holder may be required to defer deductions for a
portion of the holder's interest expense on any debt incurred or continued to
purchase or carry a REMIC Regular Security purchased with market discount. The
deferred portion of any interest deduction would not exceed the portion of the
market discount on the REMIC Regular Security that accrues during the taxable
year in which such interest would otherwise be deductible and, in general, would
be deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Security. The
Code requires that information necessary to compute accruals of market discount
be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Securities.
Notwithstanding the above rules, market discount on a REMIC Regular
Security will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular Security
multiplied by its weighted average remaining life. Weighted average remaining
life presumably is calculated in a manner similar to weighted average life
(described above under "--Current Income on REMIC Regular Securities--Original
Issue Discount"), taking into account distributions (including prepayments)
prior to the date of acquisition of such REMIC Regular Security by the
subsequent purchaser. If market discount on a REMIC Regular Security is treated
as zero under this rule, the actual amount of such discount must be allocated to
the remaining principal distributions on such REMIC Regular Security in
proportion to the amounts of such principal distributions, and when each such
distribution is made, gain equal to the discount, if any, allocated to the
distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Holders of REMIC Regular Securities
should consult their own tax advisors regarding the availability or advisability
of such an election.
SINGLE-CLASS REMICS. In the case of "single-class REMICs," certain
expenses of the REMIC will be allocated to the holders of the REMIC Regular
Securities. The deductibility of such expenses may be subject to certain
limitations. See "--Deductibility of Trust Fund Expenses" below.
SALES OF REMIC REGULAR SECURITIES. If a REMIC Regular Security is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Security. A holder's adjusted basis in a REMIC Regular Security generally equals
the cost of the REMIC Regular Security to the holder, increased by income
reported by the holder with respect to the REMIC Regular Security and reduced
(but not below zero) by distributions on the REMIC Regular Security received by
the holder and by amortized premium. Except as indicated in the next two
paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Security is held as a capital asset.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includable in the seller's income with respect to the REMIC Regular Security had
income accrued thereon at a rate equal to 110% of "the applicable federal rate"
(generally, an average of current yields on Treasury securities), determined as
of the date of purchase of the REMIC Regular Security, over (ii) the amount
actually includable in the seller's income. In addition, gain recognized on the
sale of a REMIC Regular Security by a seller who purchased the REMIC Regular
Security at a market discount would be taxable as ordinary income in an amount
not exceeding the portion of such discount that accrued during the period the
REMIC Regular Security was held by such seller, reduced by any market discount
includable in income under the rules described above under "--Current Income on
REMIC Regular Securities--Market Discount."
REMIC Regular Securities will be "evidences of indebtedness" within
the meaning of Section 582(c)(1) of the Code, so that gain or loss recognized
from a sale of a REMIC Regular Security by a bank or other financial institution
to which such section applies would be ordinary income or loss.
<PAGE>
TERMINATION. The REMIC will terminate, if not earlier, shortly
following the REMIC's receipt of the final payment in respect of the underlying
qualified mortgages. The last distribution on a REMIC Regular Security should be
treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a holder of a REMIC Regular Security of a Series will have a
separate contractual right to payments under a Yield Supplement Agreement, and
the tax treatment of such payments, if any, will be addressed in the related
Prospectus Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a holder of a REMIC Residual Certificate must be
treated as ordinary income or loss as the case may be. Income from residual
interests is "portfolio income" which cannot be offset by "passive activity
losses" in the hands of individuals or other persons subject to the passive loss
rules. The Code also provides that all residual interests must be issued on the
REMIC's startup day and designated as such. For this purpose, "startup day"
means the day on which the REMIC issues all of its regular and residual
interests, and under the REMIC Regulations may, in the case of a REMIC to which
property is contributed over a period of up to ten consecutive days, be any day
designated by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the
amounts taken into account by holders of REMIC Residual Certificates, is
determined in the same manner as in the case of an individual, with certain
exceptions. The accrual method of accounting must be used and the taxable year
of the REMIC must be the calendar year. The basis of property contributed to the
REMIC in exchange for regular or residual interests is its fair market value
immediately after the transfer. The REMIC Regulations determine the fair market
value of the contributed property by deeming it equal to the aggregate issue
prices of all regular and residual interests in the REMIC.
A REMIC Regular Security will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Assets held by the REMIC must be included
in the income of the REMIC as it accrues, rather than being included in income
only upon sale of the Mortgage Assets or as principal on the Mortgage Assets is
paid. The REMIC is not entitled to any personal exemptions or to deductions for
taxes paid to foreign countries and U.S. possessions, charitable contributions
or net operating losses, or to certain other deductions to which individuals are
generally entitled. Income or loss in connection with a "prohibited transaction"
is disregarded. See "--Prohibited Transactions."
As previously discussed, the timing of recognition of negative
original issue discount, if any, on a REMIC Regular Security is uncertain. As a
result, the timing of recognition of the related REMIC taxable income is also
uncertain. The related REMIC taxable income may be recognized when the adjusted
issue price of such REMIC Regular Security would exceed the maximum amount of
future payments with respect to such REMIC Regular Security. However, Treasury
regulations do not address this issue.
A REMIC Residual Certificate has a tax basis in its holder's hands
that is distinct from the REMIC's basis in its assets. The tax basis of a REMIC
Residual Certificate in its holder's hands will be its cost (I.E., the purchase
price of the REMIC Residual Certificate), and will be reduced (but not below
zero) by the holder's share of cash distributions and losses and increased by
its share of taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC
Residual Certificate in any quarter may not exceed the holder's basis in its
REMIC Residual Certificate. Any excess losses may be carried forward
indefinitely to future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce its share of the
REMIC's taxable income.
MISMATCHING OF INCOME AND DEDUCTIONS. The taxable income recognized by
the holder of a REMIC Residual Certificate in any taxable year will be affected
by, among other factors, the relationship between the timing of recognition of
interest and discount income (or deductions for amortization of premium) with
respect to qualified mortgages, on the one hand, and the timing of deductions
for interest (including original issue discount) on the REMIC Regular
Securities, on the other. In the case of multiple classes of REMIC Regular
Securities issued at different yields, and having different weighted average
lives, taxable income recognized by the holders of REMIC Residual Certificates
may be greater than cash flow in earlier years of the REMIC (with a
corresponding taxable loss or less taxable income than cash flow in later
years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Securities, will increase over time as the shorter term, lower yielding
classes of REMIC Regular Securities are paid, whereas interest income from the
Mortgage Assets may not increase over time as a percentage of the outstanding
principal amount of the Mortgage Assets.
In the case of Tiered REMICs, the OID Regulations provide that the
regular interests in the REMIC which directly owns the Mortgage Assets (the
"Lower Tier REMIC") will be treated as a single debt instrument for purposes of
the original issue discount provisions. Therefore, the Trust Fund will calculate
the taxable income of Tiered REMICs by treating the Lower Tier REMIC regular
interests as a single debt instrument.
EXCESS INCLUSIONS. Any "excess inclusions" with respect to a REMIC
Residual Certificate will be subject to certain special rules. The excess
inclusions with respect to a REMIC Residual Certificate are equal to the excess,
if any, of its share of REMIC taxable income for the quarterly period over the
sum of the daily accruals for such quarterly period. The daily accrual for any
day on which the REMIC Residual Certificate is held is determined by allocating
to each day in a quarter its allocable share of the product of (A) 120% of the
long-term applicable federal rate (for quarterly compounding) that would have
applied to the REMIC Residual Certificates (if they were debt instruments) on
the closing date under Section 1274(d)(1) and (B) of the Code the adjusted issue
price of such REMIC Residual Certificates at the beginning of a quarterly
period. For this purpose, the adjusted issue price of such REMIC Residual
Certificate at the beginning of a quarterly period is the issue price of such
Securities plus the amount of the daily accruals of REMIC taxable income for all
prior quarters, decreased by any distributions made with respect to such
Securities prior to the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be
offset by other deductions, including net operating loss carryforwards, on a
holder's return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective for tax years beginning after
December 31, 1986, a taxpayer may elect to have these provisions apply only with
respect to tax years beginning after August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization
subject to the tax on unrelated business income imposed by Section 511 of the
Code, the excess inclusions will be treated as unrelated business taxable income
of such holder for purposes of Section 511 of the Code. In addition, the Code
provides that under Treasury regulations, if a real estate investment trust
("REIT") owns a REMIC Residual Certificate, to the extent excess inclusions of
the REIT exceed its real estate investment trust taxable income (excluding net
capital gains), the excess inclusions would be allocated among the shareholders
of the REIT in proportion to the dividends received by the shareholders from the
REIT. Excess inclusions derived by regulated investment companies ("RICs"),
common trust funds, and subchapter T cooperatives must be allocated to the
shareholders of such entities using rules similar to those applicable to REITs.
The Internal Revenue Service has not yet adopted or proposed such regulations as
to REITs, RICs, or similar entities. A life insurance company cannot adjust its
reserve with respect to variable contracts to the extent of any excess
inclusion, except as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
PROHIBITED TRANSACTIONS. A REMIC is subject to tax at a rate of 100
percent on any net income it derives from "prohibited transactions." In general,
"prohibited transaction" means the disposition of a qualified mortgage other
than pursuant to specified exceptions, the receipt of income as compensation for
services, the receipt of income from a source other than a qualified mortgage or
certain other permitted investments, or gain from the disposition of an asset
representing a temporary investment of payments on the qualified mortgages
pending distribution on the REMIC Securities. In addition, a tax is imposed on a
REMIC equal to 100 percent of the value of certain property contributed to the
REMIC after its "startup day." No REMIC in which interests are offered hereunder
will accept contributions that would cause it to be subject to such tax. This
provision will not affect a REMIC's ability in accordance with the Agreement to
accept substitute Mortgage Assets or to sell defective Mortgage Assets.
A REMIC is subject to a tax (deductible from its income) on any "net
income from foreclosure property" (determined in accordance with Section
857(b)(4)(B) of the Code as if the REMIC were a REIT).
The related Prospectus Supplement will indicate whether any tax
described in the two preceding paragraphs that may be imposed on a Trust Fund
initially would be borne by the REMIC Residual Certificates in the related REMIC
rather than by the REMIC Regular Securities.
DEALERS' ABILITY TO MARK TO MARKET REMIC RESIDUAL CERTIFICATES.
Treasury regulations provide that all REMIC Residual Certificates acquired on or
after January 4, 1995 are not securities and cannot be marked to market pursuant
to Section 475 of the Code.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
TAX ON DISPOSITION OF REMIC RESIDUAL CERTIFICATES. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Section 582(c) of the Code, the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although the tax treatment with respect to a REMIC Residual Certificate
that has unrecovered basis after all funds of the Trust Fund have been
distributed is not addressed in Treasury regulations, under general tax
principles, the holder would be entitled to claim a loss in the amount of the
unrecovered basis.
<PAGE>
The Code provides that, except as provided in Treasury regulations
(which have not yet been issued), if a holder sells a REMIC Residual Certificate
and acquires the same or other REMIC Residual Certificates, residual interests
in another REMIC, or any similar interests in a "taxable mortgage pool" (as
defined in Section 7701(i) of the Code) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Section 1091 of the Code. In that event, any
loss realized by the seller on the sale generally will not be currently
deductible.
A tax is imposed on the transfer of any residual interest in a REMIC
to a "disqualified organization." The tax is imposed on the transferor, or,
where the transfer is made through an agent of the disqualified organization, on
the agent. "Disqualified organizations" include for this purpose the United
States, any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions for periods after such transfer with respect to the interest
transferred multiplied by the highest corporate rate of tax. The transferor (or
agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
TREATMENT OF PAYMENTS TO A TRANSFEREE IN CONSIDERATION OF TRANSFER OF
A REMIC RESIDUAL CERTIFICATE. The preamble to the REMIC Regulations indicates
that the Internal Revenue Service is considering the appropriate federal income
tax consequences of any considertaion paid to a transferee on a transfer of an
interest in a REMIC Residual Certificate and has requested comments on this
issue from tax practitioners. A transferee of such an interest should consult
its own tax advisors.
RESTRICTIONS ON TRANSFER; HOLDING BY PASS-THROUGH ENTITIES. An entity
or segregated pool of assets cannot qualify as a REMIC absent reasonable
arrangements designed to ensure that (1) residual interests in such entity or
segregated pool are not held by disqualified organizations and (2) information
necessary to calculate the tax due on transfers to disqualified organizations
(I.E., a computation of the present value of the excess inclusions) is made
available by the REMIC. The governing instruments of a Trust Fund will contain
provisions designed to ensure the foregoing, and any transferee of a REMIC
Residual Certificate must execute and deliver an affidavit stating that neither
the transferee nor any person for whose account such transferee is acquiring the
REMIC Residual Certificate is a disqualified organization. In addition, as to
the requirement that reasonable arrangements be made to ensure that disqualified
organizations do not hold a residual interest in the REMIC, the REMIC
Regulations require that notice of the prohibition be provided either through a
legend on the certificate that evidences ownership, or through a conspicuous
statement in the prospectus or other offering document used to offer the
residual interest for sale. As to the requirement that sufficient information be
made available to calculate the tax on transfers to disqualified organizations
(or the tax, discussed below, on pass-through entities, interests in which are
held by disqualified organizations), the REMIC Regulations further require that
such information also be provided to the Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated as
"pass-through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass-through entity" against the gross amount of ordinary income of the entity.
<PAGE>
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 number of partners will
be treated as disqualified organizations for purposes of the tax imposed on
pass-through entities if such partnerships hold residual interests in a REMIC.
In addition, 70 percent of an electing large partnership's miscellaneous
itemized deductions will be disallowed, including deductions for servicing and
guaranty fees and any expenses of the REMIC, although the remaining deductions
will not be subject to the 2 percent floor applicable to individual partners.
See "--Deductibility of Trust Fund Expenses" below.
The REMIC Regulations provide that a transfer of a "noneconomic
residual interest" will be disregarded for all federal income tax purposes
unless impeding the assessment or collection of tax was not a significant
purpose of the transfer. A residual interest will be treated as a "noneconomic
residual interest" unless, at the time of the transfer (1) the present value of
the expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate, and (2)
the transferor reasonably expects that for each anticipated excess inclusion,
the transferee will receive distributions from the REMIC, at or after the time
at which taxes on such excess inclusion accrue, sufficient to pay the taxes
thereon. A significant purpose to impede the assessment or collection of tax
exists if the transferor, at the time of the transfer, either knew or should
have known (had "improper knowledge") that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
transferor will be presumed not to have improper knowledge if (i) the transferor
conducts, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
came due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future, and (ii) the
transferee represents to the transferor that (A) the transferee understands that
it might incur tax liabilities in excess of any cash received with respect to
the residual interest and (B) the transferee intends to pay the taxes associated
with owning the residual interest as they come due. Any transferee of a REMIC
Residual Certificate must execute and deliver to the transferor an affidavit
containing the representations described in (ii) above. A different formulation
of this rule applies to transfers of REMIC Residual Certificates by or to
foreign transferees. See "--Foreign Investors in REMIC Securities" below.
DEDUCTIBILITY OF TRUST FUND EXPENSES
A holder of REMIC Securities that is an individual, estate or trust
will be subject to the limitation with respect to certain itemized deductions
described in Section 67 of the Code, to the extent that such deductions, in the
aggregate, do not exceed two percent of the holder's adjusted gross income, and
such holder may not be able to deduct such fees and expenses to any extent in
computing such holder's alternative minimum tax liability. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the Master Servicer of the
Mortgage Assets. These deductions will be allocated entirely to the holders of
the REMIC Residual Certificates in the case of REMIC Trust Funds with multiple
classes of REMIC Regular Securities that do not pay their principal amounts
ratably. As a result, the REMIC will report additional taxable income to holders
of REMIC Residual Certificates in an amount equal to their allocable share of
such deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC," the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Securities
and the REMIC Residual Certificates on a daily basis in proportion to the
relative amounts of income accruing to each holder on that day. In the case of a
holder of a REMIC Regular Security who is an individual or a "pass-through
interest holder" (including certain pass-through entities, but not including
REITs), the deductibility of such expenses will be subject to the limitations
described above. The reduction or disallowance of these deductions may have a
significant impact on the yield of REMIC Regular Securities to such a holder.
<PAGE>
In general terms, a single-class REMIC is one that either (i) would qualify,
under existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
which is structured with the principal purpose of avoiding the single-class
REMIC rules.
FOREIGN INVESTORS IN REMIC SECURITIES
REMIC REGULAR SECURITIES. Except as discussed below, a holder of a
REMIC Regular Security who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Security, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Security under penalties of perjury, certifying that the
holder of the REMIC Regular Security is not a United States person and providing
the name and address of the holder, (ii) the holder is not a "10-percent
shareholder" within the meaning of Section 871(h)(3)(B) of the Code, which could
be interpreted to apply to a holder of a REMIC Regular Security who holds a
direct or indirect 10 percent interest in the REMIC Residual Certificates, (iii)
the holder is not a "controlled foreign corporation" (as defined in the Code)
related to the REMIC or related to a 10 percent holder of a residual interest in
the REMIC, and (iv) the holder is not engaged in a United States trade or
business, or otherwise subject to federal income tax as a result of any direct
or indirect connection to the United States other than through its ownership of
a REMIC Regular Security. For these purposes, the term "United States person"
means (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate whose income
is includable in gross income for United States federal income taxation
regardless of its source, and (iv) a trust for which one or more United States
fiduciaries have the authority to control all substantial decisions and for
which a court of the United States can exercise primary supervision over the
trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (iv) above, unless the trust elects to have its United
States status determined under the criteria set forth in (iv) above for tax
years ending after August 20, 1996. Recently issued Treasury regulations (the
"Final Withholding Regulations"), which are generally effective with respect to
payments made after December 31, 1999, consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payor. All holders
should consult their tax advisers regarding the application of the Final
Withholding Regulations.
REMIC RESIDUAL CERTIFICATES. The Conference Report to the Tax Reform
Act of 1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "--Foreign Investors in REMIC Securities--REMIC
Regular Securities") or to the extent a tax treaty reduces or eliminates the
tax. Treasury regulations provide that amounts paid with respect to residual
interests qualify as portfolio interest only if interest on the qualified
mortgages held by the REMIC qualifies as portfolio interest. Generally, interest
on the Mortgage Assets held by a Trust Fund will not qualify as portfolio
interest, although interest on the Private Mortgage-Backed Securities, other
pass-through certificates, or REMIC regular interests held by a Trust Fund may
qualify. In any case, a holder of a REMIC Residual Certificate will not be
entitled to the portfolio interest exception from the 30% withholding tax (or to
any treaty exemption or rate reduction) for that portion of a payment that
constitutes excess inclusions. Generally, the withholding tax will be imposed
when REMIC gross income is paid or distributed to the holder of a residual
interest or there is a disposition of the residual interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Mortgage Assets from 50 percent of the Prepayment Assumption to 200
percent of the Prepayment Assumption. A transfer by a foreign transferor to a
domestic transferee will likewise be disregarded under the REMIC Regulations if
the transfer would have the effect of allowing the foreign transferor to avoid
the tax on accrued excess inclusions.
BACKUP WITHHOLDING ON REMIC SECURITIES
Distributions made on the REMIC Securities and proceeds from the sale
of REMIC Securities to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Securities complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Securities
would be refunded by the Internal Revenue Service or allowable as a credit
against the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust Fund (Form 1066 and
Schedules Q thereto) must be filed as if the Trust Fund were a partnership for
federal income tax purposes. Information on Schedule Q must be provided to
holders of REMIC Residual Certificates with respect to every calendar quarter.
Each holder of a REMIC Residual Certificate will be required to treat items on
its federal income tax returns consistently with their treatment on the Trust
Fund's information returns unless the holder either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from an incorrect schedule received from the Trust Fund. The Trust Fund also
will be subject to the procedural and administrative rules of the Code
applicable to partnerships, including the determination of any adjustments to,
among other things, items of REMIC taxable income by the Internal Revenue
Service. Holders of REMIC Residual Certificates will have certain rights and
obligations with respect to any administrative or judicial proceedings involving
the Internal Revenue Service. Under the Code and Regulations, a REMIC generally
is required to designate a tax matters person. Generally, subject to various
limitations, the tax matters person has authority to act on behalf of the REMIC
and the holders of the REMIC Residual Certificates in connection with
administrative determinations and judicial review respecting returns of taxable
income of the REMIC. Treasury regulations exempt from certain of these
procedural rules REMICs having no more than one residual interest holder.
The Prospectus Supplement will indicate whether the Trustee, its
designee or some other party will act as the tax matters person for each REMIC.
Each holder of a REMIC Residual Certificate, by the acceptance of its interest
in the REMIC Residual Certificate, agrees that the Trustee or its designee will
act as the holder's fiduciary in the performance of any duties required of the
holder in the event that the holder is the tax matters person.
FASIT SECURITIES
If a FASIT election with respect to a Trust Fund is to be made, the
Prospectus Supplement will designate the Securities of such Series or the
interests composing such Securities as "regular interests" ("FASIT Regular
Securities") which, where the context so requires, includes a reference to each
interest composing a Security where such interest has been designated as a
regular interest, in lieu of such Securities, in the FASIT (within the meaning
of Section 860L(b)(1)(A) of the Code) or an "ownership interest" ("FASIT
Ownership Certificate") in the FASIT (within the meaning of Section 860L(b)(2)
of the Code). Each class of FASIT Regular Securities which are "high-yield
interests" within the meaning of Section 860L(b)(1)(B) of the Code ("High-Yield
Interests") will be identified as such in the Prospectus Supplement. The term
"FASIT Securities" denotes Securities (or the interests composing Securities) of
a Series with respect to which a FASIT election will be made.
With respect to each Series of FASIT Securities, the Trustee will
agree in the Agreement to elect to treat the related Trust Fund or certain
assets of such Trust Fund as a FASIT. Qualification as a FASIT requires ongoing
compliance with certain conditions which are generally described below. Upon the
issuance of each Series of FASIT Securities, Federal Tax Counsel will deliver
its opinion that, with respect to each Series of FASIT Securities for which a
FASIT election is to be made, under then existing law, and assuming a proper and
timely FASIT election and ongoing compliance with the provisions of the
Agreement and applicable provisions of the Code and applicable Treasury
regulations, if any, the related Trust Fund or certain assets of such Trust Fund
will be a FASIT and the FASIT Securities will be considered to evidence
ownership of "regular interests" or an "ownership interest" within the meaning
of the FASIT provisions of the Code.
QUALIFICATION AS A FASIT
The following is a general description of the requirements under the
applicable provisions of Sections 860H through 860L of the Code for the Trust
Fund or certain assets of each Trust Fund to qualify as a FASIT. Treasury
regulations have not yet been proposed or issued with respect to FASITs. A FASIT
must fulfill an assets test, which requires that substantially all the assets of
the FASIT, as of the close of the third calendar month beginning after the
Startup Day and at all times thereafter, must consist of cash or cash
equivalents, certain permitted debt instruments (other than debt instruments
issued by the holder of the FASIT Ownership Certificate or a related party) and
hedges (including contracts to acquire hedges), foreclosure property and regular
interests in another FASIT or in a REMIC. By analogy to the REMIC provisions, it
appears that the "substantially all" requirements should be met if at all times
the aggregate adjusted basis of the nonqualified assets is less than one percent
of the aggregate adjusted basis of all the FASIT's assets. The FASIT Ownership
Certificate and "High-Yield Interests" (described below) may be held only by
certain fully taxable, domestic corporations ("eligible corporations" described
below). The Agreement for each Trust Fund will provide that no legal or
beneficial interests in the FASIT Ownership Certificate or in any Class of FASIT
Regular Securities which the Seller determines to be a High-Yield Interest may
be transferred or registered unless certain conditions, designed to prevent
violation of this requirement, are met.
For purposes of the assets test, permitted debt instruments must bear
interest, if any, at a fixed or qualified variable rate. Permitted hedges
include interest rate or foreign currency notional principal contracts, letters
of credit, insurance, guarantees of payment default and similar instruments as
provided in regulations, and which are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on interests issued
by the FASIT. Foreclosure property is real property acquired by the FASIT in
connection with the default or imminent default of a qualified mortgage,
provided the Seller had no knowledge or reason to know as of the date such asset
was acquired by the FASIT that such a default had occurred or would occur.
Foreclosure property may generally not be held beyond the close of the third
taxable year after the taxable year in which the FASIT acquired such property,
with one extension available from the Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a
FASIT also must meet the following requirements. All of the interests in a FASIT
must be: (i) one or more classes of FASIT regular interests or (ii) a single
FASIT ownership interest. A FASIT regular interest is an interest that is issued
on or after the Startup Day with fixed terms, is designated as a FASIT regular
interest, and (i) unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), (ii) provides that interest payments
(or other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or on a qualified variable rate that would be permitted
under the REMIC Regulations, (iii) has a stated maturity of generally not longer
than 30 years, (iv) has an issue price not greater than 125% of its stated
principal amount, and (v) has a yield to maturity not greater than 5 percentage
points higher that the related applicable federal rate (as defined in Section
1274(d) of the Code). A FASIT regular interest that is described in the
preceding sentence except that it fails to meet one or more of requirements (i),
(ii) (iv) or (v) is a "High-Yield Interest." In order for a FASIT to issue a
High-Yield Interest that fails requirement (ii), such High-Yield Interest must
consist of a specified, nonvarying portion of the interest payments on the
permitted assets (as provided in the REMIC rules). A FASIT ownership interest is
an interest in a FASIT other than a regular interest that is issued on the
Startup Day, is designated a FASIT ownership interest and is held by an
"eligible corporation". An "eligible corporation" is a taxable C corporation
which is not a RIC, REIT, REMIC or cooperative and, therefore, would not include
tax-exempt entities (including pension funds).
If an entity fails to comply with one or more of the ongoing
requirements of the Code for status as a FASIT during any taxable year, the
entity or applicable portion thereof will not be treated as a FASIT thereafter.
In this event, any entity that holds Mortgage Assets and is the obligor with
respect to debt obligations with two or more maturities may be treated as a
separate taxable mortgage pool (I.E, as an association taxable as a corporation;
see "--Tax Characterization of the Trust as a Partnership--Taxable Mortgage
Pools."), and the FASIT Regular Securities may be treated as equity interests
therein. The legislative history of the FASIT provisions indicates, however,
that an entity can continue to be a FASIT if loss of its status was inadvertent,
it takes prompt steps to requalify and other requirements that may be provided
in Treasury regulations are met. Loss of FASIT status results in retirement of
all FASIT regular interests and their reissuance. If the resulting interests
would be treated as equity under general tax principles, cancellation of debt
income may result.
TIERED FASIT STRUCTURES
For certain Series of Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as FASITs
("Tiered FASITs") for federal income tax purposes. Upon the issuance of any such
Series of Securities, Federal Tax Counsel will deliver its opinion that,
assuming compliance with all provisions of the related Agreement and applicable
provisions of the Code and applicable Treasury regulations and rulings, the
Tiered FASITs will each qualify under then existing law as a FASIT and the FASIT
Securities issued by the Tiered FASITs, respectively, will be considered to
evidence ownership of "regular interests" or "ownership interests" in the
related FASIT within the meaning of the FASIT provisions of the Code.
Solely for purposes of determining whether the FASIT Regular
Securities will be "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code, and assets described in Section 7701(a)(19)(C) of the
Code, and whether the income on such Securities is interest described in Section
856(c)(3)(B) of the Code, the Tiered FASITs will be treated as one FASIT.
FASIT REGULAR SECURITIES
CURRENT INCOME ON FASIT REGULAR SECURITIES-GENERAL. Except as
otherwise indicated herein, the FASIT Regular Securities will be treated for
federal income tax purposes (but not necessarily for accounting or other
purposes) as debt instruments that are issued by the FASIT on the date of
issuance of the FASIT Regular Securities and not as beneficial interests in the
FASIT or the FASIT's assets. Holders of FASIT Regular Securities who would
otherwise report income under a cash method of accounting will be required to
report income with respect to FASIT Regular Securities under an accrual method.
As FASIT Regular Securities will be treated as debt instruments, they
are subject to the same original issue discount, premium and market discount
provisions that apply to REMIC regular interests and which are described above
in "--REMIC Regular Securities--Current Income on REMIC Regular
Securities--Original Issue Discount," "--Premium" and "--Market Discount,"
except that those FASIT Regular Securities which are High-Yield Interests are
subject to additional provisions set forth below.
HIGH-YIELD INTERESTS. The taxable income of the holder of any
High-Yield Interest for any tax year will in no event be less than the sum of
that holder's taxable income determined solely with respect to that interest
(including gains and losses from sales and exchanges of those interests) and the
"excess inclusions," if any, as defined under the REMIC rules relating to REMIC
Residual Certificates for such tax year (see "REMIC Residual
Certificates--Excess Inclusions"). Therefore, holders of High-Yield Interests
may not use net operating losses to offset any FASIT income derived from the
High-Yield Interest. This rule is coordinated with the rule that limits a
taxpayer's ability to offset REMIC excess inclusion income against net operating
losses. Any net operating loss carryover is computed by disregarding any income
from the disallowed loss. For purposes of the alternative minimum tax, the
taxable income of the holder of any High-Yield Interest is determined without
regard to the above rules with respect to net operating losses. However, the
alternative minimum taxable income of the holder of any High-Yield Interest may
not be less than the holder's taxable income from the FASIT. In addition, the
alternative tax net operating loss deduction is computed without regard to any
increase in taxable income to the holder referred to above. For purposes of
these rules, all members of an affiliated group filing a consolidated return
will be treated as one taxpayer.
A transfer of a High-Yield Interest to a "disqualified holder" is not
recognized for income tax purposes. A "disqualified holder" is any holder other
than a FASIT or an "eligible corporation" (described above). The transferor
will continue to be taxed on the income from the High-Yield Interest, and the
disqualified holder will not include in its income earnings (other than gain)
from the High-Yield Interest, unless the transferee provides the transferor with
an affidavit that the transferee is not a disqualified holder or the Internal
Revenue Service determines that the High-Yield Interest is no longer held by a
disqualified holder and a corporate tax has been paid on the income from the
High-Yield Interest while it was held by a disqualified holder. Under this rule,
no High-Yield Interests will be treated as issued where the FASIT directly
issues these interests to a disqualified holder other than certain securities
dealers.
An excise tax computed at the highest corporate income tax rate is
imposed on a securities dealer (in addition to other taxes) if it ceases to be a
dealer in securities or subsequently holds the High-Yield Interest for
investment. A securities dealer will not be treated as having changed his intent
for holding High-Yield Interests to investment for the first 31 days after it
acquires the interests unless the holding is a part of a plan to avoid the
restriction on the holding of High-Yield Interests by disqualified holders.
Where a pass-through entity, other than a FASIT, issues either debt or
equity interests that are supported (i.e., secured by FASIT regular interests
and those interests bear a yield to maturity greater than that held on the FASIT
regular interests or the applicable federal rate plus 5 percentage points), then
an excise tax is imposed on the pass-through entity at a rate equal to the
highest corporate income tax rate on the income of any holder of that instrument
attributable to the FASIT regular interests, unless the pass-through entity did
not issue the debt or equity with the principal purpose of avoiding the rule
that High-Yield Interests not be owned by disqualified holders.
SALE OF FASIT REGULAR SECURITIES. If a FASIT Regular Security is sold,
the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the FASIT Regular
Security. A holder's adjusted basis in a FASIT Regular Security generally equals
the cost of the FASIT Regular Security to the holder, increased by income
reported by the holder with respect to the FASIT Regular Security and reduced
(but not below zero) by distributions on the FASIT Regular Security received by
the holder and by amortized premium. Any such gain or loss generally will be
capital gain or loss, provided the FASIT Regular Security is held as a capital
asset.
FASIT Regular Securities will be "evidences of indebtedness" within
the meaning of Section 582(c)(1) of the Code, so that gain or loss recognized
from a sale of a FASIT Regular Security by a bank or other financial institution
to which such section applies would be ordinary income or loss.
TERMINATION. The FASIT will terminate, if not earlier, shortly
following the FASIT's receipt of the final payment in respect of the underlying
qualified mortgages. The last distribution on a FASIT Regular Security should be
treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a holder of a FASIT Regular Security of a Series will have a
separate contractual right to payments under a Yield Supplement Agreement (which
may require an allocation of the purchase price between the FASIT Regular
Securities and the Yield Supplement Agreements) and the tax treatment of such
payments, if any, will be addressed in the related Prospectus Supplement.
FASIT OWNERSHIP CERTIFICATE
GENERALLY. All assets, liabilities and items of income, gain,
deduction loss and credit of a FASIT are treated as assets, liabilities and
items of income, gain, deduction, loss and credit of the holder of the FASIT
Ownership Certificate (the "FASIT Owner") in determining the FASIT Owner's
taxable income. The FASIT Owner does not take into account any item of income,
gain or deduction allocable to prohibited transactions as discussed below and
must treat tax-exempt interest accrued by the FASIT as ordinary income. The
FASIT Owner must use the constant yield method, applied under an accrual method
of accounting, in determining all interest, original issue discount, market
discount and premium deductions with respect to debt instruments held by the
FASIT. Like the holder of a High-Yield Interest, the FASIT Owner is not allowed
to offset any net taxable income derived from its FASIT Ownership Certificate
(including gains and losses from sales and exchanges of such Security) with
losses, including net operating losses. See above discussion under "--FASIT
Regular Securities--Income on FASIT Regular Securities--High-Yield Interests."
NET INCOME FROM PROHIBITED TRANSACTIONS. The FASIT Owner is required
to pay a tax equal to 100 percent of the net income derived from prohibited
transactions. Prohibited transactions include (i) the receipt of income from an
asset that is not a permitted asset; (ii) the disposition of a permitted asset,
other than a permitted disposition as described below; (iii) the receipt of
income derived from any loan originated by the FASIT; and (iv) compensation for
services (other than any fee for a waiver, amendment or consent with respect to
permitted assets, other than foreclosure property). A permitted disposition of a
permitted asset includes a disposition pursuant to the complete liquidation of
any class of regular interests, even if the FASIT itself is not liquidated.
Further, a disposition of a permitted debt instrument is not a prohibited
transaction if the disposition is (i) incident to the foreclosure, default or
imminent default of the instrument; (ii) pursuant to the bankruptcy or
insolvency of the FASIT; (iii) pursuant to a qualified liquidation; (iv)
required to prevent default on a FASIT regular interest where the threatened
default is attributable to a default on one or more debt instruments held by the
FASIT; (v) to facilitate a clean-up call or (vi) to substitute one permitted
debt instrument for another or to reduce overcollateralization of the FASIT by
distributing a debt instrument contributed by the holder of the ownership
interest to such holder (but only if a principal purpose of acquiring the debt
instrument which is disposed of was not the recognition of gain (or the
reduction of loss) as a result of an increase in the market value of the debt
instrument after its acquisition by the FASIT.
TAX ON DISPOSITION OF FASIT OWNERSHIP CERTIFICATE. The sale of a FASIT
Ownership Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the holder's adjusted
basis in the FASIT Ownership Certificate.
If the seller of a FASIT Ownership Certificate held the FASIT
Ownership Certificate as a capital asset, the gain or loss generally will be
capital gain or loss. However, under Section 582(c) of the Code, the sale of a
FASIT Ownership Certificate by certain banks and other financial institutions
will be considered a sale of property other than a capital asset, resulting in
ordinary income or loss. The tax treatment with respect to a FASIT Ownership
Certificate that has unrecovered basis after all funds of the Trust Fund have
been distributed has not been addressed in Treasury regulations, but the holder
presumably would be entitled to claim a loss in the amount of the unrecovered
basis.
The Code provides that, except as provided in Treasury regulations
(which have not been issued), if a holder sells a FASIT Ownership Certificate
and acquires the same or other FASIT Ownership Certificates in another FASIT or
any similar interests in a "taxable mortgage pool" (see "--Tax Characterization
of the Trust as a Partnership--Taxable Mortgage Pools" below) during the period
beginning six months before, and ending six months after, the date of such sale,
such sale will be subject to the "wash sales" rules of Section 1091 of the Code.
In that event, any loss realized by the seller on the sale generally will not be
currently deductible.
STATUS OF FASIT SECURITIES. The FASIT Regular Securities (but not
FASIT Ownership Certificates) will be "real estate assets" for purposes of
Section 856(c)(4)(A) of the Code and assets described in Section 7701(a)(19)(C)
of the Code (assets qualifying under one or both of those sections, applying
each section separately, "qualifying assets") to the extent that the FASIT's
assets are qualifying assets, but not to the extent that the FASIT's assets
consist of Yield Supplement Agreements. However, if at least 95 percent of the
FASIT's assets are qualifying assets, then 100 percent of the FASIT Securities
will be qualifying assets. Similarly, income on the FASIT Securities will be
treated as "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code, subject to the
limitations of the preceding two sentences. In addition to Mortgage Assets, the
Fasit's assets will include payments on the Mortgage Assets held pending
distribution to holders of FASIT Securities, amounts in Reserve Accounts (if
any), other credit enhancements (if any), and possibly buydown funds ("Buydown
Funds"). The related Prospectus Supplement will indicate whether the Mortgage
Assets will be qualifying assets under the foregoing sections of the Code. The
REMIC regulations treat credit enhancements as part of the mortgage or pool of
mortgages to which they relate and, therefore, by analogy to the REMIC
Regulations, credit enhancements generally should be qualifying assets.
Similarly, by analogy to the REMIC Regulations, amounts paid on the Mortgage
Assets and held pending distribution to holders of FASIT Securities ("cash flow
investments") should be treated as qualifying assets. Whether amounts in a
Reserve Account or Buydown Funds would also constitute qualifying assets has not
been addressed in Treasury regulations. The Prospectus Supplement for each
Series will indicate (if applicable) that it has Buydown Funds. The FASIT
Securities will not be "residential loans" for purposes of the residential loan
requirement of Section 593(g)(4)(B) of the Code.
FOREIGN INVESTORS IN FASIT SECURITIES. FASIT Regular Securities are
subject to the same United States income tax and withholding tax rules as those
that apply to a REMIC Regular Security as described in "Foreign Investors in
REMIC Securities" and "Backup Withholding on REMIC Securities" herein.
FASIT Ownership Certificates and FASIT Regular Securities which are
High-Yield Interests may not be sold or transferred to holders who are not U.S.
persons, and such securities will be subject to transfer restrictions as
described in the Agreement for the Series.
GRANTOR TRUSTS
The discussion under this heading applies only to a Series of
Securities with respect to which neither a REMIC nor a FASIT election is made
("Non-Electing Securities") and which are issued by a grantor trust.
TAX STATUS OF THE TRUST FUND. Upon the issuance of each Series of
Non-Electing Securities, Federal Tax Counsel will deliver its opinion that,
under then current law, assuming compliance with the Agreement, the related
Trust Fund will be classified for federal income tax purposes as a grantor trust
and not as an association taxable as a corporation or a taxable mortgage pool
(see"--Tax Characterization of the Trust as a Partnership--Taxable Mortgage
Pools"). Accordingly, each holder of a Non-Electing Security will be treated for
federal income tax purposes as the owner of an undivided interest in the
Mortgage Assets included in the Trust Fund. As further described below, each
holder of a Non-Electing Security therefore must report on its federal income
tax return the gross income from the portion of the Mortgage Assets that is
allocable to such Non-Electing Security and may deduct the portion of the
expenses incurred by the Trust Fund that is allocable to such Non-Electing
Security, at the same time and to the same extent as such items would be
reported by such holder if it had purchased and held directly such interest in
the Mortgage Assets and received directly its share of the payments on the
Mortgage Assets and incurred directly its share of expenses incurred by the
Trust Fund when those amounts are received or incurred by the Trust Fund.
A holder of a Non-Electing Security that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of such holder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. A holder of a Non-Electing Security
that is not a corporation cannot deduct such expenses for purposes of the
alternative minimum tax (if applicable). Such deductions will include servicing,
guarantee and administrative fees paid to the servicer of the Mortgage Assets.
As a result, individuals, estates, or trusts holding Non-Electing Securities may
have taxable income in excess of the cash received.
STATUS OF THE NON-ELECTING SECURITIES. The Non-Electing Securities
generally will be "real estate assets" for purposes of Section 856(c)(4)(A) of
the Code and "loans... secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code, and interest income on the
Non-Electing Securities generally will be "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. However, the Non-Electing Securities may not be qualifying assets under
the foregoing sections of the Code to the extent that the Trust Fund's assets
include Buydown Funds, amounts in a Reserve Account, or payments on mortgages
held pending distribution to holders. The Non-Electing Securities should not be
"residential loans made by the taxpayer" for purposes of the residential loan
requirement of Section 593(g)(4)(B) of the Code.
TAXATION OF NON-ELECTING SECURITIES UNDER STRIPPED BOND RULES. The
federal income tax treatment of the Non-Electing Securities will depend on
whether they are subject to the rules of section 1286 of the Code (the
"stripped bond rules"). The Non-Electing Securities will be subject to those
rules if stripped interest-only Securities are issued. In addition, whether or
not stripped interest-only Securities are issued, the Internal Revenue Service
may contend that the stripped bond rules apply on the ground that the Master
Servicer's servicing fee, or other amounts, if any, paid to (or retained by) the
Master Servicer or its affiliates, as specified in the applicable Prospectus
Supplement, represent greater than an arm's length consideration for servicing
the Mortgage Assets. In Revenue Ruling 91-46, the Internal Revenue Service
concluded that retained interest in excess of reasonable compensation for
servicing is treated as a "stripped coupon" under the rules of Section 1286 of
the Code.
If interest retained for the Master Servicer's servicing fee or other
interest is treated as a "stripped coupon," the Non-Electing Securities will
either be subject to the original issue discount rules or the market discount
rules. A holder of a Non-Electing Securities will account for any discount on
the Non-Electing Security (other than an interest treated as a "stripped
coupon") as market discount rather than original issue discount if either (i)
the amount of original issue discount with respect to the Non-Electing Security
was treated as zero under the original issue discount DE MINIMIS rule when the
Non-Electing Security was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from the Mortgage Assets. If neither of the above exceptions
applies, the original issue discount rules will apply to the Non-Electing
Securities. See "--REMIC Regular Securities--Current Income on REMIC Regular
Securities--Original Issue Discount and --Market Discount" above.
If the original issue discount rules apply, the holder of a
Non-Electing Security (whether a cash or accrual method taxpayer) will be
required to report interest income from the Non-Electing Security in each
taxable year equal to the income that accrues on the Non-Electing Security in
that year calculated under a constant yield method based on the yield of the
Non-Electing Security (or, possibly, the yield of each Mortgage Loan underlying
such Non-Electing Security) to such holder. Such yield would be computed at the
rate that, if used in discounting the holder's share of the payments on the
Mortgage Assets, would cause the present value of those payments to equal the
price at which the holder purchased the Non-Electing Security. The Taxpayer
Relief Act of 1997 amended the original issue discount provisions to provide
that for "any pool of debt instruments, the yield on which may be affected by
reason of prepayments," original issue discount shall be accrued based on a
prepayment assumption determined in a manner prescribed by forthcoming
regulations. This might require the use of the pricing prepayment assumption
instead of the prepayment assumptions used in the underlying transactions. The
Prospectus Supplement for each Series of Non-Electing Securities will describe
the prepayment assumption that will be used for this purpose, but no
representation is made that the Mortgage Assets will prepay at that rate or at
any other rate.
In the case of a Non-Electing Security acquired at a price equal to
the principal amount of the Mortgage Assets allocable to the Non-Electing
Security, the use of a reasonable prepayment assumption generally would not have
any significant effect on the yield used in calculating accruals of interest
income. In the case, however, of a Non-Electing Security acquired at a discount
or premium (that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a Non-Electing
Security acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Mortgage Loan that is allocable to the Non-Electing
Security and the portion of the adjusted basis of the Non-Electing Security (see
"Sales of Non-Electing Securities" below) that is allocable to the Mortgage
Loan.
Non-Electing Securities of certain Series ("Variable Rate Non-Electing
Securities") may provide for an Interest Rate based on the weighted average of
the interest rates of the Mortgage Assets held by the Trust Fund, which interest
rates may be fixed or variable. In the case of a Variable Rate Non-Electing
Security that is subject to the original issue discount rules, the daily
portions of original issue discount generally will be calculated in the same
manner as discussed above except the principles discussed in "--REMIC Regular
Securities--Current Income on REMIC Regular Securities--Original Issue
Discount--Variable Rate REMIC Regular Securities" will be applied.
<PAGE>
TAXATION OF NON-ELECTING SECURITIES IF STRIPPED BOND RULES DO NOT
APPLY. If the stripped bond rules do not apply to a Non-Electing Security, then
the holder will be required to include in income its share of the interest
payments on the Mortgage Assets in accordance with its tax accounting method. In
addition, if the holder purchased the Non-Electing Security at a discount or
premium, the holder will be required to account for such discount or premium in
the manner described below, as if it had purchased the Mortgage Assets directly.
The treatment of any discount will depend on whether the discount with respect
to the Mortgage Assets is original issue discount as defined in the Code and, in
the case of discount other than original issue discount, whether such other
discount exceeds a DE MINIMIS amount. In the case of original issue discount,
the holder (whether a cash or accrual method taxpayer) will be required to
report as additional interest income in each month the portion of such discount
that accrues in that month, calculated based on a constant yield method. In
general it is not anticipated that the amount of original issue discount to be
accrued in each month, if any, will be significant relative to the interest paid
currently on the Mortgage Assets. However, original issue discount could arise
with respect to a Mortgage Loan ("ARM") that provides for interest at a rate
equal to the sum of an index of market interest rates and a fixed number. The
original issue discount for ARMs generally will be determined under the
principals discussed in "--REMIC Regular Securities--Current Income on REMIC
Regular Securities--Original Issue Discount" and "--Variable Rate REMIC Regular
Securities."
If discount on the Mortgage Assets other than original issue discount
exceeds a DE MINIMIS amount (described below), the holder will also generally be
required to include in income in each month the amount of such discount accrued
through such month and not previously included in income, but limited, with
respect to the portion of such discount allocable to any Mortgage Loan, to the
amount of principal on such Mortgage Loan received by the Trust Fund in that
month. Because the Mortgage Assets will provide for monthly principal payments,
such discount may be required to be included in income at a rate that is not
significantly slower (and, under certain circumstances, faster) than the rate at
which such discount accrues (and therefore at a rate not significantly slower
than the rate at which such discount would be included in income if it were
original issue discount). The holder may elect to accrue such discount under a
constant yield method based on the yield of the Non-Electing Security to such
holder. In the absence of such an election, it may be necessary to accrue such
discount under a more rapid straight-line method. Under the DE MINIMIS rule,
market discount with respect to a Non-Electing Security will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Mortgage Assets allocable to the Non-Electing Security and (ii) the weighted
average life (determined using complete years) of the Mortgage Assets remaining
at the time of purchase of the Non-Electing Security. See "--REMIC Regular
Securities--Current Income on REMIC Regular Securities--Market Discount."
If a holder purchases a Non-Electing Security at a premium, such
holder may elect under Section 171 of the Code to amortize, as an offset to
interest income, the portion of such premium that is allocable to a Mortgage
Loan under a constant yield method based on the yield of the Mortgage Loan to
such holder, provided that such Mortgage Loan was originated after September 27,
1985. Premium allocable to a Mortgage Loan originated on or before that date
should be allocated among the principal payments on the Mortgage Loan and
allowed as an ordinary deduction as principal payments are made or, perhaps,
upon termination.
Treasury regulations do not address whether the foregoing adjustments
for discount or premium would be made based on the scheduled payments on the
Mortgage Assets or taking account of a reasonable prepayment assumption.
If a Mortgage Loan is prepaid in full, the holder of a Non-Electing
Security acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to the Non-Electing Security and the
portion of the adjusted basis of the Non-Electing Security (see "Sales of
Non-Electing Securities" below) that is allocable to the Mortgage Loan.
SALES OF NON-ELECTING SECURITIES. A holder that sells a Non-Electing
Security will recognize gain or loss equal to the difference between the amount
realized in the sale and its adjusted basis in the Non-Electing Security. In
general, such adjusted basis will equal the holder's cost for the Non-Electing
Security, increased by the amount of any income previously reported with respect
to the Non-Electing Security and decreased by the amount of any losses
previously reported with respect to the Non-Electing Security and the amount of
any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-Electing Security were
held as capital assets, except that, for a Non-Electing Security to which the
stripped bond rules do not apply and that was acquired with more than a DE
MINIMIS amount of discount other than original issue discount (see "Taxation of
Non-Electing Securities if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-
Electing Security and that was not previously included in income.
FOREIGN INVESTORS. A holder of a Non-Electing Security who is not a
"United States person" (as defined below) and is not subject to federal income
tax as a result of any direct or indirect connection to the United States other
than its ownership of a Non-Electing Security will not be subject to United
States income or withholding tax in respect of payments of interest or original
issue discount on a Non-Electing Security to the extent attributable to Mortgage
Assets that were originated after July 18, 1984, provided that the holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-Electing
Security under penalties of perjury, certifying that such holder is not a United
States person and providing the name and address of such holder). Recently
issued Treasury regulations (the "Final Withholding Regulations"), which are
generally effective with respect to payments made after December 31, 1999,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide certain presumptions regarding the status of holders when payments
to the holders cannot be reliably associated with appropriate documentation
provided to the payor. All holders should consult their tax advisers regarding
the application of the Final Withholding Regulations. Interest or original issue
discount on a Non-Electing Security attributable to Mortgage Assets that were
originated prior to July 19, 1984 will be subject to a 30% withholding tax
(unless such tax is reduced or eliminated by an applicable tax treaty). For
these purposes, the term "United States person" means a citizen or a resident of
the United States, a corporation, partnership or other entity created or
organized in, or under the laws of, the United States or any political
subdivision thereof, an estate the income of which is subject to United States
federal income taxation regardless of its source, and a trust for which one or
more United States fiduciaries have the authority to control all substantial
decisions and for which a court of the United States can exercise primary
supervision over the trust's administration. For years beginning before January
1, 1997, the term "United States person" shall include a trust whose income is
includible in gross income for United States federal income taxation regardless
of source, in lieu of trusts just described, unless the trust elects to have its
United States status determined under the criteria described in the previous
sentence for tax years ending after August 20, 1996.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
If a Trust Fund is intended to be a partnership for federal income tax
purposes the applicable Agreement will provide that the nature of the income of
the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Securities will
be structured as a private placement under an IRS safe harbor, so that the Trust
Fund will not be characterized as a publicly traded partnership taxable as a
corporation, and that no action will be taken that is inconsistent with the
treatment of the Trust Fund as a partnership (such as election to treat the
Trust Fund as a corporation for federal income tax purposes). If, however, the
Trust Fund has a single owner for federal income tax purposes, it will be
treated as a division of its owner and as such will be disregarded as an entity
separate from its owner for federal income tax purposes, assuming no election
will be made to treat the Trust Fund as a corporation for federal income tax
purposes.
TAXABLE MORTGAGE POOLS. Certain entities classified as "taxable
mortgage pools" are subject to corporate level tax on their net income. A
"taxable mortgage pool" is generally defined as an entity that meets the
following requirements: (i) the entity is not a REMIC or a FASIT, (ii)
substantially all of the assets of the entity are debt obligations, and more
than 50 percent of such debt obligations consists of real estate mortgages (or
interests therein), (iii) the entity is the obligor under debt obligations with
two or more maturities, and (iv) payments on the debt obligations on which the
entity is the obligor bear a relationship to the payments on the debt
obligations which the entity holds as assets. With respect to requirement (iii),
the Code authorizes the IRS to provide by regulations that equity interests may
be treated as debt for purposes of determining whether there are two or more
maturities. If the Trust Fund were treated as a taxable mortgage pool, it would
be ineligible to file consolidated returns with any other corporation and could
be liable for corporate tax. Treasury regulations do not provide for the
recharacterization of equity as debt for purposes of determining whether an
entity has issued debt with two maturities, except in the case of transactions
structured to avoid the taxable mortgage pool rules. Federal Tax Counsel will
deliver its opinion for a Trust Fund which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
that the Trust Fund will not be a taxable mortgage pool. This opinion will be
based on the assumption that the terms of the related Agreement and related
documents will be complied with, and on Federal Tax Counsel's conclusion that
either the number of classes of debt obligations issued be the Trust Fund, or
the nature of the assets held by the Trust Fund will exempt the Trust Fund from
treatment as a taxable mortgage pool.
TAX CONSEQUENCES TO HOLDERS OF DEBT SECURITIES ISSUED BY A PARTNERSHIP
GENERAL. Certain Non-Electing Securities ("Debt Securities") may be
issued with the intention to treat them, for federal income tax purposes, either
as (i) nonrecourse debt of the Seller secured by the related Mortgage Assets, in
which case the related Trust Fund will constitute only a security device which
constitutes a collateral arrangement for the issuance of secured debt and not an
entity for federal income tax purposes or (ii) debt of a partnership, in which
case the related Trust Fund will constitute a partnership for federal income tax
purposes, and Federal Tax Counsel will deliver its opinion that, for federal
income tax purposes, assuming compliance with all the provisions of the related
Indenture, (i) Debt Securities will be characterized as debt issued by, and not
equity in, the related Trust Fund and (ii) the related Trust Fund will not be
characterized as an association (or publicly traded partnership within the
meaning of Code Section 7704) taxable as a corporation or as a taxable mortgage
pool. Since different criteria are used to determine the non-tax accounting
treatment of the issuance of Debt Securities, however, the Seller expects to
treat such transactions, for financial accounting purposes, as a transfer of an
ownership interest in the related Mortgage Assets to the related Trust Fund and
not as the issuance of debt obligations. In this regard, it should be noted that
the IRS has issued a notice stating that, upon examination, it will scrutinize
instruments treated as debt for federal income tax purposes but as equity for
regulatory, rating agency or financial accounting purposes to determine if their
purported status as debt for federal income tax purposes is appropriate.
Assuming, as Federal Tax Counsel advises, that Debt Securities will be treated
as indebtedness for federal income tax purposes, holders of Debt Securities,
using their method of tax accounting, will follow the federal income tax
treatment hereinafter described.
ORIGINAL ISSUE DISCOUNT. If interest payments on the Debt Securities
may, in the event of certain shortfalls, be deferred for periods exceeding one
year, it is likely that the Debt Securities will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. As a result, interest payments may not be considered "qualified stated
interest" payments.
In general, a holder of a Debt Security having original issue discount
must include original issue discount in ordinary income as it accrues in advance
of receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a Debt
Security will be computed generally as described under "--REMIC Regular
Securities--Current Income on REMIC Regular Securities--Original Issue Discount"
and "--Variable Rate Regular Securities." The Seller intends to report any
information required with respect to the Debt Securities based on the OID
Regulations.
MARKET DISCOUNT. A purchaser of a Debt Security may be subject to the
market discount rules of Code Sections 1276 through 1278. In general, "market
discount" is the amount by which the stated redemption price at maturity (or, in
the case of a Debt Security issued with original issue discount, the adjusted
issue price) of the Debt Security exceeds the purchaser's basis in a Debt
Security. The holder of a Debt Security that has market discount generally will
be required to include accrued market discount in ordinary income to the extent
payments includible in the stated redemption price at maturity of such Debt
Security are received. The amount of market discount on a Debt Security will be
computed generally as described under "--REMIC Regular Securities--Current
Income on REMIC Regular Securities--Market Discount."
PREMIUM. A Debt Security purchased at a cost greater than its
currently outstanding stated redemption price at maturity is considered to be
purchased at a premium. A holder of a Debt Security which holds a Debt Security
as a "capital asset" within the meaning of Section 1221 of the Code may elect
under Section 171 of the Code to amortize the premium under the constant
interest method. That election will apply to all premium obligations that the
holder of a Debt Security acquires on or after the first day of the taxable
year for which the election is made, unless the IRS permits the revocation of
the election. In addition, it appears that the same rules that apply to the
accrual of market discount on installment obligations are intended to apply in
amortizing premium on installment obligations such as the Debt Securities. The
treatment of premium incurred upon the purchase of a Debt Security will be
determined generally as described above under "--REMIC Regular
Securities--Premium."
SALE OR EXCHANGE OF DEBT SECURITIES. If a holder of a Debt Security
sells or exchanges a Debt Security, the holder of a Debt Security will recognize
gain or loss equal to the difference, if any, between the amount received and
the holder of a Debt Security's adjusted basis in the Debt Security. The
adjusted basis in the Debt Security generally will equal its initial cost,
increased by any original issue discount or market discount previously included
in the seller's gross income with respect to the Debt Security and reduced by
the payments previously received on the Debt Security, other than payments of
qualified stated interest, and by any amortized premium.
In general, except as described above with respect to market discount,
and except for certain financial institutions subject to Code Section 582(c),
any gain or loss on the sale or exchange of a Debt Security recognized by an
investor who holds the Debt Security as a capital asset (within the meaning of
Code Section 1221), will be capital gain or loss and will be long-term or
short-term depending on whether the Debt Security has been held for more than
one year. For corporate taxpayers, there is no preferential rate afforded to
long-term capital gains. For individual taxpayers, net capital gains are subject
to varying tax rates depending upon the holding period of the Debt Securities.
BACKUP WITHHOLDING. Holders of Debt Securities will be subject to
backup withholding rules identical to those applicable to REMIC Regular
Securities. See "--REMIC Regular Securities--Backup Withholding on REMIC
Securities."
TAX TREATMENT OF FOREIGN INVESTORS. Holders of Debt Securities who are
foreign investors will be subject to taxation in the same manner as foreign
holders of REMIC Regular Securities. See"--REMIC Regular Securities--Foreign
Investors in REMIC Securities."
TAX CONSEQUENCES TO HOLDERS OF NOTES ISSUED BY A PARTNERSHIP
The Trust Fund will agree, and the holders of Notes will agree by
their purchase of Notes, to treat the Notes as debt for federal income tax
purposes. If the related Prospectus Supplement indicates that one or more
Classes of Notes are to be treated as debt for federal income tax purposes,
Federal Tax Counsel will advise the Seller that the Notes will be classified as
debt for federal income tax purposes. If, contrary to the opinion of Federal Tax
Counsel, the IRS successfully asserted that one or more of the Notes did not
represent debt for federal income tax purposes, the Notes might be treated as
equity interests in the Trust Fund. If so treated, the Trust Fund would likely
be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
foreign investors generally would be subject to U.S. federal income tax and
federal income tax return filing and withholding requirements, income to certain
tax-exempt entities would be "unrelated business taxable income," and individual
holders might be subject to certain limitations on their ability to deduct their
share of the Trust Fund's expenses.
With respect to those Securities issued as Notes, no regulations,
published rulings or judicial decisions exist that discuss the characterization
for federal income tax purposes of instruments with terms substantially the same
as the Notes. However, if the related Prospectus Supplement indicates that one
or more Classes of Notes are to be treated as debt for federal income tax
purposes, Federal Tax Counsel will deliver its opinion that, for federal income
tax purposes, assuming compliance with all the provisions of the related
Indenture, (i) such Notes will be characterized as debt issued by, and not
equity in, the related Trust Fund and (ii) the related Trust Fund will not be
characterized as an association (or publicly traded partnership within the
meaning of Section 7704 of the Code) taxable as a corporation or as a taxable
mortgage pool. Assuming, as Federal Tax Counsel advises, that Notes are treated
as indebtedness for federal income tax purposes, holders of Notes, using their
method of tax accounting, will follow the same federal income tax treatment as
Debt Securities, as described above under "--Tax Consequences for Holders of
Debt Securities Issued by a Partnership."
For federal income tax purposes, (i) Notes held by a thrift
institution taxed as a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) interest on Notes held by
a real estate investment trust will not be treated as "interest on obligations
secured by mortgages on real property or on interests in real property "within
the meaning of Code Section 856(c)(3)(B); (iii) Notes held by a real estate
investment trust will not constitute "real estate assets" or "Government
securities" within the meaning of Section 856(c)(4)(A) of the Code; and (v)
Notes held by a regulated investment company will not constitute "Government
securities" within the meaning of Section 851(b)(3)(A)(i) of the Code.
TAX CONSEQUENCES TO HOLDERS OF CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. In the case of a Trust
Fund intended to qualify as a partnership for federal income tax purposes, the
Trust Fund and the Seller will agree, and the holders of Certificates will agree
by their purchase of Certificates, to treat the Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust Fund, the partners of the partnership being the
holders of Certificates, and the Notes, if any, being debt of the partnership,
or if there is a single holder of Certificates for federal income tax purposes,
to disregard the Trust Fund as an entity separate from the holder of
Certificates.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Generally, provided
such Certificates are issued at or close to face value, any such
characterization would not result in materially adverse tax consequences to
holders of Certificates as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership. The following discussion also assumes that all payments on the
Certificates are denominated in U.S. dollars, none of the Certificates have
interest rates which would qualify as contingent interest under the OID
regulations, and that a Series of Securities includes a single Class of
Certificates. If these conditions are not satisfied with respect to any given
Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each holder of Certificates will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned on
the Mortgage Assets (including appropriate adjustments for market discount, OID
and bond premium) and any gain upon collection or disposition of Mortgage
Assets. The Trust Fund's deductions will consist primarily of interest and OID
accruing with respect to the Notes, servicing and other fees, and losses or
deductions upon collection or disposition of Mortgage Assets.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Agreement). The Agreement will provide, in general, that the holders
of Certificates will be allocated taxable income of the Trust Fund for each
month equal to the sum of (i) the interest that accrues on the Certificates in
accordance with their terms for such month, including interest accruing at the
Interest Rate for such month and interest on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust Fund income attributable to
discount on the Mortgage Assets that corresponds to any excess of the principal
amount of the Certificates over their initial issue price; (iii) prepayment
premium payable to the holders of Certificates for such month; and (iv) any
other amounts of income payable to the holders of Certificates for such month.
Such allocation will be reduced by any amortization by the Trust Fund of premium
on the Mortgage Assets that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Seller. Based on the economic arrangement of
the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to holders of Certificates. Moreover, even under the foregoing method of
allocation, holders of Certificates may be allocated income equal to the entire
Interest Rate plus the other items described above even though the Trust Fund
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis and holders of Certificates may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all holders of Certificates
but holders may be purchasing Certificates at different times and at different
prices, such holders may be required to report on their tax returns taxable
income that is greater or less than the amount reported to them by the Trust
Fund.
If Notes are also issued, all of the taxable income allocated to a
holder of Certificates that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund
(including fees to the Master Servicer but not interest expense) would be
miscellaneous itemized deductions. Such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to holders of Certificates on an aggregate basis. If the IRS
were to require that such calculations be made separately for each Mortgage
Loan, the Trust Fund might be required to incur additional expense but it is
believed that there would not be a material adverse effect on such holders.
DISCOUNT AND PREMIUM. It is believed that the Mortgage Assets will not
have been issued with OID and, therefore, the Trust Fund should not have
original issue discount income. However, the purchase price paid by the Trust
Fund for the Mortgage Assets may be greater or less than the remaining principal
balance of the Mortgage Assets at the time of purchase. If so, the Mortgage Loan
will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Mortgage Loan by Mortgage Loan
basis.)
If the Trust Fund acquires the Mortgage Assets at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Assets or to offset any
such premium against interest income on the Mortgage Assets. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to holders of Certificates.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates issued by a partnership in an amount equal
to the difference between the amount realized and the seller's tax basis in the
Certificates sold. The tax basis of a holder in a Certificate will generally
equal the holder's cost increased by the holder's share of Trust Fund income
(includible in income) and decreased by any distributions received with respect
to such Certificate. In addition, both the tax basis in the Certificates and the
amount realized on a sale of a Certificate would include the holder's share of
the Notes and other liabilities of the Trust Fund. A holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Certificates, and, upon sale or other disposition of
some of the Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Mortgage Assets would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust Fund does not expect to have any
other assets that would give rise to such special reporting requirements. Thus,
to avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a holder of Certificates is required to recognize an aggregate
amount of income (not including income attributable to disallowed itemized
deductions described above) over the life of the Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN SELLERS AND TRANSFEREES. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the holders of
Certificates in proportion to the principal amount of Certificates owned by them
as of the close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The legislative history relating to these provisions directs Treasury
to establish a convention for such allocations, but no Treasury regulations have
been issued or proposed. Accordingly, the use of such a monthly convention may
not be permitted. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the holders of Certificates. The
Trust Fund's method of allocation between transferors and transferees may be
revised to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a holder sells its
Certificates at a profit (loss), the purchasing holder will have a higher
(lower) basis in the Certificates than the selling holder had. The tax basis of
the Trust Fund's assets will not be adjusted to reflect that higher (or lower)
basis unless the Trust Fund were to file an election under Section 754 of the
Code. In order to avoid the administrative complexities that would be involved
in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust Fund currently does not intend to
make such election. As a result, holders of Certificates might be allocated a
greater or lesser amount of Trust Fund income than would be appropriate based on
their own purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each holder's allocable share of items of Trust Fund
income and expense to holders and the IRS on Schedule K-1. The Trust Fund will
provide the Schedule K-1 information to nominees that fail to provide the Trust
Fund with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as
a nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes (i)
the name, address and taxpayer identification number of the nominee and (ii) as
to each beneficial owner (x) the name, address and identification number of such
person, (y) whether such person is a United States person, a tax-exempt entity
or a foreign government, an international organization, or any wholly owned
agency or instrumentality of either of the foregoing, and (z) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions that
hold Certificates through a nominee are required to furnish directly to the
Trust Fund information as to themselves and their ownership of Certificates. A
clearing agency registered under Section 17A of the Exchange Act is not required
to furnish any such information statement to the Trust Fund. The information
referred to above for any calendar year must be furnished to the Trust Fund on
or before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Trust Fund with the information described above may be
subject to penalties.
The Seller will be designated as the tax matters partner in the related
Agreement and, as such, will be responsible for representing the holders of
Certificates in any dispute with the IRS. The Code provides for administrative
examination of a partnership as if the partnership were a separate and distinct
taxpayer. Generally, the statute of limitations for partnership items does not
expire before three years after the date on which the partnership information
return is filed. Any adverse determination following an audit of the return of
the Trust Fund by the appropriate taxing authorities could result in an
adjustment of the returns of the holders of Certificates, and, under certain
circumstances, a holder of Certificates may be precluded from separately
litigating a proposed adjustment to the items of the Trust Fund. An adjustment
could also result in an audit of returns of a holder of Certificates and
adjustments of items not related to the income and losses of the Trust Fund.
TAX CONSEQUENCES TO FOREIGN HOLDERS OF CERTIFICATES. There is no clear
authority addressing the issue of whether the Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to foreign investors. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold pursuant to Section 1446 of the
Code on the portion of its taxable income that is allocable to holders of
Certificates that are foreign investors, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for foreign holders that
are taxable as corporations and 39.6% for all other foreign holders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Trust Fund to change its withholding procedures.
Each holder of Certificates that is a foreign investor might be
required to file a U.S. individual or corporate income tax return (including, in
the case of a corporation, the branch profits tax) on its share of the Trust
Fund's income. A foreign holder generally would be entitled to file with the IRS
a claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a holder of
Certificates who is a foreign investor generally will be considered guaranteed
payments to the extent such payments are determined without regard to the income
of the Trust Fund. If these interest payments are properly characterized as
guaranteed payments, then the interest probably will not be considered
"portfolio interest." As a result, holders of Certificates will be subject to
United States federal income tax and withholding tax at a rate of 30%, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
investor would only be entitled to claim a refund for that portion of the taxes,
if any, in excess of the taxes that should be withheld with respect to the
guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the holder of Certificates fails to
comply with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code and, if necessary, adequately
demonstrates such status.
TAXATION OF CLASSES OF EXCHANGEABLE SECURITIES
GENERAL
The arrangement pursuant to which the ES Classes of a Series are
created, sold and administered (an "ES Pool") will be classified as a grantor
trust under subpart E, part I of subchapter J of the Code. The interests in the
classes of Securities that have been exchanged for ES Classes will be the assets
of the ES Pool and the ES Classes represent beneficial ownership of these
interests in the classes of Securities.
TAX STATUS
The ES Classes should be considered to represent "real estate assets"
within the meaning of Code Section 856(c)(4)(A) and assets described in Section
7701(a)(19)(C) of the Code. Original issue discount and interest accruing
on ES Classes should be considered to represent "interest on obligations secured
by mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. ES Classes will be "qualified mortgages" under Section 860G(a) (3) of the
Code for a REMIC.
TAX ACCOUNTING FOR EXCHANGEABLE SECURITIES
An ES Class represents beneficial ownership of an interest in one or
more classes of Securities on deposit in an Exchangeable Security Trust Fund, as
specified in the applicable Prospectus Supplement. If it represents an interest
in more than one class of Securities, a purchaser must allocate its basis in the
ES Class among the interests in the classes of Securities in accordance with
their relative fair market values as of the time of acquisition. Similarly, on
the sale of such an ES Class, the holder must allocate the amount received on
the sale among the interests in the classes of Securities in accordance with
their relative fair market values as of the time of sale.
The holder of an ES Class must account separately for each interest in
a class of Securities (there may be only one such interest). Where the interest
represents a pro rata portion of a class of Securities, the holder of the ES
Class should account for such interest as described under "--Current Income on
REMIC Regular Securities" above. Where the interest represents beneficial
ownership of a disproportionate part of the principal and interest payments on a
class of Securities (a "Strip"), the holder is treated as owning, pursuant to
Section 1286 of the Code, "stripped bonds" to the extent of its share of
principal payments and "stripped coupons" to the extent of its share of interest
payments on such class of Securities. The Seller intends to treat each Strip as
a single debt instrument for purposes of information reporting. The Internal
Revenue Service, however, could take a different position. For example, the
Internal Revenue Service could contend that a Strip should be treated as a pro
rata part of the class of Securities to the extent that the Strip represents a
pro rata portion thereof, and "stripped bonds" or "stripped coupons" with
respect to the remainder. An investor should consult its tax advisor regarding
this matter.
A holder of an ES Class should calculate original issue discount with
respect to each Strip and include it in ordinary income as it accrues, which may
be prior to the receipt of cash attributable to such income, in accordance with
a constant interest method that takes into account the compounding of interest.
See "--Current Income on REMIC Regular Securities--Original Issue Discount"
above. The holder should determine its yield to maturity based on its purchase
price allocated to the Strip and on a schedule of payments projected using a
prepayment assumption, and then make periodic adjustments to take into account
actual prepayment experience. With respect to a particular holder, Treasury
regulations do not address whether the prepayment assumption used to calculate
original issue discount would be determined at the time of purchase of the Strip
or would be the original prepayment assumption with respect to the related class
of Securities. Further, if the related class of Securities is subject to
redemption as described in the applicable Prospectus Supplement, Treasury
regulations do not address the extent to which such prepayment assumption should
take into account the possibility of the retirement of the Strip concurrently
with the redemption of such class of Securities. An investor should consult its
tax advisor regarding these matters. For purposes of information reporting
relating to original issue discount, the original yield to maturity of the
Strip, determined as of the date of issuance of the Series, will be calculated
based on the original prepayment assumption.
If original issue discount accruing with respect to a Strip, computed
as described above, is negative for any period, the holder is entitled to offset
such amount only against future positive original issue discount accruing from
such Strip, and income is reported in all cases in this manner. Although not
entirely free from doubt, such a holder may be entitled to deduct a loss to the
extent that its remaining basis would exceed the maximum amount of future
payments to which the holder is entitled with respect to such Strip, assuming no
further prepayments of the Mortgages (or, perhaps, assuming prepayments at a
rate equal to the prepayment assumption). Although the issue is not free from
doubt, all or a portion of such loss may be treated as a capital loss if the
Strip is a capital asset in the hands of the holder.
A holder realizes gain or loss on the sale of a Strip in an amount
equal to the difference between the amount realized and its adjusted basis in
such Strip. The holder's adjusted basis generally is equal to the holder's
allocated cost of the Strip, increased by income previously included, and
reduced (but not below zero) by distributions previously received. Except as
described below, any gain or loss on such sale is capital gain or loss if the
holder has held its interest as a capital asset and is long-term if the
interest has been held for the long-term capital gain holding period (more than
one year). Such gain or loss will be ordinary income or loss (i) for a bank or
thrift institution or (ii) to the extent income recognized by the holder is less
than the income that would have been recognized if the yield on such interest
were 110% of the applicable federal rate under Section 1274(d) of the Code.
If a holder exchanges a single ES Class (an "Exchanged ES Class") for
several ES Classes (each, a "Received ES Class") and then sells one of the
Received ES Classes, the sale will subject the investor to the coupon stripping
rules of Section 1286 of the Code. The holder must allocate its basis in the
Exchanged ES Class between the part of such class underlying the Received ES
Class that was sold and the part of the Exchanged ES Class underlying the
Received ES Classes that was retained, in proportion to their relative fair
market values as of the date of such sale. The holder is treated as purchasing
the interest retained for the amount of basis allocated to such interest. The
holder must calculate original issue discount with respect to the retained
interest as described above.
Although the matter is not free from doubt, a holder that acquires in
one transaction a combination of ES Classes that may be exchanged for a single
ES Class that is identical to a class of Securities that is on deposit in the
related Exchangeable Security Trust Fund should be treated as owning the
relevant class of Securities.
EXCHANGES OF EXCHANGEABLE SECURITIES
An exchange of an interest in one or more ES Classes for an interest
in one or more other related ES Classes that are part of the same Combination,
or vice versa, will not be a taxable exchange. After the exchange, the holder is
treated as continuing to own the interests in the class or classes of
Exchangeable Securities that it owned immediately prior to the exchange.
TAX TREATMENT OF FOREIGN INVESTORS
A holder of an ES Class is subject to taxation in the same manner as
foreign holders of REMIC Regular Securities. See "--REMIC Regular
Securities--Investors in REMIC Securities."
BACKUP WITHHOLDING
A holder of an ES Class is subject to backup withholding rules to
those applicable to REMIC Regular Securities. See "--REMIC Regular
Securities--Backup Withholding on REMIC Securities."
REPORTING AND ADMINISTRATIVE MATTERS
Reports will be made to the Internal Revenue Service and to holders of
record of ES Classes that are not excepted from the reporting requirements.
CALLABLE CLASSES
Any amount received in redemption of a class of Securities that is a
Callable Class will be treated under the original issue discount rules and
market discount rules as a distribution with respect to such class of Securities
in the same manner as REMIC Regular Securities. See "--REMIC Regular
Securities--Original Issue Discount" and "--Market Discount."."
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the state
and local income tax consequences of the acquisition, ownership, and disposition
of the Securities. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore,
potential investors should consult their own tax advisors with respect to the
various state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
GENERAL. A fiduciary of a pension, profit-sharing, retirement or other
employee benefit plan subject to Title I of ERISA, should consider the fiduciary
standards under ERISA in the context of the plan's particular circumstances
before authorizing an investment of a portion of such plan's assets in the
Securities. Accordingly, pursuant to Section 404 of ERISA, such fiduciary should
consider among other factors (i) whether the investment is for the exclusive
benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the applicable diversification requirements; (iii) whether
the investment is in accordance with the documents and instruments governing the
plan; and (iv) whether the investment is prudent, considering the nature of the
investment. Fiduciaries of plans also should consider ERISA's prohibition on
improper delegation of control over, or responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code (each, a "Plan"), are prohibited from
engaging in a broad range of transactions involving Plan assets and persons
having certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes are imposed upon such
persons by Section 4975 of the Code. The Seller, Bear, Stearns & Co. Inc., each
Master Servicer or other servicer, any Pool Insurer, any Special Hazard Insurer,
the Trustee, and certain of their affiliates might be considered "parties in
interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition, holding or disposition of Securities by or on behalf of such Plan
could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. Furthermore, if
an investing Plan's assets were deemed to include the Mortgage Loans and not
merely an interest in the Securities, transactions occurring in the management
of Mortgage Loans might constitute prohibited transactions and the fiduciary
investment standards of ERISA could apply to the assets of the Trust Fund,
unless an administrative exemption applies.
ERISA CONSIDERATIONS RELATING TO CERTIFICATES. In DOL Regulation
ss.2510.3-101 (the "Plan Asset Regulations"), the U.S. Department of Labor has
defined what constitutes Plan assets for purposes of ERISA and Section 4975 of
the Code. The Regulation provides that if a Plan makes an investment in an
"equity interest" in an entity, the assets of the entity will be considered the
assets of such Plan unless certain exceptions apply. The Seller can give no
assurance that the Securities will qualify for any of the exceptions under the
Regulation. As a result, the Mortgage Loans may be considered the assets of any
Plan which acquires Securities, unless some administrative exemption is
available.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass-through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. A "mortgage pool pass-through certificate" is defined as a
certificate which represents a beneficial undivided interest in a mortgage pool
which entitles the holder to pass-through payments of principal and interest
from the Mortgage Loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Seller and
the Trustee maintain a system of insurance or other protection for the Mortgage
Loans and the property securing such Mortgage Loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the Mortgage Loans, or 1% of
the principal balance of the largest covered pooled Mortgage Loan; (ii) the
Trustee may not be an affiliate of the Seller; and (iii) the payments made to
and retained by the Seller in connection with the Trust Fund, together with
all funds inuring to its benefit for administering the Trust Fund, represent no
more than "adequate consideration" for selling the Mortgage Loans, plus
reasonable compensation for services provided to the Trust Fund.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a
Plan with respect to which the Seller, the Special Hazard Insurer, the Pool
Insurer, the Master Servicer, or other servicer, or the Trustee is a party in
interest if the Plan does not pay more than fair market value for such
Certificate and the rights and interests evidenced by such Certificate are not
subordinated to the rights and interests evidenced by other Certificates of the
same pool. PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the Mortgage
Pool, provided that any payments made to the Master Servicer in connection with
the servicing of the Trust Fund are made in accordance with a binding agreement,
copies of which must be made available to prospective investors.
In the case of any Plan with respect to which the Seller, the Master
Servicer, the Special Hazard Insurer, the Pool Insurer, or the Trustee is a
fiduciary, PTCE 83-1 will only apply if, in addition to the other requirements:
(i) the initial sale, exchange or transfer of Certificates is expressly approved
by an independent fiduciary who has authority to manage and control those plan
assets being invested in Certificates; (ii) the Plan pays no more for the
Certificates than would be paid in an arm's length transaction; (iii) no
investment management, advisory or underwriting fee, sale commission, or similar
compensation is paid to the Seller with regard to the sale, exchange or transfer
of Certificates to the Plan; (iv) the total value of the Certificates purchased
by such Plan does not exceed 25% of the amount issued; and (v) at least 50% of
the aggregate amount of Certificates is acquired by persons independent of the
Seller, the Trustee, the Master Servicer, and the Special Hazard Insurer or Pool
Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm
that the Trust Fund is a "mortgage pool," that the Certificates constitute
"mortgage pool pass-through certificates," and that the conditions set forth in
PTCE 83-1 would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in PTCE 83-1, the Plan
fiduciary should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary also should consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates on
behalf of a Plan.
In addition to PTCE 83-1, the U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction Exemption 90-30 ("PTE 90-30"), to
Bear, Stearns & Co. Inc., which is applicable to Certificates which meet its
requirements whenever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate, or is the
selling or placement agent. PTE 90-30 generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that certain conditions set forth in PTE 90-30 are
satisfied. The exempted transactions include certain transactions relating to
the servicing and operation of investment trusts holding assets of the following
general categories: single and multifamily residential or commercial mortgages,
motor vehicle receivables, consumer or commercial receivables and guaranteed
government mortgage pool certificates and the purchase, sale and holding of
mortgage-backed or asset-backed pass-through certificates representing
beneficial ownership interests in the assets of such investment trusts.
PTE 90-30 sets forth seven general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Certificates
to be eligible for exemptive relief thereunder. First, the acquisition of
Certificates by certain Plans must be on terms that are at least as favorable to
the Plan as they would be in an arm's length transaction with an unrelated
party. Second, the rights and interests evidenced by the Certificates must not
be subordinated to the rights and interests evidenced by other certificates of
the same trust. Third, the Certificates at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by Standard
& Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.,
Moody's Investors Services, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA,
Inc. ("Nationally Recognized Rating Agencies"). Fourth, the Trustee cannot be an
affiliate of any member of the "Restricted Group" which consists of any
underwriter as defined in PTE 90-30, the Seller, the Master Servicer, each
servicer, the Pool Insurer, the Special Hazard Insurer and any obligor with
respect to obligations or receivables constituting more than 5% of the aggregate
unamortized principal balance of the obligations or receivables as of the date
of initial issuance of the Certificates. Fifth, the sum of all payments made to
and retained by such underwriters must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made to
and retained by the Seller pursuant to the assignment of the obligations or
receivables to the related Trust Fund must represent not more than the fair
market value of such obligations; and the sum of all payments made to and
retained by the Master Servicer and any servicer must represent not more than
reasonable compensation for such person's services under the Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, (i) the investment pool consists only of assets of the type enumerated in
the exemption and which have been included in other investment pools; (ii)
certificates evidencing interests in such other investment pools have been rated
in one of the three highest generic rating categories by one of the Nationally
Recognized Rating Agencies for at least one year prior to a Plan's acquisition
of certificates; and (iii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at least
one year prior to a Plan's acquisition of certificates. Finally, the investing
Plan must be an accredited investor as defined in Rule 501(a)(1) of Regulation D
of the Commission under the Securities Act of 1933, as amended. The Seller
assumes that only Plans which are accredited investors under the federal
securities laws will be permitted to purchase the Certificates.
If the general conditions of PTE 90-30 are satisfied, such exemption
may provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of the
Certificates by Plans. However, no exemption is provided from the restrictions
of ERISA for the acquisition or holding of a Certificate on behalf of an
"Excluded Plan" by any person who is a fiduciary with respect to the assets of
such Excluded Plan. For purposes of the Certificates, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group. In addition, each Plan's
investment in each class of Certificates cannot exceed 25% of the outstanding
Certificates in the class, and after the Plan's acquisition of the Certificates,
no more than 25% of the assets over which the fiduciary has investment authority
are invested in Certificates of a trust containing assets which are sold or
serviced by the same entity. Finally, in the case of initial issuance (but not
secondary market transactions), at least 50% of each class of Certificates, and
at least 50% of the aggregate interests in the trust, must be acquired by
persons independent of the Restricted Group.
On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Exemption which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendment generally allows a portion of the mortgages or
receivables ("Loans") supporting payments to holders of Certificates and having
a principal amount equal to no more than 25% of the total principal amount of
the Certificates to be transferred to the Trust within a 90-day or three-month
period following the Closing Date ("DOL Pre-Funding Period"), instead of
requiring that all such Loans be either identified or transferred on or before
the Closing Date. The relief is effective for transactions occurring on or after
May 23, 1997, provided that the following conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Certificates being offered ("Pre-Funding
Limit") must not exceed twenty-five percent (25%).
(2) All Loans transferred after the Closing Date ("Additional Loans")
must meet the same terms and conditions for eligibility as the original Loans
used to create the Trust, which terms and conditions have been approved by the
Rating Agency.
(3) The transfer of such Additional Loans to the Trust during the DOL
Pre-Funding Period must not result in the Certificates receiving a lower credit
rating from the Rating Agency upon termination of the DOL Pre-Funding Period
than the rating that was obtained at the time of the initial issuance of the
Certificates by the Trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "average interest rate") for all of the
Loans in the Trust Fund at the end of the DOL Pre-Funding Period must not be
more than 100 basis points lower than the average interest rate for the Loans
which were transferred to the Trust on the Closing Date.
(5) Either: (i) the characteristics of the Additional Loans must be
monitored by an insurer or other credit support provider which is independent of
the Seller; or (ii) an independent accountant retained by the Seller must
provide the Seller with a letter (with copies provided to the Rating Agency, the
Underwriter and the Trustee) stating whether or not the characteristics of the
Additional Loans conform to the characteristics described in the Prospectus,
Prospectus Supplement, Private Placement Memorandum ("Offering Documents")
and/or the Agreement. In preparing such letter, the independent accountant must
use the same type of procedures as were applicable to the Loans which were
transferred as of the Closing Date.
(6) The DOL Pre-Funding Period must end no later than three months or
90 days after the Closing Date or earlier, in certain circumstances, if the
amount on deposit in the Pre-Funding Account is reduced below the minimum level
specified in the Agreement or an event of default occurs under the Agreement.
(7) Amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested only in
investments which are permitted by the Rating Agency and (i) are direct
obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith and credit
of the United States); or (ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by the Rating Agency
("Acceptable Investments").
(8) The Offering Documents must describe: (i) any Pre-Funding Account
and/or Capitalized Interest Account used in connection with a Pre-Funding
Account; (ii) the duration of the DOL Pre-Funding Period; (iii) the percentage
and/or dollar amount of the Pre-Funding Limit for the Trust Fund; and (iv) that
the amounts remaining in the Pre-Funding Account at the end of the DOL
Pre-Funding Period will be remitted to holders of Certificates (each a as
repayments of principal.
(9) The Agreement must describe the Acceptable Investments for the
Pre-Funding Account and Capitalized Interest Account and, if not disclosed in
the Offering Documents, the terms and conditions for eligibility of the
Additional Loans.
Before purchasing a Certificate in reliance on any of these exemptions
or any other exemption, a fiduciary of a Plan should itself confirm that
requirements set forth in such exemption would be satisfied.
One or more exemptions may be available, with respect to certain
prohibited transactions to which neither PTCE 83-1 nor PTE 90-30 is applicable,
depending in part upon the type of Plan fiduciary making the decision to acquire
Certificates and the circumstances under which such decision is made, including,
but not limited to PTCE 90-1 (regarding investments by insurance company pooled
separate accounts), PTCE 91-38 (regarding investments by bank collective
investments funds), PTCE 84-14 (regarding transactions effected by "qualified
professional asset managers"), PTCE 95-60 (regarding investments by insurance
company general accounts) and PTCE 96-23 (regarding transactions effected by
"in-house asset managers") (collectively, the "Investor Based Exemptions").
However, even if the conditions specified in either of these exemptions are met,
the scope of the relief provided by these exemptions might or might not cover
all acts which might be construed as prohibited transactions.
Each Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to the related
Certificates.
ERISA CONSIDERATIONS RELATING TO THE NOTES. Under the Plan Asset
Regulations, the assets of the Trust Fund would be treated as plan assets of a
Plan for the purposes of ERISA and the Code only if the Plan acquires an "Equity
Interest" in the Trust Fund and none of the exceptions contained in the Plan
Asset Regulations is applicable. An equity interest is defined under the Plan
Asset Regulations as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. Assuming that a Series of Notes is treated as indebtedness without
substantial equity features for purposes of the Plan Asset Regulations, then
such Series of Notes will be eligible for purchase by Plans. However, without
regard to whether a Series of Notes is treated as an "equity interest" for such
purposes, the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the Trust Fund or any of
its affiliates is or becomes a party in interest or disqualified person with
respect to such Plan, or in the event that a Note is purchased in the secondary
market and such purchase constitutes a sale or exchange between a Plan and a
party in interest or disqualified person with respect to such Plan. There can be
no assurance that the Trust Fund or any of its affiliates will not be or become
a party in interest or a disqualified person with respect to a Plan that
acquires Notes. However, one or more of the Investor Based Exemptions described
above may apply to any potential prohibited transactions arising as a
consequence of the acquisition, holding and transfer of the Notes.
With respect to those classes of Exchangeable Securities which were
eligible for exemptive relief under PTE 90-30 when purchased, PTE 90-30 would
also cover the acquisition or disposition of such Exchangeable Securities when
the Securityholder exercises its exchange rights. Similarly, with respect to
classes of Securities which were eligible for exemptive relief under PTE 90-30
and were issued as a Callable Class, the exercise of the Call would be covered
under PTE 90-30. However, with respect to classes of Exchangeable Securities and
Callable Classes which were not eligible for exemptive relief under PTE 90-30
when purchased, the exchange, purchase or sale of such securities pursuant to
the exercise of exchange rights or call rights may give rise to prohibited
transactions if a Plan and a party-in-interest with respect to such Plan are
involved in the transaction. However, one or more Investor Based Exemptions
discussed above may be applicable to these transactions.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
A governmental plan as defined in Section (32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such governmental plan may be subject
to federal, state and local law, which is, to a material extent, similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of such
investment under applicable fiduciary or other investment standards, and the
need for the availability of any exemptive relief under any Similar Law.
FASIT REGULAR CERTIFICATES WHICH ARE HIGH-YIELD INTERESTS OR FASIT
OWNERSHIP CERTIFICATES ARE NOT ELIGIBLE TO BE ACQUIRED BY A PURCHASER WHICH IS
ACQUIRING SUCH FASIT CERTIFICATES DIRECTLY OR INDIRECTLY FOR, ON BEHALF OF OR
WITH THE ASSETS OF, A PLAN OR A GOVERNMENTAL PLAN.
<PAGE>
LEGAL INVESTMENT
SMMEA
The Prospectus Supplement for each Series of Securities will specify
which, if any, of the classes of Securities offered thereby will constitute
"mortgage related securities" for purposes of SMMEA. Any Securities which
constitute mortgage related securities, absent state legislation described
below, will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that under
applicable law obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for such entities. Under SMMEA, if a state enacted legislation prior
to October 4, 1991 specifically limiting the legal investment authority of any
such entities with respect to "mortgage related securities," the Securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Certain states adopted legislation which limits the
ability of insurance companies domiciled in these states to purchase
mortgage-related securities, such as the Securities.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with Securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in Securities, and
national banks may purchase Securities for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. 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 Securities under consideration for purchase constitutes a "mortgage
related security").
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency and the Office of
Thrift Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Securities by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
The Policy Statement provides that a "high-risk mortgage security" is
not suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate liquidity
that has a closely supervised trading department is not precluded from acquiring
high-risk mortgage securities for trading purposes.
<PAGE>
A depository institution must ascertain and document prior to purchase
and no less frequently than annually thereafter that a nonhigh-risk mortgage
security held for investment remains outside the high-risk category. If an
institution is unable to make these determinations through internal analysis, it
must use information derived from a source that is independent of the party from
whom the product is being purchased. The institution is responsible for ensuring
that the assumptions underlying the analysis and resulting calculations are
reasonable. Reliance on analyses and documentation from a securities dealer or
other outside party without internal analyses by the institution is
unacceptable.
In general, a high-risk mortgage security is a mortgage derivative
product possessing greater price volatility than a benchmark fixed rate 30-year
mortgage-backed pass-through security. Mortgage derivative products include
CMOs, REMICs, CMO and REMIC residuals and stripped mortgage-backed securities. A
mortgage derivative product that, at the time of purchase or at a subsequent
testing date, meets any one of three tests will be considered a high-risk
mortgage security. When the characteristics of a mortgage derivative product are
such that the first two tests cannot be applied (such as interest-only strips),
the mortgage derivative product remains subject to the third test.
The three tests of a high-risk mortgage security are as follows: (i)
the mortgage derivative product has an expected weighted average life greater
than 10.0 years; (ii) the expected weighted average life of the mortgage
derivative product: (a) extends by more than 4.0 years, assuming an immediate
and sustained parallel shift in the yield curve of plus 300 basis points, or (b)
shortens by more than 6.0 years, assuming an immediate and sustained parallel
shift in the yield curve of minus 300 basis points; and (iii) the estimated
change in the price of the mortgage derivative product is more than 17%, due to
an immediate and sustained parallel shift in the yield curve of plus or minus
300 basis points.
When performing the price sensitivity test, the same prepayment
assumptions and same cash flows that were used to estimate average life
sensitivity must be used. The discount rate assumptions should be determined by
(i) assuming that the discount rate for the security equals the yield on a
comparable average life U.S. Treasury security plus a constant spread, (ii)
calculating the spread over Treasury rates from the bid side of the market for
the mortgage derivative product, and (iii) assuming the spread remains constant
when the Treasury curve shifts up or down 300 basis points. Discounting the cash
flows by their respective discount rates estimates a price in the plus or minus
300 basis point environments. The initial price must be determined by the offer
side of the market and used as the base price from which the 17% price
sensitivity test will be measured.
Generally, a floating-rate debt class will not be subject to the
average life and average life sensitivity tests described above if it bears a
rate that, at the time of purchase or at a subsequent testing date, is below the
contractual cap on the instrument. An institution may purchase interest rate
contracts that effectively uncap the instrument. For purposes of the Policy
Statement, a CMO floating-rate debt class is a debt class whose rate adjusts at
least annually on a one-for-one basis with the debt class's index. The index
must be a conventional, widely-used market interest rate index such as the
London Interbank Offered Rate ("LIBOR"). Inverse floating rate debt classes are
not included in the definition of a floating rate debt class.
Securities and other products, whether carried on or off balance sheet
(such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total investment portfolio or total
capital of a depository institution are considered an imprudent investment
practice. Long-maturity generally means a remaining maturity exceeding 10 years.
GENERALLY
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities, to purchase
Securities representing more than a specified percentage of the investor's
assets, or to purchase certain types of Securities, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Securities constitute
legal investments for such investors and comply with any other applicable
requirements.
<PAGE>
METHOD OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus
Supplements will be offered in Series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Bear, Stearns & Co. Inc. ("Bear,
Stearns"), an affiliate of the Seller, acting as underwriter with other
underwriters, if any, named therein. In such event, the related Prospectus
Supplement may also specify that the underwriters will not be obligated to pay
for any Securities agreed to be purchased by purchasers pursuant to purchase
agreements acceptable to the Seller. In connection with the sale of the
Securities, underwriters may receive compensation from the Seller or from
purchasers of the Securities in the form of discounts, concessions or
commissions. The related Prospectus Supplement will describe any such
compensation paid by the Seller.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by Bear, Stearns acting as agent or in some cases
as principal with respect to Securities that it has previously purchased or
agreed to purchase. If Bear, Stearns acts as agent in the sale of Securities,
Bear, Stearns will receive a selling commission with respect to each Series of
Securities, depending on market conditions, expressed as a percentage of the
aggregate principal balance of the Securities sold hereunder as of the Cut-off
Date. The exact percentage for each Series of Securities will be disclosed in
the related Prospectus Supplement. To the extent that Bear, Stearns elects to
purchase Securities as principal, Bear, Stearns may realize losses or profits
based upon the difference between its purchase price and the sales price. The
related Prospectus Supplement with respect to any Series offered other than
through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the Seller and purchasers
of Securities of such Series.
The Seller will indemnify Bear, Stearns and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Bear, Stearns and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Bear, Stearns and the Seller may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Seller's Mortgage Loans pending
the sale of such Mortgage Loans or interests therein, including the Securities.
This Prospectus and the related Prospectus Supplement may be used by
Bear Stearns in connection with offers and sales related to market-making
transactions in the Securities. Bear Stearns may act as principal or agent in
such transactions. Such sales will be made at prices related to prevailing
market prices at the time of sale or otherwise.
The Seller anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
federal income tax consequences with respect thereto, will be passed upon for
the Seller by Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038.
<PAGE>
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Securities and no Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the related Prospectus Supplement that they shall have
been rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies specified in the related
Prospectus Supplement.
Ratings on mortgage-backed securities address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage loans
or other assets. These ratings address the structural, legal and issuer-related
aspects associated with such Securities, the nature of the underlying mortgage
loans or other assets and the credit quality of the guarantor, if any. Ratings
on mortgage-backed securities do not represent any assessment of the likelihood
of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
Securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped Securities under certain scenarios might fail to recoup
their underlying investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
<PAGE>
GLOSSARY
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
TERM PAGE
Accounts.....................................................................36
Accrual Class................................................................44
Accrual Securities...........................................................38
Agency Securities............................................................ 1
Annual Interest Amount.......................................................44
APR.......................................................................... 7
ARM..........................................................................98
Available Funds..............................................................37
Bankruptcy Bond..............................................................13
Basis Risk Shortfall.........................................................78
Bear, Stearns...............................................................115
Buydown Funds............................................................79, 96
Buydown Loans.................................................................5
Call Class...................................................................11
Call Securities...............................................................1
Callable Class...............................................................11
Callable Securities...........................................................1
Capitalized Interest Account..................................................9
Cedel........................................................................40
Certificates..................................................................1
Charter Act..................................................................27
Class Factor.................................................................48
Cleanup Costs................................................................77
CMO...........................................................................7
Code.....................................................................15, 77
Collateral Value.............................................................23
Combinations.................................................................43
Commission....................................................................2
Contracts.....................................................................1
Cooperative..................................................................42
Cooperative Loans.............................................................1
Cooperatives..................................................................4
Current Principal Amount.....................................................38
Cut-off Date.................................................................11
Debt Securities.............................................................100
Definitive Security..........................................................40
Detailed Description.........................................................22
Distribution Date.............................................................2
DTC..........................................................................40
Equity Interest.............................................................112
ERISA....................................................................... 18
ES Class.....................................................................11
Euroclear................................................................... 40
Euroclear Operator...........................................................42
European Depositaries........................................................40
Events of Default........................................................65, 66
Exchangeable Security........................................................11
Exchangeable Security Trust Fund.............................................44
Exchanged ES Class..........................................................107
Fannie Mae....................................................................1
Fannie Mae Certificates.......................................................7
FASIT.....................................................................2, 78
FASIT Owner..................................................................95
FASIT Ownership Security.................................................... 92
FASIT Ownership Security.....................................................16
FASIT Regular Securities.................................................16, 92
FASIT Securities.............................................................92
FDIC.........................................................................34
Federal Tax Counsel..........................................................77
FHA...........................................................................5
FHA Insurance................................................................36
FHA Loans....................................................................26
FHLMC Act....................................................................28
Floating Rate Class..........................................................44
Freddie Mac...................................................................1
Freddie Mac Certificate Group................................................28
Freddie Mac Certificates......................................................7
FTC Rule.....................................................................75
Garn-St Germain Act..........................................................75
GNMA..........................................................................1
GNMA Certificates.............................................................7
GNMA Issuer..................................................................26
Guaranty Agreement...........................................................26
High-Yield Interests.........................................................92
Holders of Securities........................................................17
Housing Act..................................................................26
HUD..........................................................................30
Indenture....................................................................36
Insurance Proceeds...........................................................58
Insured Expenses.............................................................58
Interest Rate................................................................11
Inverse Floating Rate Class..................................................44
Investor Based Exemptions...................................................112
Lender........................................................................1
LIBOR.......................................................................114
Liquidation Expenses.........................................................58
Liquidation Proceeds.........................................................58
Loan-to-Value Ratio..........................................................23
Lower Tier REMIC.............................................................87
Manufactured Homes...........................................................25
Manufacturer's Invoice Price.................................................23
Master Servicer...............................................................1
Master Servicing Agreement...................................................24
Mortgage.....................................................................56
Mortgage Assets...............................................................1
Mortgage Loans................................................................4
Mortgage Pool.................................................................4
Mortgage Rate.................................................................5
Mortgaged Properties.........................................................22
Multifamily Loans.............................................................1
Multiple Variable Rate REMIC Regular Security................................83
Nationally Recognized Rating Agencies.......................................110
NCUA........................................................................113
Non-Electing Securities......................................................17
Non-REMIC Certificates.......................................................17
Notes.........................................................................1
OID Regulations..............................................................80
Owners.......................................................................40
Participants.................................................................40
Percentage Interests.........................................................65
Permitted Investments........................................................53
Plan........................................................................108
Plan Asset Regulations......................................................108
Planned Amortization Class...................................................45
PMBS Agreement...............................................................30
PMBS Issuer...................................................................8
PMBS Servicer.................................................................8
PMBS Trustee..................................................................8
Policy Statement............................................................113
Pool Insurance Policy........................................................13
Pool Insurer.................................................................49
Pooling and Servicing Agreement..............................................36
Pre-Funded Amount.............................................................9
Pre-Funding Account...........................................................9
Pre-Funding Period............................................................9
Prepayment Assumption........................................................80
Presumed Single Qualified Floating Rate......................................82
Presumed Single Variable Rate................................................83
Primary Insurance Policy.....................................................22
Primary Insurer..............................................................62
Principal Prepayments........................................................38
Private Mortgage-Backed Securities............................................1
Protected Account............................................................58
PTCE 83-1...................................................................109
PTE 90-30...................................................................109
Purchase Price...............................................................35
Rating Agency................................................................14
Received ES Class...........................................................107
Record Date..................................................................37
Refinance Loan...............................................................23
REIT.........................................................................87
Relevant Depositary..........................................................40
Relief Act...................................................................76
REMIC.....................................................................2, 78
REMIC Regular Securities.............................................15, 16, 78
REMIC Regulations........................................................79, 96
REMIC Residual Securities....................................................15
REMIC Securities.............................................................78
Reserve Account...............................................................2
Restricted Group............................................................110
Retained Interest............................................................36
RICs.........................................................................87
Securities....................................................................1
Securities Account...........................................................59
Securities Register..........................................................37
Securityholders...............................................................1
Seller.....................................................................1, 3
Senior Securities............................................................10
Series........................................................................1
Single Family Loans...........................................................1
Single Variable Rate REMIC Regular Security..................................83
SMMEA........................................................................15
Special Hazard Insurance Policy..............................................13
Special Hazard Insurer.......................................................50
Strip.......................................................................106
Subordinated Securities......................................................10
Sub-Servicer.................................................................14
Sub-Servicing Agreement......................................................59
Superlien....................................................................77
Terms and Conditions.........................................................42
Tiered FASITs................................................................93
Tiered REMICs................................................................79
Title V......................................................................76
Trust Agreement..............................................................36
Trust Assets..................................................................1
Trust Fund....................................................................1
Trustee......................................................................36
U.S. Government Securities.................................................1, 4
United States person.........................................................90
VA ...........................................................................5
VA Guarantees................................................................36
VA Loans.....................................................................26
Variable Rate Non-Electing Securities........................................98
Variable Rate REMIC Regular Security.........................................82
Yield Supplement Agreement...................................................78
<PAGE>
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INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. THE SELLER, THE ISSUER
OR THE UNDERWRITER HAVE NOT AUTHORIZED ANYONE TO PROVIDE INVESTORS WITH
DIFFERENT INFORMATION. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE CERTIFICATES OFFERED HEREBY NOR AN OFFER OF
SUCH CERTIFICATES TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH
SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-----------------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Summary of Terms .............................. S-4
Risk Factors .................................. S-13
Description of the Mortgage Loans ............. S-13
The Master Servicer ........................... S-17
Description of the Certificates ............... S-19
Yield and Prepayment Considerations ........... S-31
The Pooling and Servicing Agreement ........... S-39
Federal Income Tax Considerations ............. S-51
ERISA Considerations .......................... S-52
Legal Investment .............................. S-53
Restrictions on Purchase and Transfer of the
Residual Certificate ....................... S-53
Method of Distribution ........................ S-54
Legal Matters ................................. S-54
Rating ........................................ S-54
Index of Principal Definitions ................ S-56
Schedule A -- Certain Characteristics of the
Mortgage Loans ............................. A-1
PROSPECTUS
Prospectus Supplement ......................... 2
Available Information ......................... 2
Incorporation of Certain Documents By Reference 3
Reports to Securityholders .................... 3
Summary of Terms .............................. 4
Risk Factors .................................. 19
The Trust Fund ................................ 21
Use of Proceeds ............................... 32
The Seller .................................... 32
The Mortgage Loans ............................ 33
Description of the Securities ................. 36
Exchangeable Securities ....................... 43
Credit Enhancement ............................ 48
Yield and Prepayment Considerations ........... 54
Administration ................................ 56
Legal Aspects of the Mortgage Loans ........... 69
Federal Income Tax Consequences ............... 77
State Tax Consequences ........................ 108
ERISA Considerations .......................... 108
Legal Investment .............................. 113
Method of Distribution ........................ 115
Legal Matters ................................. 115
Financial Information ......................... 116
Rating ........................................ 116
Glossary ...................................... 117
</TABLE>
$225,128,187
(APPROXIMATE)
STRUCTURED ASSET MORTGAGE
INVESTMENTS INC.
MORTGAGE PASS-THROUGH
CERTIFICATES,
SERIES 1998-10
-------------------------------------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------------------------------------
BEAR, STEARNS & CO. INC.
NOVEMBER 19, 1998
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