PROSPECTUS SUPPLEMENT
(To Prospectus dated May 21, 1998)
$96,404,000
(Approximate)
Structured Asset Mortgage Investments Inc.
Depositor
Boston Safe Deposit and Trust Company
Originator and Master Servicer
Mortgage Pass-Through Certificates, Series 1998-7
The Mortgage Pass-Through Certificates, Series 1998-7 (collectively, the
"Certificates"), consist of all Classes identified in the chart below (the
"Offered Certificates") as well as certain additional Classes of Other
Certificates (as hereinafter defined) which are not being offered for sale
hereunder. The original principal amount of one or more Classes of Certificates
may be increased or decreased by up to 10% prior to their issuance, depending on
the Mortgage Loans actually delivered to the Trustee named herein, and may be
adjusted as necessary to obtain the required ratings on the Offered
Certificates. It is a condition to their issuance that each Class of
Certificates receive the respective ratings (set forth under "Summary of
Terms--Rating") of Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("S&P") and Fitch IBCA, Inc. ("Fitch").
(cover continued on next page)
THE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR INTEREST IN SAMI, THE
TRUSTEE, THE MASTER SERVICER, BSMCC OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL ENTITY, SAMI, THE TRUSTEE, THE MASTER SERVICER,
BSMCC OR ANY OF THEIR AFFILIATES, OR ANY OTHER PERSON. DISTRIBUTIONS ON THE
CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS TRANSFERRED OR PLEDGED TO
THE TRUST FOR THE BENEFIT OF CERTIFICATEHOLDERS.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
-------------------
For a discussion of significant matters affecting investments in the
Offered Certificates, see "Risk Factors" herein commencing on page S-20.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
$ 93,726,200 (1) Class A Certificates $730,300 (1) Class B-2 Certificates
$ 1,460,600 (1) Class B-1 Certificates $486,800 (1) Class B-3 Certificates
</TABLE>
$100 (1) Class R Certificates
- -----------
(1) The Offered Certificates will bear interest at a variable rate (the
"Pass-Through Rate") equal to the weighted average of the Net Rates (as
defined herein) of the Mortgage Loans. The Pass-Through Rate with respect
to the first Interest Accrual Period (as defined herein) is expected to be
approximately 6.922% per annum.
-------------------
The Offered Certificates will be purchased by Bear, Stearns & Co. Inc. (the
"Underwriter") from SAMI and will be offered by the Underwriter from time to
time in negotiated transactions at varying prices to be determined at the time
of sale. Proceeds to SAMI are expected to be approximately 101% of the aggregate
principal balance of the Offered Certificates plus accrued interest thereon, but
before deducting expenses payable by SAMI in connection with the Offered
Certificates, estimated to be $175,000.
The Offered Certificates are offered by the Underwriter when, as and if
issued, delivered to and accepted by the Underwriter and subject to certain
other conditions. It is expected that delivery of the Class R Certificates will
be made against payment therefor at the offices of Bear, Stearns & Co. Inc., 245
Park Avenue, New York, New York 10167 and that delivery of the other Offered
Certificates will be made in book entry form only, through the Same Day Funds
Settlement System of The Depository Trust Company, in each case on or about
May 29, 1998.
Bear, Stearns & Co. Inc.
The date of this Prospectus Supplement is May 22, 1998
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
The Offered Certificates and the Other Certificates will represent, in
the aggregate, the entire beneficial ownership interest in a trust (the "Trust")
consisting primarily of conventional, first lien, adjustable rate mortgage loans
secured by one- to four-family residences, individual condominium and
cooperative units (each a "Mortgaged Property") and having original terms to
stated maturity of 30 years or less. Each Mortgage Loan is an interest-only
mortgage loan for the first ten years after origination, and then amortizes on a
twenty-year schedule until maturity. The characteristics of the Mortgage Loans
are described herein under "Description of the Mortgage Loans" and in Annex A
hereto. All the Mortgage Loans will be acquired by Structured Asset Mortgage
Investments Inc. ("SAMI") on the date of issuance of the Certificates from Bear
Stearns Mortgage Capital Corporation ("BSMCC"), an affiliate of SAMI and the
Underwriter. All of the Mortgage Loans were originated by Boston Safe Deposit
and Trust Company ("The Boston Company") and were acquired by BSMCC in May 1998
either directly or indirectly from The Boston Company.
Principal and interest on the Certificates are payable as described
herein on the 25th day of each month or, if such day is not a business day, then
on the next succeeding business day, beginning in June 1998 (each, a
"Distribution Date"). Interest will accrue on the Certificates at the applicable
Pass-Through Rates described above and will be distributed in the amounts as
described under "Description of the Certificates--Distributions on the
Certificates--Interest" herein. Distributions of principal among the
Certificates will be made as described under "Description of the
Certificates--Distributions on the Certificates--Principal" herein. Realized
Losses (as defined under "Description of the Certificates--Realized Losses") on
the Mortgage Loans will be allocated to the Certificates as described under
"Description of the Certificates--Allocation of Losses; Subordination" herein.
There is currently no secondary market for the Certificates and there
can be no assurance that one will develop. The Underwriter intends to establish
a market in the Offered Certificates but is not obligated to do so. There is no
assurance that any such market, if established, will continue.
THE YIELD TO INVESTORS IN EACH CLASS OF OFFERED CERTIFICATES WILL BE
SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS)
ON THE MORTGAGE LOANS. THE YIELD TO MATURITY OF A CLASS OF OFFERED CERTIFICATES
PURCHASED AT A DISCOUNT OR PREMIUM WILL BE MORE SENSITIVE TO THE RATE AND TIMING
OF PAYMENTS THEREON. HOLDERS OF THE OFFERED CERTIFICATES SHOULD CONSIDER, IN THE
CASE OF ANY SUCH CERTIFICATES PURCHASED AT A DISCOUNT, THE RISK THAT A SLOWER
THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT
IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY OFFERED CERTIFICATES
PURCHASED AT A PREMIUM THE RISK THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL
PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED
YIELD. SINCE SUBSTANTIALLY ALL OF THE MORTGAGE LOANS BEAR ADJUSTABLE INTEREST
RATES, THE YIELD TO INVESTORS IN EACH CLASS OF CERTIFICATES WILL ALSO BE HIGHLY
SENSITIVE TO THE LEVEL OF THE INDEX (AS DEFINED HEREIN) ON THE MORTGAGE LOANS.
THE YIELD TO INVESTORS IN THE CERTIFICATES, AND PARTICULARLY THE SUBORDINATE
CERTIFICATES (AS DEFINED HEREIN), ALSO WILL BE ADVERSELY AFFECTED BY REALIZED
LOSSES AND NET INTEREST SHORTFALLS (EACH AS DEFINED HEREIN). NO REPRESENTATION
IS MADE AS TO THE ANTICIPATED RATE OF PREPAYMENTS ON THE MORTGAGE LOANS, THE
LEVEL OF THE INDEX, THE AMOUNT AND TIMING OF REALIZED LOSSES OR NET INTEREST
SHORTFALLS OR AS TO THE RESULTING YIELD TO MATURITY OF ANY CLASS OF
CERTIFICATES. SEE "SUMMARY -- YIELD AND PREPAYMENT CONSIDERATIONS" AND "YIELD
AND PREPAYMENT CONSIDERATIONS" HEREIN.
As described herein, a real estate mortgage investment conduit
("REMIC") election will be made in connection with the Trust for federal income
tax purposes. As described more fully herein and in the Prospectus, all of the
Certificates other than the Class R Certificates will be designated as "regular
interests" in a REMIC and the Class R Certificates will represent a "residual
interest" in a REMIC. See "Federal Income Tax
Considerations"
herein and "Certain Federal Income Tax Consequences" in the Prospectus. The
Class R Certificates will be subject to certain restrictions on transfer and may
have tax liabilities during the early years of the REMIC that substantially
exceed the principal and interest paid thereon during such period. See
"Restrictions on Purchase and Transfer of the Residual Certificates" herein.
Certain limited representations and warranties concerning the Mortgage
Loans have been made by BSMCC. The obligations of BSMCC to repurchase or
substitute for a Mortgage Loan as to which a breach has occurred and is
S-2
<PAGE>
continuing will constitute the sole remedies available to Certificateholders
with respect to a breach of any representations or warranties concerning the
Mortgage Loans. The Boston Company will act as master servicer (in such
capacity, the "Master Servicer") of the Mortgage Loans.
To the extent statements contained herein do not relate to historic or
current information, this Prospectus Supplement may be deemed to contain forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended (the "1933 Act"), and Section 21E of the Securities Exchange
Act of 1934, as amended (the "1934 Act"). Actual results could differ materially
from those contained in such statements as a result of the matters set forth
above, under "Summary of Terms--Yield and Prepayment Considerations" and "Yield
and Prepayment Considerations" and elsewhere in this Prospectus Supplement.
The Offered Certificates offered by this Prospectus Supplement
constitute a portion of a separate series of Certificates being offered by SAMI
pursuant to its Prospectus dated May 21, 1998, of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein and prospective investors are urged to read the Prospectus and
this Prospectus Supplement in full.
S-3
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OF TERMS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND IN
THE ACCOMPANYING PROSPECTUS. CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS
SUMMARY SHALL HAVE THE MEANING ASSIGNED ELSEWHERE IN THE PROSPECTUS SUPPLEMENT.
SEE "INDEX OF PRINCIPAL DEFINITIONS" HEREIN.
<S> <C>
Title of Series....................Mortgage Pass-Through Certificates, Series
1998-7. The Offered Certificates and the
Other Certificates will represent in the
aggregate the entire beneficial
ownership interest in a trust (the
"Trust") consisting primarily of
Mortgage Loans having an aggregate
principal balance as of the Cut-off Date
of approximately $97,377,981. The
Certificates will be issued pursuant to
a Pooling and Servicing Agreement (the
"Agreement") to be dated as of May 1,
1998 (the "Cut-off Date") between
Structured Asset Mortgage Investments
Inc., as depositor ("SAMI"), and Norwest
Bank Minnesota, National Association, as
trustee (the "Trustee").
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Offered Certificates....................$ 93,726,200 (1) Class A Certificates
$ 1,460,600 (1) Class B-1 Certificates
$ 730,300 (1) Class B-2 Certificates
$ 486,800 (1) Class B-3 Certificates
$ 100 (1) Class R Certificates
</TABLE>
(1) The Offered
Certificates
will bear
interest at a
variable rate
equal to the
weighted
average of the
Net Rates of
the Mortgage
Loans.
The original principal amount of one or
more Classes of Certificates may be
increased or decreased by SAMI by up to
10%, depending upon the Mortgage Loans
actually acquired by SAMI and delivered
to the Trustee. In addition, the
original principal amount of any Class
of Certificates may be adjusted, as
necessary, to obtain the required
ratings on the Certificates from the
Rating Agencies. Accordingly, any
investor's commitments with respect to
the Certificates may be correspondingly
decreased or increased.
Other Certificates................In addition to the Offered Certificates,
the Trust will issue the following
Classes of "Other Certificates," in the
indicated approximate original principal
amounts, which will provide credit
support to the Offered Certificates, but
which are not offered hereby:
S-4
<PAGE>
$ 243,400 (1) Class B-4 Certificates
$ 243,400 (1) Class B-5 Certificates
$ 487,180 (1) Class B-6 Certificates
----------
(1) The Other Certificates will bear
interest at a variable rate equal to the
weighted average of the Net Rates of the
Mortgage Loans.
Any information contained herein with
respect to the Other Certificates is
provided only to permit a better
understanding of the Offered
Certificates.
Designations
CERTIFICATES....................Offered Certificates and Other Certificates.
OFFERED CERTIFICATES ...........Class A, Class B-1, Class B-2, Class B-3 and
Class R Certificates.
OTHER CERTIFICATES..............Class B-4, Class B-5, and Class B-6
Certificates (not offered hereby).
SENIOR CERTIFICATES.............The Class A 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.
REGULAR CERTIFICATES............All Classes of Certificates other than the
Class R Certificates.
RESIDUAL CERTIFICATES...........The Class R Certificates.
PHYSICAL CERTIFICATES...........The Class R, Class B-4, Class B-5 and Class
B-6 Certificates.
BOOK-ENTRY CERTIFICATES.........All Offered Certificates other than the
Physical Certificates.
Denominations......................Each Class of Book-Entry Certificates will be
registered as a single Certificate held
by a nominee of The Depository Trust
Company, and beneficial interests will
be held by investors through the
book-entry facilities of The Depository
Trust Company, as described herein, in
minimum denominations of (i) in the case
of the Senior Certificates (other than
the Residual Certificates), $1,000 and
increments of $1.00 in excess thereof
and (ii) in the case of the Offered
Subordinate Certificates, $25,000 and
increments of $1.00 in excess thereof.
One Certificate of each Class of
Book-Entry Certificates may be issued in
a different principal amount to
accommodate the remainder of the initial
principal amount of the Certificates of
such Class.
S-5
<PAGE>
The Class R Certificates will each be issued
in certificated fully-registered form in
a single certificate of $100.
Depositor..........................SAMI, a wholly-owned subsidiary of BSMCC.
See "Structured Asset Mortgage
Investments Inc." in the Prospectus.
Seller.............................BSMCC, pursuant to a Mortgage Loan Purchase
Agreement, dated as of May 29, 1998 (the
"Mortgage Loan Purchase Agreement"),
between BSMCC and SAMI.
Master Servicer....................Boston Safe Deposit and Trust Company, a
Massachusetts trust company.
Cut-off Date.......................May 1, 1998.
Closing Date.......................On or about May 29, 1998.
The Mortgage Pool..................The Mortgage Loans in the aggregate (the
"Mortgage Pool") generally consist of
first lien, adjustable rate mortgage
loans secured by one- to four-family
residences, individual condominium and
cooperative units having original terms
to stated maturity of 30 years or less.
Each Mortgage Loan is an interest-only
mortgage loan for the first ten years
after origination, and then amortizes on
a twenty-year schedule until maturity.
With respect to four Mortgage Loans,
representing 3.67% of the Mortgage Pool,
the loan-to-value ratio at origination
was 90% or more and the Mortgage Loan
amount in excess of 80% of the property
value was secured by a pledge of
Additional Collateral (as defined
herein). In addition, with respect to
five Mortgage Loans, representing 3.80%
of the Mortgage Pool, the loan-to-value
ratio at origination was in excess of
80% and less than or equal to 90% and
the related borrower met the criteria of
The Boston Company's "High LTV" loan
program which sets forth stricter credit
worthiness requirements for borrowers.
The interest rate borne by each Mortgage
Loan (each, a "Mortgage Rate") will be
fixed for the first ten years after
origination (the "Interest Only
Period"). After the Interest Only
Period, the Mortgage Rate will be
adjusted annually to equal the related
Index plus a fixed percentage set forth
in or computed in accordance with the
related note (a "Gross Margin") subject
to rounding and to certain other
limitations (including a maximum
lifetime Mortgage Rate (a "Maximum
Lifetime Mortgage Rate") and a Periodic
Cap on each Adjustment Date (each as
defined herein) other than the first
Adjustment Date, all as more fully
described under "Description of the
Mortgage Loans" herein. The "Index" is
the weekly average yield on United
S-6
<PAGE>
States Treasury Securities adjusted to a
constant maturity of one year.
Four Mortgage Loans, representing
approximately 3.67% of the Mortgage
Pool, are secured in part by, in
addition to real estate or shares of
stock in a cooperative housing
corporation (and the related leasehold
interest), Additional Collateral (as
defined herein) generally consisting of
marketable securities. See "Description
of the Mortgage Loans" herein.
In general, see "Description of the
Mortgage Loans" and Annex A hereto
herein for information with respect to
the Mortgage Pool.
Net Rate...........................The "Net Rate" for each Mortgage Loan is the
Mortgage Rate less the Master Servicing
Fee and Trustee's Fee (each, as defined
in the Agreement) attributable thereto
(in each case expressed as a per annum
rate) (the "Aggregate Expense Rate").
With respect to each Distribution Date,
the Master Servicing Fee for each
Mortgage Loan (as defined herein) will
be either 0.250% per annum or 0.375% per
annum, and the Trustee's Fee will be
0.015% per annum of the Scheduled
Principal Balance of each Mortgage Loan
as of the Due Date in the month
preceding the month in which such
Distribution Date occurs. For any
Distribution Date, the "Due Date" for a
Mortgage Loan will be the date in each
month on which its Monthly Payment (as
defined under "Description of the
Certificates--Distributions of
Principal" herein) is due 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)(a) during the
Interest Only Period, the unpaid
principal balance of such Mortgage Loan
as of the close of business on the
related Due Date or (b) after the
Interest Only Period, the unpaid
principal balance of such Mortgage Loan
as of the close of business on the
related Due Date (taking account of the
principal portion of the scheduled
payment to be made on such Due Date and
irrespective of any delinquency in its
payment), as specified in the
amortization schedule at the time
relating thereto (before any adjustment
to such amortization schedule by reason
of any bankruptcy or similar proceeding
occurring after the Cut-off Date (other
than a Deficient Valuation, as defined
under "Description of the
Certificates--Realized Losses" herein)
or any moratorium or similar waiver or
grace period) less (ii) any Principal
Prepayments and the principal portion of
any Net Liquidation Proceeds (as defined
herein) received during or
S-7
<PAGE>
prior to the immediately preceding
Prepayment Period (as defined herein);
provided that the Scheduled Principal
Balance of any Liquidated Mortgage Loan
(as defined herein) is zero.
Distribution Dates.................The 25th day of each month, or if such day
is not a business day, then the next
succeeding business day, beginning in
June 1998 (each, a "Distribution Date").
Record Date........................The "Record Date" for each Distribution Date
will be the close of business on the
last Business Day of the month preceding
the month in which the related
Distribution Date occurs.
Due Period.........................With respect to each Distribution Date, the
period commencing on the second day of
the month preceding the month in which
the Distribution Date occurs and ending
at the close of business on the first
day of the month in which the
Distribution Date occurs (each, a "Due
Period").
Prepayment Period..................With respect to each Distribution Date,
the period from the first day through
the last day of the month preceding the
month in which the Distribution Date
occurs (each, a "Prepayment Period").
Distributions on the
Certificates.......................GENERAL. As more fully described herein,
distributions with respect to each Class
of Certificates will be payable from
certain collections and other recoveries
on the Mortgage Loans. On each
Distribution Date, (i) the Senior
Certificates will be entitled to receive
all amounts distributable to them for
such Distribution Date before any
distributions are made to the
Subordinate Certificates on such date
and (ii) each Class of Subordinate
Certificates will be entitled to receive
all amounts distributable to them for
such Distribution Date before any
distributions are made on such date on
any Class of Subordinate Certificates
with a higher numerical Class
designation. In general, an amount equal
to the Available Funds (as defined
below) for each Distribution Date will
be allocated FIRST, to pay interest due
the holders of the Senior Certificates;
SECOND, to pay interest due the holders
of the Senior Certificates which remains
unpaid from prior periods; THIRD, to
reduce the Current Principal Amounts (as
defined herein) of the Senior
Certificates to the extent of the Senior
Optimal Principal Amount (as described
herein); and FOURTH, to pay interest on
and then principal of each Class of
Subordinate Certificates in the order of
their numerical Class designations. The
Available Funds will be allocated among
the Classes of Certificates in the
manner set forth in "Description of the
Certificates -- Distributions on the
Certificates -- Allocation of Available
Funds" herein.
S-8
<PAGE>
INTEREST. Interest will accrue during the
preceding Interest Accrual Period for
each Class at the variable rate for such
Class determined as set forth on the
cover page hereof (each, a "Pass-Through
Rate") on the Current Principal Amount
of such Class immediately preceding such
Distribution Date. With respect to each
Distribution Date, the "Interest Accrual
Period" for each Class of Certificates
will be the calendar month preceding the
month in which the Distribution Date
occurs, commencing in May 1998. Interest
will be calculated on the basis of a
360-day year comprised of twelve 30-day
months.
On each Distribution Date, interest will be
distributable on each Class of
Certificates from the Available Funds
for such Distribution Date in an
aggregate amount equal to the Accrued
Certificate Interest for such Class on
such Distribution Date, plus any Accrued
Certificate Interest thereon remaining
undistributed from previous Distribution
Dates.
The "Accrued Certificate Interest" for any
Certificate for any Distribution Date
will equal the interest accrued during
the related Interest Accrual Period at
the applicable Pass-Through Rate on the
Current Principal Amount of such
Certificate immediately prior to such
Distribution Date, less (i) in the case
of a Senior Certificate, such
Certificate's share of any Net Interest
Shortfall and, after the Distribution
Date on which the Current Principal
Amounts of the Subordinate Certificates
are reduced to zero (the "Cross-Over
Date"), the interest portion of any
Realized Losses and (ii) in the case of
a Subordinate Certificate, such
Certificate's share of Net Interest
Shortfall and the interest portion of
any Realized Losses.
Such Net Interest Shortfall will be allocated
among the Certificates in proportion to
the amount of Accrued Certificate
Interest that would have been allocated
thereto in the absence of such
shortfalls. To the extent described
herein, the interest portion of Realized
Losses will be allocated first to the
Subordinate Certificates in reverse
order of their numerical designations
commencing with the Class B-6
Certificates and following the
Cross-Over Date, such Realized Losses
will be allocated PRO RATA to the
Classes of Senior Certificates.
Any Interest Shortfalls resulting from
prepayments (in full and in part) on the
Mortgage Loans during the related
Prepayment Period will be offset by the
Master Servicer to the extent such
Interest Shortfalls do not exceed the
portion of the Master Servicing Fee
calculated at a rate of 0.250% per annum
in connection with such Distribution
S-9
<PAGE>
Date (the amount of such portion of the
fee so used, a "Compensating Interest
Payment"). No assurance can be given
that the servicing compensation
available to cover Interest Shortfalls
will be sufficient therefor. See "The
Pooling and Servicing
Agreement--Servicing Compensation and
Payment of Expenses" herein.
The "Current Principal Amount" of any
Certificate as of any Distribution Date
will equal such Certificate's initial
principal amount on the Closing Date as
reduced by (i) all amounts distributed
on previous Distribution Dates on such
Certificate on account of principal,
(ii) the principal portion of all
Realized Losses previously allocated to
such Certificate taking account of the
Loss Allocation Limitation (as defined
herein) and (iii) in the case of a
Subordinate Certificate, such
Certificate's PRO RATA share, if any, of
the Subordinate Certificate Writedown
Amount for previous Distribution Dates.
PRINCIPAL. Principal will be distributable
monthly on the Senior Certificates on
each Distribution Date in an aggregate
amount equal to the Senior Optimal
Principal Amount (as defined herein) for
such Distribution Date to the extent of
the Available Funds for such
Distribution Date remaining after
distributions of interest are made on
the Senior Certificates. Subject to such
limitation, the Senior Optimal Principal
Amount will be allocated among the
Senior Certificates in the manner
described herein.
Principal will be distributed monthly on each
Class of Subordinate Certificates on
each Distribution Date in an aggregate
amount equal to such Class's Allocable
Share (as defined herein) for such
Distribution Date to the extent of the
Available Funds remaining after (i)
distributions of interest and principal
have been made on each Class of Senior
Certificates entitled thereto as
described herein and each Class of
Subordinate Certificates, if any, with a
lower numerical Class designation than
such Class and (ii) distributions of
interest have been made on such Class of
Subordinate Certificates.
Distributions of principal of a Class of
Certificates will be made on a PRO RATA
basis among all outstanding Certificates
of such Class. See "Description of the
Certificates -- Distributions on the
Certificates" herein.
Additional Rights of the
Residual Certificates............In addition to distributions of principal
and interest, the holders of the
Residual Certificates will be entitled
to receive (i) the amount, if any, of
Available Funds remaining on any
Distribution Date after distributions of
interest and
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<PAGE>
principal are made on the Certificates
on such date and (ii) the proceeds, if
any, of the assets of the Trust
remaining after the Current Principal
Amount of each Class of Certificates has
been reduced to zero. It is not
anticipated that any material assets
will be remaining for such distributions
at any such time.
Credit Enhancement.................Credit enhancement for the Senior
Certificates will be provided by the
Subordinate Certificates. Credit
enhancement for each Class of
Subordinate Certificates will be
provided by the Class or Classes of
Subordinate Certificates with higher
numerical Class designations.
The subordination of the Subordinate
Certificates to the Senior Certificates
and the further subordination among the
Subordinate Certificates are each
intended to increase the likelihood of
timely receipt by the holders of the
Certificates with higher relative
payment priority of the maximum amount
to which they are entitled on any
Distribution Date and to provide such
holders protection against losses
resulting from defaults on Mortgage
Loans to the extent described herein.
The Subordinate Certificates also
provide protection against Debt Service
Reductions (as defined herein). 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 PRO RATA share of any Realized
Losses with respect to Mortgage Loans in
excess of the available total
subordination amount. See "Description
of the Certificates -- Distributions on
the Certificates," " -- Allocation of
Losses; Subordination" and " --
Subordination" herein.
As of the Closing Date, the aggregate
Current Principal Amounts of the
Subordinate Certificates and of the
Other Certificates which are part of the
Subordinate Certificates will equal
approximately 3.75% and 1.00%,
respectively, of the aggregate Current
Principal Amounts of all the Classes of
Certificates.
In addition, to extend the period during
which the Subordinate Certificates
remain available as credit enhancement
for the Senior Certificates, the entire
amount of any prepayments and certain
other unscheduled recoveries of
principal with respect to the Mortgage
Loans will be allocated to the Senior
Certificates to the extent described
herein during the first ten years after
the Cut-off Date (with such allocation
being subject to reduction over a five
year period thereafter as described
herein). This allocation has the effect
of accelerating the amortization of the
related Senior Certificates as a whole
while, in the absence of losses in
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respect of the Mortgage Loans,
increasing the percentage interest in
the principal balance of the Mortgage
Loans evidenced by the related
Subordinate Certificates. See
"Description of the Certificates --
Distributions on the Certificates" and "
-- Subordination" herein.
Monthly Advances...................The Master Servicer will be obligated to
advance delinquent scheduled payments of
principal and interest on a Mortgage
Loan under certain circumstances (each
such advance, a "Monthly Advance"). The
Trustee will be obligated to make any
such Monthly Advance if the Master
Servicer fails in its obligation to do
so, to the extent provided in the
Agreement. See "The Pooling and
Servicing Agreement -- Monthly Advances"
herein.
Allocation of Losses...............Subject to the limitations set forth below,
Realized Losses (other than a Debt
Service Reduction) on the Mortgage Loans
will be allocated as follows: the
principal portion of such Realized
Losses, first, among the Subordinate
Certificates in the inverse order of
their numerical Class designations and
then PRO RATA to the Senior
Certificates, until, in each case, the
Current Principal Amount of each such
Class of Certificates is reduced to
zero. See "Description of the
Certificates -- Allocation of Losses;
Subordination" herein.
Neither the Offered Certificates nor the
Mortgage Loans are insured or guaranteed
by a governmental agency or
instrumentality, SAMI, the Trustee, the
Master Servicer, BSMCC, or any affiliate
thereof or any other person.
Yield and Prepayment
Considerations.....................GENERAL CONSIDERATIONS. The yield to maturity
of each Class of Certificates will be
affected by the amount and timing of
principal payments on the Mortgage
Loans, the allocation of Available Funds
to such Class of Certificates, the
applicable Pass-Through Rate for such
Class of Certificates and the purchase
price paid for such Certificates. In
addition, the yields to investors in the
Certificates will be adversely affected
by Realized Losses and Net Interest
Shortfalls. The interaction of the
foregoing factors may have different
effects on the various Classes of
Certificates and the effects on any
Class may vary at different times during
the life of such Class. No
representation is made as to the
anticipated rate of prepayments on the
Mortgage Loans, the amount and timing of
Realized Losses or Net Interest
Shortfalls or as to the anticipated
yield to maturity of any Certificates.
Prospective investors are urged to
consider their own estimates as to the
anticipated rate of future prepayments
on the Mortgage Loans and the
suitability of the Certificates to their
investment objectives. In addition to
the discussion below, prospective
investors
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should review the discussion under
"Yield and Prepayment Considerations"
herein and in the Prospectus.
ADJUSTABLE MORTGAGE RATES. The Mortgage Rates
will be fixed for ten years, and
thereafter will be subject to adjustment
annually on the adjustment date
applicable thereto (each such date, an
"Adjustment Date"), rounded to the
nearest 0.125%, of the sum of the Index
and the related Gross Margin (as defined
herein). As a result, the yield to
maturity on the Offered Certificates
will be sensitive to the level of the
Index which may not correlate with
mortgage interest rates generally. It is
possible that lower prevailing mortgage
interest rates, which might be expected
to result in faster prepayments, could
occur concurrently with an increase in
the level of the Index.
With respect to the Mortgage Loans,
adjustments of the Mortgage Rates are
subject to a maximum Mortgage Rate (the
"Maximum Lifetime Mortgage Rate"), and
adjustments of the Mortgage Rates are
generally subject to an initial periodic
rate cap of 6.000% and a periodic rate
adjustment cap of 2.000% (the "Periodic
Cap") on each Adjustment Date (other
than the first Adjustment Date), all as
set forth in the related Note.
MORTGAGE LOAN PAYMENTS. If prevailing
mortgage rates fall significantly below
the Mortgage Rates on the Mortgage
Loans, the Mortgage Loans are likely to
be subject to higher prepayment rates
than if prevailing rates remain at or
above the Mortgage Rates on the Mortgage
Loans. Other factors affecting
prepayments of Mortgage Loans include
changes in Mortgagors' housing needs,
job transfers, unemployment, net equity
in the Mortgaged Properties and
servicing decisions. Amounts received by
virtue of liquidations of Mortgage
Loans, repurchases of Mortgage Loans
upon breach of representations or
warranties and optional termination of
the Trust also affect the receipt of
principal on the Mortgage Loans. In
general, the Mortgage Loans may be
prepaid at any time without penalty.
TIMING OF PAYMENTS AND DISTRIBUTIONS. Unlike
certain corporate bonds, the timing and
amount of principal payments on the
Certificates are not fixed because they
are generally determined by the timing
and amount of principal payments on the
applicable Mortgage Loans. The timing of
payments on the Mortgage Loans may
significantly affect an investor's
yield. In general, the earlier a
prepayment of principal on the Mortgage
Loans, the greater will be the effect on
an investor's yield to maturity. As a
result, the effect on an investor's
yield of
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<PAGE>
principal prepayments occurring at a
rate higher (or lower) than the rate
anticipated by the investor during the
period immediately following the
issuance of the Certificates will not be
offset by a subsequent like reduction
(or increase) in the rate of principal
prepayments. Furthermore, the effective
yield to Certificateholders will be
slightly lower than the yield otherwise
produced by the applicable Pass-Through
Rate and purchase price because, while
interest generally will accrue on each
such Certificate from the first day of
the month, the distribution of such
interest will not be made earlier than
the 25th day of the month following the
month of accrual. Moreover, to the
extent any Net Interest Shortfall or the
interest portion of any Realized Loss is
allocated to a Class of Certificates the
yield to investors in such Class will be
reduced.
DISCOUNTS AND PREMIUMS. In the case of any
Certificates purchased at a discount, a
slower than anticipated rate of
principal payments could result in an
actual yield that is lower than the
anticipated yield. In the case of any
Certificates purchased at a premium, a
faster than anticipated rate of
principal payments could result in an
actual yield that is lower than the
anticipated yield. A discount or premium
would be determined in relation to the
price at which a Certificate will yield
its Pass-Through Rate, after giving
effect to any payment delay.
REINVESTMENT RISK. Because the Mortgage Loans
may be prepaid at any time, it is not
possible to predict the rate at which
distributions on the Certificates will
be received. Since prevailing interest
rates are subject to fluctuation, there
can be no assurance that investors in
the Certificates will be able to
reinvest the distributions thereon at
yields equaling or exceeding the yields
on the Certificates. Yields on any such
reinvestments may be lower, and may even
be significantly lower, than yields on
the Certificates. Generally, when
prevailing interest rates increase,
prepayment rates on mortgage loans tend
to decrease, resulting in a reduced rate
of return of principal to investors at a
time when reinvestment at such higher
prevailing rates would be desirable.
Conversely, when prevailing interest
rates decline, prepayment rates on
mortgage loans tend to increase,
resulting in a greater rate of return of
principal to investors at a time when
reinvestment at comparable yields may
not be possible. Prospective investors
in the Certificates should consider
carefully the related reinvestment risks
in light of other investments that may
be available to such investors.
Approximately 95.6% of the Mortgage
Loans in the Mortgage Pool provide for a
prepayment penalty of generally 1% of
the amount of any prepayments which
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<PAGE>
exceed 10% of the original principal
balance of the related Mortgage Loan
that are made within one year of the
date of origination.
WEIGHTED AVERAGE INTEREST RATES. Because the
Pass-Through Rate applicable to the
Certificates will be based upon the
weighted average of the Net Rates of the
Mortgage Loans, disproportionate
prepayments of Mortgage Loans with
higher Net Rates will adversely affect
the yield. Mortgage Loans with higher
Net Rates will have higher Mortgage
Rates as well, and such Mortgage Loans
are likely to prepay at rates that are
faster than those applicable to Mortgage
Loans with lower Mortgage Rates with
adverse effects on the yields on the
Certificates.
SUBORDINATION OF CERTAIN CLASSES OF
CERTIFICATES. The rights of the holders
of the Subordinate Certificates to
receive distributions with respect to
each Mortgage Loan will be subordinated
to such rights of the holders of the
Senior Certificates, and to each Class
of Subordinate Certificates having a
lower numerical Class designation than
such Class. The level of subordination
available as support to the Senior
Certificates will be directly affected
by the rate and timing of prepayments
and the occurrence of Realized Losses.
PREPAYMENTS. Prepayments on each Mortgage
Loan will be allocated solely to the
Senior Certificates during at least the
first ten years after the Closing Date
and then such allocation will decrease
subject to meeting certain loss and
delinquency tests during the next five
years until the Senior Certificates and
the Subordinate Certificates share PRO
RATA in such allocations. Consequently,
during not less than the first fifteen
years after the Closing Date,
prepayments will have the effect of
accelerating the amortization of the
Senior Certificates while increasing the
percentage interest in the Mortgage
Loans evidenced by the Subordinate
Certificates. In addition, in order to
maintain the relative subordination
among the Subordinate Certificates
prepayments and certain other
unscheduled recoveries of principal in
respect of the Mortgage Loans will not
be distributable to the holders of any
Class of Subordinate Certificates on any
Distribution Date for which the related
Class Prepayment Distribution Trigger is
not satisfied except as otherwise
described herein. If the Class
Prepayment Distribution Trigger is not
satisfied with respect to any Class of
Subordinate Certificates, the
amortization of those Classes of
Subordinate Certificates with a lower
numerical class designation may occur
more rapidly than would otherwise have
been the case and, in the absence of
losses in respect of the Mortgage Loans,
the
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<PAGE>
percentage interest in the principal
balance of the Mortgage Loans evidenced
by such Class of Subordinate
Certificates may increase.
RESIDUAL CERTIFICATES. Holders of the
Residual Certificates are entitled to
receive distributions of principal and
interest as described herein. However,
holders of such Certificates may have
tax liabilities with respect to their
Certificates during the early years of
the REMIC that substantially exceed the
principal and interest payable thereon
during such periods.
Liquidity..........................There is currently no secondary market for
the Certificates, and there can be no
assurance that one will develop. The
Underwriter intends to establish a
market in the Offered Certificates, but
it is not obligated to do so. There is
no assurance that any such market, if
established, will continue. Each
Certificateholder will receive monthly
reports pertaining to the Certificates
as described under "The Pooling and
Servicing Agreement -- Reports to
Certificateholders" in the Prospectus.
There are a limited number of sources
which provide certain information about
mortgage pass-through certificates in
the secondary market, and there can be
no assurance that any of these sources
will provide information about the
Certificates. Investors should consider
the effect of limited information on the
liquidity of the Certificates.
Optional Termination...............On any Distribution Date on which the
aggregate unpaid principal balance of
the Mortgage Loans is less than 5% of
the aggregate Cut-off Date Scheduled
Principal Balance 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 the purchase
price set forth in the Agreement. Any
such repurchase will result in the
retirement of the Certificates. The
Trust may also be terminated and the
Certificates retired on any Distribution
Date upon the determination by SAMI,
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.
Certain Federal Income Tax
Consequences.....................An election will be made to treat the
Mortgage Loans, the Certificate Account
and certain other assets owned by the
Trust as a real estate mortgage
investment conduit ("REMIC") for federal
income tax purposes. The REMIC will
issue "regular interests" and a
"residual interest." The Certificates
(other than the Residual Certificates)
will
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<PAGE>
be designated as regular interests in
the REMIC and are herein referred to as
the "Regular Certificates" or the "REMIC
Regular Certificates." The Class R
Certificates will be designated as the
residual interest in the REMIC (the
"Residual Certificates" or the "REMIC
Residual Certificates"). See "Federal
Income Tax Considerations" herein and
"Certain Federal Income Tax
Consequences" in the Prospectus and
"Restrictions on Purchase and Transfer
of the Residual Certificates" herein.
ERISA Considerations...............Fiduciaries of employee benefit plans subject
to Title I of the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), should consider the ERISA
fiduciary investment standards before
authorizing an investment by a plan in
the Certificates. In addition,
fiduciaries of employee benefit plans or
other retirement arrangements (such as
individual retirement accounts or
certain Keogh plans) which are subject
to Title I of ERISA, and/or Section 4975
of the Internal Revenue Code of 1986, as
amended (the "Code"), as well as any
entity, including an insurance company
general account, whose underlying assets
include plan assets by reason of a plan
or account investing in such entity
(collectively, "Plan(s)"), should
consult with their legal counsel to
determine whether an investment in the
Certificates will cause the assets of
the Trust ("Trust Assets") to be
considered plan assets pursuant to the
plan asset regulations set forth in 29
C.F.R. ss. 2510.3-101, thereby
subjecting the Plan to the prohibited
transaction rules with respect to the
Trust Assets and the Trustee or the
Master Servicer to the fiduciary
investment standards of ERISA, or cause
the excise tax provisions of Section
4975 of the Code to apply to the Trust
Assets, unless some exemption granted by
the Department of Labor applies to the
acquisition, holding or transfer of the
Certificates.
Subject to the considerations set forth under
"ERISA Considerations" herein and in the
Prospectus, the purchase or holding of
the Senior Certificates by, on behalf
of, or with plan assets of, a Plan may
qualify for exemptive relief under
Prohibited Transaction Exemption 90-30
(the "Exemption").
Because the exemptive relief afforded by the
Exemption (or any similar exemption that
might be available) will not likely
apply to the purchase, sale or holding
of the Class B Certificates (due to the
subordinate nature thereof) or the
Residual Certificates, transfers of such
Certificates to a Plan, to a trustee or
other person acting on behalf of any
Plan, or to any other person using "Plan
Assets" to effect such acquisition are
restricted. See "ERISA Considerations"
herein and in the Prospectus.
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<PAGE>
Restrictions on Purchase and
Transfer of the Residual
Certificates....................The Residual Certificates are not offered
for sale to certain tax exempt
organizations that are "disqualified
organizations" as defined in "Certain
Federal Income Tax Consequences--REMIC
Residual Certificates--Tax on
Disposition of REMIC Residual
Certificates; Restrictions on Transfer,
Holding by Pass-Through Entities" in the
Prospectus. Such "disqualified
organizations" are prohibited from
acquiring or holding any beneficial
interest in the Residual Certificates.
Further, neither the Residual
Certificates nor any beneficial interest
therein may be sold or otherwise
transferred without the express written
consent of Norwest Bank Minnesota,
National Association, acting as agent
for the Holders of the Residual
Certificates as tax matters person (the
"Tax Matters Person"), which may be
withheld to avoid a risk of REMIC
disqualification or REMIC-level tax. See
"Certain Federal Income Tax
Consequences--REMIC Residual
Certificates--Tax on Disposition of
REMIC Residual Certificates;
Restrictions on Transfer, Holding by
Pass-Through Entities" in the Prospectus
and "Restrictions on Purchase and
Transfer of the Residual Certificates"
herein. Finally, unless the Tax Matters
Person consents in writing (which
consent may be withheld in the Tax
Matters Person's sole discretion), the
Residual Certificates (including a
beneficial interest therein) may not be
purchased by or transferred to any
person who is not a "United States
person," as such term is defined in
Section 7701(a)(30) of the Code. For
certain additional tax-related
restrictions on the transfer of the
Residual Certificates, see "Certain
Federal Income Tax Consequences -- REMIC
Residual Certificates -- Mismatching of
Income and Deductions; Excess
Inclusions" and "Certain Federal Income
Tax Consequences -- Foreign Investors --
REMIC Residual Certificates" in the
Prospectus.
Rating.............................It is a condition to their issuance that
each Class of Offered Certificates
receives the ratings set forth below
from Standard & Poor's Ratings Services,
a division of The McGraw-Hill Companies,
Inc. ("S&P"), and Fitch IBCA, Inc.
("Fitch"). S&P and Fitch are referred to
herein as the "Rating Agencies."
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<PAGE>
RATING
---------------------------------
CLASS S&P FITCH
----- --- -----
Class A AAA AAA
Class B-1 AA AA
Class B-2 A A
Class B-3 BBB BBB
Class R AAA AAA
The ratings of the Offered Certificates of
any Class should be evaluated
independently from similar ratings on
other types of securities. A rating is
not a recommendation to buy, sell or
hold securities and may be subject to
revision or withdrawal at any time by
the Rating Agencies. See "Rating"
herein.
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, if it
does, what rating would be assigned by
such other rating agency. The rating
assigned by such other rating agency to
the Offered Certificates could be lower
than the respective ratings assigned by
the Rating Agencies.
Legal Investment...................The Senior Certificates and the Class B-1
Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") so long as they
are rated in one of the two highest
rating categories and, as such, will be
legal investments for certain entities
to the extent provided in SMMEA, subject
to state laws overriding SMMEA. Certain
states have enacted legislation
overriding the legal investment
provisions of SMMEA. The remaining
Classes of Certificates will not
constitute "mortgage related securities"
under SMMEA (the "Non-SMMEA
Certificates"). The appropriate
characterization of the Non-SMMEA
Certificates under various legal
investment restrictions, and thus the
ability of investors subject to these
restrictions to purchase Non-SMMEA
Certificates, may be subject to
significant interpretive uncertainties.
All investors whose investment activities
are subject to legal investment laws and
regulations or to review by certain
regulatory authorities may be subject to
restrictions on investment in the
Certificates. Any such institution
should consult its own legal advisors in
determining whether and to what extent
there may be restrictions on its ability
to invest in the Certificates. See
"Legal Investment" herein and in the
Prospectus.
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<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the accompanying Prospectus, prospective investors should
carefully consider the following factors before deciding to invest in the
Offered Certificates.
COOPERATIVE LOANS; UNRECOGNIZED SECURITY INTERESTS
The Mortgage Pool includes Mortgage Loans made in connection with a
purchase or refinancing of cooperative apartments ("Cooperative Loans"). Certain
cooperative housing corporations permit purchasers to obtain mortgage financing
on only a portion, or on none, of a cooperative apartment's purchase price. Ten
Mortgage Loans, representing approximately 3.58% of the Mortgage Pool, were made
despite such restrictions and have not been recognized by the related
cooperative housing corporation (such loans, "Unrecognized Cooperative Loans").
As described under "Certain Legal Aspects of the Mortgage
Loans--Foreclosure/Repossession-- Cooperative Loans" in the accompanying
Prospectus, there are certain risks attendant to foreclosure on Cooperative
Loans. In the case of the Unrecognized Cooperative Loans, such risks are
increased. A cooperative housing corporation may declare the borrower in default
under the related lease or occupancy agreement because of the unrecognized
financing and terminate such lease or occupancy agreement. The cooperative
housing corporation will be under no obligation to recognize the lien of the
Trust against the related cooperative shares, and may actively oppose the
efforts of the Trust to realize upon such collateral. Investors should consider
the risk that, in the event of a default under an Unrecognized Cooperative Loan
and resulting foreclosure, the related collateral may have no value.
BSMCC will represent and warrant that each Cooperative Loan is secured
by a perfected, enforceable first priority security interest in the related
shares and lease or occupancy agreement, and that the value of such collateral
equals at least 80% of the principal balance of such Cooperative Loan at
origination or modification. In the event of a breach of such representation and
warranty that materially and adversely affects Certificateholders, BSMCC will be
required to purchase the related Cooperative Loan from the Trust for a price
equal to the unpaid principal balance thereof plus accrued interest thereon (or,
in certain circumstances, substitute another mortgage loan).
Certain other risks to investors arise as a result of the inclusion of
Cooperative Loans in the Mortgage Pool. See "Certain Legal Aspects of the
Mortgage Loans--Cooperatives" and "--Foreclosure/Repossession-- Cooperative
Loans" in the accompanying Prospectus.
INTEREST-ONLY PAYMENTS
The Mortgage Loans provide for payment of interest at the Mortgage
Rate, but no payment of principal, for a period of ten years following the
origination of such Mortgage Loan. Following such ten year period, the monthly
payment with respect to each such Mortgage Loan will be increased to an amount
sufficient to fully amortize the principal balance of such Mortgage Loan over
the remaining term and to pay interest at the Mortgage Rate.
The failure of such Mortgage Loans to amortize during such period may
extend the weighted average lives of the Offered Certificates. Investors that
purchased Offered Certificates at a discount to their initial Certificate
Principal Amounts should consider that such extension would result in a yield to
investors that would be lower than would be the case if such Mortgage Loans
provided for payment of principal and interest upon every payment date. In
addition, borrowers may view the absence of any obligation to make a payment of
principal during the first ten years of the term of the related Mortgage Loan as
a disincentive to prepayment of such Mortgage Loan.
To the extent that a recalculated monthly payment as described above is
substantially in excess of a borrower's previous monthly payment providing
solely for the payment of interest, such loan may be subject to an increased
risk of delinquency and loss.
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<PAGE>
GEOGRAPHICAL CONCENTRATION OF THE MORTGAGE LOANS
Approximately 30.50% and 18.16% of the Mortgage Loans are secured by
Mortgaged Properties located in the states of California and New York,
respectively. In addition, approximately 26.14% of the Mortgage Loans are
secured by Mortgaged Properties located in the states of Connecticut,
Massachusetts, New Jersey and the District of Columbia, collectively. The
economies of such states may be adversely affected to a greater degree than the
economies of other areas of the country by certain developments affecting
industries concentrated in such states. In recent periods, several regions of
the United States (including California and the northeast) have experienced
significant downturns in the market value of real estate. In addition, Mortgaged
Properties located in California may be more susceptible to certain types of
hazards, such as wildfires and mudslides, and certain types of special hazards
not covered by insurance, such as earthquakes, than properties located in other
parts of the country.
Under the Mortgage Loan Purchase Agreement, BSMCC has represented and
warranted that each Mortgaged Property was free of material damage as of the
date of the Closing Date. If any Mortgaged Property incurs material damage prior
to the Closing Date, BSMCC will be required to repurchase the related Mortgage
Loan from the Trust (or, in certain circumstances, substitute another mortgage
loan) and the proceeds of any such repurchase will be treated as a prepayment in
full. BSMCC will not be obligated to repurchase any Mortgage Loan if the related
Mortgaged Property is damaged after the Closing Date. In addition, the standard
hazard insurance policies covering the Mortgaged Properties generally do not
cover damage caused by flooding and landslides, and flood or landslide insurance
may not have been obtained with respect to such Mortgaged Properties. If any
Mortgaged Property incurs material damage after the Closing Date, to the extent
that insurance proceeds received with respect to such Mortgaged Property are not
applied to the restoration thereof such proceeds will be used to prepay the
related Mortgage Loan in full or in part. Any repurchases or repayments of the
Mortgage Loans may reduce the weighted average lives of the Offered Certificates
and will reduce the yields on such Certificates to the extent they are purchased
at a premium.
HIGH BALANCE MORTGAGE LOANS
As of the Cut-Off Date, the average original principal balance of the
Mortgage Loans was approximately $633,184, and approximately 40.44% of the
Mortgage Loans had original principal balances in excess of $900,000. Investors
are urged to consider the risk that the loss and delinquency experience on such
higher balance loans may have a disproportionate effect on the Mortgage Pool as
a whole. A loss of the entire principal balance of such Mortgage Loan may result
in a substantial Realized Loss, which may be allocated to the Offered
Certificates.
DESCRIPTION OF THE MORTGAGE LOANS
The Mortgage Pool will consist of approximately 154 Mortgage Loans. In
general, these are first lien, adjustable rate mortgages secured by one- to
four-family residences, individual condominium and cooperative units and having
original terms to maturity of 30 years or less. Each Mortgage Loan is an
interest-only mortgage loan for the first ten years after origination, and then
amortizes on a twenty-year schedule until maturity. The Mortgage Loans were
originated by or on behalf of, The Boston Company. The following paragraphs and
the tables set forth in Annex A set forth additional information with respect to
the Mortgage Pool.*
- --------
* The description herein and in Annex A hereof of the Mortgage Loans is based
upon estimates of the composition thereof as of the Cut-off Date, as adjusted to
reflect the Scheduled Principal Balances as of the Cut-off Date. Prior to the
issuance of the Certificates, Mortgage Loans may be removed as a result of (i)
Principal Prepayments thereof in full prior to the dates on which BSMCC acquired
the Mortgage Loans, (ii) requirements of S&P or Fitch or (iii) delinquencies or
otherwise. In any such event, other mortgage loans may be included in the Trust.
SAMI believes that the estimated information set forth herein with respect to
the Mortgage Loans as presently constituted is representative of the
characteristics thereof at the time the Certificates are issued, although
certain characteristics of the Mortgage Loans may vary.
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<PAGE>
As used herein, unless the context indicates otherwise, "Mortgage
Loans" includes Cooperative Loans, "Mortgaged Properties" includes shares in the
related cooperative apartment corporation and the related proprietary leases or
occupancy agreements securing Cooperative Notes, "Mortgage Notes" includes
Cooperative Notes, and "mortgages" includes security agreements with respect to
Cooperative Notes.
All of the Mortgage Loans provide for monthly payments of interest at
the Mortgage Rate but no payments of principal for the first ten years after
origination of such Mortgage Loan (the "Interest Only Period"). Following the
Interest Only Period, the monthly payment on each such Mortgage Loan will be
increased to an amount sufficient to fully amortize the outstanding principal
balance of such Mortgage Loan over its remaining term and pay interest at
the related Mortgage Rate.
The Mortgage Loans are adjustable rate mortgage loans evidenced by a
note (each a "Note") bearing interest at a Mortgage Rate which is fixed during
the Interest Only Period. After the Interest Only Period, the Mortgage Rate is
subject to annual adjustment on the date specified in the related Note (each
such date, an "Adjustment Date") to equal the sum, generally, rounded to the
nearest 0.125%, of (i) the weekly average yield on United States Treasury
Securities adjusted to a constant maturity of one year (the "Index") as most
recently available as of the date 45 days prior to such Adjustment Date, and
(ii) an amount equal to 3.250% (with respect to 99.38% of the Mortgage Loans) or
2.750% (with respect to 0.62% of the Mortgage Loans) (the "Gross Margin"),
subject, however, to certain limitations described below.
With respect to the Mortgage Loans, the Mortgage Rate will not increase
or decrease on any Adjustment Date by more than 2.000% (the "Periodic Cap");
provided that the Periodic Cap will not apply to the first Adjustment Date after
the Interest Only Period. The maximum increase on the first Adjustment Date is
generally 6.00%. The Mortgage Rate is subject to a maximum Mortgage Rate (the
"Maximum Lifetime Mortgage Rate"), as set forth in the related Note. See the
applicable table in Annex A. Effective with the first payment due on the first
Adjustment Date and on each following Adjustment Date, the monthly payment will
be adjusted to an amount that will fully amortize the outstanding principal
balance of the Mortgage Loan over its remaining term and pay interest at the
Mortgage Rate as so adjusted.
Ten Mortgage Loans, representing approximately 3.58% of the Mortgage
Pool, are Unrecognized Cooperative Loans (as defined herein); the value of the
related collateral may prove to be substantially less, in the event of
foreclosure, than the unpaid principal balance of the related Mortgage Loan. It
is possible that such collateral will have no value. See "Risk
Factors--Cooperative Loans; Unrecognized Security Interests" herein.
Four Mortgage Loans, representing approximately 3.67% of the Mortgage
Pool, are secured by, in addition to real estate or shares of stock in a
cooperative housing corporation (and the related leasehold interest), additional
collateral ("Additional Collateral") generally consisting of marketable
securities. In addition, with respect to five Mortgage Loans, representing 3.80%
of the Mortgage Pool, the loan-to-value ratio at origination was in excess of
80% and less than or equal to 90% and the related borrower met the criteria of
the Boston Company's "High LTV" loan program which sets forth stricter credit
worthiness requirements for borrowers.
The Boston Company requires that borrowers pledge Additional Collateral
to secure a mortgage loan to the extent that the loan-to-value ratio of such
mortgage loan would otherwise exceed applicable underwriting guidelines or the
related borrowers do not choose the "High LTV" loan program. Additional
Collateral may include publicly traded stocks, corporate and municipal bonds,
government securities, commercial paper, bank deposits, trust accounts and
mutual funds. The loan-to-value ratio of a mortgage loan secured in part by
Additional Collateral may, with respect to the real property securing such loan,
be up to 100%.
The market value of Additional Collateral required to be pledged
ranges, depending on collateral type, from 100% to 200% of the portion of the
related mortgage loan balance not secured by real estate or shares in a
cooperative housing corporation. All Additional Collateral is valued on a daily
basis; if the market value of such collateral with respect to any mortgage loan
declines below specified levels, the related borrower is required to pledge
sufficient
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<PAGE>
Additional Collateral to meet such levels. The Boston Company will generally
release its lien on some or all of the Additional Collateral securing a mortgage
loan if, within five years after origination of such loan, the borrower meets
certain requirements and the loan-to-value ratio has been reduced due to (i) an
increase in the appraised value of the real property securing such mortgage loan
or (ii) prepayment by the borrower of a portion of the loan balance. After five
years have elapsed following origination of a mortgage loan, The Boston Company
may, at its option, liquidate all or part of the related Additional Collateral
in order to reduce the outstanding loan balance to a level within its
loan-to-value guidelines. The security interests in all Additional Collateral
pledged to secure the Mortgage Loans will be assigned to the Trustee. The Boston
Company will continue to hold such Additional Collateral as custodian on behalf
of the Trustee.
Investors should consider that, due to changes in market conditions,
Additional Collateral pledged to secure a Mortgage Loan may not be readily
marketable at the time that the related borrower defaults on such Mortgage Loan
and foreclosure proceedings are commenced. No assurance can be given as to the
amount of proceeds, if any, that
might be realized from any Additional Collateral.
Pursuant to its terms, each Mortgage Loan, other than a Cooperative
Loan or a loan secured by a condominium unit, is required to be covered by a
standard hazard insurance policy in an amount generally equal to the lower of
the unpaid principal amount thereof or the replacement value of the improvements
on the Mortgaged Property. Generally, a cooperative housing corporation or
condominium association is responsible for maintaining hazard insurance covering
the entire building. See "The Pooling and Servicing Agreement--Hazard Insurance"
in the Prospectus.
None of the Mortgage Loans are covered by primary mortgage insurance
policies.
THE MASTER SERVICER
GENERAL. The Boston Company will service the Mortgage Loans pursuant to
the Sale and Servicing Agreement (as defined herein) and in accordance with the
Pooling and Servicing Agreement. BSMCC's rights under the Sale and Servicing
Agreement will be assigned to the Trustee. The information set forth in this
section has been provided by The Boston Company. Neither SAMI, BSMCC, the
Underwriter, the Trustee, nor any of their respective affiliates have made or
will make any representation as to the accuracy or completeness of such
information.
BOSTON SAFE DEPOSIT AND TRUST COMPANY
Boston Safe Deposit and Trust Company, a wholly-owned indirect
subsidiary of Mellon Bank Corporation, is a Massachusetts trust company engaged
in the business or originating mortgage loans with high principal balances. Its
executive offices are located at One Boston Place, Boston, Massachusetts 02108.
The Boston Company originates mortgage loans through nine regional offices.
THE SUBSERVICER
The Mortgage Loans will be subserviced by a designated servicing staff
of the Mellon Mortgage Company in Denver, Colorado. The subservicer is an
indirect wholly-owned subsidiary of Mellon Bank Corporation. The subservicer
originates, purchases and services residential and commercial mortgage loans
through approximately 80 offices throughout the United States.
MORTGAGE LOAN UNDERWRITING
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The Mortgage Loans were originated by The Boston Company generally in
accordance with the underwriting criteria described herein. Although the
underwriting policies used in originating the Mortgage Loans have changed from
time to time, the policies described herein generally apply to the Mortgage
Loans in all material respects.
The underwriting process is intended to assess both the prospective
borrower's credit standing and ability to repay, and the value and adequacy of
the mortgaged property as collateral. In underwriting a mortgage loan, The
Boston Company relies primarily on the borrower's ability to repay the loan,
determined by analyzing the borrower's cash flow, liquidity and overall
financial condition and the value of the mortgaged property as a measure of the
extent of its recovery in the event of a default. In determining the adequacy of
the property as collateral for a loan, appraisals are obtained from qualified
outside appraisers approved by The Boston Company. The qualifications of
appraisers are reviewed at least annually.
The Boston Company's appraisal requirements satisfy or exceed the
guidelines of Federal National Mortgage Association ("FNMA") and Freddie Mac
(formerly the Federal Home Loan Mortgage Corporation) ("Freddie Mac"). Multiple
appraisals may be required depending upon the loan amount and the location of
the mortgaged property. The appraiser is instructed to inspect the interior and
exterior of the property and prepares a report that includes a market data
analysis based on reported recent sales of comparable homes and, in certain
cases, a cost analysis based on the estimated current cost of constructing a
similar home. This report is reviewed by a representative of The Boston Company,
who makes a final determination regarding the appraised value of the home.
Each prospective borrower submits an application package that includes
in many cases the applicant's federal income tax returns for at least the last
two years (self-employed individuals are generally required to submit their
personal and business tax returns for the past three years) and information with
respect to the applicant's bank and brokerage accounts, assets, liabilities,
income, credit history and employment history. To establish the applicant's
ability to make timely payments, The Boston Company obtains a credit report on
each borrower. The Boston Company endeavors to verify the income, current
employment and liquid assets of the applicant. The Boston Company will generally
obtain a verification of mortgage and current mortgage statement for mortgage
loans not reported on the credit report. Information relative to adverse credit
and legal actions must be explained in writing by the applicant and must be
acceptable to The Boston Company. The origination process also requires that
adequate title insurance, standard fire and hazard insurance and, where
necessary, flood insurance be obtained and maintained.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective Borrower has (i)
sufficient income available to meet both housing and total debt obligations and
(ii) sufficient post-loan liquidity. The Boston Company generally requires that
the applicant's total housing related expenses and other current obligations not
exceed 38% of the applicant's stable income. However, a high ratio of expenses
to income will not disqualify an applicant if other factors indicating the
applicant's ability to make the mortgage payments are present.
The amount of the loan is limited by The Boston Company to an
applicable loan-to-value ratio, which is equal to the original principal balance
of the mortgage loan divided by (i) in the case of a mortgage loan to refinance
an existing mortgage loan, the appraised value of the mortgaged property
determined at the time of application as reviewed by a representative of The
Boston Company, or (ii) in the case of a mortgage loan to purchase a residence,
the lesser of the appraised value as reviewed by a representative of The Boston
Company or the sales price of the residence. As described under "Description of
The Mortgage Pool--Additional Collateral" above, The Boston Company may accept
Additional Collateral in conjunction with real estate collateral to lower the
loan-to-value ratio to an acceptable level.
DELINQUENCY AND FORECLOSURE EXPERIENCE. Generally, when a mortgagor
fails to make a required payment on a mortgage loan and does not cure the
deficiency promptly, the loan is classified as delinquent. In many cases,
delinquencies are cured promptly, but if not, foreclosure proceedings are
generally commenced. The procedural steps necessary for foreclosure vary from
state to state, but generally, if the loan is not reinstated within certain
periods specified by the relevant mortgage loan documents, the property securing
the loan can be acquired by the lender. If a
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<PAGE>
mortgagee takes title to the mortgaged property through foreclosure but the
mortgaged property had a value lower than the outstanding amount of the debt,
the law in certain states permits such mortgagee to obtain a deficiency judgment
in the amount of the difference. The laws of certain other states restrict or
prohibit such deficiency judgments. It is anticipated that, in those states
where deficiency judgments are permitted, the Servicer will determine on a
case-by-case basis whether to seek such a judgment.
Loan Servicing Activities. As of March 31, 1998, The Boston Company's
total loan portfolio contained loans with an aggregate outstanding principal
balance of approximately $4.5 billion. The loans contained in The Boston
Company's servicing portfolio include fixed and adjustable rate loans, first and
second lien loans and one- to four family loans, and therefore may differ
significantly from the Mortgage Loans. There can be no assurance, and no
representation is made, that the delinquency 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 following table sets forth certain information regarding the
delinquency experience of The Boston Company with respect to all mortgage loans
serviced by it. The indicated periods of delinquency are based on the number of
days past due on a contractual basis.
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<PAGE>
<TABLE>
<CAPTION>
MORTGAGE LOAN PORTFOLIO1
AS OF YEAR ENDED 1995 AS OF YEAR ENDED 1996
No. % by No. % by
of Principal Principal of Principal Principal
Loans Balance Balance Loans Balance Balance
----- ------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Portfolio Principal
Balance 9,884 $4,079,316 100.00% $10,088 4,355,536 100.00%
DELINQUENT LOANS
30-59 Days 196 56,829 1.39% 115 45,378 1.04%
60-89 Days 20 3,733 0.09% 16 3,827 0.09%
90 Days or more 9 1,311 0.03% 19 4,662 0.11%
Non-accrual Loans(2) 74 32,635 0.80% 57 21,815 0.50%
Total 299 94,508 2.32% 207 75,682 1.74%
Net Charge-Offs -- 1,154 0.03% -- 1,738 0.04%
REO 7 2,139 0.05% 7 3,132 0.07%
</TABLE>
<TABLE>
<CAPTION>
AS OF YEAR ENDED 1997 AS OF 3-MONTH PERIOD ENDED 1998
--------------------- -------------------------------
No. % by No. % by
of Principal Principal of Principal Principal
Loans Balance Balance Loans Balance Balance
----- ------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Portfolio Principal
Balance 10,034 $4,448,651 100.00% 9,927 $4,456,156 100.00%
DELINQUENT LOANS
30-59 Days 9 35,954 0.81% 116 44,465 1.00%
60-89 Days 9 6,620 0.15% 11 3,575 0.08%
90 Days or more 14 1,254 0.03% 15 8,280 0.19%
Non-accrual Loans(2) 38 16,387 0.37% 39 16,393 0.37%
Total 160 60,215 1.35% 181 72,713 1.63%
Net Charge-Offs -- 68 0.00% -- (12) 0.00%
REO 6 2,172 0.05% 4 1,502 0.03%
</TABLE>
- --------------
(1) Percentages in the table are rounded to the nearest 0.01%; dollar amounts
are rounded to the nearest dollar.
(2) In general, a "Non-accrual Loan" is a mortgage loan owned by The Boston
Company as to which (i) payments are delinquent for a specified period (based on
the principal balance of such loan) or (ii) The Boston Company determines that
collection is in doubt.
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<PAGE>
The above delinquency statistics represent the recent experience of The
Boston Company. There can be no assurance, however, that the delinquency
experience on the Mortgage Loans will be comparable. In addition, the foregoing
statistics include mortgage loans with a variety of payment and other
characteristics that may not correspond to those of the Mortgage Loans. Further,
the Mortgage Loans were not chosen from The Boston Company's portfolio on the
basis of any methodology which could or would make them representative of the
total pool of mortgage loans in The Boston Company's portfolio. The actual loss
and delinquency experience on the Mortgage Loans will depend on, among other
things, the value of the real estate and cooperative shares securing such
Mortgage Loans and the ability of the mortgagors to make required payments. If
The Boston Company undertakes litigation or retains outside attorneys or
investigators, the cost thereof will be borne by the Trust Fund or the
Certificateholders.
The likelihood that mortgagors will become delinquent in the payment of
their mortgage loans and the rate of any subsequent foreclosures may be affected
by a number of factors related to borrowers' personal circumstances, including,
for example, unemployment or change in employment (or in the case of self-
employed mortgagors or mortgagors relying on commission income, fluctuations in
income), marital separation and a mortgagor's equity in the related mortgaged
property. In addition, delinquency and foreclosure experience may be sensitive
to adverse economic conditions, either nationally or regionally, may exhibit
seasonal variations and may be influenced by the level of interest rates and
servicing decisions on the applicable mortgage loans. Regional economic
conditions (including declining real estate values) may particularly affect
delinquency and foreclosure experience on mortgage loans to the extent that
mortgaged properties are concentrated in certain geographic areas.
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 1998-7 (the
"Certificates") will consist of the classes of Certificates offered hereby (the
"Offered Certificates") in addition to the Class B-4, Class B-5 and Class B-6
Certificates (the "Other Certificates"), which are not being offered hereby.
The Certificates will evidence in the aggregate the entire beneficial
ownership interest in the Trust. The Trust will consist of (i) the Mortgage
Loans, (ii) such assets as from time to time are identified as deposited in
respect of the Mortgage Loans in the account (the "Protected Account")
established by the Master Servicer for the collection of payments on the
Mortgage Loans 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; and (iv) all proceeds of the foregoing.
Each Class of Book-Entry Certificates will be represented initially by
a single certificate registered in the name of Cede & Co. ("Cede") as the
nominee of The Depository Trust Company ("DTC"). Beneficial interests in
Book-Entry Certificates may be issued or held by investors in minimum
denominations of (i) in the case of the Senior Certificates (other than the
Residual Certificates), $1,000 and increments of $1.00 in excess thereof and
(ii) in the case of the Offered Subordinate Certificates, $25,000 and increments
of $1.00 in excess thereof. One Certificate of each such Class may be issued in
a different principal amount to accommodate the remainder of the initial
principal amount of the Certificates of such Class. No person acquiring an
interest in the Book-Entry Certificates (a "Certificate Owner") will be entitled
to receive a certificate representing such person's interest in the Trust,
except in the event Definitive Certificates are issued under the limited
circumstances set forth below under "-- Definitive Certificates." Unless and
until Definitive Certificates are issued, all references to actions by holders
of Book-Entry Certificates shall refer to actions taken by DTC upon instructions
from its Participants (as defined below), and all references herein to
distributions, notices, reports and statements to holders of Book-Entry
Certificates shall refer to distributions, notices,
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<PAGE>
reports and statements to DTC or Cede, as the registered holder of the
Book-Entry Certificates, as the case may be, for distribution to Certificate
Owners in accordance with DTC procedures.
The Class R Certificates will each be issued in certificated
fully-registered form in a single certificate having an original principal
amount of $100.
Distributions of principal and interest as set forth below initially
will be made by the Trustee to Cede, as the registered holder of the Book-Entry
Certificates, and to the holder of the Physical Certificates. Upon the issuance
of Definitive Certificates to persons other than Cede, distributions will be
made by the Trustee to the persons in whose names such Certificates are
registered at the close of business on each Record Date, which will be the last
Business Day (as defined below) of the month preceding the month in which the
related Distribution Date occurs. Such distributions will be made (i) by check
mailed to each Certificateholder entitled thereto at the address appearing in
the Certificate Register to be maintained in accordance with the provisions of
the Agreement or (ii) upon timely receipt by the Trustee of written instructions
from a Certificateholder holding Certificates representing an initial aggregate
Current Principal Amount of not less than $1,000,000, by wire transfer to a
United States dollar account maintained by the payee at any United States
depository institution with appropriate facilities for receiving such a wire
transfer, PROVIDED, HOWEVER, that the final payment in respect of each Class of
Certificates will be made only upon presentation and surrender of such
respective Certificates at the office or agency of the Trustee specified in the
notice to Certificateholders of such final payment.
A "Business Day" is generally any day other than a Saturday, a Sunday
or a day on which the New York Stock Exchange is closed or on which banking
institutions in New York City, Maryland, Minnesota or Boston, Massachusetts
are authorized or obligated by law or executive order to be closed.
BOOK-ENTRY REGISTRATION
DTC is a limited purpose trust company organized under the laws of the
State of New York and is a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934. DTC was created to hold securities for its participating
organizations ("Participants") and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers (including Bear, Stearns & Co. Inc.),
banks, trust companies and clearing corporations. Indirect access to the DTC
system also is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Certificate Owners that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants and
Indirect Participants. In addition, Certificate Owners will receive all
distributions of principal and interest on the Book-Entry Certificates through
Participants. Under a book-entry format, Certificate Owners may experience some
delay in their receipt of payments, since such payments will be forwarded to
Cede, as nominee for DTC. DTC will forward such payments to its Participants,
which thereafter will forward them to Indirect Participants or Certificate
Owners. It is anticipated that, except as provided below under " --Definitive
Certificates," the only "Certificateholder" with respect to the Book-Entry
Certificates will be Cede, as nominee for DTC. Certificate Owners will not be
recognized by the Trustee as Certificateholders, as such term is used in the
Agreement, and Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC will be required to make book-entry
transfers of Book-Entry Certificates among Participants and to receive and
transmit distributions of principal of, and interest on, Book-Entry
Certificates. Participants and Indirect Participants with which Certificate
Owners have accounts with respect to the Book-Entry Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Certificate Owners. Accordingly,
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<PAGE>
although, Certificate Owners will not possess physical certificates, the Rules
provide a mechanism by which Participants and Certificate Owners will receive
payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, and on behalf of certain banks, the ability of
a Certificate Owner to pledge Book-Entry Certificates to persons or entities
that do not participate in the DTC system, or to otherwise act with respect to
such Book-Entry Certificates, may be limited due to the absence of physical
certificates for such Book-Entry Certificates.
DTC has advised SAMI that it will take any action permitted to be taken
by a holder of Book-Entry Certificates under the Agreement only at the direction
of one or more Participants to whose accounts with DTC the Book-Entry
Certificates are credited. Additionally, DTC has advised SAMI that it will take
such action where the consent of specified percentages of the Book-Entry
Certificates is required under the Agreement only at the direction of and on
behalf of Participants whose interests represent such specified percentages. DTC
may take conflicting actions on behalf of other Participants.
Neither SAMI, the Master Servicer nor the Trustee will have any
liability for any aspect of the records relating to or payment made on account
of beneficial ownership interests of the Book-Entry Certificates held by Cede,
as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership
interests.
DEFINITIVE CERTIFICATES
Except for the Physical Certificates, the Offered Certificates will be
issued in fully registered, certificated form ("Definitive Certificates") to
Certificate Owners or their nominees, rather than to DTC or its nominee, only if
(i) SAMI advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as depository with respect to the
Certificates and SAMI is unable to locate a qualified successor within 30 days
or (ii) SAMI, at its option, elects to terminate the book-entry system through
DTC.
Upon the occurrence of either event described in clause (i) or (ii) of
the immediately preceding paragraph, the Trustee is required to notify DTC,
which in turn will notify all Certificate Owners through Participants, of the
availability of Definitive Certificates. Upon surrender by Cede, as nominee of
DTC, of the Definitive Certificates representing the Book-Entry Certificates and
receipt of instructions for re-registration, the Trustee will reissue the
Book-Entry Certificates as Definitive Certificates to Certificate Owners. Under
no circumstances will Definitive Certificates of any Class be issued in an
amount representing an interest in, as of the Cut-off Date, less than the
minimum denomination of the respective Class of Book-Entry Certificate, except
with respect to any initially issued Certificate in a lower principal amount as
described above.
Physical Certificates and Definitive Certificates will be transferable
and exchangeable on a "Certificate Register" to be maintained by the Trustee at
the office or agency of the Trustee maintained for that purpose in Boston,
Massachusetts. Physical Certificates and Definitive Certificates surrendered to
the Trustee for registration of transfer or exchange must be accompanied by a
written instrument of transfer in form satisfactory to the Trustee. No service
charge will be made for any registration of transfer or exchange of Physical
Certificates and Definitive Certificates, but payment of a sum sufficient to
cover any tax or other governmental charge may be required. Such office or
agency of the Trustee is currently located at Sixth Street and Marquette Avenue,
Minneapolis, Minnesota 55479.
AVAILABLE FUNDS
Available funds for any Distribution Date will be an amount equal to
the aggregate of the following with respect to the 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
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related Determination Date, (b) any Monthly Advances and Compensating Interest
Payments by the Master Servicer and (c) any reimbursed amount in connection with
losses on certain eligible investments, except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all Principal Prepayments and Liquidation Proceeds received after
the applicable Prepayment Period;
(iii) all payments, other than Principal Prepayments, that represent
early receipt of scheduled payments
due on a date or dates subsequent to the related Due Date;
(iv) amounts received on particular Mortgage Loans as late payments of
principal or interest and respecting which, and to the extent that, there are
any unreimbursed Monthly Advances;
(v) amounts of Monthly Advances determined to be nonrecoverable;
(vi) amounts of Trustee's Fees for such Distribution Date; and
(vii) any investment earnings on amounts on deposit in the Certificate
Account and amounts permitted to be withdrawn from the Certificate Account
pursuant to the Pooling and Servicing Agreement.
DISTRIBUTIONS ON THE CERTIFICATES
ALLOCATION OF AVAILABLE FUNDS. Interest and principal on the
Certificates will be distributed monthly on each Distribution Date commencing in
June 1998, in an aggregate amount equal to the Available Funds for such
Distribution Date.
SENIOR CERTIFICATES. On each Distribution Date, the Available Funds
will be distributed in the following order of priority among the Senior
Certificates:
FIRST, to the Class A Certificates and Class R Certificates the Accrued
Certificate Interest on each such Class for such Distribution Date;
SECOND, to the Class A Certificates and Class R Certificates any
Accrued Certificate Interest thereon remaining undistributed from
previous Distribution Dates, to the extent of remaining Available
Funds;
THIRD, to the Class A Certificates and Class R Certificates in
reduction of the Current Principal Amounts thereof, the Senior Optimal
Principal Amount for such Distribution Date, to the extent of remaining
Available
Funds, in the following order of priority:
first, to the Class R Certificates until the Current
Principal Amount thereof has been reduced to zero; and
second, to the Class A Certificates until the Current
Principal Amount thereof has been reduced to zero;
SUBORDINATE CERTIFICATES. On each Distribution Date, the Available
Funds remaining after the distributions described above under "-- Senior
Certificates" will be distributed among the Subordinate Certificates
sequentially, in the following order, to the Class B-1, Class B-2, Class B-3,
Class B-4, Class B-5 and Class B-6 Certificates, in each case up to an amount
equal to and in the following order: (a) the Accrued Certificate Interest
thereon for such
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Distribution Date, (b) any Accrued Certificate Interest thereon remaining
undistributed from previous Distribution Dates and (c) such Class's Allocable
Share (as defined herein) for such Distribution Date.
INTEREST. Interest will accrue during the preceding Interest Accrual
Period for each Class of Certificates at its then applicable Pass-Through Rate
on the Current Principal Amount of such Class immediately preceding such
Distribution Date. The variable Pass-Through Rate for each Class of Certificates
is described on the cover page hereof. The effective yield to the holders of
Certificates will be lower than the yield otherwise produced by the applicable
Pass-Through Rate and purchase price, because interest will not be distributed
to such Certificateholders until the 25th day (or if such day is not a Business
Day, then on the next succeeding Business Day) of the month following the month
in which interest accrues on the Mortgage Loans. See "Yield and Prepayment
Considerations" herein.
The "Accrued Certificate Interest" for any Certificate for any
Distribution Date will equal the interest accrued during the related Interest
Accrual Period at the applicable Pass-Through Rate on the Current Principal
Amount of such Certificate immediately prior to such Distribution Date less (i)
in the case of a Senior Certificate, such Certificate's share of any Net
Interest Shortfall and, after the Cross-Over Date, the interest portion of any
Realized Losses and (ii) in the case of a Subordinate Certificate, such
Certificate's share of any Net Interest Shortfall and the interest portion of
any Realized Losses. Such Net Interest Shortfalls will be allocated among the
Certificates in proportion to the amount of Accrued Certificate Interest that
would have been allocated thereto in the absence of such shortfalls. The
interest portion of Realized Losses will be allocated first to the Subordinate
Certificates in reverse order of their numerical designations commencing with
the Class B-6 Certificates, and following the Cross-Over Date, such Realized
Losses will be allocated PRO RATA to the Classes of Senior Certificates. Accrued
Certificate Interest is calculated on the basis of a 360-day year consisting of
twelve 30-day months. No Accrued Certificate Interest will be payable with
respect to any Class of Certificates after the Distribution Date on which the
outstanding principal balance of such Certificate has been reduced to zero.
The "Current Principal Amount" of any Certificate as of any
Distribution Date will equal such Certificate's initial principal amount on the
Closing Date as reduced by (i) all amounts distributed on previous Distribution
Dates on such Certificate on account of principal, (ii) the principal portion of
all Realized Losses previously allocated to such Certificate (taking account of
its Loss Allocation Limitations) and (iii) in the case of a Subordinate
Certificate, such Certificate's PRO RATA share, if any, of the Subordinate
Certificate Writedown for previous Distribution Dates. With respect to any Class
of Certificates, the Current Principal Amount thereof will equal the sum of the
Current Principal Amounts of all Certificates in such Class.
As of any Distribution Date, the "Subordinate Certificate Writedown
Amount" will equal the amount by which (a) the sum of the Current Principal
Amounts of all of the Certificates (after giving effect to the distribution of
principal and the allocation of Realized Losses in reduction of the Current
Principal Amounts of the Certificates on such Distribution Date) exceeds (b) the
Scheduled Principal Balances of the Mortgage Loans on the Due Date related to
such Distribution Date less any Deficient Valuation occurring prior to such
Distribution Date. The applicable Subordinate Certificate Writedown Amount will
be allocated to the Classes of Subordinate Certificates in inverse order of
their numerical Class designations, until the Current Principal Amount of each
such Class has been reduced to zero.
With respect to any Distribution Date, the "Interest Shortfall" is
equal to the aggregate shortfall, if any, in collections of interest (adjusted
to the related Net Rates) resulting from (a) prepayments in full received during
the related Prepayment Period, (b) partial prepayments received during the
related Prepayment Period to the extent applied prior to the Due Date in the
month of the Distribution Date and (c) interest payments on certain of the
Mortgage Loans being limited pursuant to the provisions of the Soldiers' and
Sailors' Civil Relief Act of 1940 (the "Relief Act"). Interest Shortfalls will
result because (i) Mortgagors are obligated to pay interest on prepayments in
full only to the date of prepayment by the Mortgagor, (ii) (a) partial
prepayments are generally not required to be accompanied by interest on the
amount of such partial prepayment and (b) partial prepayments applied prior to
the Due Date in the month of the Distribution Date will result in a reduction of
the Scheduled Principal Balance of the related Mortgage Loan without a
corresponding reduction of the Current Principal Amount of any Certificate and
(iii) the Relief Act limits, in certain circumstances, the interest rate
required to be paid by a Mortgagor in the military service, to 6% per
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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 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 is less than the
Accrued Certificate Interest on the Senior Certificates for such Distribution
Date prior to reduction for Net Interest Shortfall and the interest portion of
Realized Losses, the shortfall will be allocated among the holders of each Class
of Senior Certificates in proportion to the respective amounts of Accrued
Certificate Interest that would have been allocated thereto in the absence of
such Net Interest Shortfall and/or Realized Losses for such Distribution Date.
In addition, the amount of any interest shortfalls that are covered by
subordination will constitute unpaid Accrued Certificate Interest and will be
distributable to holders of the Certificates of the related Classes entitled to
such amounts on subsequent Distribution Dates, to the extent of the applicable
Available Funds after current interest distributions as required herein. Any
such amounts so carried forward will not bear interest. Shortfalls in interest
payments will not be offset by a reduction in the servicing compensation of the
Master Servicer or otherwise, except to the extent of applicable Compensating
Interest Payments.
PRINCIPAL. Distributions in reduction of the Current Principal Amounts
of each Class of Senior Certificates will be made on each Distribution Date
pursuant to priority THIRD above under "-- Senior Certificates". In accordance
with such priority THIRD, the Available Funds remaining after distribution of
the interest on the Senior Certificates will be allocated to such Senior
Certificates in an aggregate amount not to exceed the Senior Optional Principal
Amount for such Distribution Date.
Distributions in reduction of the Current Principal Amounts of the
Subordinate Certificates will be made pursuant to "-- Subordinate Certificates"
above. In accordance therewith, the Available Funds, if any, remaining after
distributions of principal and interest on the Senior Certificates on such
Distribution Date will be allocated to the Subordinate Certificates in an amount
equal to each such Class's Allocable Share for such Distribution Date, provided
that no distribution of principal will be made on any such Class until any Class
ranking prior thereto has received distributions of interest and principal, and
such Class has received distributions of interest, on such Distribution Date.
The "Senior Optimal Principal Amount" Certificates with respect to each
Distribution Date, will be an amount equal to the sum of:
(i) the Senior Percentage of all scheduled payments of
principal allocated to the Scheduled Principal Balance due
on each Mortgage Loan on the related Due Date as specified
in the amortization schedule at the time applicable thereto;
(ii) the Senior Prepayment Percentage of the Scheduled
Principal Balance of each Mortgage Loan which was the
subject of a prepayment in full received by the Master
Servicer during the applicable Prepayment Period;
(iii) the Senior Prepayment Percentage of all partial
prepayments of principal allocated to principal received
during the applicable Prepayment Period;
(iv) the lesser of (a) the Senior Prepayment Percentage of
all Net Liquidation Proceeds (as defined herein) allocable
to principal received in respect of each Mortgage Loan which
became a Liquidated Mortgage Loan during the related
Prepayment Period); and (b) the Senior Percentage of the
Schedule Principal balance of each Mortgage Loan which
became a Liquidated Mortgage Loan during the related
Prepayment Period); and
(v) the Senior Prepayment Percentage of the sum of (a) the
Schedule Principal Balance of each Mortgage Loan or REO
Property which was repurchased in connection with such
Distribution Date and (b) the excess, if any, of the
Scheduled Principal Balance of a Mortgage Loan that has been
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replaced by BSMCC or its designee with a substitute Mortgage
Loan pursuant to the Sale and Servicing Agreement in
connection with such Distribution Date over the Scheduled
Principal Balance of such substitute Mortgage Loan.
The "Senior Percentage" for the Senior Certificates on any Distribution
Date will equal the lesser of (i) 100% and (ii) the percentage (carried to six
places rounded up) obtained by dividing the aggregate Current Principal Amount
of all the Senior Certificates immediately preceding such Distribution Date by
the aggregate Scheduled Principal Balance of the Mortgage Loans as of the
beginning of the related Due Period. The initial Senior Percentage is expected
to be approximately 96.25%.
The "Senior Prepayment Percentage" for the Senior Certificates on any
Distribution Date occurring during the periods set forth below will be as
follows:
PERIOD (DATES INCLUSIVE) SENIOR PREPAYMENT PERCENTAGE
- ------------------------ ----------------------------
June 25, 1998 - May 25, 2008.............. 100%
June 25, 2008 - May 25, 2009.............. Senior Percentage plus 70% of the
Subordinate Percentage
June 25, 2009 - May 25, 2010.............. Senior Percentage plus 60% of the
Subordinate Percentage
June 25, 2010 - May 25, 2011.............. Senior Percentage plus 40% of the
Subordinate Percentage
June 25, 2011 - May 25, 2012.............. Senior Percentage plus 20% of the
Subordinate Percentage
June 25, 2012 and thereafter.............. Senior Percentage
Notwithstanding the foregoing, if on any Distribution Date the
applicable Senior Percentage exceeds the applicable Senior Percentage as of the
Cut-off Date, the Senior Prepayment Percentage for such Distribution Date will
equal 100%.
In addition, no reduction of a Senior Prepayment Percentage shall occur
on any Distribution Date unless, as of the last day of the month preceding such
Distribution Date, either (a)(i) the aggregate outstanding principal balance of
Mortgage Loans delinquent 60 days or more (including for this purpose any
Mortgage Loans in foreclosure and Mortgage Loans with respect to which the
related Mortgaged Property has been acquired by the Trust), averaged over the
last six months, as a percentage of the aggregate Current Principal Amount of
the Subordinate Certificates as of such Distribution Date, does not exceed 50%,
and (ii) cumulative Realized Losses on such Mortgage Loans do not exceed (a) 30%
of the aggregate Current Principal Amounts of the Subordinate Certificates as of
the Cut-Off Date (the "Original Subordinate Principal Balance") if such
Distribution Date occurs between and including June 2008 and May 2009, (b) 35%
of the Original Subordinate Principal Balance if such Distribution Date occurs
between and including June 2009 and May 2010, (c) 40% of the Original
Subordinate Principal Balance if such Distribution Date occurs between and
including June 2010 and May 2011, (d) 45% of the Original Subordinate Principal
Balance if such Distribution Date occurs between and including June 2011 and May
2012, and (e) 50% of the Original Subordinate Principal Balance if such
Distribution Date occurs during or after June 2012.
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
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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 3.75%.
The "Subordinate Optimal Principal Amount" for the Subordinate
Certificates with respect to each Distribution Date will be an amount equal to
the sum of the following (but in no event greater than the aggregate Current
Principal Amounts of the Subordinate Certificates immediately prior to such
Distribution Date):
(i) the Subordinate Percentage of the principal portion of all Monthly
Payments due on each Mortgage Loan on the related Due Date, as
specified in the amortization schedule at the time applicable thereto
(after adjustment for previous principal prepayments);
(ii) the Subordinate Prepayment Percentage of the Scheduled Principal
Balance of each Mortgage Loan which was the subject of a prepayment in
full received by the Master Servicer during the applicable Prepayment
Period;
(iii) the Subordinate Prepayment Percentage of all partial prepayments
of principal received during the applicable Prepayment Period;
(iv) the excess, if any, of (a) the Net Liquidation Proceeds allocable
to principal received during the related Prepayment Period in respect
of each Liquidated Mortgage Loan over (c) the sum of the amounts
distributable to Senior Certificateholders pursuant to clause (iv) of
the definition of "Senior Optimal Principal Amount" on such
Distribution Date;
(v) the Subordinate Prepayment Percentage of the sum of (a) the
Scheduled Principal Balance of each Mortgage Loan or REO Property
which was repurchased in connection with such Distribution Date and
(b) the difference, if any, between the Scheduled Principal Balance of
a Mortgage Loan that has been replaced by BSMCC or its designee with a
substitute Mortgage Loan pursuant to the Agreement in connection with
such Distribution Date and the Scheduled Principal Balance of such
substitute Mortgage Loan; and
(vi) on the Distribution Date on which the Current Principal Balance
Amounts of the Senior Certificates have all been reduced to zero, 100%
of any applicable Senior Optimal Principal Amount.
The "Allocable Share" with respect to any Class of Subordinate
Certificates on any Distribution Date will generally equal such Class's PRO RATA
share (based on the Current Principal Amount of each Class entitled thereto) of
the sum of each of the components of the definition of the Subordinate Optimal
Principal Amount; provided, that, except as described in the second succeeding
sentence, no Class of Subordinate Certificates shall be entitled on any
Distribution Date to receive distributions pursuant to clauses (ii), (iii) and
(v) of the definition of the Subordinate Optimal Principal Amount unless the
Class Prepayment Distribution Trigger for the related Class is satisfied for
such Distribution Date. The "Class Prepayment Distribution Trigger" for a Class
of Subordinate Certificates for any Distribution Date is satisfied if the
fraction (expressed as a percentage), the numerator of which is the aggregate
Current Principal Amount of such Class and each Class subordinated thereto, if
any, and the denominator of which is the Scheduled Principal Balances of all of
the Mortgage Loans as of the related Due Date, equals or exceeds such percentage
calculated as of the Closing Date. If on any Distribution Date the Current
Principal Amount of any Class of Subordinate Certificates for which the related
Class Prepayment Distribution Trigger was satisfied on such Distribution Date is
reduced to zero, any amounts distributable to such Class pursuant to clauses
(ii), (iii) and (v) of the definition of "Subordinate Optimal Principal Amount,"
to the extent of such Class's remaining Allocable Share, shall be distributed to
the remaining Classes of Subordinate Certificates in reduction of their
respective Current Principal Amounts, sequentially, in the order of their
numerical Class designations. If the Class Prepayment Distribution Trigger is
not satisfied for any Class of Subordinate Certificates on any Distribution
Date, this may have the effect of accelerating the amortization of more senior
Classes of Subordinate Certificates.
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"Determination Date" means the 13th day of the month of the
Distribution Date, or if such day is not a Business Day, the preceding 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 standard
hazard insurance policy, flood insurance policy or title insurance policy
covering any Mortgage Loan or Mortgaged Property other than amounts required to
be paid over to the Mortgagor pursuant to law or the related Mortgage Note and
other than amounts used to repair or restore the Mortgaged Property or to
reimburse certain expenses.
"Repurchase Proceeds" are proceeds of any Mortgage Loan repurchased
pursuant to the Agreement, the Mortgage Loan Purchase Agreement or the Sale and
Servicing Agreement and any cash deposit in connection with the substitution of
a Mortgage Loan pursuant to the provisions described under "The Pooling and
Servicing Agreement -- Assignment of Mortgage Loans", "-- Representations and
Warranties".
"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, 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.
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On any Distribution Date, the principal portion of any Realized Loss
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 principal portion of Realized Loss 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
principal portion of any Realized Loss (other than a Debt Service Reduction)
will be allocated among the outstanding Classes of Senior Certificates PRO RATA
based upon their respective Current Principal Amounts.
No reduction of the Current Principal Amount of any Class shall be made
on any Distribution Date on account of Realized Losses to the extent that such
reduction would have the effect of reducing the aggregate Current Principal
Amount of all of the Certificates as of such Distribution Date to an amount less
than the Scheduled Principal Balances of all of the Mortgage Loans as of the
related Due Date, less any Deficient Valuations occurring on or prior to such
Distribution Date (such limitation being the "Loss Allocation Limitation").
The principal portion of Debt Service Reductions will not be allocated
in reduction of the Current Principal Amount of any Certificate. However, Debt
Service Reductions may reduce the amount of Available Funds otherwise available
for distribution on a Distribution Date. As a result of the subordination of the
Subordinate Certificates in right of distribution, any Debt Service Reductions
will be borne by the Subordinate Certificates (to the extent then outstanding)
in inverse order of priority.
All allocations of Realized Losses will be accomplished on a
Distribution Date by reducing the Current Principal Amount of the applicable
Classes by their appropriate shares of any such losses occurring during the
month preceding the month of such Distribution Date and, accordingly, will be
taken into account in determining the distributions of principal and interest on
the Certificates commencing on the following Distribution Date.
The interest portion of all Realized Losses will be allocated among the
outstanding Classes of Certificates offered hereby to the extent described under
"Distributions on the Certificates -- Interest" above.
Any Deficient Valuation will on each Distribution Date be allocated
solely to the outstanding Subordinate Certificates
SUBORDINATION
PRIORITY OF SENIOR CERTIFICATES. The rights of the holders of the
Subordinate Certificates to receive distributions with respect to the Mortgage
Loans will be subordinated to such rights of the holders of the Senior
Certificates and of each Class of Subordinate Certificates having a lower
numerical Class designation than such Class. The subordination of the
Subordinate Certificates to the Senior Certificates, and the further
subordination among the Subordinate Certificates are each intended to increase
the likelihood of timely receipt by the holders of the Certificates with higher
relative payment priorities of the maximum amount to which they are entitled on
any Distribution Date and to provide such holders protection against losses
resulting from defaults on 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 Realized Losses to the Subordinate Certificates on any
Distribution Date will decrease the protection provided to the Senior
Certificates then outstanding on future Distribution Dates by reducing the
aggregate Current Principal Amount of the Subordinate Certificates then
outstanding.
In addition, in order to extend the period during which the Subordinate
Certificates remain available as credit enhancement for the Senior Certificates,
the entire amount of any prepayment or other unscheduled recovery of
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principal with respect to a Mortgage Loan will be allocated to the applicable
Senior Certificates to the extent described herein during the first ten 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 related Mortgage Loans evidenced by the Subordinate
Certificates.
In certain other circumstances as described under "-- Distributions on
the Certificates -- Allocation of Available Funds," above, Principal Prepayments
otherwise distributable to the Subordinate Certificates will in lieu thereof be
distributed to Senior 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, Realized Losses
will be allocated, to the extent set forth herein, in reduction of the Current
Principal Amounts of the Classes of Subordinate Certificates in the inverse
order of their numerical Class designation. The effect of the allocation of such
Realized Losses to a Class of Subordinate Certificates will be to reduce future
distributions allocable to such Class and increase the relative portion of
distributions allocable to more senior Classes of Subordinate Certificates.
In order to maintain the relative levels of subordination among the
Classes of Subordinate Certificates, prepayments and certain other unscheduled
recoveries of principal in respect of the Mortgage Loans (which generally will
not be distributable to such Certificates for at least the first ten years after
the Cut-Off Date) will not be distributable to the holders of any Class of
Subordinate Certificates on any Distribution Date for which the related Class
Prepayment Distribution Trigger is not satisfied, except as described above. See
"Description of the Certificates -- Distributions on the Certificates --
Principal." If the Class Prepayment Distribution Trigger is not satisfied with
respect to any Class of Subordinate Certificates, the amortization of more
senior Classes of Subordinate Certificates may occur more rapidly than would
otherwise have been the case and, in the absence of losses in respect of the
Mortgage Loans, the percentage interest in the principal balance of the Mortgage
Loans evidenced by such Subordinate Certificates may increase.
As a result of the subordination of any Class of Subordinate
Certificates, such Class of Certificates will be more sensitive than more senior
Classes of Certificates to the rate of delinquencies and defaults on the
Mortgage Loans, and under certain circumstances investors in such Certificates
may not recover their initial investment.
YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and weighted average lives of the Certificates
will be affected by the amount and timing of principal payments and the
allocation of Available Funds to various Classes of Certificates. Investors
should carefully consider the associated risks discussed under the headings
"Yield and Prepayment Considerations" and "Legal Investment" in the "Summary of
Terms" herein and under the headings "Yield and Prepayment Considerations" and
"Legal Investment" in the Prospectus.
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The effective yield to the holders of the Offered Certificates will be
lower than the yield otherwise produced by the Pass-Through Rate and purchase
price because monthly distributions will not be payable to such holders until
the 25th day (or the immediately following Business Day if such 25th day is not
a Business Day) of the month following the month in which interest accrues on
the Mortgage Loans (without any additional distribution of interest or earnings
thereon in respect of such delay).
The yield to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of Mortgagor defaults
resulting in Realized Losses. Such yield may be adversely affected by a higher
or lower than anticipated rate of principal payments on the Mortgage Loans. The
rate of principal payments on such Mortgage Loans will in turn be affected by
the amortization schedules of the Mortgage Loans, the rate and timing of
principal prepayments thereon by the Mortgagors, liquidations of defaulted
Mortgage Loans and purchases of Mortgage Loans due to certain breaches of
representations. The timing of changes in the rate of prepayments, liquidations
and repurchases of the Mortgage Loans may, and the timing of Realized Losses
will, significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the Mortgage
Loans will depend on future events and on a variety of factors (as described
more fully herein and in the Prospectus under "Yield and Prepayment
Considerations"), no assurance can be given as to such rate or the timing of
principal payments on the Offered Certificates.
Approximately 95.6% of the Mortgage Loans in the Mortgage Pool provide
for a prepayment penalty of generally 1% of the amount of any prepayments which
exceed 10% of the original principal balance of the related Mortgage Loan that
are made within one year of the date of origination. As described under
"Description of the Certificates--Distributions on the Certificates" herein,
during certain periods all or a disproportionately large percentage of principal
prepayments on the Mortgage Loans will be allocated among the Senior
Certificates. Prepayments, liquidations and purchases of the Mortgage Loans will
result in distributions to holders of the Senior Certificates of principal
amounts which would otherwise be distributed over the remaining terms of the
Mortgage Loans. Factors affecting prepayment (including defaults and
liquidations) of mortgage loans include changes in mortgagors' housing needs,
job transfers, unemployment, mortgagors' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest
rates, solicitations and servicing decisions. In addition, if prevailing
mortgage rates fell significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayments (including refinancings) would be expected to
increase in subsequent periods. Conversely, if prevailing mortgage rates rose
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayments on the Mortgage Loans would be expected to decrease in subsequent
periods.
Although the Mortgage Rates on the Mortgage Loans will adjust monthly,
such increases and decreases will be limited by the Maximum Lifetime Mortgage
Rate on each Mortgage Loan and will be based on the Index (which may not rise
and fall consistently with mortgage interest rates or with other indices) plus
the Gross Margins (which may be different from the prevailing margins on other
mortgage loans). As a result, the Mortgage Rates on the Mortgage Loans at any
time may not equal the prevailing rates for other adjustable rate loans and
accordingly, the rate of prepayment may be lower or higher than would otherwise
be anticipated.
The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios at origination, may be higher than for other types of Mortgage Loans.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the Mortgage Loans will be affected by the general economic condition of the
region of the country in which the related Mortgaged Properties are located. The
risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values. See
"Yield and Prepayment Considerations" in the Prospectus.
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The yield to maturity of the Offered Certificates will depend on the
price paid by the holders of the Offered Certificates and the related
Pass-Through Rate. The extent to which the yield to maturity of an Offered
Certificate is sensitive to prepayments will depend, in part, upon the degree to
which it is purchased at a discount or premium. In general, if an Offered
Certificate is purchased at a premium and principal distributions thereon occur
at a rate faster than anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that assumed at the time of purchase.
Conversely, if an Offered Certificate is purchased at a discount and principal
distributions thereon occur at a rate slower than that assumed at the time of
purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase.
As is the case with conventional, fixed interest rate mortgage loans
originated in a high interest rate environment which may be subject to a greater
rate of principal prepayments when interest rates decrease, adjustable interest
rate mortgage loans may be subject to a greater rate of principal prepayment due
to their refinancing to fixed interest rate loans in a low interest rate
environment. For example, if prevailing interest rates fall significantly,
adjustable interest rate mortgage loans could be subject to higher prepayment
rates than if prevailing interest rates remain constant because the availability
of fixed interest rate or other adjustable rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their adjustable interest
rate mortgages to "lock in" a lower fixed interest rate or to take advantage of
their availability of such other adjustable interest rate mortgage loans. A
rising interest rate environment may result in an increase in the rate of
defaults on the Mortgage Loans.
ASSUMED FINAL DISTRIBUTION DATE
The "Assumed Final Distribution Date" for distributions on the
Certificates is June 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 balance of the Mortgage Loans is less than 5% of the Cut-off Date
Scheduled Principal Balance of the Mortgage Loans. See "The Pooling and
Servicing Agreement--Termination" herein.
WEIGHTED AVERAGE LIVES
The weighted average life of a security refers to the average amount of
time that will elapse from the date of its issuance until each dollar of
principal of such security will be distributed to the investor. The weighted
average life of a Certificate is determined by (a) multiplying the amount of the
reduction, if any, of the principal balance of such Certificate from one
Distribution Date to the next Distribution Date by the number of years from the
date of issuance to the second such Distribution Date, (b) summing the results
and (c) dividing the sum by the aggregate amount of the reductions in the
principal balance of such Certificate referred to in clause (a). The weighted
average lives of the Certificates will be influenced by, among other factors,
the rate at which principal is paid on Mortgage Loans. Principal payments of
Mortgage Loans may be in the form of scheduled amortization or prepayments
including as a result of foreclosure proceedings or by virtue of the purchase of
a Mortgage Loan in advance of its stated maturity as required or permitted by
the Agreement. In general, the Mortgage Loans may be prepaid by the Mortgagors
at any time without payment of any prepayment fee or penalty. The actual
weighted average life and term to maturity of each Class of Certificates, in
general, will be shortened if the level of such prepayments of principal
increase.
PREPAYMENT MODEL
Prepayments on mortgage loans are commonly measured by a prepayment
standard or model. The model ("CPR") used in this Prospectus Supplement
represents an assumed constant rate of prepayments each month, expressed as an
annual rate, relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. CPR DOES NOT PURPORT TO BE
EITHER A HISTORICAL DESCRIPTION OF THE PREPAYMENT EXPERIENCE OF
S-39
<PAGE>
ANY POOL OF MORTGAGE LOANS OR A PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT
OF ANY POOL OF MORTGAGE LOANS, INCLUDING THE MORTGAGE LOANS.
PRICING ASSUMPTION
The Certificates were structured assuming, among other things, a 12%
CPR. The prepayment assumptions to be used for pricing purposes for the
respective Classes may vary as determined at the time of sale. The actual rate
of prepayment may vary considerably from the rate used for any prepayment
assumption.
DECREMENT TABLES
The following tables entitled "Percent of Initial Principal Amount
Outstanding" indicate the percentages of the initial principal amount of each
Class of Offered Certificates that would be outstanding after each of the dates
shown at various constant percentages of CPR 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 based on the characteristics of
the Mortgage Loans as described herein, (ii) the Index of the Mortgage Loans
remain constant at 5.473%, (iii) the Mortgage Loans prepay at the indicated
percentages of CPR set forth below, (iv) no defaults in the payment by
Mortgagors of principal of and interest on the Mortgage Loans are experienced,
(v) the Mortgage Rate on each Mortgage Loan will be adjusted on each Adjustment
Date (as necessary) to a rate equal to the Index (as described in (ii) above)
plus the Gross Margin, subject to Maximum Lifetime Mortgage Rates and the
applicable Periodic Cap, (vi) scheduled Monthly Payments of principal and
interest on each Mortgage Loan will be adjusted on each Adjustment Date (as
necessary) for such Mortgage Loan to equal the fully amortizing payment as
described in (x) below subject to the Periodic Cap, (vii) scheduled payments on
the Mortgage Loans are received on the first day of each month commencing in
June 1998 and are computed prior to giving effect to prepayments received on the
last day of the prior month, (viii) prepayments are allocated as described
herein without giving effect to loss and delinquency tests, (ix) there are no
Net Interest Shortfalls and prepayments represent prepayments in full of
individual Mortgage Loans and are received on the last day of each month,
commencing in May 1998, (x) scheduled Monthly Payments of principal and interest
on the Mortgage Loans are calculated on their respective principal balances
(prior to giving effect to prepayments received thereon during the preceding
calendar month), Mortgage Rate and remaining terms to stated maturity such that
the Mortgage Loans will fully amortize by their stated maturities, (xi) the
initial principal amounts of the Certificates are as set forth on the cover page
hereof and under "Summary of Terms--Other Certificates," (xii) distributions in
respect of the Certificates are received in cash on the 25th day of each month,
commencing in June 1998, (xiii) the Offered Certificates are purchased on May
29, 1998 and (xiv) 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 Prepayment Assumption, this is not likely
to be the case.
Discrepancies will exist between the characteristics of the actual
Mortgage Loans which will be delivered to the Trustee and characteristics of the
Mortgage Loans assumed in preparing the tables. To the extent that the Mortgage
Loans have characteristics which differ from those assumed in preparing the
tables, the Certificates may mature earlier or later than indicated by the
tables.
Based on the foregoing assumptions, the tables below indicate the
weighted average life of each Class of Offered Certificates and set forth the
percentages of the initial Current Principal Amount of each such Class that
would be outstanding after the Distribution Date in May of each of the years
indicated, assuming that the Mortgage Loans prepay at the percentage of CPR
indicated therein. Neither CPR nor any other prepayment model or assumption
purports to be an historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. Variations in the actual prepayment experience and
the balance of the Mortgage Loans that prepay may increase or decrease the
percentage of initial Current Principal Amount
S-40
<PAGE>
(and weighted average life) shown in the following tables. Such variations may
occur even if the average prepayment experience of all such Mortgage Loans
equals any of the specified percentages of CPR.
S-41
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A CERTIFICATES
% OF CPR
DISTRIBUTION DATE 6% 9% 12% 15% 18%
- ----------------- -- -- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage 00 100 100 100 100
May 25, 1999 94 91 88 84 81
May 25, 2000 88 82 77 71 66
May 25, 2001 82 74 67 60 53
May 25, 2002 77 67 58 50 43
May 25, 2003 72 61 51 42 35
May 25, 2004 68 55 44 35 28
May 25, 2005 63 50 39 29 22
May 25, 2006 59 45 33 24 17
May 25, 2007 56 41 29 20 14
May 25, 2008 52 36 25 16 10
May 25, 2009 48 32 21 13 8
May 25, 2010 44 29 18 11 6
May 25, 2011 40 25 15 9 5
May 25, 2012 36 22 13 7 4
May 25, 2013 33 20 11 6 3
May 25, 2014 30 17 9 5 2
May 25, 2015 27 15 8 4 2
May 25, 2016 24 13 7 3 1
May 25, 2017 22 11 6 3 1
May 25, 2018 19 10 5 2 1
May 25, 2019 17 8 4 2 1
May 25, 2020 15 7 3 1 *
May 25, 2021 12 6 2 1 *
May 25, 2022 10 5 2 1 *
May 25, 2023 8 4 1 1 *
May 25, 2024 7 3 1 * *
May 25, 2025 5 2 1 * *
May 25, 2026 3 1 * * *
May 25, 2027 1 * * * *
May 25, 2028 0 0 0 0 0
Weighted Average Life to
Maturity (years)** 11.7 8.8 6.9 5.5 4.5
- --------------------
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate amount of the
reductions in the principal balance of such Certificate.
S-42
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS R CERTIFICATES
% OF CPR
DISTRIBUTION DATE 6% 9% 12% 15% 18%
- ----------------- -- -- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100
May 25, 1999 0 0 0 0 0
May 25, 2000 0 0 0 0 0
May 25, 2001 0 0 0 0 0
May 25, 2002 0 0 0 0 0
May 25, 2003 0 0 0 0 0
May 25, 2004 0 0 0 0 0
May 25, 2005 0 0 0 0 0
May 25, 2006 0 0 0 0 0
May 25, 2007 0 0 0 0 0
May 25, 2008 0 0 0 0 0
May 25, 2009 0 0 0 0 0
May 25, 2010 0 0 0 0 0
May 25, 2011 0 0 0 0 0
May 25, 2012 0 0 0 0 0
May 25, 2013 0 0 0 0 0
May 25, 2014 0 0 0 0 0
May 25, 2015 0 0 0 0 0
May 25, 2016 0 0 0 0 0
May 25, 2017 0 0 0 0 0
May 25, 2018 0 0 0 0 0
May 25, 2019 0 0 0 0 0
May 25, 2020 0 0 0 0 0
May 25, 2021 0 0 0 0 0
May 25, 2022 0 0 0 0 0
May 25, 2023 0 0 0 0 0
May 25, 2024 0 0 0 0 0
May 25, 2025 0 0 0 0 0
May 25, 2026 0 0 0 0 0
May 25, 2027 0 0 0 0 0
May 25, 2028 0 0 0 0 0
Weighted Average Life to
Maturity (years)* 0.1 0.1 0.1 0.1 0.1
- --------------------
</TABLE>
* The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate amount of the
reductions in the principal balance of such Certificate.
S-43
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS B-1, CLASS B-2 AND CLASS B-3 CERTIFICATES
% OF CPR
DISTRIBUTION DATE 6% 9% 12% 15% 18%
- ----------------- -- -- --- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percentage 100 100 100 100 100
May 25, 1999 100 100 100 100 100
May 25, 2000 100 100 100 100 100
May 25, 2001 100 100 100 100 100
May 25, 2002 100 100 100 100 100
May 25, 2003 100 100 100 100 100
May 25, 2004 100 100 100 100 100
May 25, 2005 100 100 100 100 100
May 25, 2006 100 100 100 100 100
May 25, 2007 100 100 100 100 100
May 25, 2008 100 100 100 100 100
May 25, 2009 96 95 94 93 92
May 25, 2010 91 89 87 85 83
May 25, 2011 86 82 79 75 72
May 25, 2012 80 74 69 64 60
May 25, 2013 72 66 59 53 48
May 25, 2014 66 58 50 44 38
May 25, 2015 59 50 42 36 30
May 25, 2016 53 44 36 29 23
May 25, 2017 48 38 30 23 18
May 25, 2018 42 32 25 19 14
May 25, 2019 37 27 20 15 11
May 25, 2020 32 23 16 12 8
May 25, 2021 27 19 13 9 6
May 25, 2022 23 15 10 7 4
May 25, 2023 18 12 8 5 3
May 25, 2024 14 9 6 3 2
May 25, 2025 10 6 4 2 1
May 25, 2026 6 4 2 1 1
May 25, 2027 3 2 1 1 *
May 25, 2028 0 0 0 0 0
Weighted Average Life to
Maturity (years)** 19.2 18.0 17.0 16.3 15.6
- --------------------
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate amount of the
reductions in the principal balance of such Certificate.
S-44
<PAGE>
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement. The
Agreement provides for the servicing of the Mortgage Loans by The Boston Company
pursuant to a Mortgage Loan Sale, Warranties and Servicing Agreement between
BSMCC and The Boston Company, dated as of May 1, 1998 (the "Sale and Servicing
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 1% of the voting rights will be allocated to the Residual
Certificates regardless of their Current Principal Amount.
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 Trust. The
Mortgage Loans will be identified in a schedule appearing as an exhibit to the
Agreement. Such schedule will include information as to the principal balance of
each Mortgage Loan as of the Cut-off Date, as well as information including,
among other things, the Mortgage Rate, the Net Rate, the Monthly Payment, the
maturity date of each Mortgage Note, the Master Servicing Fee and the
loan-to-value ratio.
In addition, SAMI will deposit with the Trustee with respect to each
Mortgage Loan the original Mortgage Note, which will be endorsed without
recourse to the order of the Trustee and show to the extent available to 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 may be in the form of a blanket assignment) to the Trustee of the
Mortgage, with evidence of recording with respect to each Mortgage Loan in the
name of the Trustee thereon; all intervening assignments of the Mortgage
available to SAMI, if any, with evidence of recording thereon; the original or a
copy of the policy or certificate of primary mortgage guaranty insurance, if
any; originals of all available assumption and modification agreements;
PROVIDED, HOWEVER, that in lieu of the foregoing, 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.
The Trustee will review each item of the Mortgage File within 45 days
of the Closing Date (and will review each document permitted to be delivered to
the Trustee after the Closing Date, if received by the Trustee after the initial
45-day period, promptly after its delivery). If, as a result of its review, the
Trustee determines that any document is missing, does not appear regular on its
face, or appears to be unrelated to the Mortgage Loans identified in the
Mortgage Loan schedules (a "Material Defect"), the Trustee shall notify BSMCC of
such Material Defect. BSMCC shall correct or cure any such Material Defect
within 90 days from the date of notice from the Trustee of the Material Defect
and if BSMCC does not correct or cure such Material Defect within such period
and such defect materially and adversely affects the interests of the
Certificateholders in the related Mortgage Loan, BSMCC will, within 120 days of
the date of notice, provide the Trustee with a substitute Mortgage Loan (if
within two years of the Closing Date) or purchase the related Mortgage Loan at
the applicable Repurchase Price.
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<PAGE>
The Trustee also will review the Mortgage Files within 180 days of the
Closing Date. If the Trustee discovers a Material Defect, the Trustee shall
notify BSMCC of such Material Defect. BSMCC shall correct or cure any such
Material Defect within 90 days from the date of notice from the Trustee of the
Material Defect and if BSMCC does not correct or cure such Material Defect
within such period and such defect materially and adversely affects the
interests of the Certificateholders in the related Mortgage Loan, BSMCC will,
within 120 days of the date of notice, provide the Trustee with a substitute
Mortgage Loan (if within two years of the Closing Date) or purchase the related
Mortgage Loan at the applicable Repurchase Price.
The "Repurchase Price" means, with respect to any Mortgage Loan
required to be repurchased, an amount equal to (i) 100% of the Outstanding
Principal Balance of such Mortgage Loan plus accrued but unpaid interest on the
Outstanding Principal Balance at the related Mortgage Rate through and including
the last day of the month of repurchase reduced by (ii) any advances payable to
the purchaser of the Mortgage Loan.
As of any time of determination the "Outstanding Principal Balance" of
a Mortgage Loan is the principal balance of such Mortgage Loan remaining to be
paid by the Mortgagor or, in the case of an REO Property, the principal balance
of the related Mortgage Loan remaining to be paid by the Mortgagor at the time
such property was acquired by
the Trust.
REPRESENTATIONS AND WARRANTIES
In the purchase agreement pursuant to which SAMI purchased the Mortgage
Loans from BSMCC, BSMCC made certain limited representations and warranties to
SAMI concerning the Mortgage Loans. The Trustee will be assigned all right,
title and interest in such purchase agreement insofar as they relate to such
representations and warranties, as well as the remedies provided for breach of
such representations and warranties. The representations and warranties of BSMCC
primarily include the following:
(a) The Mortgage Loan has not been delinquent 30 or more days more than
once during the 12 months preceding the Cut-off Date. As of the Closing Date,
the Mortgage Loan is not delinquent in payment more than 30 days;
(b) The information set forth in the Mortgage Loan Schedule is true,
complete and correct in all material respects as of the Cut-off Date;
(c) Immediately prior to the sale of the Mortgage Loans pursuant to the
purchase agreement, BSMCC was the sole owner of record and holder of the
Mortgage Loans. As of the Closing Date, the Mortgage Loans were not assigned or
pledged, and BSMCC had good and marketable title thereto, and had full right to
transfer and sell the Mortgage Loans therein to SAMI free and clear of any
encumbrance, equity, participation interest, lien, pledge, charge, claim or
security interest, and had full right and authority subject to no interest or
participation of, or agreement with, any other party, to sell and assign each
Mortgage Loan pursuant to the purchase agreement; and
(d) As of the Closing Date, there is no default, breach or violation in
connection with the servicing on the part of or attributable to the Master
Servicer under the Sale and Servicing Agreement in connection with any Mortgage
Loan.
In the case of a breach of any representation or warranty set forth
above which materially and adversely affects the value of the interests of
Certificateholders or the Trustee in any of the Mortgage Loans, within 90 days
from the date of discovery or notice from the Trustee or SAMI, BSMCC will (i)
cure such breach in all material respects, (ii) provide the Trustee with a
substitute Mortgage Loan (if within two years of the Closing Date) or (iii)
purchase the related Mortgage Loan at the applicable Repurchase Price. If BSMCC
fails to remedy any such breach in accordance with the foregoing, within 90 days
from the date of discovery or notice from the Trustee or SAMI, BSMCC will remedy
such breach in accordance with the previous sentence. The obligations of BSMCC
to cure, purchase or substitute shall constitute the Trustee's sole and
exclusive remedy respecting a breach of such representations and warranties.
S-46
<PAGE>
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 reduce or permit to be suspended or reduced regular monthly
payments for a period of up to six months or arrange or permit an arrangement
with a Mortgagor for a schedule for the liquidation of delinquencies. In the
event the Master Servicer shall consent to the deferment of due dates for
payments due on a Mortgage Note, the Master Servicer shall nonetheless continue
to make advances as described herein to the same extent as if such installment
were due, owing and delinquent and had not been deferred through liquidation of
the Mortgaged Property, but the obligation 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 "Certain Legal
Aspects of Mortgage Loans -- Due-on-Sale Clauses" in the Prospectus. In
connection with any such assumption, the Mortgage Rate borne by the related
Mortgage Note may not be changed.
The Master Servicer will establish and maintain, in addition to the
Protected Account described below under "-- Protected Account," one or more
accounts (each, a "Servicing Account") in a depository institution the deposits
of which are insured by the FDIC to the maximum extent permitted by law. 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 as provided in the Sale and
Servicing Agreement. Amounts in any Servicing Account may relate to mortgage
loans in more than one mortgage pool or to mortgage loans not yet included in a
mortgage pool. Each Servicing Account and the investment of deposits therein
("Permitted Investments") shall comply with the requirements of the Sale and
Servicing Agreement and shall meet the requirements of the Rating Agencies.
Withdrawals of amounts from the Servicing Accounts may be made only to effect
timely payment of taxes, assessments, insurance premiums, or comparable items,
to reimburse the Master Servicer for any advances made with respect to such
items, to refund to any Mortgagors any sums as may be determined to be overages,
to pay interest, if required, to Mortgagors on balances in the Servicing
Accounts, to pay earnings not required to be paid to Mortgagors to the Master
Servicer or to clear and terminate the Servicing Accounts at or at any time
after the termination of the Sale and Servicing Agreement.
The Master Servicer will maintain errors and omissions insurance and
fidelity bonds in certain specified amounts.
HAZARD INSURANCE
The Master Servicer will maintain and keep, or cause to be maintained
and kept, with respect to each Mortgage Loan, other than a Cooperative Loan or a
loan secured by a condominium unit, 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 maximum insurable
value of the improvements securing such Mortgage Loan and containing a standard
mortgagee clause; provided, however, that the amount of the hazard insurance may
not be less
S-47
<PAGE>
than the amount necessary to prevent loss due to the application of any
co-insurance provision of the related policy. Any amounts collected by the
Master Servicer under any such hazard insurance policy (other than amounts to be
applied to the restoration or repair of the Mortgaged Property or amounts
released to the Mortgagor in accordance with normal servicing procedures) shall
be deposited in a Protected Account. Any cost incurred in maintaining any such
hazard insurance policy shall not be added to the amount owing under the
Mortgage Loan for the purpose of calculating monthly distributions to
Certificateholders, notwithstanding that the terms of the Mortgage Loan so
permit. Such costs shall be recoverable by the Master Servicer out of related
late payments by the Mortgagor or out of Insurance Proceeds or Liquidation
Proceeds or any other amounts in the Certificate Account. The right of the
Master Servicer to reimbursement for such costs incurred will be prior to the
right of Certificateholders to receive any related Insurance Proceeds or
Liquidation Proceeds or any other amounts in the Certificate Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism and malicious mischief. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not
intended to be all-inclusive.
Hazard insurance policies covering properties similar to the Mortgaged
Properties typically contain a clause which in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial
loss.
If the insured's coverage falls below this specified percentage, such clause
provides that the insurer's liability in the event of partial loss does not
exceed the greater of (i) the replacement cost of the improvements less physical
depreciation, or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Since the amount of hazard insurance to be maintained on the
improvements securing the Mortgage Loans may decline as the principal balances
owing thereon decrease, and since residential properties have historically
appreciated in value over time, in the event of partial loss, hazard insurance
proceeds may be insufficient to restore fully the damaged property.
Where the property securing a Mortgage Loan is located at the time of
origination in a federally designated flood area, the Master Servicer will cause
with respect to such Mortgage Loan flood insurance to the extent available and
in accordance with industry practices to be maintained. Such flood insurance
will be in an amount equal to the lesser of (i) the Outstanding Principal
Balance of the related Mortgage Loan and (ii) the minimum amount required under
the terms of coverage to compensate for any damage or loss on a replacement cost
basis, but not more than the maximum amount of such insurance available for the
related Mortgaged Property under either the regular or emergency programs of the
National Flood Insurance Program (assuming that the area in which such Mortgaged
Property is located is participating in such program).
The Master Servicer, on behalf of the Trustee and Certificateholders,
will present claims to the insurer under any applicable hazard insurance policy.
As set forth above, all collections under such policies that are not applied to
the restoration or repair of the related Mortgaged Property or released to the
Mortgagor in accordance with normal servicing procedures are to be deposited in
a Protected Account. The Master Servicer is required to deposit in a Protected
Account the amount of any deductible under a blanket hazard insurance policy.
REALIZATION UPON DEFAULTED MORTGAGE LOANS; PURCHASES OF DEFAULTED MORTGAGE LOANS
S-48
<PAGE>
The Master Servicer will use its reasonable efforts to maximize the
receipt of principal and interest on Defaulted Mortgage Loans and foreclose upon
or otherwise comparably convert the ownership of properties securing Defaulted
Mortgage Loans as to which no satisfactory collection arrangements can be made.
To the extent set forth in the Sale and Servicing Agreement, 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.
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.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be entitled to a servicing fee payable from
full payments of accrued interest on each Mortgage Loan as compensation for its
activities under the Sale and Servicing Agreement. However, Interest Shortfalls
on the 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 of Compensating Interest Payments.
In addition to the primary compensation described above, the Master
Servicer will retain all prepayment charges and penalties, if any, assumption
fees, tax service fees, fees for statement of account payoff and late payment
charges, all to the extent collected from Mortgagors. To the extent specified in
the Sale and Servicing Agreement, 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).
The Master Servicer will pay all expenses incurred in connection with
its servicing responsibilities (subject to limited reimbursement as described
herein).
PROTECTED ACCOUNT
The Master Servicer will establish and maintain one or more accounts
(each, a "Protected Account") into which it will deposit daily, or cause to be
deposited, within two business days all collections of principal and interest on
any Mortgage Loan, including Principal Prepayments, Insurance Proceeds,
Liquidation Proceeds, the Repurchase Price for any Mortgage Loans repurchased,
and advances made from the Master Servicer's own funds (less servicing
compensation as permitted above). All Protected Accounts and amounts at any time
credited thereto shall comply with the requirements of the Sale and Servicing
Agreement and shall meet the requirements of the Rating Agencies.
On the 18th day of each month, or if such day is not a business day,
the following business day (each, a "Servicer Remittance Date"), the Master
Servicer will withdraw or cause to be withdrawn from the Protected Accounts and
any other permitted accounts and will remit to the Trustee for deposit 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 related Mortgage Loans received
or advanced by the Master Servicer which were due on the related Due
Date, net of servicing fees due the Master Servicer; and
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(ii) Principal prepayments and any Liquidation Proceeds
received by the Master Servicer with respect to such Mortgage Loans in
the related Prepayment Period, with interest to the date of prepayment
or liquidation, net of servicing fees due the Master Servicer that
exceeds the related Compensating Interest Payments.
As its compensation the Trustee is entitled to receive all investment
earnings on amounts in the Certificate Account. In the event a successor Trustee
is appointed by the Certificateholders pursuant to the Agreement, that portion,
if any, of the successor Trustee's fees which exceeds the Trustee's fee
established at the time of issuance of the
Certificates will be borne by the Certificateholders.
CERTIFICATE ACCOUNT
The Trustee shall establish and maintain in the name of the Trustee,
for the benefit of the Certificateholders, an account (the "Certificate
Account") as a non-interest bearing trust account. The Trustee will deposit in
the Certificate
Account, as received, the 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
or REO Property repurchased and all proceeds of any Mortgage
Loans or property acquired in connection with the optional
termination of the Trust;
(v) Any amounts required to be deposited with respect to
losses on Permitted Investments; and
(vi) Any other amounts received by or on behalf of the 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.
The amount at any time credited to the Certificate Account shall be in general
(i) fully insured by the FDIC to the maximum coverage provided thereby or (ii)
invested in the name of the Trustee, in such Permitted Investments selected by
the Trustee or deposited in demand deposits with such depository institutions as
selected by the Trustee, provided that time deposits of such depository
institutions would be a Permitted Investment.
On each Distribution Date, from the funds in the Certificate Account
the amount distributable to the Certificateholders shall be paid by the Trustee
in accordance with the provisions set forth under "Description of the
Certificates - Distributions on the Certificates."
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Sale and Servicing Agreement will generally provide that the Master
Servicer may not resign from its obligations and duties thereunder, except upon
determination, evidenced by an opinion of counsel to such effect, that the
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until a successor has assumed the
obligations and duties of the Master Servicer to the extent required under the
Sale and Servicing Agreement. The Master Servicer, however, has the right, with
the written consent of the Trustee (which consent will not be unreasonably
withheld), to assign, sell or transfer its rights and delegate its duties
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and obligations under the Sale and Servicing Agreement; provided that the
purchaser or transferee accepting such assignment, sale, transfer or delegation
is qualified to service mortgage loans for FNMA or Freddie Mac and shall satisfy
the other requirements listed in the Sale and Servicing Agreement with respect
to the qualifications of such purchaser or transferee.
The Sale and Servicing Agreement generally provides that neither the
Master Servicer nor any of its directors, officers, employees and agents shall
be under any liability to the Trustee for taking any action or for refraining
from taking any action in good faith pursuant to the Sale and Servicing
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 Sale and Servicing Agreement. In addition, the
Sale and Servicing 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 Sale and Servicing 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 Sale and Servicing Agreement and the rights and
duties of the parties thereto. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs and
liabilities of the accounts thereunder, and the Master Servicer will be entitled
to be reimbursed therefor from the related accounts.
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 Sale and Servicing Agreement, PROVIDED that any such
successor to the Master Servicer shall be qualified to service Mortgage Loans on
behalf of FNMA or Freddie Mac and shall satisfy the other requirements listed in
the Sale and Servicing Agreement with respect to the qualifications of a
successor to the Master Servicer.
EVENTS OF DEFAULT
"Events of Default" under the Sale and Servicing Agreement consists 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
Sale and Servicing Agreement, and such failure continues unremedied for two
Business Days, (ii) failure by the Master Servicer to observe or perform in any
material respect any other material covenants and agreements set forth in the
Sale and Servicing Agreement to be performed by it, and such failure continues
unremedied for 30 days after the date on which written notice of such failure
has been given to the Master Servicer, (iii) failure of the Master Servicer to
maintain any license required to do business in any jurisdiction where a
Mortgage Property is located, (iv) the entry against the Master Servicer of a
decree or order by a court or agency or supervisory authority having
jurisdiction in the premises for the appointment of a conservator, receiver or
liquidator in any insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding up or liquidation of its
affairs, and the continuance of any such decree or order unstayed and in effect
for a period of 60 consecutive days, (v) 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
for three Business Days, (vi) ceases to meet the financial qualifications of a
FNMA or Freddie Mac approved seller/servicer or (vii) assignment or delegation
by the Master Servicer of its duties or rights under the Sale and Servicing
Agreement in contravention of the provisions permitting such assignment or
delegation under the Sale and Servicing 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 Sale and Servicing 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
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the Master Servicer under the Sale and Servicing Agreement, whether with respect
to the Certificates, the Mortgage Loans or under any other related agreements
(but only to the extent that such other agreements relate to the Mortgage Loans)
shall, subject to the provisions of the Agreement, automatically and without
further action pass to and be vested in the Trustee.
Upon the receipt by the Master Servicer of a notice of termination or
an opinion of counsel to the effect that the Master Servicer is legally unable
to act or to delegate its duties to a person which is legally able to act, the
Trustee shall automatically become the successor in all respects to the Master
Servicer in its capacity under the Sale and Servicing Agreement and the
transactions set forth or provided for therein and shall thereafter be subject
to all the responsibilities, duties, liabilities and limitations on liabilities
relating thereto placed on the Master Servicer by the terms and provisions
hereof; PROVIDED, HOWEVER, that the Trustee (i) shall be under no obligation to
repurchase any Mortgage Loan; and (ii) shall have no obligation whatsoever with
respect to any liability incurred by the Master Servicer at or prior to the time
of receipt by such 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 FNMA or Freddie Mac approved servicer having a net worth
of not less than $15,000,000, as the successor to the Master Servicer under the
Sale and Servicing Agreement in the assumption of all or any part of the
responsibilities, duties or liabilities of the Master Servicer under the Sale
and Servicing Agreement. Pending appointment of a successor to the Master
Servicer under the Sale and Servicing Agreement, the Trustee shall act in such
capacity as provided under such Sale and Servicing Agreement. In connection with
such appointment and assumption, the Trustee may make such arrangements for the
compensation of such successor out of payments on Mortgage Loans as it and such
successor shall agree; PROVIDED, HOWEVER, that no such compensation shall be in
excess of that permitted the Trustee as provided above, and that such successor
shall undertake and assume the obligations of the Trustee to pay compensation to
any third person acting as an agent or independent contractor in the performance
of master servicing responsibilities under the Sale and Servicing Agreement.
MONTHLY ADVANCES
If the scheduled payment on a Mortgage Loan which was due on a related
Due Date is delinquent other than as a result of application of the Relief Act,
the Master Servicer will deposit in the Certificate Account on the Servicer
Remittance Date an amount equal to such deficiency, net of the Aggregate Expense
Rate except to the extent the Master Servicer determines any such advance to be
nonrecoverable from Liquidation Proceeds, Insurance Proceeds or from future
payments on the Mortgage Loan for which such advance was made. Subject to the
foregoing, such advances will be made through liquidation of the related
Mortgaged Property. Failure by the Master Servicer to deposit in the Certificate
Account any advance required to be deposited by the Master Servicer, which
failure goes unremedied for the days specified in the Sale and Servicing
Agreement, would constitute an Event of Default with respect to the Master
Servicer as discussed under "--Events of Default" above. The Trustee will be
required to make an advance which Master Servicer is required to make but fails
to do so.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, a written report will be provided to each
holder of Certificates setting forth certain information with respect to the
composition of the payment being made, the Current Principal Amount of an
individual Certificate following the payment and certain other information
relating to the Certificates and the Mortgage
Loans.
The information included in such report will be based solely on information
provided by the Master Servicer to the Trustee and the Trustee will not be
required to confirm, verify or recalculate any such information.
TERMINATION
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The obligations of the Trustee created by the Agreement will terminate
upon (i) the later of the making of the final payment or other liquidation, or
any advance with respect thereto, of the last Mortgage Loan subject thereto or
the disposition of all property acquired upon foreclosure or acceptance of a
deed in lieu of foreclosure of any such Mortgage Loans and (ii) the payment to
Certificateholders of all amounts required to be paid to them pursuant to such
Agreement.
On any Distribution Date on which the aggregate unpaid principal
balance of the Mortgage Loans is less than 5% of the aggregate Cut-off Date
Scheduled Principal Balance 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 (but not more than the unpaid principal balance of the related
Mortgage Loan, together with accrued but unpaid interest on that balance at the
applicable Mortgage Rate to the next Due Date), less the good faith estimate of
the Master Servicer of liquidation expenses to be incurred in connection with
its disposal thereof. The Trust may also be terminated and the Certificates
retired on any Distribution Date upon SAMI's determination, based upon an
opinion of counsel, that the real estate mortgage investment conduit status of
either of the REMICs has been lost or that a substantial risk exists that such
status will be lost for the then current taxable year. Upon termination, the
holders of will receive the Current Principal Amount of their Certificates, if
any, and accrued but unpaid interest.
THE TRUSTEE
The Trustee may resign at any time, in which event the Depositor will
be obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes incapable of acting, bankrupt, insolvent or
if a receiver or public officer takes charge of the Trustee or its property.
Upon becoming aware of such circumstances, the Depositor will be entitled to
appoint a successor Trustee. The Trustee may also be removed at any time by the
holders of Certificates evidencing ownership of not less than 51% of the Trust.
In the event that the Certificateholders remove the Trustee, the compensation of
any successor Trustee shall be paid by the Certificateholders to the extent that
such compensation exceeds the amount agreed to by the Depositor and the Trustee.
Any resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the Mortgage Loans, the Certificate
Account and certain assets owned by the Trust as a real estate mortgage
investment conduit ("REMIC") for federal income tax purposes. The REMIC will
issue "regular interests" and one "residual interest." The Certificates (other
than the Residual Certificates) will be designated as regular interests in the
REMIC and are herein referred to as "Regular Certificates" or "REMIC Regular
Certificates". The Class R Certificates will be designated as the residual
interest in REMIC (the "Residual Certificates" or the "REMIC Residual
Certificates"). Upon the issuance of the Offered Certificates, Thacher Proffitt
& Wood, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the Agreement, for
federal income tax purposes, the REMIC will qualify as a REMIC under Sections
860A through 860G of the Internal Revenue Code of 1986 (the "Code"). All
Certificateholders are advised to see "Certain Federal Income Tax Consequences"
in the Prospectus for a discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of the REMIC Regular
Certificates and the REMIC Residual Certificates.
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Code,
and interest paid or accrued on the Regular Certificates, including original
issue discount with respect to any Regular Certificates issued with original
issue discount, will be taxable to Certificateholders in accordance with the
accrual method of accounting. For federal income tax purposes, the Class
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B-1, Class B-2 and Class B-3 Certificates may be issued with original issue
discount. See "Certain Federal Income Tax Consequences--REMIC Regular
Certificates -- Current Income on REMIC Regular Certificates -- Original Issue
Discount" in the Prospectus. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount or premium with
respect to the Certificates is 12% CPR. The prepayment assumption represents a
rate of payment of unscheduled principal on a pool of mortgage loans, expressed
as an annualized percentage of the outstanding principal balance of such
mortgage loans at the beginning of each period. However, no representation is
made as to the rate at which prepayments actually will occur.
Certain other Classes of Regular Certificates may be treated as having
been issued at a premium. Holders of REMIC Regular Certificates issued with a
premium may elect to amortize such premium under a constant yield method in
which case such amortizable premium will generally be allocated among the
interest payments on such Certificates and will be applied as an offset against
such interest payments. All purchasers of REMIC Regular certificates are urged
to consult their tax advisors for advice regarding the effect, if any, of the
rules relating to original issue discount and premium on the purchase of the
Regular Certificates. See "Certain Federal Income Tax Consequences -- REMIC
Regular Certificates -- Premium" in the Prospectus.
The Residual Certificates generally will not be treated as evidences of
indebtedness for federal income tax purposes. Instead, the Residual Certificates
will be considered as residual interests in a REMIC, representing rights to the
taxable income or net loss of the REMIC. Holders of the Residual Certificates
will be required to report and will be taxed on their PRO RATA share of such
income or loss, and such reporting requirements will continue until there are no
Certificates of any Class outstanding, even though holders of Residual
Certificates previously may have received full payment of any stated interest
and principal. The taxable income of holders of the Residual Certificates
attributable to the Residual Certificates may exceed any principal and interest
payments received by such Certificateholders during the corresponding period,
which would result in a negligible (or even negative) after-tax return, in
certain circumstances.
The Offered Certificates (including the Residual Certificates) will
generally be treated as "qualifying real property loans" for domestic building
and loan associations, and "real estate assets" for real estate investment
trusts ("REITs"), subject to the limitations described in "Certain Federal
Income Tax Consequences -- REMIC Certificates -- Status of REMIC Certificates"
in the Prospectus. Similarly, interest on such Certificates will be considered
"interest on obligations secured by mortgages on real property" for REITs,
subject to the limitations described in "Certain Federal Income Tax Consequences
- -- REMIC Certificates -- Status of REMIC Certificates" in the Prospectus.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of ERISA
should consider the ERISA fiduciary investment standards before authorizing an
investment by a plan in the Certificates. In addition, fiduciaries of employee
benefit plans subject to Title I of ERISA, as well as certain plans or other
retirement arrangements not subject to ERISA, but which are subject to Section
4975 of the Code (such as individual retirement accounts and Keogh plans
covering only a sole proprietor, or partners), or any entity whose underlying
assets include plan assets by reason of a plan or account investing in such
entity, including an insurance company general account (collectively,
"Plan(s)"), should consult with their legal counsel to determine whether an
investment in the Certificates will cause the assets of the Trust ("Trust
Assets") to be considered plan assets pursuant to the plan asset regulations set
forth at 29 C.F.R. ss. 2510.3-101 (the "Plan Asset Regulations"), thereby
subjecting the Plan to the prohibited transaction rules with respect to the
Trust Assets and the Trustee or the Master Servicer to the fiduciary investments
standards of ERISA, or cause the excise tax provisions of Section 4975 of the
Code to apply to the Trust Assets, unless an exemption granted by the Department
of Labor applies to the purchase, sale, transfer or holding of the Certificates.
Prohibited Transaction Exemption 90-30 (the "Exemption") may be met
with respect to the Senior 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
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such Class of Senior Certificates. However, before purchasing a Senior
Certificate, a fiduciary of a Plan should make its own determination as to the
availability of exemptive relief provided by the Exemption or the availability
of any other prohibited transaction exemptions, and whether the conditions of
any such exemption will be applicable to such Senior Certificates. See "ERISA
Considerations" in the Prospectus.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not likely apply to the purchase, sale
or holding of the Class B Certificates (due to the subordinate nature thereof)
or the Residual Certificates, transfers of such Certificates to a Plan, to a
trustee or other person acting on behalf of any Plan, or to any other person
using "Plan Assets" to effect such acquisition will not be registered by the
Trustee unless the transferee provides the Company, the Trustee and the Master
Servicer with an opinion of counsel satisfactory to the Company, the Trustee and
the Master Servicer, which opinion will not be at the expense of the Company,
the Trustee or the Master Servicer, that the purchase of such Certificates by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in a non-exempt prohibited transaction under ERISA or Section 4975 of
the Code and will not subject the Company, the Trustee or the Master Servicer to
any obligation in addition to those undertaken in the Pooling and Servicing
Agreement.
In lieu of such opinion of counsel, the transferee may provide (or, in
the case of Book-Entry Certificates, shall be deemed to provide) a certification
substantially to the effect that the purchase of the Class B Certificates by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in a non-exempt prohibited transaction under ERISA or Section 4975 of
the Code, will not subject the Company, the Trustee or the Master Servicer to
any obligation in addition to those undertaken in the Pooling and Servicing
Agreement and one of the following conditions are satisfied: (a) the transferee
is an insurance company and (i) the source of funds used to purchase such
Certificates is an "insurance company general account" (as such term is defined
in PTCE 95-60), (ii) the conditions set forth in PTCE 95-60 have been satisfied
and (iii) there is no Plan with respect to which the amount of such general
account's reserves and liabilities for contracts held by or on behalf of such
Plan and all other Plans maintained by the same employer (or any "affiliate"
thereof, as defined in PTCE 95-60) or by the same employee organization, exceeds
10% of the total of all reserves and liabilities of such general account (as
determined under PTCE 95-60) as of the date of the acquisition of such
Certificates; (b) the transferee is an insurance company and (i) the source of
funds used to purchase such Certificates is an insurance company general
account, (ii) the requirements of Sections 401(c) of ERISA and the regulations
to be promulgated thereunder have been satisfied and will continue to be
satisfied and (iii) the insurance company represents that it understands that
the operation of the general account after December 31, 1998 may affect its
ability to continue to hold such Certificates after the date which is 18 months
after the 401(c) Regulations become final and that unless a Class Exemption or
an exception under Section 401(c) of ERISA is then available for the continued
holding of such Certificates, it will dispose of such Certificates prior to the
date which is 18 months after the 401(c) Regulations become final; (c) the
transferee is an insurance company and (i) the source of funds used to purchase
such Certificates is an "insurance company pooled separate account" (as such
term is defined in PTCE 90-1), (ii) the conditions set forth in PTCE 90-1 have
been satisfied and (iii) there is no Plan, together with all other Plans
maintained by the same employer (or any "affiliate" thereof, as defined in PTCE
90-1) or by the same employee organization, with assets which exceed 10% of the
total of all assets in such pooled separate account (as determined under PTCE
90-1) as of the date of the acquisition of such Certificates; (d) the transferee
is a bank and (i) the source of funds used to purchase such Certificates is a
"collective investment fund" (as defined in PTCE 91-38), (ii) the conditions set
forth in PTCE 91-38 have been satisfied and (iii) there is no Plan, the
interests of which, together with the interests of any other Plans maintained by
the same employer or employee organization, in the collective investment fund
exceed 10% of the total of all assets in the collective investment fund (as
determined under PTCE 91-38) as of the date of acquisition of such Certificates;
(e) the transferee is a "qualified professional asset manager" described in PTCE
84-14 and the conditions set forth in PTCE 84-14 have been satisfied and will
continue to be satisfied; or (f) the transferee is an "in-house asset manager"
described in PTCE 96-23 and the conditions set forth in PTCE 96-23 have been
satisfied and will continue to be satisfied. The Residual Certificates and the
Class B Certificates will contain a legend describing such restrictions on
transfer.
Any Plan fiduciary which proposes to cause a Plan to purchase Offered
Certificates should consult with its own counsel with respect to the potential
consequences under ERISA and the Code of the Plan's acquisition and ownership of
the Senior Certificates. Assets of a Plan should not be invested in the Senior
Certificates unless it is clear
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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") for so long as they are rated in one of the
two highest rating categories by at least one nationally recognized statistical
rating organization, and, as such, will be legal investments for certain
entities to the extent provided in SMMEA, subject to state laws overriding
SMMEA. Certain states have enacted legislation overriding the legal investment
provisions of SMMEA. The remaining Classes of Certificates will NOT constitute
"mortgage related securities" under SMMEA (the "Non-SMMEA Certificates"). The
appropriate characterization of the Non-SMMEA Certificates under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Non-SMMEA Certificates, may be subject to significant
interpretive uncertainties.
All investors whose investment activities are subject to legal
investment laws and regulations or to review by certain regulatory authorities
may be subject to restrictions on investment in the Certificates. Any such
institution should consult its own legal advisors in determining whether and to
what extent there may be restrictions on its ability to invest in the
Certificates. See "Legal Investment" In the Prospectus.
RESTRICTIONS ON PURCHASE AND TRANSFER
OF THE RESIDUAL CERTIFICATES
The Residual Certificates are not offered for sale to any investor that
is a "disqualified organization" as described in "Certain Federal Income Tax
Consequences -- Transfers of REMIC Residual Certificates -- Tax on Disposition
of REMIC Residual Certificates" and "-- Restrictions on Transfer; Holding by
Pass-Through Entities" in
the Prospectus.
A Residual Certificate (or interests therein) may not be transferred
without the prior express written consent of the holder of such Residual
Certificate as "Tax Matters Person" as defined in the Code or by Norwest Bank
Minnesota, National Association, acting as agent for the Tax Matters Person. The
Tax Matters Person or its agent will not give its consent to any proposed
transfer to a disqualified organization. As a prerequisite to such consent to
any other transfer, the proposed transferee must provide the Tax Matters Person
and the Trustee with an affidavit that the proposed transferee is not a
disqualified organization (and, unless the Tax Matters Person or its agent
consents to the transfer to a person who is not a U.S. Person (as defined
below), an affidavit that it is a U.S. Person). Notwithstanding the fulfillment
of the prerequisites described above, the Tax Matters Person or its agent may
withhold its consent to a transfer, but only to the extent necessary to avoid a
risk of REMIC disqualification or REMIC-level tax. In the event that legislation
is enacted which would subject the Trust to tax (or disqualify the REMIC as a
REMIC) on the transfer of an interest in the Residual Certificate to any other
person or persons, the Tax Matters Person may, without action on the part of
Holders, amend the Agreement to restrict or prohibit prospectively such
transfer. A transfer in violation of the restrictions set forth herein may
subject a Residual Certificateholder to taxation. See "Certain Federal Income
Tax Consequences -- REMIC Residual Certificates -- Transfers of REMIC Residual
Certificates -- Tax on Disposition of REMIC Residual Certificates" and "--
Restrictions on Transfer; Holding by Pass-Through Entities" in the Prospectus.
Moreover, certain transfers of a Residual Certificate that are effective to
transfer legal ownership may
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nevertheless be ineffective to transfer ownership for federal income tax
purposes, if at the time of the transfer the Residual Certificate represents a
"non-economic residual interest" as defined in the REMIC Regulations and if
avoiding or impeding the assessment or collection of tax is a significant
purpose of the transfer. See "Certain Federal Income Tax Consequences -- REMIC
Residual Certificates -- Transfers of REMIC Residual Certificates" and "--
Restrictions on Transfer; Holding by Pass-Through Entities" in the Prospectus.
Further, unless the Tax Matters Person consents in writing (which consent may be
withheld in the Tax Matters Person's sole discretion), a Residual Certificate
(including a beneficial interest therein) may not be purchased by or transferred
to any person who is not a "United States person," as such term is defined in
Section 7701(a)(30) of the Code (a "U.S. Person").
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Offered Certificates, are being purchased from SAMI by the
Underwriter upon issuance. The Underwriter is an affiliate of SAMI. Distribution
of such Certificates will be made from time to time in negotiated transactions
or otherwise at varying prices to be determined at the time of sale. Proceeds to
SAMI are expected to be approximately the percentage set forth on the cover page
of the aggregate principal balance of the Offered Certificates, as of the
Cut-off Date, plus accrued interest thereon, but before deducting expenses
payable by SAMI in connection with the Offered Certificates. In connection with
the purchase and sale of the Offered Certificates, the Underwriter may be deemed
to have received compensation from 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 Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon
for SAMI and the Underwriter by Thacher Proffitt & Wood, 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.
CLASS S&P FITCH
--------------------- --------------------- -------------
Class A AAA AAA
Class B-1 AA AA
Class B-2 A A
Class B-3 BBB BBB
Class R AAA AAA
S&P's ratings on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under the
Agreement. S&P's ratings take into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the Certificates,
and the extent to which the payment stream in the mortgage pool is adequate to
make payments required under the Certificates. S&P's rating on the Offered
Certificates does not, however, constitute a statement regarding frequency of
prepayments on the mortgages.
The ratings assigned by 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 are issued. Fitch's ratings take into consideration the credit
quality of the related mortgage pool, including
S-57
<PAGE>
any credit support providers, the structural and legal aspects associated with
such certificates, and the extent to which the payment stream on the mortgage
pool is adequate to make payments required by such certificates. Fitch's ratings
on such certificates do not, however, constitute a statement regarding frequency
of prepayments on the mortgage loans.
The ratings of the Rating Agencies do not address the possibility that,
as a result of principal prepayments (i) Certificateholders might suffer a lower
than anticipated yield. The ratings on the Class R-1 and Class R-2 Certificates
address only the return of its principal balance and interest thereon.
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-58
<PAGE>
PRINCIPAL DEFINITIONS
Page
----
1933 Act...................................................................S-3
1934 Act...................................................................S-3
Accrued Certificate Interest...............................................S-9
Additional Collateral.....................................................S-22
Adjustment Date...........................................................S-13
Aggregate Expense Rate.....................................................S-7
Agreement..................................................................S-4
Allocable Share...........................................................S-34
Assumed Final Distribution Date...........................................S-39
Bankruptcy Loss...........................................................S-35
Book-Entry Certificates....................................................S-5
Boston Company Sale and Servicing Agreement...............................S-45
BSMCC......................................................................S-2
Business Day..............................................................S-28
Cede......................................................................S-27
Certificate Account.......................................................S-50
Certificate Owner.........................................................S-27
Certificate Register......................................................S-29
Certificateholder.........................................................S-28
Certificates...............................................................S-1
Class Prepayment Distribution Trigger.....................................S-34
Closing Date...............................................................S-6
Code......................................................................S-17
Compensating Interest Payment.............................................S-10
Cooperative Loans.........................................................S-20
CPR.......................................................................S-39
Cross-Over Date............................................................S-9
Current Principal Amount..................................................S-10
Cut-off Date...............................................................S-4
Debt Service Reduction....................................................S-35
Deficient Valuation.......................................................S-35
Definitive Certificates...................................................S-29
Depositor..................................................................S-6
Determination Date........................................................S-35
Distribution Date..........................................................S-2
DTC.......................................................................S-27
Due Date...................................................................S-7
Due Period.................................................................S-8
ERISA.....................................................................S-17
Events of Default.........................................................S-51
Exemption.................................................................S-17
Fitch......................................................................S-1
FNMA......................................................................S-24
Freddie Mac...............................................................S-24
Gross Margin...............................................................S-6
S-59
<PAGE>
Page
----
Index......................................................................S-6
Indirect Participants.....................................................S-28
Insurance Proceeds........................................................S-35
Interest Accrual Period....................................................S-9
Interest Only Period.................................................S-6, S-22
Interest Shortfall........................................................S-31
Liquidated Mortgage Loan..................................................S-35
Liquidation Proceeds......................................................S-35
Loss Allocation Limitation................................................S-36
Master Servicer............................................................S-3
Material Defect...........................................................S-45
Maximum Lifetime Mortgage Rate.............................................S-6
Monthly Advance...........................................................S-12
Monthly Payment...........................................................S-35
Mortgage File.............................................................S-45
Mortgage Loan Purchase Agreement...........................................S-6
Mortgage Loans............................................................S-22
Mortgage Pool..............................................................S-6
Mortgage Rate..............................................................S-6
Mortgaged Property.........................................................S-2
Net Interest Shortfalls...................................................S-32
Net Liquidation Proceeds..................................................S-35
Net Rate...................................................................S-7
Non-accrual Loan..........................................................S-26
Non-SMMEA Certificates....................................................S-19
Note......................................................................S-22
Offered Certificates.......................................................S-1
Original Subordinate Principal Balance....................................S-33
Other Certificates.........................................................S-4
Outstanding Principal Balance.............................................S-46
Participants..............................................................S-28
Pass-Through Rate..........................................................S-9
Periodic Cap..............................................................S-13
Permitted Investments.....................................................S-47
Physical Certificates......................................................S-5
Plan Asset Regulations....................................................S-54
Plan(s)...................................................................S-17
Prepayment Period..........................................................S-8
Principal Prepayment......................................................S-35
Protected Account.........................................................S-27
Rating Agencies...........................................................S-18
Realized Loss.............................................................S-35
Record Date................................................................S-8
Regular Certificates.......................................................S-5
REITs.....................................................................S-54
Relief Act................................................................S-31
S-60
<PAGE>
Page
----
REMIC.....................................................................S-53
REMIC Regular Certificates................................................S-17
REMIC Residual Certificates...............................................S-17
REO Property..............................................................S-35
Repurchase Price..........................................................S-46
Repurchase Proceeds.......................................................S-35
Residual Certificates......................................................S-5
Rules.....................................................................S-28
S&P........................................................................S-1
Sale and Servicing Agreement..............................................S-45
SAMI.......................................................................S-2
Scheduled Principal Balance................................................S-7
Senior Certificates........................................................S-5
Senior Optimal Principal Amount...........................................S-32
Senior Percentage.........................................................S-33
Senior Prepayment Percentage..............................................S-33
Servicer Remittance Date..................................................S-49
Servicing Account.........................................................S-47
Similar Law...............................................................S-56
SMMEA.....................................................................S-19
Subordinate Certificate Writedown Amount..................................S-31
Subordinate Certificates...................................................S-5
Subordinate Optimal Principal Amount......................................S-34
Subordinate Percentage....................................................S-33
Subordinate Prepayment Percentage.........................................S-33
Tax Matters Person........................................................S-18
The Boston Company.........................................................S-2
Trust......................................................................S-2
Trust Assets..............................................................S-17
Trustee....................................................................S-4
U.S. Person...............................................................S-57
Underwriter................................................................S-1
Unrecognized Cooperative Loans............................................S-20
S-61
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
The description herein of the Mortgage Loans is based upon estimates of the
composition thereof as of the Cut-off Date, as adjusted to reflect the Scheduled
Principal Balances as of the Cut-off Date. Prior to the issuance of the
Certificates, Mortgage Loans may be removed as a result of (i) Principal
Prepayments thereof in full prior to May 1, 1998, (ii) requirements of S&P or
Fitch, (iii) delinquencies or otherwise. In any such event, other mortgage loans
may be included in the Trust. SAMI believes that the estimated information set
forth herein with respect to the Mortgage Loans as presently constituted is
representative of the characteristics thereof at the time the Certificates are
issued, although certain characteristics of the Mortgage Loans may vary.
Original Loan-to-Value Ratios of Mortgage Loans*
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS* LOANS CUT-OFF DATE POOL
- ----------------------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
30.00% or less .......................... 2 $ 610,263 0.63%
30.01% -- 40.00% ........................ 6 5,620,000 5.77
40.01% -- 50.00% ........................ 20 14,043,000 14.42
50.01% -- 60.00% ........................ 22 15,999,397 16.43
60.01% -- 70.00% ........................ 21 12,371,576 12.70
70.01% -- 75.00% ........................ 25 16,704,118 17.15
75.01% -- 80.00% ........................ 49 24,749,473 25.42
80.01% -- 85.00% ........................ 2 1,674,000 1.72
85.01% -- 90.00% ........................ 5 3,876,152 3.98
90.01% -- 95.00% ........................ 1 1,100,000 1.13
Greater than 95.00% ..................... 1 630,000 0.65
-- ----------- ------
Total ............................... .. 154 $97,377,981 100.00%
=== =========== ======
</TABLE>
The weighted average original Loan-to-Value Ratio is approximately 65.88%.
- -----------
* Ratio of loan balance to value of real property securing the related Mortgage
Loan, without regard to Additional Collateral.
ORIGINAL LOAN-TO-COLLATERAL VALUE RATIOS OF MORTGAGE LOANS*
(GIVING EFFECT TO ADDITIONAL COLLATERAL)
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
RANGE OF ORIGINAL LOAN-TO-COLLATERAL VALUE RATIOS* LOANS CUT-OFF DATE POOL
- ---------------------------------------------------- ----------- ------------------- --------
<S> <C> <C> <C>
30.00% or less ..................................... 2 $ 610,263 0.63%
30.01% -- 40.00% ................................... 6 5,620,000 5.77
40.01% -- 50.00% ................................... 20 14,043,000 14.42
50.01% -- 60.00% ................................... 22 15,999,397 16.43
60.01% -- 70.00% ................................... 21 12,371,576 12.70
70.01% -- 75.00% ................................... 27 19,154,118 19.67
75.01% -- 80.00% ................................... 51 25,876,273 26.57
80.01% -- 85.00% ................................... 2 1,674,000 1.72
85.01% -- 90.00% ................................... 3 2,029,352 2.08
-- ----------- ------
Total .......................................... .. 154 $97,377,981 100.00%
=== =========== ======
</TABLE>
The weighted average original Loan-to-Collateral Value Ratio is approximately
65.25 %.
- -----------
* Ratio of loan balance, less any Additional Collateral, to value of real
property securing the related Mortgage Loan.
A-1
<PAGE>
CURRENT MORTGAGE RATES OF MORTGAGE LOANS
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
RANGE OF CURRENT MORTGAGE RATES LOANS CUT-OFF DATE POOL
- --------------------------------- ----------- ------------------- ---------
6.251% -- 6.500% ................ 1 $ 1,160,000 1.19%
6.501% -- 6.750% ................ 4 2,609,000 2.68
6.751% -- 7.000% ................ 13 7,175,500 7.37
7.001% -- 7.250% ................ 63 42,403,690 43.55
7.251% -- 7.500% ................ 49 31,176,704 32.02
7.501% -- 7.750% ................ 14 7,059,500 7.25
7.751% -- 8.000% ................ 10 5,793,586 5.95
-- ----------- ------
Total ........................ 154 $97,377,981 100.00%
=== =========== ======
The weighted average Current Mortgage Rate is approximately 7.268%.
MAXIMUM RATES OF MORTGAGE LOANS
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
RANGE OF MAXIMUM RATES LOANS CUT-OFF DATE POOL
- ---------------------------- ----------- ------------------- -----------
12.001% -- 12.250% ......... 1 $ 1,700,000 1.75%
12.251% -- 12.500% ......... 1 1,160,000 1.19
12.501% -- 12.750% ......... 4 2,609,000 2.68
12.751% -- 13.000% ......... 13 7,175,500 7.37
13.001% -- 13.250% ......... 62 40,703,690 41.80
13.251% -- 13.500% ......... 49 31,176,704 32.02
13.501% -- 13.750% ......... 14 7,059,500 7.25
13.751% -- 14.000% ......... 10 5,793,586 5.95
-- ----------- ------
Total ................... 154 $97,377,981 100.00%
=== =========== ======
The weighted average Maximum Rate is approximately 13.250%.
MARGINS OF MORTGAGE LOANS
Aggregate
Number of Scheduled Balance % of
Mortgage Outstanding as of Mortgage
Margins Loans Cut-Off Date Pool
- ----------------- ----------- ------------------- -----------
2.750% .......... 1 $ 600,000 0.62%
3.250% .......... 153 96,777,981 99.38
--- ----------- ------
Total ......... 154 $97,377,981 100.00%
=== =========== ======
A-2
<PAGE>
ORIGINAL TERMS TO MATURITY OF MORTGAGE LOANS
Aggregate
Number of Scheduled Balance % of
Mortage Outstanding as of Mortgage
Range of Maturities Loans Cut-Off Date Pool
- --------------------- ----------- ------------------- ----------
360 Months .......... 154 $ 97,377,981 100.00%
--- ------------ ------
Total ............. 154 $ 97,377,981 100.00 %
=== ============ =======
Remaining Terms to Maturity of Mortgage Loans
Aggregate
Number of Scheduled Balance % of
Mortage Outstanding as of Mortgage
Range of Maturities Loans Cut-Off Date Pool
- --------------------- ----------- ------------------- -----------
353 Months .......... 1 $ 306,000 0.31%
354 Months .......... 7 3,913,639 4.02
355 Months .......... 13 7,470,948 7.67
356 Months .......... 15 8,498,025 8.73
357 Months .......... 28 15,845,726 16.27
358 Months .......... 55 38,366,193 39.40
359 Months .......... 33 21,267,450 21.84
360 Months .......... 2 1,710,000 1.76
-- ------------ ------
Total ............. 154 $ 97,377,981 100.00%
=== ============ ======
The weighted average Remaining Term to maturity is approximately 358 months.
NEXT RATE ADJUSTMENT DATE OF MORTGAGE LOANS
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTAGE OUTSTANDING AS OF MORTGAGE
NEXT RATE ADJUSTMENT DATE LOANS CUT-OFF DATE POOL
- --------------------------- ----------- ------------------- -----------
October 1, 2007 ........... 1 $ 306,000 0.31%
November 1, 2007 .......... 7 3,913,639 4.02
December 1, 2007 .......... 13 7,470,948 7.67
January 1, 2008 ........... 15 8,498,025 8.73
February 1, 2008 .......... 27 15,331,726 15.74
March 1, 2008 ............. 56 38,880,193 39.93
April 1, 2008 ............. 33 21,267,450 21.84
May 1, 2008 ............... 2 1,710,000 1.76
-- ----------- ------
Total ................... 154 $97,377,981 100.00%
=== =========== ======
A-3
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGE LOANS
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
STATE LOANS CUT-OFF DATE POOL
- -------------------------- ----------- ------------------- -----------
California ............... 39 $ 29,703,579 30.50%
New York ................. 35 17,680,750 18.16
Massachusetts ............ 20 9,643,852 9.90
Connecticut .............. 8 5,831,217 5.99
New Jersey ............... 8 5,067,646 5.20
Washington, D.C. ......... 8 4,913,000 5.05
Florida .................. 6 4,285,000 4.40
Pennsylvania ............. 7 3,656,639 3.76
Colorado ................. 3 3,288,198 3.38
Maryland ................. 4 2,845,000 2.92
Illinois ................. 2 2,460,000 2.53
Virginia ................. 5 2,330,600 2.39
Idaho .................... 1 1,235,000 1.27
Rhode Island ............. 1 1,000,000 1.03
Georgia .................. 1 750,000 0.77
Wyoming .................. 1 532,500 0.55
Washington ............... 1 505,000 0.52
Oregon ................... 1 500,000 0.51
New Hampshire ............ 1 460,000 0.47
Arizona .................. 1 350,000 0.36
Vermont .................. 1 340,000 0.35
-- ------------ ------
Total .................. 154 $ 97,377,981 100.00%
=== ============ ======
Zip Code Concentration Greater Than 2.0%
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
ZIP CODE LOANS CUT-OFF DATE POOL
- -------------------------------------------- ----------- ------------------- ---------
<S> <C> <C> <C>
10021 -- New York, New York ................ 12 $ 5,607,500 5.76%
90210 -- Beverly Hills, California ......... 2 3,650,000 3.75
81611 -- Aspen, Colorado ................... 2 2,250,000 2.31
20854 -- Potomac, Maryland ................. 2 2,125,000 2.18
06880 -- Westport, Connecticut ............. 2 2,042,990 2.10
-- ----------- -----
Total .................................... 20 $15,675,490 16.10%
== =========== =====
</TABLE>
A-4
<PAGE>
CUT-OFF DATE SCHEDULED PRINCIPAL BALANCES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
SCHEDULED PRINCIPAL BALANCE AS OF CUT-OFF DATE LOANS CUT-OFF DATE POOL
- ------------------------------------------------ ----------- ------------------- -----------
<S> <C> <C> <C>
$ 300,000.00 or less .......................... 21 $ 5,124,288 5.26%
$ 300,000.01 -- $ 400,000.00 ................. 26 9,161,521 9.41
$ 400,000.01 -- $ 500,000.00 ................. 26 12,208,785 12.54
$ 500,000.01 -- $ 600,000.00 ................. 19 10,457,941 10.74
$ 600,000.01 -- $ 700,000.00 ................. 15 9,799,406 10.06
$ 700,000.01 -- $ 800,000.00 ................. 7 5,179,000 5.32
$ 800,000.01 -- $ 900,000.00 ................. 7 6,070,000 6.23
$ 900,000.01 -- $1,000,000.00 ................. 10 9,726,000 9.99
$1,000,000.01 -- $1,100,000.00.................. 9 9,755,550 10.02
$1,100,000.01 -- $1,200,000.00.................. 4 4,615,490 4.74
$1,200,000.01 -- $1,300,000.00.................. 2 2,470,000 2.54
$1,300,000.01 -- $1,400,000.00.................. 3 4,100,000 4.21
Greater than $1,400,000.00 ..................... 5 8,710,000 8.94
-- ------------ ------
Total ........................................ 154 $ 97,377,981 100.00%
=== ============ ======
</TABLE>
The average Scheduled Principal Balance is approximately $632,325.
PROPERTY TYPE OF MORTGAGED PROPERTIES
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
PROPERTY TYPE LOANS CUT-OFF DATE POOL
- ----------------------- ----------- ------------------- -----------
Single Family ......... 111 $ 76,777,578 78.84 %
Cooperative ........... 30 12,395,750 12.73
Condominium ........... 12 7,504,653 7.71
Two-Family ............ 1 700,000 0.72
--- ------------ -----
Total ................ 154 $ 97,377,981 100.00 %
=== ============ ======
OCCUPANCY STATUS OF MORTGAGED PROPERTIES
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
OCCUPANCY STATUS LOANS CUT-OFF DATE POOL
- ---------------------- ----------- ------------------- ----------
Primary Home ......... 137 $85,224,383 87.52%
Second Home .......... 17 12,153,597 12.48
--- ----------- ------
Total ............... 154 $97,377,981 100.00%
=== =========== ======
LOAN PURPOSES OF MORTGAGED PROPERTIES
AGGREGATE
NUMBER OF SCHEDULED BALANCE % OF
MORTGAGE OUTSTANDING AS OF MORTGAGE
LOAN PURPOSE LOANS CUT-OFF DATE POOL
- ----------------------------- ----------- ------------------- -----------
Purchase .................... 65 $38,400,563 39.43%
Rate/Term Refinance ......... 43 27,978,951 28.73
Cash Out Refinance .......... 46 30,998,466 31.83
-- ----------- ------
Total ...................... 154 $97,377,981 100.00%
=== =========== ======
A-5
<PAGE>
================================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representations in connection with this offering
other than those contained in this Prospectus Supplement and the accompanying
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by SAMI or the Underwriter. This
Prospectus Supplement and the accompanying Prospectus do not constitute an offer
to sell or a solicitation of an offer to buy any securities other than the
Certificates offered hereby nor an offer of such Certificates to any person in
any state or other jurisdiction in which such offer would be unlawful. The
delivery of this Prospectus Supplement and the accompanying Prospectus at any
time does not imply that information herein is correct as of any time subsequent
to its date.
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and the Prospectus. This is in addition to the obligation of dealers
to deliver a Prospectus Supplement and Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
Prospectus Supplement
Page
-----
Summary of Terms ......................................... S-4
Risk Factors ............................................. S-20
Description of the Mortgage Loans ........................ S-21
The Master Servicer ...................................... S-23
Description of the Certificates .......................... S-27
Yield and Prepayment Considerations ...................... S-37
The Pooling and Servicing Agreement ...................... S-45
Federal Income Tax Considerations ........................ S-53
ERISA Considerations ..................................... S-54
Legal Investment ......................................... S-56
Restrictions on Purchase and Transfer of
the Residual Certificates .............................. S-56
Method of Distribution ................................... S-57
Legal Matters ............................................ S-57
Rating ................................................... S-57
Principal Definitions .................................... S-59
Annex A -- Certain Characteristics of the
Mortgage Loans ......................................... A-1
Prospectus
Prospectus Supplement .................................... 2
Available Information .................................... 2
Incorporation of Certain Documents By Reference .......... 2
Reports to Certificateholders ............................ 3
Summary of Terms ......................................... 4
The Trust Fund ........................................... 16
Use of Proceeds .......................................... 26
The Seller ............................................... 27
Mortgage Loan Program .................................... 27
Description of the Certificates .......................... 30
Credit Enhancement ....................................... 36
Yield and Prepayment Considerations ...................... 42
The Pooling and Servicing Agreement ...................... 45
Certain Legal Aspects of the Mortgage Loans .............. 56
Certain Federal Income Tax Consequences .................. 64
ERISA Considerations ..................................... 82
Legal Investment ......................................... 85
Method of Distribution ................................... 87
Legal Matters ............................................ 87
Financial Information .................................... 87
Rating ................................................... 87
Glossary ................................................. 89
================================================================================
================================================================================
$96,404,000
(Approximate)
Structured Asset
Mortgage Investments
Inc.
Mortgage Pass-Through
Certificates,
Series 1998-7
--------------------------------------------------------------
PROSPECTUS SUPPLEMENT
--------------------------------------------------------------
Bear, Stearns & Co. Inc.
May 22, 1998
================================================================================
<PAGE>
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
STRUCTURED ASSET MORTGAGE INVESTMENTS INC.
SELLER
------------------------------------
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates"), which may be sold from time to time in one or more Series on
terms determined at the time of sale and described in the related Prospectus
Supplement. The Certificates of a Series will evidence beneficial ownership of
one or more trust funds (each a "Trust Fund"). As specified in the related
Prospectus Supplement, a Trust Fund for a Series of Certificates will include
certain mortgage-related assets (the "Mortgage Assets") consisting of (i) first
lien mortgage loans or participations therein secured by one- to four-family
residential properties ("Single Family Loans"), (ii) first lien mortgage loans
or participations therein secured by multifamily residential properties
("Multifamily Loans"), (iii) loans or participations therein secured by security
interests or similar liens on shares in cooperative housing corporations and the
related proprietary leases or occupancy agreements ("Cooperative Loans"), (iv)
conditional sales contracts and installment sales or loan agreements or
participations therein secured by manufactured housing ("Contracts"), (v)
mortgage pass-though securities (the "Agency Securities") issued or guaranteed
by the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") or other government agencies or government-sponsored agencies or (vi)
privately issued mortgage-backed securities ("Private Mortgage-Backed
Securities"). If specified in the related Prospectus Supplement, certain
Certificates will evidence the entire beneficial ownership interest in a Trust
Fund which will contain a beneficial ownership interest in another Trust Fund
which will contain the Mortgage Assets. The Mortgage Assets will be acquired by
Structured Asset Mortgage Investments Inc. (the "Seller") from one or more
institutions which may be affiliates of the Seller (each, a "Lender") and
conveyed by the Seller to the related Trust Fund. A Trust Fund also may include
insurance policies, cash accounts, letters of credit, financial guaranty
insurance policies, third party guarantees or other assets to the extent
described in the related Prospectus Supplement.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more senior classes that receive certain
preferential treatment with respect to one or more other classes of Certificates
of such Series. One or more classes of Certificates of a Series may be entitled
to receive distributions of principal, interest or any combination thereof prior
to one or more other classes of Certificates of such Series or after the
occurrence of specified events or may be required to absorb one or more types of
losses prior to one or more other classes of Certificates, in each case as
specified in the related Prospectus Supplement.
Distributions to holders of Certificates ("Certificateholders") will be
made monthly, quarterly, semi-annually or at such other intervals and on the
dates specified in the related Prospectus Supplement. Distributions on the
Certificates of a Series will be made only
from the assets of the related Trust Fund.
The Certificates will not represent an obligation of or interest in the
Seller or any affiliate thereof and will not be insured or guaranteed by any
governmental agency or instrumentality or by any other person. Unless otherwise
specified in the related Prospectus Supplement, the only obligations of the
Seller with respect to a Series of Certificates will be to obtain certain
representations and warranties from the Lenders or other third parties and to
assign to the trustee (the "Trustee") for the related Series of Certificates the
Seller's rights with respect to such representations and warranties. The
principal obligations of one or more master servicers (each, a "Master
Servicer") named in the Prospectus Supplement with respect to the related Series
of Certificates will be limited to its or their contractual servicing
obligations, including any obligation to advance delinquent payments on the
Mortgage Assets in the related Trust Fund.
The yield on each class of Certificates of a Series will be affected by
the rate of payment of principal (including prepayments) on the Mortgage Assets
in the related Trust Fund and the timing of receipt of such payments as
described herein and in the related Prospectus Supplement. A Trust Fund may be
subject to early termination under the circumstances described herein and in the
related Prospectus Supplement.
<PAGE>
If specified in a Prospectus Supplement, one or more elections may be
made to treat each Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Consequences."
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------------------
Prior to issuance there will have been no market for the Certificates
of any Series and there can be no assurance that a secondary market for any
Certificates will develop. This Prospectus may not be used to consummate sales
of a Series of Certificates unless accompanied by a Prospectus Supplement.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Method of Distribution" herein and in the related Prospectus Supplement. All
Certificates will be distributed by,
or sold by underwriters managed by:
BEAR, STEARNS & CO. INC.
The date of this Prospectus is May 21, 1998.
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Certificates of each Series
to be offered hereunder will, among other things, set forth with respect to such
Certificates, as appropriate: (i) a description of the class or classes of
Certificates; (ii) the rate of interest (the "Pass-Through Rate") or method of
determining the amount of interest, if any, to be passed through to each such
class; (iii) the aggregate principal amount, if any, relating to each such
class; (iv) the distribution dates (each a "Distribution Date") for interest and
principal payments and, if applicable, the initial and final scheduled
Distribution Dates for each class; (v) if applicable, the aggregate original
percentage ownership interest in the Trust Fund to be evidenced by each class of
Certificates; (vi) information as to the nature and extent of subordination with
respect to any class of Certificates that is subordinate to any other class;
(vii) information as to the assets comprising the Trust Fund, including the
general characteristics of the Mortgage Assets included therein and, if
applicable, the amount and source of any reserve fund (a "Reserve Account"), and
the insurance, letters of credit, guarantees, or other instruments or agreements
included in the Trust Fund; (viii) the circumstances, if any, under which the
Trust Fund may be subject to early termination; (ix) additional information with
respect to the plan of distribution of such Certificates; (x) whether one or
more REMIC elections will be made and designation of the regular interests and
residual interests; (xi) information as to the Trustee; and (xii) information as
to the Master Servicer.
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus and the Prospectus
Supplement relating to each Series of Certificates contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement of which
this Prospectus is a part. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement and
exhibits can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street -- Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, 7 World Trade Center -- 13th Floor, New York, New York 10048.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended, with respect to
a series of Certificates subsequent to the date of this Prospectus and the
related Prospectus Supplement and prior to the termination of the offering of
such series of Certificates shall be deemed to be incorporated by reference in
this Prospectus as supplemented by the related Prospectus Supplement. If so
specified in any such documents, such document shall also be deemed to be
incorporated by reference in the Registration Statement of which this Prospectus
forms a part.
Any statement contained herein or in a Prospectus Supplement for a
series of Certificates or in a document incorporated or deemed to be
incorporated by reference herein or therein shall be deemed to be modified
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or superseded for purposes of this Prospectus and such Prospectus Supplement
and, if applicable, the Registration Statement to the extent that a statement
contained herein or therein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein or therein modifies or
supersedes such statement, except to the extent that such subsequently filed
document expressly states otherwise. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or the related Prospectus Supplement or, if
applicable, the Registration Statement.
The Depositor will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and the related Prospectus
Supplement is delivered, on the written or oral request of any such person, a
copy of any and all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the President, 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 CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund will be
provided to the Certificateholders. See "Description of the Certificates --
Reports to Certificateholders."
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SUMMARY OF TERMS
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE RELATED PROSPECTUS
SUPPLEMENT WHICH WILL BE PREPARED IN CONNECTION WITH EACH SERIES OF
CERTIFICATES.
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Title of Securities................................... Mortgage Pass-Through Certificates (Issuable in Series).
Seller................................................ Structured Asset Mortgage Investments, Inc., previously known as Bear
Stearns Mortgage Securities Inc., a Delaware corporation and a
wholly-owned subsidiary of Bear Stearns Mortgage Capital Corporation.
See "The Seller."
Trustee............................................... The Trustee for each Series of Certificates will be
specified in the related Prospectus Supplement.
Master Servicer....................................... One or more entities named as a Master Servicer in the related
Prospectus Supplement, which may be an affiliate of the Seller. See
"The Pooling and Servicing Agreement -- Certain Matters Regarding the
Master Servicer and the Seller."
Trust Fund Assets..................................... A Trust Fund for a Series of Certificates will include the Mortgage
Assets consisting of (i) a pool (a "Mortgage Pool") of Single Family
Loans, Multifamily Loans, Cooperative Loans or Contracts (collectively,
the "Mortgage Loans"), (ii) Agency Securities or (iii) Private
Mortgage-Backed Securities, together with payments in respect of such
Mortgage Assets and certain other accounts, obligations or agreements,
in each case as specified in the related Prospectus Supplement.
A. Single Family, Cooperative
and Multi-family Loans........................... Unless otherwise specified in the related Prospectus Supplement, Single
Family Loans will be secured by first mortgage liens on one- to
four-family residential properties. Unless otherwise specified in the
related Prospectus Supplement, Cooperative Loans will be secured by
security interests in shares issued by private, nonprofit, cooperative
housing corporations ("Cooperatives") and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in such Cooperatives' buildings. Single Family
Loans and Cooperative Loans may be conventional loans (i.e., loans that
are not insured or guaranteed by any governmental agency), insured by
the Federal Housing Authority ("FHA") or partially guaranteed by the
Veterans Administration ("VA") as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus
Supplement, Single Family Loans and Cooperative Loans will all have
individual principal balances at origination of not less than $25,000
and not more than $1,000,000, and original terms to stated maturity of
15 to 40 years.
Multifamily Loans will be secured by first mortgage liens on rental
apartment buildings or projects containing five or more residential
units, including apartment buildings owned by Cooperatives. Such loans
may be conventional loans or insured by the FHA, as specified in the
related
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Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Multifamily Loans will all have individual
principal balances at origination of not less than $25,000 and original
terms to stated maturity of not more than 40 years.
The payment terms of the Mortgage Loans to be included in a Trust Fund
will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an
index, a rate that is fixed for a period of time or under
certain circumstances and is followed by an
adjustable rate, a rate that otherwise varies from
time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination
of such limitations. Accrued interest may be deferred
and added to the principal of a Mortgage Loan for
such periods and under such circumstances as may
be specified in the related Prospectus Supplement.
Mortgage Loans may provide for the payment of
interest at a rate lower than the specified
interest rate on the Mortgage Loan (the "Mortgage Rate") for a
period of time or for the life of the Mortgage
Loan, and the amount of any difference may be
contributed from funds supplied by the seller of the Mortgaged
Property or another source ("Buydown Loans") or
may be treated as accrued interest and added to the
principal of the Mortgage Loan.
(b) Principal may be payable on a level debt service basis to fully
amortize the Mortgage Loan over its term, may be calculated on the
basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate
that is different from the interest rate on the Mortgage Loan or
may not be amortized during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be
due on maturity ("balloon" payments). Principal may include
interest that has been deferred and added to the principal balance
of the Mortgage Loan.
(c) Payments of principal and interest may be fixed for the life of
the Mortgage Loan, may increase over a specified period of time or
may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments.
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(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Mortgage Loan or may decline over
time, and may be prohibited for the life of the Mortgage Loan or
for certain periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other Mortgage
Loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The Mortgage
Loans may include due-on-sale clauses which permit the mortgagee
to demand payment of the entire Mortgage Loan in connection with
the sale or certain transfers of the related Mortgaged Property.
Other Mortgage Loans may be assumable by persons meeting the then
applicable underwriting standards of the Lender.
Certain Mortgage Loans may be originated or acquired in connection with
employee relocation programs. The real property constituting security
for repayment of a Mortgage Loan may be located in any one of the fifty
states or the District of Columbia. Unless otherwise specified in the
related Prospectus Supplement, all of the Mortgage Loans will be
covered by standard hazard insurance policies insuring against losses
due to fire and various other causes. The Mortgage Loans will be
covered by primary mortgage insurance policies to the extent provided
in the related Prospectus Supplement. All Mortgage Loans will have been
purchased by the Seller, either directly or through an affiliate, from
Lenders.
B. Contracts.......................................... Contracts will consist of conditional sales and installment sales or
loan agreements secured by new or used Manufactured Homes (as defined
herein). Contracts may be conventional loans, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus
Supplement, each Contract will be fully amortizing and will bear
interest at a fixed accrual percentage rate ("APR"). Unless otherwise
specified in the related Prospectus Supplement, Contracts will all have
individual principal balances at origination of not less than $10,000
and not more than $1,000,000 and original terms to stated maturity of 5
to 30 years.
C. Agency Securities.................................. The Agency Securities will consist of (i) fully modified pass-through
mortgage-backed certificates guaranteed as to timely payment of
principal and interest by the Government National Mortgage Association
("GNMA Certificates"), (ii) Guaranteed Mortgage Pass-Through
Certificates issued and guaranteed as to timely payment of principal
and interest by the Federal National Mortgage Association ("FNMA
Certificates"), (iii) Mortgage Participation
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Certificates issued and guaranteed as to timely payment of interest
and, unless otherwise specified in the related Prospectus Supplement,
ultimate payment of principal by the Federal Home Loan Mortgage
Corporation ("FHLMC Certificates"), (iv) stripped mortgage-backed
securities representing an undivided interest in all or a part of
either the principal distributions (but not the interest distributions)
or the interest distributions (but not the principal distributions) or
in some specified portion of the principal and interest distributions
(but not all of such distributions) on certain GNMA, FNMA, FHLMC or
other government agency or government-sponsored agency Certificates
and, unless otherwise specified in the Prospectus Supplement,
guaranteed to the same extent as the underlying securities, (v) another
type of guaranteed pass-through certificate issued or guaranteed by
GNMA, FNMA, FHLMC or another government agency or government-sponsored
agency and described in the related Prospectus Supplement, or (vi) a
combination of such Agency Securities. All GNMA Certificates will be
backed by the full faith and credit of the United States. No FNMA or
FHLMC Certificates will be backed, directly or indirectly, by the full
faith and credit of the United States. The Agency Securities may
consist of pass-through securities issued under the GNMA I Program, the
GNMA II Program, FHLMC's Cash or Guarantor Program or another program
specified in the Prospectus Supplement. The payment characteristics of
the Mortgage Loans underlying the Agency Securities will be described
in the related Prospectus Supplement.
D. Private Mortgage-Backed
Securities....................................... Private Mortgage-Backed Securities may include (i) mortgage
participations or pass-through certificates representing beneficial
interests in certain Mortgage Loans or (ii) Collateralized Mortgage
Obligations ("CMOs") secured by such Mortgage Loans. Private Mortgage-
Backed Securities may include stripped mortgage-backed securities
representing an undivided interest in all or a part of any of the
principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not
all of such distributions) on certain mortgage loans. Although
individual Mortgage Loans underlying a Private Mortgage-Backed Security
may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the Private Mortgage-
Backed Securities themselves will not be so insured or guaranteed. See
"The Trust Fund -- Private Mortgage- Backed Securities." Unless
otherwise specified in the Prospectus Supplement relating to a Series
of Certificates, payments on the Private Mortgage-Backed Securities
will be distributed directly to the Trustee as registered owner of such
Private Mortgage-Backed Securities. See "The Trust Fund -- Private
Mortgage-Backed Securities."
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The related Prospectus Supplement for a Series will specify (i) the
aggregate approximate principal amount and type of any Private
Mortgage-Backed Securities to be included in the Trust Fund for such
Series; (ii) certain characteristics of the Mortgage Loans which
comprise the underlying assets for the Private Mortgage-Backed
Securities including to the extent available (A) the payment features
of such Mortgage Loans, (B) the approximate aggregate principal amount,
if known, of the underlying Mortgage Loans which are insured or
guaranteed by a governmental entity, (C) the servicing fee or range of
servicing fees with respect to the Mortgage Loans, and (D) the minimum
and maximum stated maturities of the Mortgage Loans at origination;
(iii) the maximum original term-to-stated maturity of the Private
Mortgage-Backed Securities; (iv) the weighted average term-to-stated
maturity of the Private Mortgage-Backed Securities; (v) the
pass-through or certificate rate or ranges thereof for the Private
Mortgage-Backed Securities; (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities; (vii) the
issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer"),
the servicer of the Private Mortgage-Backed Securities (the "PMBS
Servicer") and the trustee of the Private Mortgage-Backed Securities
(the "PMBS Trustee"); (viii) certain characteristics of credit support,
if any, such as reserve funds, insurance policies, letters of credit,
financial guaranty insurance policies or third party guarantees,
relating to the Mortgage Loans underlying the Private Mortgage-Backed
Securities, or to such Private Mortgage- Backed Securities themselves;
(ix) the terms on which underlying Mortgage Loans for such Private
Mortgage- Backed Securities may, or are required to, be repurchased
prior to stated maturity; and (x) the terms on which substitute
Mortgage Loans may be delivered to replace those initially deposited
with the PMBS Trustee. See "The Trust Fund."
E. Pre-Funding and Capitalized Interest
Accounts......................................... If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a "Pre-Funding
Account") established and maintained with the Trustee for the related
Series. If so specified, on the closing date for such Series, a portion
of the proceeds of the sale of the Certificates of such Series (such
amount, the "Pre-Funded Amount") will be deposited in the Pre-Funding
Account and may be used to purchase additional Primary Assets during
the period of time, not to exceed six months, specified in the related
Prospectus Supplement (the "Pre-Funding Period"). The Primary Assets to
be so purchased will be required to have certain characteristics
specified in the related Prospectus Supplement. If any Pre-Funded
Amount remains on deposit in the Pre-Funding Account at the end of the
Pre- Funding Period, such amount will be applied in the manner
specified in
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the related Prospectus Supplement to prepay the Certificates of the
applicable Series. The amount initially deposited in a pre-funding
account for a Series of Certificates will not exceed fifty percent of
the aggregate principal amount of such Series of Certificates.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established
and maintained with the Trustee for the related Series. On the closing
date for such Series, a portion of the proceeds of the sale of the
Certificates of such Series will be deposited in the Capitalized
Interest Account and used to fund the excess, if any, of (x) the sum of
(i) the amount of interest accrued on the Certificates of such Series
and (ii) if specified in the related Prospectus Supplement, certain
fees or expenses during the Pre-Funding Period such as trustee fees and
credit enhancement fees, over (y) the amount of interest available
therefor from the Primary Assets in the Trust Fund. Any amounts on
deposit in the Capitalized Interest Account at the end of the
Pre-Funding Period that are not necessary for such purposes will be
distributed to the person specified in the related Prospectus
Supplement.
Description of the
Certificates..................................... Each Certificate will represent a beneficial ownership interest in a
Trust Fund created by the Seller pursuant to a Pooling and Servicing
Agreement (each, an "Agreement") among the Seller, the Master
Servicer(s) and the Trustee for the related Series. The Certificates of
any Series may be issued in one or more classes as specified in the
related Prospectus Supplement. A Series of Certificates may include one
or more classes of senior Certificates (collectively, the "Senior
Certificates") which receive certain preferential treatment specified
in the related Prospectus Supplement with respect to one or more
classes of subordinate Certificates (collectively, the "Subordinated
Certificates"). Certain Series or classes of Certificates may be
covered by insurance policies, cash accounts, letters of credit,
financial guaranty insurance policies, third party guarantees or other
forms of credit enhancement as described herein and in the related
Prospectus Supplement.
One or more classes of Certificates of each Series (i) may be entitled
to receive distributions allocable only to principal, only to interest
or to any combination thereof; (ii) may be entitled to receive
distributions only of prepayments of principal throughout the lives of
the Certificates or during specified periods; (iii) may be subordinated
in the right to receive distributions of scheduled payments of
principal, prepayments of principal, interest or any combination
thereof to one or more other classes of Certificates of such Series
throughout the lives of the Certificates or during specified periods or
may be subordinated with respect to certain losses or delinquencies;
(iv) may be entitled to receive such distributions only after
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the occurrence of events specified in the Prospectus Supplement; (v)
may be entitled to receive distributions in accordance with a schedule
or formula or on the basis of collections from designated portions of
the assets in the related Trust Fund; (vi) as to Certificates entitled
to distributions allocable to interest, may be entitled to receive
interest at a fixed rate or a rate that is subject to change from time
to time; and (vii) as to Certificates entitled to distributions
allocable to interest, may be entitled to distributions allocable to
interest only after the occurrence of events specified in the
Prospectus Supplement and may accrue interest until such events occur,
in each case as specified in the Prospectus Supplement. The timing and
amounts of such distributions may vary among classes, over time, or
otherwise as specified in the related Prospectus Supplement.
Distributions on the
Certificates..................................... Distributions on the Certificates entitled thereto will be made
monthly, quarterly, semi-annually or at such other intervals and on
such other Distribution Dates specified in the Prospectus Supplement
solely out of the payments received in respect of the assets of the
related Trust Fund or other assets pledged for the benefit of the
Certificates as specified in the related Prospectus Supplement. The
amount allocable to payments of principal and interest on any
Distribution Date will be determined as specified in the Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement,
all distributions will be made pro rata to Certificateholders of the
class entitled thereto, and the aggregate original principal balance of
the Certificates will equal the aggregate distributions allocable to
principal that such Certificates will be entitled to receive. If
specified in the Prospectus Supplement, the Certificates will have an
aggregate original principal balance equal to the aggregate unpaid
principal balance of the Mortgage Assets as of a date specified in the
related Prospectus Supplement related to the creation of the Trust Fund
(the "Cut-off Date") and will bear interest in the aggregate at a rate
equal to the interest rate borne by the underlying Mortgage Loans,
Agency Securities or Private Mortgage-Backed Securities, net of the
aggregate servicing fees and any other amounts specified in the
Prospectus Supplement. If specified in the Prospectus Supplement, the
aggregate original principal balance of the Certificates and interest
rates on the classes of Certificates will be determined based on the
cash flow on the Mortgage Assets. The Pass-Through Rate at which
interest will be passed through to holders of Certificates entitled
thereto may be a fixed rate or a rate that is subject to change from
time to time from the time and for the periods, in each case as
specified in the Prospectus Supplement. Any such rate may be calculated
on a loan- by-loan, weighted average or other basis, in each case as
described in the Prospectus Supplement.
Credit Enhancement.................................... The assets in a Trust Fund or the Certificates of one or more classes
in the related Series may have the benefit of
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one or more types of credit enhancement described in the related
Prospectus Supplement. The protection against losses afforded by any
such credit support will be limited. Such credit enhancement may
include one or more of the following types:
A. Subordination...................................... The rights of the holders of the Subordinated Certificates of a Series
to receive distributions with respect to the assets in the related
Trust Fund will be subordinated to such rights of the holders of the
Senior Certificates of the same Series to the extent described in the
related Prospectus Supplement. This subordination is intended to
enhance the likelihood of regular receipt by holders of Senior
Certificates of the full amount of payments which such holders would be
entitled to receive if there had been no losses or delinquencies. The
protection afforded to the holders of Senior Certificates of a Series
by means of the subordination feature may be accomplished by (i) the
preferential right of such holders to receive, prior to any
distribution being made in respect of the related Subordinated
Certificates, the amounts of principal and interest due them on each
Distribution Date out of the funds available for distribution on such
date in the related Certificate Account and, to the extent described in
the related Prospectus Supplement, by the right of such holders to
receive future distributions on the assets in the related Trust Fund
that would otherwise have been payable to the Subordinated
Certificateholders; (ii) reducing the ownership interest of the related
Subordinated Certificates; (iii) a combination of clauses (i) and (ii)
above; or (iv) as otherwise described in the related Prospectus
Supplement. The protection afforded to the holders of Senior
Certificates of a Series by means of the subordination feature also may
be accomplished by allocating certain types of losses or delinquencies
to the Subordinated Certificates to the extent described in the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, the same class of
Certificates may be Senior Certificates with respect to certain types
of payments or certain types of losses or delinquencies and
Subordinated Certificates with respect to other types of payments or
types of losses or delinquencies. If so specified in the related
Prospectus Supplement, subordination may apply only in the event of
certain types of losses not covered by other forms of credit support,
such as hazard losses not covered by standard hazard insurance policies
or losses due to the bankruptcy of the borrower. If specified in the
Prospectus Supplement, a reserve fund may be established and maintained
by the deposit therein of distributions allocable to the holders of
Subordinated Certificates until a specified level is reached. The
related Prospectus Supplement will set forth information concerning the
amount of subordination of a class or classes of Subordinated
Certificates in a Series,
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the circumstances in which such subordination will be applicable, the
manner, if any, in which the amount of subordination will decrease over
time, the manner of funding the related reserve fund, if any, and the
conditions under which amounts in any such reserve fund will be used to
make distributions to holders of Senior Certificates or released from
the related Trust Fund.
B. Reserve Accounts................................... One or more Reserve Accounts may be established and maintained for each
Series. The related Prospectus Supplement will specify whether or not
any such Reserve Account will be included in the corpus of the Trust
Fund for such Series and will also specify the manner of funding the
related Reserve Account and the conditions under which the amounts in
any such Reserve Account will be used to make distributions to holders
of Certificates of a particular class or released from the related
Trust Fund.
C. Pool Insurance Policy.............................. A mortgage pool insurance policy or policies (the "Pool Insurance
Policy") may be obtained and maintained for each Series pertaining to
Single Family Loans, Cooperative Loans or Contracts, limited in scope,
covering defaults on the related Single Family Loans, Cooperative Loans
or Contracts in an initial amount equal to a specified percentage of
the aggregate principal balance of all Single Family Loans, Cooperative
Loans or Contracts included in the Mortgage Pool as of the Cut-off Date
or such other date as is specified in the related Prospectus
Supplement.
D. Special Hazard Insurance
Policy........................................... In the case of Single Family Loans, Cooperative Loans or Contracts,
certain physical risks that are not otherwise insured against by
standard hazard insurance policies may be covered by a special hazard
insurance policy or policies (the "Special Hazard Insurance Policy").
Unless otherwise specified in the related Prospectus Supplement, each
Special Hazard Insurance Policy will be limited in scope and will cover
losses in an initial amount equal to the greatest of (i) a specified
percentage of the aggregate principal balance of the Single Family
Loans, Cooperative Loans or Contracts as of the related Cut-off Date,
(ii) twice the unpaid principal balance as of the related Cut-off Date
of the largest Single Family Loan, Cooperative Loan or Contract in the
related Mortgage Pool, or (iii) the aggregate principal balance of
Single Family Loans, Cooperative Loans or Contracts as of the Cut-off
Date secured by property in any single zip code concentration.
E. Bankruptcy Bond.................................... A bankruptcy bond or bonds (the "Bankruptcy Bond") may be obtained
covering certain losses resulting from action which may be taken by a
bankruptcy court in connection with a Single Family Loan, Cooperative
Loan or Contract. The level of coverage of each Bankruptcy Bond will be
specified in the related Prospectus Supplement.
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F. FHA Insurance and VA
Guarantee........................................ All or a portion of the Mortgage Loans in a Mortgage Pool may be
insured by FHA insurance and all or a portion of the Single Family
Loans or Contracts in a Mortgage Pool may be partially guaranteed by
the VA.
G. Other Arrangements................................. Other arrangements as described in the related Prospectus Supplement
including, but not limited to, one or more letters of credit, financial
guaranty insurance policies or third party guarantees, interest rate or
other swap agreements, caps, collars or floors, may be used to provide
coverage for certain risks of defaults or losses. These arrangements
may be in addition to or in substitution for any forms of credit
support described in the Prospectus. Any such arrangement must be
acceptable to each nationally recognized rating agency that rates the
related Series of Certificates (the "Rating Agency").
H. Cross Support...................................... If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets or separate Trust Funds may be evidenced by
separate classes of the related Series of Certificates. In such case,
credit support may be provided by a cross-support feature which
requires that distributions be made with respect to certain
Certificates evidencing beneficial ownership of one or more asset
groups or Trust Funds prior to distributions to other Certificates
evidencing a beneficial ownership interest in other asset groups or
Trust Funds. If specified in the Prospectus Supplement, the coverage
provided by one or more forms of credit support may apply concurrently
to two or more separate Trust Funds, without priority among such Trust
Funds, until the credit support is exhausted. If applicable, the
Prospectus Supplement will identify the asset groups or Trust Funds to
which such credit support relates and the manner of determining the
amount of the coverage provided thereby and of the application of such
coverage to the identified asset groups or Trust Funds.
Advances.............................................. Unless otherwise specified in the related Prospectus Supplement, each
Master Servicer and, if applicable, each mortgage servicing institution
that services a Mortgage Loan in a Mortgage Pool on behalf of a Master
Servicer (a "Sub-Servicer") will be obligated to advance amounts
corresponding to delinquent principal and interest payments on such
Mortgage Loan until the date on which the related Mortgaged Property is
sold at a foreclosure sale or the related Mortgage Loan is otherwise
liquidated. Any such obligation to make advances may be limited to
amounts due holders of Senior Certificates of the related Series, to
amounts deemed to be recoverable from late payments or liquidation
proceeds, for specified periods or any combination thereof, or as
otherwise specified in the related Prospectus Supplement. See
"Description of the Certificates -- Advances." Advances will be
reimbursable to the extent described herein and in the related
Prospectus Supplement.
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Optional Termination.................................. The Master Servicer, the holders of the residual interests in a REMIC,
or any other entity specified in the related Prospectus Supplement may
have the option to effect early retirement of a Series of Certificates
through the purchase of the Mortgage Assets and other assets in the
related Trust Fund under the circumstances and in the manner described
in "The Pooling and Servicing Agreement -- Termination; Optional
Termination."
Legal Investment...................................... Unless otherwise specified in the related Prospectus Supplement, each
class of Certificates offered hereby and by the related Prospectus
Supplement will constitute "mortgage-related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") and,
as such, will be legal investments for certain types of institutional
investors to the extent provided in SMMEA, subject, in any case, to any
other regulations which may govern investments by such institutional
investors. See "Legal Investment."
Institutions whose investment activities are subject to legal
investment laws and regulations or to review by certain regulatory
authorities may be subject to restrictions on investment in the
Certificates. Any such institution should consult its own legal
advisors in determining whether and to what extent there may be
restrictions on its ability to invest in the Certificates. See "Legal
Investment" herein.
Certain Federal Income Tax
Consequences..................................... The federal income tax consequences of the purchase, ownership and
disposition of the Certificates of each series will depend on whether
an election is made to treat the corresponding Trust Fund (or certain
assets of the Trust Fund) as a REMIC under the Internal Revenue Code of
1986, as amended (the "Code").
REMIC. If an election is to be made to treat the Trust Fund for a
series of Certificates as a REMIC for federal income tax purposes, the
related Prospectus Supplement will specify which class or classes
thereof will be designated as regular interests in the REMIC ("REMIC
Regular Certificates") and which class of Certificates will be
designated as the residual interest in the REMIC ("REMIC Residual
Certificates").
For federal income tax purposes, REMIC Regular Certificates generally
will be treated as debt obligations of the Trust Fund with payment
terms equivalent to the terms of such Certificates. Holders of REMIC
Regular Certificates will be required to report income with respect to
such Certificates under an accrual method, regardless of their normal
tax accounting method. Original issue discount, if any, on REMIC
Regular Certificates will be includible in the income of the Holders
thereof as it accrues, in advance of receipt of the cash attributable
thereto, which rate of accrual will be determined based on a reasonable
assumed
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prepayment rate. The REMIC Residual Certificates generally will not be
treated as evidences of indebtedness for federal income tax purposes,
but instead, as representing rights to the taxable income or net loss
of the REMIC.
Each holder of a REMIC Residual Certificate will be required to take
into account separately its pro rata portion of the REMIC's taxable
income or loss. Certain income of a REMIC (referred to as "excess
inclusions") generally may not be offset by such a holder's net
operating loss carryovers or other deductions, and in the case of a
tax-exempt holder of a REMIC Residual Certificate will be treated as
"unrelated business taxable income". In certain situations,
particularly in the early years of a REMIC, holders of a REMIC Residual
Certificate may have taxable income, and possibly tax liabilities with
respect to such income, in excess of cash distributed to them.
"DISQUALIFIED ORGANIZATIONS," AS DEFINED IN "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- REMIC RESIDUAL CERTIFICATES -- TAX ON DISPOSITION OF
REMIC RESIDUAL CERTIFICATES; RESTRICTION ON TRANSFER; HOLDING BY
PASS-THROUGH ENTITIES," ARE PROHIBITED FROM ACQUIRING OR HOLDING ANY
BENEFICIAL INTEREST IN THE REMIC RESIDUAL CERTIFICATES. In certain
cases, a transfer of a REMIC Residual Certificate will not be effective
for Federal income tax purposes. See "Certain Federal Income Tax
Consequences -- Transfers of REMIC Residual Certificates" and " --
Foreign Investors" herein.
GRANTOR TRUST. If no election is to be made to treat the Trust Fund for
a series of Certificates ("Non-REMIC Certificates") as a REMIC, the
Trust Fund will be classified as a grantor trust for federal income tax
purposes and not as an association taxable as a corporation. Holders of
Non-REMIC Certificates will be treated for such purposes, subject to
the possible application of the stripped bond rules, as owners of
undivided interests in the related Mortgage Loans and generally will be
required to report as income their pro rata share of the entire gross
income (including amounts paid as reasonable servicing compensation)
from the Mortgage Loan and will be entitled, subject to certain
limitations, to deduct their pro rata share of expenses of the Trust
Fund.
Investors are advised to consult their tax advisors and to review
"Certain Federal Income Tax Consequences" herein and, if applicable, in
the related Prospectus Supplement.
ERISA Considerations.................................. A fiduciary of any employee benefit plan or other retirement plan or
arrangement subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Code should
carefully review with its legal advisors whether the purchase, holding
or disposition of Certificates could give rise to a prohibited
transaction under ERISA or the Code or subject the assets of the Trust
Fund to the fiduciary investment standards of ERISA. See "ERISA
Considerations."
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THE TRUST FUND
A Trust Fund for a Series of Certificates will include the Mortgage
Assets consisting of (A) a Mortgage Pool* comprised of (i) Single Family Loans,
(ii) Multifamily Loans, (iii) Cooperative Loans or (iv) Contracts, (B) Agency
Securities, or (C) Private Mortgage-Backed Securities, in each case, as
specified in the related Prospectus Supplement, together with payments in
respect of such Mortgage Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will be entitled to payment only from the assets of the related
Trust Fund and will not be entitled to payments in respect of the assets of any
other trust fund established by the Seller. If specified in the related
Prospectus Supplement, certain Certificates will evidence the entire beneficial
ownership interest in a Trust Fund which will contain a beneficial ownership
interest in another Trust Fund which will contain the Mortgage Assets. Unless
otherwise specified in the related Prospectus Supplement, the Mortgage Assets of
any Trust Fund will consist of Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities but not a combination thereof.
The Mortgage Assets will be acquired by the Seller, either directly or
through affiliates, from the Lenders and conveyed by the Seller to the related
Trust Fund. The Lenders may have originated the Mortgage Assets or acquired the
Mortgage Assets from the originators or other entities. See "Mortgage Loan
Program-Underwriting Standards."
The following is a brief description of the Mortgage Assets expected to
be included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time the related Series of Certificates initially is
offered, more general information of the nature described below will be provided
in the Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Certificates (the "Detailed Description"). A copy of
the Agreement with respect to each Series of Certificates will be attached to
the Form 8-K and will be available for inspection at the corporate trust office
of the Trustee specified in the related Prospectus Supplement. A schedule of the
Mortgage Assets relating to such Series will be attached to the Agreement
delivered to the Trustee upon delivery of the Certificates.
THE MORTGAGE LOANS-GENERAL
The real property and Manufactured Homes, as the case may be, which
secure repayment of the Mortgage Loans (the "Mortgaged Properties") may be
located in any one of the fifty states or the District of Columbia, Guam, Puerto
Rico or any other territory of the United States. Certain Mortgage Loans may be
conventional loans (i.e., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the Prospectus Supplement and described below. Mortgage Loans with
certain Loan-to-Value Ratios (as defined herein) and/or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly or bi-weekly. Unless otherwise specified in the related Prospectus
Supplement, all of the monthly-pay Mortgage Loans in a Mortgage Pool will have
payments due on the first day of each month. The payment terms of the Mortgage
Loans to be included in a Trust Fund will be described in the related Prospectus
Supplement and may include any of the following features or combination thereof
or other features described in the related Prospectus Supplement:
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* Whenever the terms "Mortgage Pool" and "Certificates" are used in this
Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Mortgage Pool and the Certificates
representing certain undivided interests, as described below, in a single
Trust Fund consisting primarily of the Mortgage Loans in such Mortgage
Pool. Similarly, the term "Pass-Through Rate" will refer to the
Pass-Through Rate borne by the Certificates of one specific Series and the
term "Trust Fund" will refer to one specific Trust Fund.
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(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for period of time or
under certain circumstances and is followed by an adjustable rate, a rate that
otherwise varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an adjustable rate may be subject to
periodic limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be specified
in the related Prospectus Supplement. Mortgage Loans may provide for the payment
of interest at a rate lower than the Mortgage Rate for a period of time or for
the life of the Mortgage Loan, and the amount of any difference may be
contributed from funds supplied by the seller of the Mortgaged Property or
another source or may be treated as accrued interest added to the principal of
the Mortgage Loan.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate that
is different from the interest rate on the Mortgage Loan or may not be
amortized during all or a portion of the original term. Payment of all
or a substantial portion of the principal may be due on maturity
("balloon" payments). Principal may include interest that has been
deferred and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time or may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments. Certain Mortgage Loans sometimes called graduated payment
mortgage loans may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred
payment of a portion of the interest due monthly during such period,
and recoup the deferred interest through negative amortization whereby
the difference between the scheduled payment of interest and the amount
of interest actually accrued is added monthly to the outstanding
principal balance. Other Mortgage Loans sometimes referred to as
growing equity mortgage loans may provide for periodic scheduled
payment increases for a specified period with the full amount of such
increases being applied to principal. Other Mortgage Loans sometimes
referred to as reverse mortgages may provide for monthly payments to
the borrowers with interest and principal payable when the borrowers
move or die. Reverse mortgages typically are made to older persons who
have substantial equity in their homes.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include
due-on-sale clauses which permit the mortgagee to demand payment of the
entire Mortgage Loan in connection with the sale or certain transfers
of the related Mortgaged Property. Other Mortgage Loans may be
assumable by persons meeting the then applicable underwriting standards
of the Lender.
Each Prospectus Supplement will contain information, as of the date of
such Prospectus Supplement and to the extent then specifically known to the
Seller, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Mortgage Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Mortgage Loans (e.g., one- to
four-family houses, vacation and second homes, Manufactured Homes, multifamily
apartments or other real property), (iii) the original terms to maturity of the
Mortgage Loans, (iv) the largest original principal balance and the smallest
original principal balance of any of the Mortgage Loans, (v) the earliest
origination date and latest maturity date of any of the Mortgage Loans, (vi) the
aggregate principal balance of Mortgage Loans having Loan-to-Value Ratios at
origination exceeding 80%, (vii) the Mortgage Rates or APR's or range of
Mortgage Rates or APR's borne by the Mortgage Loans, and (viii) the geographical
distribution of the Mortgage Loans on a state-by-state basis. If specific
information respecting the Mortgage Loans is not known to the Seller at the time
the related Certificates are initially offered, more general information of the
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nature described above will be provided in the Prospectus Supplement and
specific information will be set forth in the Detailed Description.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio, expressed as a percentage, of the then outstanding principal balance of
the Mortgage Loan to the Collateral Value of the related Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, the "Collateral
Value" of a Mortgaged Property, other than with respect to Contracts and certain
Mortgage Loans the proceeds of which were used to refinance an existing mortgage
loan (each, a "Refinance Loan"), is the lesser of (a) the appraised value
determined in an appraisal obtained by the originator at origination of such
Mortgage Loan and (b) the sales price for such property. Unless otherwise
specified in the related Prospectus Supplement, in the case of Refinance Loans,
the Collateral Value of the related Mortgaged Property is the appraised value
thereof determined in an appraisal obtained at the time of refinancing. Unless
otherwise specified in the related Prospectus Supplement, for purposes of
calculating the Loan-to-Value Ratio of a Contract relating to a new Manufactured
Home, the Collateral Value is no greater than the sum of a fixed percentage of
the list price of the unit actually billed by the manufacturer to the dealer
(exclusive of freight to the dealer site) including "accessories" identified in
the invoice (the "Manufacturer's Invoice Price"), plus the actual cost of any
accessories purchased from the dealer, a delivery and set-up allowance,
depending on the size of the unit, and the cost of state and local taxes, filing
fees and up to three years prepaid hazard insurance premiums. Unless otherwise
specified in the related Prospectus Supplement, the Collateral Value of a used
Manufactured Home is the least of the sales price, appraised value, and National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home is based upon the
age and condition of the manufactured housing unit and the quality and condition
of the mobile home park in which it is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Pool. In the case of
Multifamily Loans, such other factors could include excessive building resulting
in an oversupply of rental housing stock or a decrease in employment reducing
the demand for rental units in an area; federal, state or local regulations and
controls affecting rents; prices of goods and energy; environmental
restrictions; increasing labor and material costs; and the relative
attractiveness to tenants of the Mortgaged Properties. To the extent that such
losses are not covered by credit enhancements, such losses will be borne, at
least in part, by the holders of the Certificates of the related Series.
The Seller will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Certificates of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "Mortgage Loan Program"
and "The Pooling and Servicing Agreement." With respect to Mortgage Loans
serviced by a Master Servicer through a Sub- Servicer, the Master Servicer will
remain liable for its servicing obligations under the related Agreement as if
the Master Servicer alone were servicing such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the
only obligations of the Seller with respect to a Series of Certificates will be
to obtain certain representations and warranties from the Lenders or other third
parties and to assign to the Trustee for such Series of Certificates the
Seller's rights with respect to such representations and warranties. See "The
Pooling and Servicing Agreement-Assignment of Mortgage Assets." The obligations
of each Master Servicer with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related Agreement
(including its obligation to enforce the obligations of the Sub-Servicers,
Lenders or other third parties as more fully described herein under "Mortgage
Loan Program-Representations by Lenders; Repurchases" and "The Pooling and
Servicing Agreement-Sub-Servicing by Lenders," "-Assignment of Mortgage Assets")
and its obligation to make certain cash advances in the event
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of delinquencies in payments on or with respect to the Mortgage Loans in the
amounts described herein under "Description of the Certificates-Advances." The
obligations of a Master Servicer to make advances may be subject to limitations,
to the extent provided herein and in the related Prospectus Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
Unless otherwise specified in the Prospectus Supplement, Single Family
Loans will consist of mortgage loans, deeds of trust or participation or other
beneficial interests therein, secured by first liens on one- to four-family
residential properties. If so specified, the Single Family Loans may include
loans or participations therein secured by mortgages or deeds of trust on
condominium units in condominium buildings together with such condominium unit's
appurtenant interest in the common elements of the condominium building. Unless
otherwise specified, the Cooperative Loans will be secured by security interests
in or similar liens on stock, shares or membership certificates issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in such
Cooperatives' buildings. Single Family Loans and Cooperative Loans may be
conventional loans (i.e., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, Single Family Loans and Cooperative Loans
will all have individual principal balances at origination of not less than
$25,000 and not more than $1,000,000, and original terms to stated maturity of
15 to 40 years.
The Mortgaged Properties relating to Single Family Loans will consist
of detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, and certain other dwelling units. Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold will exceed the scheduled maturity of the Mortgage Loan by at
least five years, unless otherwise specified in the related Prospectus
Supplement. Certain Mortgage Loans may be originated or acquired in connection
with employee relocation programs.
MULTIFAMILY LOANS
Multifamily Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first liens on
rental apartment buildings or projects containing five or more residential
units. Such loans may be conventional loans or FHA-insured loans, as specified
in the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Multifamily Loans will all have original terms to stated
maturity of not more than 40 years.
Mortgaged Properties which secure Multifamily Loans may include
high-rise, mid-rise and garden apartments. Certain of the Multifamily Loans may
be secured by apartment buildings owned by Cooperatives. The Cooperative owns
all the apartment units in the building and all common areas. The Cooperative is
owned by tenant-stockholders who, through ownership of stock, shares or
membership certificates in the corporation, receive proprietary leases or
occupancy agreements which confer exclusive rights to occupy specific apartments
or units. Generally, a tenant- stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its mortgage loan, real property taxes,
maintenance expenses and other capital or ordinary expenses. Those payments are
in addition to any payments of principal and interest the tenant- stockholder
must make on any loans to the tenant-stockholder secured by its shares in the
Cooperative. The Cooperative will be directly responsible for building
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. A Cooperative's ability to meet debt service obligations on
a Multifamily Loan, as well as all other operating expenses, will be dependent
in large part on the receipt of maintenance payments from the tenant-
stockholders, as well as any rental income from units or commercial areas the
Cooperative might control. Unanticipated expenditures may in some cases have to
be paid by special assessments on the tenant-stockholders.
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CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Contract will be fully amortizing and will bear interest at its APR. Unless
otherwise specified in the related Prospectus Supplement, Contracts will all
have individual principal balances at origination of not less than $10,000 and
not more than $1,000,000 and original terms to stated maturity of 5 to 40 years.
Unless otherwise specified in the related Prospectus Supplement, the
"Manufactured Homes" securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning, and
electrical systems contained therein; except that such term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust Fund, among other things, the date of origination
of the Contracts; the APRs on the Contracts; the Contract Loan-to- Value Ratios;
the minimum and maximum outstanding principal balances as of the Cut-off Date
and the average outstanding principal balance; the outstanding principal
balances of the Contracts included in the related Trust Fund; and the original
maturities of the Contracts and the last maturity date of any Contract.
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GNMA is a wholly-owned
corporate instrumentality of the United States with the United States Department
of Housing and Urban Development. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgage loans insured by FHA under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or Chapter 37 of Title 38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury in an amount which is at
any time sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
GNMA CERTIFICATES. Each GNMA Certificate held in a Trust Fund (which
may be issued under either the GNMA I Program or the GNMA II Program) will be a
"fully modified pass-through" mortgaged-backed certificate issued and serviced
by a mortgage banking company or other financial concern ("GNMA Issuer")
approved by GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or VA
Loans. The mortgage loans underlying the GNMA Certificates will consist of FHA
Loans and/or VA Loans. Each such mortgage loan is secured by a one- to
four-family residential property or a manufactured home. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate,
even if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each such
GNMA Certificate.
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The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties or manufactured homes and will provide for the payment by
or on behalf of the GNMA Issuer to the registered holder of such GNMA
Certificate of scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loan or VA Loan
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate
as it becomes due, it must promptly notify GNMA and request GNMA to make such
payment. Upon notification and request, GNMA will make such payments directly to
the registered holder of such GNMA Certificate. In the event no payment is made
by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make
such payment, the holder of such GNMA Certificate will have recourse only
against GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must have
the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on such GNMA I
Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans
secured by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or Buydown Loans. No statistics comparable
to the FHA's
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prepayment experience on level payment, non-buydown loans are available in
respect of graduated payment or buydown mortgages. GNMA Certificates related to
a Series of Certificates may be held in book-entry form.
If specified in a Prospectus Supplement, GNMA Certificates may be
backed by multifamily mortgage loans having the characteristics specified in
such Prospectus Supplement.
The GNMA Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act (the "Charter Act"). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA CERTIFICATES. FNMA Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by FNMA. Each mortgage loan must meet the applicable
standards of the FNMA purchase program. Mortgage loans comprising a pool are
either provided by FNMA from its own portfolio or purchased pursuant to the
criteria of the FNMA purchase program.
Mortgage loans underlying FNMA Certificates held by a Trust Fund will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Under a
regular servicing option (pursuant to which the mortgagee or other servicers
assumes the entire risk of foreclosure losses), the annual interest rates on the
mortgage loans underlying a FNMA Certificate will be between 50 basis points and
250 basis points greater than in its annual pass-through rate and under a
special servicing option (pursuant to which FNMA assumes the entire risk for
foreclosure losses), the annual interest rates on the mortgage loans underlying
a FNMA Certificate will generally be between 55 basis points and 255 basis
points greater than the annual FNMA Certificate pass-through rate. If specified
in the Prospectus Supplement, FNMA Certificates may be backed by adjustable rate
mortgages.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's operations or to assist
FNMA in any other manner. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA Certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than FNMA Certificates backed by pools
containing graduated payment mortgage loans or mortgage loans
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secured by multifamily projects) are available in book-entry form only.
Distributions of principal and interest on each FNMA Certificate will be made by
FNMA on the 25th day of each month to the persons in whose name the FNMA
Certificate is entered in the books of the Federal Reserve Banks (or registered
on the FNMA Certificate register in the case of fully registered FNMA
Certificates) as of the close of business on the last day of the preceding
month. With respect to FNMA Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
FNMA Certificates, distributions thereon will be made by check.
The FNMA Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION. FHLMC is a publicly held United
States government-sponsored enterprise created pursuant to the Federal Home Loan
Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). The common stock of FHLMC is owned by the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of first lien conventional mortgage loans or
participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily FHLMC Certificates. FHLMC is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality, type and class
as to meet generally the purchase standards imposed by private institutional
mortgage investors.
FHLMC CERTIFICATES. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC Certificate group"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be
issued under either FHLMC's Cash Program or Guarantor Program.
Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 30 years. Each such
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate group. Under the Guarantor Program, any
such FHLMC Certificate group may include only whole loans or participation
interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Certificate rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
FHLMC Certificate group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the Prospectus
Supplement for a Series of Certificates, guarantee the timely payment of
scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the timely
payment of principal based on the difference between the pool factor, published
in the month preceding the month of distribution and the pool factor published
in such month of distribution. Pursuant to its guarantees, FHLMC indemnifies
holders of FHLMC Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. FHLMC may remit the
amount due on account of its guarantee of collection of principal at any time
after default on an underlying mortgage loan, but not later than (i) 30 days
following foreclosure sale, (ii) 30 days following payment of the claim by any
mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time
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necessary for FHLMC to determine that a mortgage loan should be accelerated
varies with the particular circumstances of each mortgagor, and FHLMC has not
adopted standards which require that the demand be made within any specified
period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial repayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the seller thereof. FHLMC is required to remit each
registered FHLMC Certificateholder's pro rata share of principal payments on the
underlying mortgage loans, interest at the FHLMC pass-through rate and any other
sums such as prepayment fees, within 60 days of the date on which such payments
are deemed to have been received by FHLMC.
Under FHLMC's Cash Program, interest rates on the mortgage loans
underlying a FHLMC Certificate may exceed the pass-through rate on the FHLMC
Certificate by 50 to 100 basis points. Under such program, FHLMC purchases
groups of whole mortgage loans from sellers at specified percentages of their
unpaid principal balances, adjusted for accrued or prepaid interest, which when
applied to the interest rate of the mortgage loans and participations purchased,
results in the yield (expressed as a percentage) required by FHLMC. The required
yield, which includes a minimum servicing fee retained by the servicer, is
calculated using the outstanding principal balance. The range of interest rates
on the mortgage loans and participations in a FHLMC Certificate group under the
Cash Program will vary since mortgage loans and participations are purchased and
assigned to a FHLMC Certificate group based upon their yield to FHLMC rather
than on the interest rate on the underlying mortgage loans. Under FHLMC's
Guarantor Program, the pass-through rate on a FHLMC Certificate is established
based upon the lowest interest rate on the underlying mortgage loans, minus a
minimum servicing fee and the amount of FHLMC's management and guaranty income
as agreed upon between the seller and FHLMC.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of
one or more stripped mortgage-backed securities, each as described herein and in
the related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA, GNMA
or other government agency or government- sponsored agency Certificates. The
underlying securities will be held under a trust agreement by FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency, each as trustee, or
by another trustee named in the related Prospectus Supplement. FHLMC, FNMA, GNMA
or another government agency or government- sponsored agency will guarantee each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
OTHER AGENCY SECURITIES. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA, FHLMC or other government
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agencies or government-sponsored agencies. The characteristics of any such
mortgage pass-through certificates will be described in such Prospectus
Supplement. If so specified, a combination of different types of Agency
Securities may be held in a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates evidencing an undivided interest in a pool of Mortgage
Loans, or (b) collateralized mortgage obligations secured by Mortgage Loans.
Private Mortgage-Backed Securities will have been issued pursuant to a PMBS
agreement (the "PMBS Agreement"). The seller/servicer of the underlying Mortgage
Loans will have entered into the PMBS Agreement with the PMBS Trustee under the
PMBS Agreement. The PMBS Trustee or its agent, or a custodian, will possess the
Mortgage Loans underlying such Private Mortgage-Backed Security. Mortgage Loans
underlying a Private Mortgage- Backed Security will be serviced by the PMBS
Servicer directly or by one or more sub-servicers who may be subject to the
supervision of the PMBS Servicer. Unless otherwise described in the Prospectus
Supplement, the PMBS Servicer will be a FNMA or FHLMC approved servicer and, if
FHA Loans underlie the Private Mortgage-Backed Securities, approved by the
Department of Housing and Urban Development ("HUD") as an FHA mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate of
the Seller. The obligations of the PMBS Issuer will generally be limited to
certain representations and warranties with respect to the assets conveyed by it
to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the Mortgage Loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will he made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
UNDERLYING LOANS. The Mortgage Loans underlying the Private
Mortgage-Backed Securities may consist of fixed rate, level payment, fully
amortizing loans or graduated payment mortgage loans, buydown loans, adjustable
rate mortgage loans, or loans having balloon or other special payment features.
Such Mortgage Loans may be secured by single family property, multifamily
property, Manufactured Homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a Cooperative and the
related shares issued by such Cooperative. Except as otherwise specified in the
related Prospectus Supplement, (i) no Mortgage Loan will have had a
Loan-to-Value Ratio at origination in excess of 95%, (ii) each Single Family
Loan secured by a Mortgaged Property having a Loan-to-Value Ratio in excess of
80% at origination will be covered by a primary mortgage insurance policy until
the principal balance is reduced to 80%, (iii) each Mortgage Loan will have had
an original term to stated maturity of not less than 5 years and not more than
40 years, (iv) no Mortgage Loan that was more than 30 days delinquent more than
once in the past 12 months and will not be delinquent as of the Cut-off Date as
to the payment of principal or interest will have been eligible for inclusion in
the assets under the related PMBS Agreement, (v) each Mortgage Loan (other than
a Cooperative Loan) will be required to be covered by a standard hazard
insurance policy (which may be a blanket policy), and (vi) each Mortgage Loan
(other than a Cooperative Loan or a Contract secured by a Manufactured Home)
will be covered by a title insurance policy.
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CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Mortgage Loans underlying the
Private Mortgage-Backed Securities or with respect to the Private Mortgage-
Backed Securities themselves.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Mortgage-Backed Securities will specify
(i) the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the Mortgage Loans which comprise the underlying assets for
the Private Mortgage-Backed Securities including to the extent available (A) the
payment features of such Mortgage Loans, (B) the approximate aggregate principal
balance, if known, of underlying Mortgage Loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Mortgage Loans, and (D) the minimum and maximum stated maturities
of the underlying Mortgage Loans at origination, (iii) the maximum original
term-to-stated maturity of the Private Mortgage-Backed Securities, (iv) the
weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the Mortgage Loans underlying the Private
Mortgage-Backed Securities or to such Private Mortgage-Backed Securities
themselves, (ix) the terms on which the underlying Mortgage Loans for such
Private Mortgage-Backed Securities may, or are required to, be purchased prior
to their stated maturity or the stated maturity of the Private Mortgage-Backed
Securities and (x) the terms on which Mortgage Loans may be substituted for
those originally underlying the Private Mortgage-Backed Securities.
SUBSTITUTION OF MORTGAGE ASSETS
If so provided in the related Prospectus Supplement, substitution of
Mortgage Assets will be permitted in the event of breaches of representations
and warranties with respect to any original Mortgage Asset or in the event the
documentation with respect to any Mortgage Asset is determined by the Trustee to
be incomplete. The period during which such substitution will be permitted
generally will be indicated in the related Prospectus Supplement. The related
Prospectus Supplement will describe any other conditions upon which Mortgage
Assets may be substituted for Mortgage Assets initially included in the Trust
Fund.
USE OF PROCEEDS
The Seller intends to use the net proceeds to be received from the sale
of the Certificates of each Series to repay short-term loans incurred to finance
the purchase of the Mortgage Assets related to such Certificates, to acquire
certain of the Mortgage Assets to be deposited in the related trust Fund, and/or
to pay other expenses connected with pooling Mortgage Assets and issuing
Certificates. Any amounts remaining after such payments may be used for general
corporate purposes. The Seller expects to sell Certificates in Series from time
to time.
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THE SELLER
Structured Asset Mortgage Investments, Inc., the Seller, is a Delaware
corporation organized on October 17, 1991 for the purpose of acquiring Mortgage
Assets and selling interests therein or bonds secured thereby. It is a wholly
owned subsidiary of Bear Stearns Mortgage Capital Corporation, a Delaware
corporation, and an affiliate of Bear, Stearns & Co. Inc. On May 1, 1998, the
Seller changed its name from Bear Stearns Mortgage Securities Inc. The Seller
maintains its principal office at 245 Park Avenue, New York, New York 10167. Its
telephone number is (212) 272-2000.
The Seller does not have, nor is it expected in the future to have, any
significant assets.
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Seller, either
directly or through affiliates, from Lenders. Unless otherwise specified in the
related Prospectus Supplement, the Mortgage Loans so acquired by the Seller will
have been originated in accordance with the underwriting criteria specified
below under "Underwriting Standards."
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will represent and warrant that all Mortgage Loans originated and/or sold
by it to the Seller or one of its affiliates will have been underwritten in
accordance with standards consistent with those utilized by mortgage lenders or
manufactured home lenders generally during the period of origination. As to any
Mortgage Loan insured by the FHA or partially guaranteed by the VA, the Lender
will represent that it has complied with underwriting policies of the FHA or the
VA, as the case may be.
Underwriting standards are applied by or on behalf of a Lender to
evaluate the borrower's credit standing and repayment ability, and the value and
adequacy of the Mortgaged Property as collateral. In general, a prospective
borrower applying for a Single Family Loan or a Cooperative Loan or for
financing secured by a Manufactured Home is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report which summarizes the borrower's credit history with
local merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained from an independent source (typically the
borrower's employer) which verification reports the length of employment with
that organization, the current salary, and whether it is expected that the
borrower will continue such employment in the future. If a prospective borrower
is self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
Underwriting standards which pertain to the creditworthiness of borrowers
seeking Multifamily Loans will be described in the related Prospectus
Supplement.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. With respect to Single Family
Loans, the appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. With respect to Cooperative Loans, the appraisal is based
on the market value of comparable units. With respect to Contracts, the
appraisal is based on recent sales of comparable Manufactured Homes and, when
deemed applicable, a replacement cost analysis based on the cost of a comparable
Manufactured Home. With respect to a Multifamily Loan, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis, was
used. An appraisal employing the income approach to value analyzes a multifamily
project's cashflow, expenses, capitalization and other operational information
in determining the property's value. The market approach to value focuses its
analysis on the prices paid for the purchase of similar properties in the
multifamily project's area, with adjustments made for variations between these
other properties and the multifamily project being appraised. The cost approach
calls for the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued
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depreciation. In any case, the value of the property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance.
In the case of Single Family Loans, Cooperative Loans and Contracts,
once all applicable employment, credit and property information is received, a
determination generally is made as to whether the prospective borrower has
sufficient monthly income available (i) to meet the borrower's monthly
obligations on the proposed mortgage loan (determined on the basis of the
monthly payments due in the year of origination) and other expenses related to
the Mortgaged Property (such as property taxes and hazard insurance) and (ii) to
meet monthly housing expenses and other financial obligations and monthly living
expenses. The underwriting standards applied by Lenders may be varied in
appropriate cases where factors such as low Loan-to-Value Ratios or other
favorable credit factors exist.
A Lender may originate Mortgage Loans under a reduced documentation
program. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the Lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain credit underwriting documentation concerning income and employment
verification is waived.
In the case of a Single Family or Multifamily Loan secured by a
leasehold interest in a real property, the title to which is held by a third
party lessor, the Lender will represent and warrant, among other things, that
the remaining term of the lease and any sublease is at least five years longer
than the remaining term of the Mortgage Loan.
Certain of the types of Mortgage Loans which may be included in the
Mortgage Pools are recently developed and may involve additional uncertainties
not present in traditional types of loans. For example, certain of such Mortgage
Loans may provide for escalating or variable payments by the mortgagor or
obligor. These types of Mortgage Loans are underwritten on the basis of a
judgment that mortgagors or obligors will have the ability to make monthly
payments required initially. In some instances, however, a mortgagor's or
obligor's income may not be sufficient to permit continued loan payments as such
payments increase.
QUALIFICATIONS OF LENDERS
Unless otherwise specified in the related Prospectus Supplement, each
Lender will be required to satisfy the qualifications set forth herein. Each
Lender must be an institution experienced in originating and servicing Mortgage
Loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those Mortgage Loans. Unless otherwise
specified in the Prospectus Supplement, each Lender must be a seller/servicer
approved by either FNMA or FHLMC, and each Lender must be a mortgagee approved
by the HUD or an institution the deposit accounts in which are insured by the
Federal Deposit Insurance Corporation (the "FDIC").
REPRESENTATIONS BY LENDERS; REPURCHASES
Unless otherwise specified in the related Prospectus Supplement or
Agreement, each Lender will have made representations and warranties in respect
of the Mortgage Loans sold by such Lender and evidenced by a Series of
Certificates. Such representations and warranties generally include, among other
things: (i) that title insurance (or in the case of Mortgaged Properties located
in areas where such policies are generally not available, an attorney's
certificate of title) in the case of Single Family Loans and Multifamily Loans
and any required hazard insurance policy was in effect on the date of purchase
of the Mortgage Loan from the Lender by or on behalf of the Seller; (ii) that
the Lender had title to each such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims; (iii) that each Mortgage Loan
constituted a valid first lien on, or a perfected security interest with respect
to, the Mortgaged Property (subject only to permissible title insurance
exceptions, if applicable, and certain other exceptions described in the
Agreement) and that the Mortgaged Property was free from damage and was in good
repair; (iv) that there were no delinquent tax or assessment liens against the
Mortgaged Property, (v) that no required payment on a Mortgage Loan was more
than thirty days delinquent; and (vi) that each Mortgage Loan was made in
compliance with, and is enforceable under, all applicable state and federal laws
and regulations in all material respects.
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Unless otherwise specified in the related Prospectus Supplement, all of
the representations and warranties of a Lender in respect of a Mortgage Loan
will have been made as of the date on which such Lender sold the Mortgage Loan
to the Seller or one of its affiliates. A substantial period of time may have
elapsed between such date and the date of initial issuance of the Series of
Certificates evidencing an interest in such Mortgage Loan. Since the
representations and warranties of a Lender do not address events that may occur
following the sale of a Mortgage Loan by such Lender, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a Mortgage Loan occurs after
the date of sale of such Mortgage Loan by such Lender to the Seller or its
affiliates. If the Master Servicer is also a Lender with respect to a particular
Series, such representations will be in addition to the representations and
warranties, if any, made by the Master Servicer in its capacity as a Master
Servicer.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer or the Trustee, if the Master Servicer is the Lender, will
promptly notify the relevant Lender of any breach of any representation or
warranty made by it in respect of a Mortgage Loan which materially and adversely
affects the interests of the Certificateholders in such Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, if such Lender cannot
cure such breach within 60 days after notice from the Master Servicer or the
Trustee, as the case may be, then such Lender will be obligated to repurchase
such Mortgage Loan from the Trust Fund at a price (the "Purchase Price") equal
to the unpaid principal balance thereof as of the date of the repurchase plus
accrued interest thereon to the first day of the month following the month of
repurchase at the Mortgage Rate (less any amount payable as related servicing
compensation if the Lender is the Master Servicer) or such other price as may be
described in the related Prospectus Supplement. Except in those cases in which
the Master Servicer is the Lender, the Master Servicer will be required under
the applicable Agreement to enforce this obligation for the benefit of the
Trustee and the holders of the Certificates, following the practices it would
employ in its good faith business judgment were it the owner of such Mortgage
Loan. This repurchase obligation will constitute the sole remedy available to
holders of Certificates or the Trustee for a breach of representation by a
Lender. Certain rights of substitution for defective Mortgage Loans may be
provided with respect to a Series in the related Prospectus Supplement.
Neither the Seller nor the Master Servicer (unless the Master Servicer
is the Lender) will be obligated to purchase a Mortgage Loan if a Lender
defaults on its obligation to do so, and no assurance can be given that Lenders
will carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty of
a Lender may also constitute a breach of a representation made by the Master
Servicer, the Master Servicer may have a repurchase obligation as described
below under "The Pooling and Servicing Agreement -- Assignment of Mortgage
Assets."
If specified in the related Prospectus Supplement, the Lender may have
acquired the Mortgage Loans from a third party which made certain
representations and warranties to the Lender as of the time of the sale to the
Lender. In lieu of representations and warranties made by the Lender as of the
time of the sale to the Seller, the Lender may assign the representations and
warranties from the third party to the Seller, which will assign them to the
Trustee on behalf of the Certificateholders. In such cases, the third party will
be obligated to purchase a Mortgage Loan upon a breach of such representations
and warranties, and the Lender will not be obligated to purchase a Mortgage Loan
if the third party defaults on its obligation to do so.
The Lender and any third party which conveyed the Mortgage Loans to the
Lender may experience financial difficulties and in some instances may enter
into insolvency proceedings. As a consequence, the Lender or such third party
may be unable to perform its repurchase obligations with respect to the Mortgage
Loans. Any arrangements for the assignment of representations and the repurchase
of Mortgage Loans must be acceptable to the Rating Agency rating the related
Certificates.
OPTIONAL PURCHASE OF DEFAULTED LOANS
If specified in the related Prospectus Supplement, the Master Servicer
may, at its option, purchase from the Trust Fund any Mortgage Loan which is
delinquent in payment by 91 days or more. Any such purchase shall be at such
price as may be described in the related Prospectus Supplement.
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DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement,
dated as of the related Cut-off Date, among the Seller, one or more Master
Servicers and the Trustee for the benefit of the holders of the Certificates of
such Series. The provisions of each Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the related
Trust Fund. A form of an Agreement is an exhibit to the Registration Statement
of which this Prospectus is a part. The following summaries describe certain
provisions which may appear in each Agreement. The Prospectus Supplement for a
Series of Certificates will describe any provision of the Agreement relating to
such Series that materially differs from the description thereof contained in
this Prospectus. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Agreement for each Series of Certificates and the applicable Prospectus
Supplement. The Seller will provide a copy of the Agreement (without exhibits)
relating to any Series without charge upon written request of a holder of a
Certificate of such Series addressed to Structured Asset Mortgage Investments
Inc., 245 Park Avenue, New York, New York 10167.
GENERAL
Unless otherwise specified in the Prospectus Supplement, the
Certificates of each Series will be issued in fully registered form only, in the
denominations specified in the related Prospectus Supplement, will evidence
specified beneficial ownership interests in the related Trust Fund created
pursuant to each Agreement and will not be entitled to payments in respect of
the Mortgage Assets included in any other Trust Fund established by the Seller.
The Certificates will not represent obligations of the Seller or any affiliate
of the Seller. The Mortgage Loans will not be insured or guaranteed by any
governmental entity or other person, unless otherwise specified in the
Prospectus Supplement. Each Trust Fund will consist of, to the extent provided
in the Agreement, (i) the Mortgage Assets, as from time to time are subject to
the related Agreement (exclusive of any amounts specified in the Prospectus
Supplement ("Retained Interest"), (ii) such assets as from time to time are
required to be deposited in the related Protected Account, Certificate Account
or any other accounts established pursuant to the Agreement (collectively, the
"Accounts"); (iii) property which secured a Mortgage Loan and which is acquired
on behalf of the Certificateholders by foreclosure or deed in lieu of
foreclosure and (iv) any Primary Insurance Policies, FHA insurance (the "FHA
Insurance"), VA guarantees (the "VA Guarantees"), other insurance policies or
other forms of credit enhancement required to be maintained pursuant to the
Agreement. If so specified in the related Prospectus Supplement, a Trust Fund
may include one or more of the following: reinvestment income on payments
received on the Mortgage Assets, a reserve fund, a mortgage pool insurance
policy, a special hazard insurance policy, a bankruptcy bond, one or more
letters of credit, a financial guaranty insurance policy, third party guarantees
or similar instruments or other agreements. If provided in the related
Agreement, a certificate administrator may be obligated to perform certain
duties in connection with the administration of the Certificates.
Each Series of Certificates will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the Mortgage Assets in the related Trust Fund. A Series of
Certificates may include one or more classes that receive certain preferential
treatment with respect to one or more other classes of Certificates of such
Series. Certain Series or classes of Certificates may he covered by insurance
policies or other forms of credit enhancement, in each case as described herein
and in the related Prospectus Supplement. Distributions on one or more classes
of a Series of Certificates may be made prior to one or more other classes,
after the occurrence of specified events, in accordance with a schedule or
formula, on the basis of collections from designated portions of the Mortgage
Assets in the related Trust Fund or on a different basis, in each case, as
specified in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes or over time as specified in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions of principal and interest (or, where applicable, of principal only
or interest only) on the related Certificates will be made by the Trustee on
each Distribution Date (i.e, monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the Prospectus Supplement) in
proportion to the percentages specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Certificates are
registered at the close
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of business on the dates specified in the Prospectus Supplement (each, a "Record
Date"). Distributions will be made by check or money order mailed to the persons
entitled thereto at the address appearing in the register maintained for holders
of Certificates (the "Certificate Register") or, if specified in the related
Prospectus Supplement, in the case of Certificates that are of a certain minimum
denomination, upon written request by the Certificateholder, by wire transfer or
by such other means as are described therein; provided, however, that the final
distribution in retirement of the Certificates will be made only upon
presentation and surrender of the Certificates at the office or agency of the
Trustee or other person specified in the notice to Certificateholders of such
final distribution.
The Certificates will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Certificates of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax
or other governmental charge.
DISTRIBUTIONS ON CERTIFICATES
GENERAL. In general, the method of determining the amount of
distributions on a particular Series of Certificates will depend on the type of
credit support, if any, that is used with respect to such Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Certificates of a
particular Series. The Prospectus Supplement for each Series of Certificates
will describe the method to be used in determining the amount of distributions
on the Certificates of such Series.
Distributions allocable to principal and interest on the Certificates
will be made by the Trustee out of, and only to the extent of, funds in the
related Certificate Account, including any funds transferred from any Reserve
Account and funds received as a result of credit enhancement. As between
Certificates of different classes and as between distributions of interest and
principal and, if applicable, between distributions of prepayments of principal
and scheduled payments of principal, distributions made on any Distribution Date
will be applied as specified in the Prospectus Supplement. Unless otherwise
specified in the Prospectus Supplement, distributions to any class of
Certificates will be made pro rata to all Certificateholders of that class.
AVAILABLE FUNDS. All distributions on the Certificates of each Series
on each Distribution Date will be made from the Available Funds described below,
in accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. Unless otherwise provided in the related Prospectus
Supplement, "Available Funds" for each Distribution Date will equal the sum of
the following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal (including principal prepayments, if any, and
prepayment penalties, if so provided in the related Prospectus
Supplement) and interest on the Mortgage Loans in the related Trust
Fund received by the Master Servicer after the Cut-off Date and on or
prior to the day of the month of the related Distribution Date
specified in the Prospectus Supplement (the "Determination Date")
except:
(a) all payments which were due on or before the Cut-off
Date;
(b) all Liquidation Proceeds, all Insurance Proceeds, all
Principal Prepayments (each defined herein) and all
proceeds of any Mortgage Loan purchased by a Lender
or any other entity pursuant to the Agreement that
were received after the prepayment period specified
in the Prospectus Supplement and all related payments
of interest representing interest for any period
after such prepayment period;
(c) all scheduled payments of principal and interest due
on a date or dates subsequent to the first day of the
month of distribution;
(d) amounts received on particular Mortgage Loans as late
payments of principal or interest or other amounts
required to be paid by the mortgagors (the
"Mortgagors"), but only to the extent of any
unreimbursed advance in respect thereof made by the
Master Servicer (including the related
Sub-Servicers);
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(e) amounts representing reimbursement, to the extent
permitted by the Agreement and as described under
"Advances" below, for advances made by the Master
Servicer and advances made by Sub-Servicers that were
deposited into the Certificate Account, and amounts
representing reimbursement for certain other losses
and expenses incurred by the Master Servicer or the
Seller and described below or in the related
Agreement; and
(f) that portion of each collection of interest on a
particular Mortgage Loan in such Trust Fund which
represents servicing compensation payable to the
Master Servicer or Retained Interest which is to be
retained from such collection or is permitted to be
retained from related Insurance Proceeds, Liquidation
Proceeds or proceeds of Mortgage Loans purchased
pursuant to the Agreement;
(ii) the amount of any advance made by the Master Servicer
(including Sub-Servicers) as described under "Advances" below and
deposited by it in the Certificate Account; and
(iii) if applicable, amounts withdrawn from a Reserve
Account or received in connection with other credit support.
DISTRIBUTIONS OF INTEREST. Unless otherwise specified in the Prospectus
Supplement, interest will accrue on the aggregate Current Principal Amount
(defined herein) (or, in the case of Certificates entitled only to distributions
allocable to interest, the aggregate notional principal balance) of each class
of Certificates entitled to interest from the date, at the Pass-Through Rate and
for the periods specified in the Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on each
class of Certificates entitled to interest (other than a class of Certificates
that provides for interest that accrues, but is not currently payable, referred
to hereafter as "Accrual Certificates") will be distributable on the
Distribution Dates specified in the Prospectus Supplement until the aggregate
Current Principal Amount of the Certificates of such class has been distributed
in full or, in the case of Certificates entitled only to distributions allocable
to interest, until the aggregate notional principal balance of such Certificates
is reduced to zero or for the period of time designated in the Prospectus
Supplement. The original Current Principal Amount of each Certificate will equal
the aggregate distributions allocable to principal to which such Certificate is
entitled. Unless otherwise specified in the Prospectus Supplement, distributions
allocable to interest on each Certificate that is not entitled to distributions
allocable to principal will be calculated based on the notional principal
balance of such Certificate. The notional principal balance of a Certificate
will not evidence an interest in or entitlement to distributions allocable to
principal but will be used solely for convenience in expressing the calculation
of interest and for certain other purposes.
With respect to any class of Accrual Certificates, if specified in the
Prospectus Supplement, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Current Principal Amount of
such class of Certificates on that Distribution Date. Unless otherwise specified
in the Prospectus Supplement, distributions of interest on each class of Accrual
Certificates will commence only after the occurrence of the events specified in
the Prospectus Supplement. Unless otherwise specified in the Prospectus
Supplement, prior to such time, the beneficial ownership interest of such class
of Accrual Certificates in the Trust Fund, as reflected in the aggregate Current
Principal Amount of such class of Accrual Certificates, will increase on each
Distribution Date by the amount of interest that accrued on such class of
Accrual Certificates during the preceding interest accrual period but that was
not required to be distributed to such class on such Distribution Date. Any such
class of Accrual Certificates will thereafter accrue interest on its outstanding
Current Principal Amount as so adjusted.
DISTRIBUTIONS OF PRINCIPAL. Unless otherwise specified in the
Prospectus Supplement, the aggregate "Current Principal Amount" of any class of
Certificates entitled to distributions of principal will be the aggregate
original Current Principal Amount of such class of Certificates specified in the
Prospectus Supplement, reduced by all distributions and losses reported to the
holders of such Certificates as allocable to principal, and, in the case of
Accrual Certificates, unless otherwise specified in the Prospectus Supplement,
increased by all interest accrued but not then distributable on such Accrual
Certificates. The Prospectus Supplement will specify the method by which the
amount of principal to be distributed on the Certificates on each Distribution
Date will be calculated and the manner in which such amount will be allocated
among the classes of Certificates entitled to distributions of principal.
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If so provided in the Prospectus Supplement, one or more classes of
Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal which are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments ("Principal
Prepayments") in the percentages and under the circumstances or for the periods
specified in the Prospectus Supplement. Any such allocation of Principal
Prepayments to such class or classes of Certificateholders will have the effect
of accelerating the amortization of such Senior Certificates while increasing
the interests evidenced by the Subordinated Certificates in the Trust Fund.
Increasing the interests of the Subordinated Certificates relative to that of
the Senior Certificates is intended to preserve the availability of the
subordination provided by the Subordinated Certificates. See "Credit
Enhancement--Subordination."
UNSCHEDULED DISTRIBUTIONS. If specified in the Prospectus Supplement,
the Certificates will be subject to receipt of distributions before the next
scheduled Distribution Date under the circumstances and in the manner described
below and in the Prospectus Supplement. If applicable, the Trustee will be
required to make such unscheduled distributions on the day and in the amount
specified in the Prospectus Supplement if, due to substantial payments of
principal (including Principal Prepayments) on the Mortgage Assets, low rates
then available for reinvestment of such payments or both, the Trustee or the
Master Servicer determines, based on the assumptions specified in the Agreement,
that the amount anticipated to be on deposit in the Certificate Account on the
next Distribution Date, together with, if applicable, any amounts available to
be withdrawn from any Reserve Account, may be insufficient to make required
distributions on the Certificates on such Distribution Date. Unless otherwise
specified in the Prospectus Supplement, the amount of any such unscheduled
distribution that is allocable to principal will not exceed the amount that
would otherwise have been required to be distributed as principal on the
Certificates on the next Distribution Date. Unless otherwise specified in the
Prospectus Supplement, all unscheduled distributions will include interest at
the applicable Pass-Through Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified in
the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution will be
made in the same priority and manner as distributions of principal on the
Certificates would have been made on the next Distribution Date, and with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
ADVANCES
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be required to advance on or before each Distribution Date
(from its own funds, funds advanced by Sub-Servicers or funds held in any of the
Accounts for future distributions to the holders of such Certificates), an
amount equal to the aggregate of payments of principal and interest that were
delinquent on the related Determination Date and were not advanced by any
Sub-Servicer, subject to the Master Servicer's determination that such advances
will be recoverable out of late payments by Mortgagors, Liquidation Proceeds,
Insurance Proceeds or otherwise with respect to the specific Mortgage Loan or,
if required by the applicable Rating Agency, with respect to any of the Mortgage
Loans.
In making advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Certificates, rather than to guarantee or insure against losses. If advances are
made by the Master Servicer from cash being held for future distribution to
Certificateholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Account on
such Distribution Date would be less than the amount required to be available
for distributions to Certificateholders on such date. Any Master Servicer funds
advanced will be reimbursable to the Master Servicer out of recoveries on the
specific Mortgage Loans with respect to which such advances were made (E.g.,
late payments made by the related Mortgagor, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Mortgage Loan purchased by a Lender
under the circumstances described hereinabove). Advances by the Master Servicer
(and any advances by a Sub-Servicer) also will be reimbursable to the Master
Servicer (or Sub-Servicer) from cash otherwise distributable to
Certificateholders (including the holders of Senior Certificates) at such time
as the Master Servicer determines that any such advances previously made are not
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ultimately recoverable from the proceeds with respect to the specific Mortgage
Loan or, if required by the applicable Rating Agency, at such time as a loss is
realized with respect to a specific Mortgage Loan. The Master Servicer also will
be obligated to make advances, to the extent recoverable out of Insurance
Proceeds, Liquidation Proceeds or otherwise, in respect of certain taxes and
insurance premiums not paid by Mortgagors on a timely basis. Funds so advanced
are reimbursable to the Master Servicer to the extent permitted by the
Agreement. If specified in the related Prospectus Supplement, the obligations of
the Master Servicer to make advances may be supported by a cash advance reserve
fund, a surety bond or other arrangement, in each case as described in such
Prospectus Supplement.
REPORTS TO CERTIFICATEHOLDERS
Prior to or concurrently with each distribution on a Distribution Date
and except as otherwise set forth in an applicable Prospectus Supplement or
Agreement, the Master Servicer or the Trustee will furnish to each
Certificateholder of record of the related Series a statement setting forth, to
the extent applicable or material to such Series of Certificates, among other
things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and if so specified in the related Prospectus Supplement,
prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any advance by the Master Servicer;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Certificateholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the
amounts distributed to the Senior Certificateholders;
(v) the outstanding Current Principal Amount or notional
principal balance of such class after giving effect to the distribution
of principal on such Distribution Date;
(vi) if applicable, the percentage of principal payments on
the Mortgage Loans, if any, which such class will be entitled to
receive on the following Distribution Date;
(vii) unless the Pass-Through Rate is a fixed rate, the
Pass-Through Rate applicable to the distribution on the Distribution
Date;
(viii) the number and aggregate principal balances of Mortgage
Loans in the related Mortgage Pool delinquent (a) one month and (b) two
or more months;
(ix) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure, and if such real
estate secured a Multifamily Loan, such additional information as may
be specified in the related Prospectus Supplement; and
(x) if applicable, the amount remaining in any Reserve Account
or the amount remaining of any other credit support, after giving
effect to the distribution on the Distribution Date.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Certificate of the relevant class having a denomination
or interest specified in the related Prospectus Supplement or the report to
Certificateholders. The report to Certificateholders for any Series of
Certificates may include additional or other information of a similar nature to
that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Certificateholder of record at any time during such calendar year a report (a)
as to the aggregate of amounts reported pursuant to (i) and (ii) for such
calendar year and (b) such other customary information as may be deemed
necessary or desirable for Certificateholders to prepare their tax returns.
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BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, a class of
Certificates initially may be represented by one or more certificates registered
in the name of Cede & Co. ("Cede"), the nominee for The Depository Trust Company
("DTC"). DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code ("UCC")
and a "clearing agency" registered pursuant to the provisions of Section 17A of
the Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to others such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participant").
Certificateholders that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of Certificates
registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Certificateholders
will receive all distributions of principal of and interest on the Certificates
from the Trustee through DTC and its Participants. Under a book-entry format,
Certificateholders will receive payments after the related Distribution Date
because, while payments are required to be forwarded to Cede, as nominee for
DTC, on each such date, DTC will forward such payments to its Participants which
thereafter will be required to forward them to Indirect Participants or
Certificateholders. Under a book-entry format, it is anticipated that the only
Certificateholder will be Cede, as nominee of DTC, and that the beneficial
holders of Certificates will not be recognized by the Trustee as
Certificateholders under the Agreement. The beneficial holders of such
Certificates will only be permitted to exercise the rights of Certificateholders
under the Agreement indirectly through DTC and its Participants who in turn will
exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Certificates and is
required to receive and transmit payments of principal of and interest of the
Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Certificateholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates may be limited due to the lack of a physical certificate for such
Certificates.
DTC in general advises that it will take any action permitted to be
taken by a Certificateholder under an Agreement only at the direction of one or
more Participants to whose account with DTC the Certificates are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Certificateholders only at the direction of and
on behalf of Participants whose holdings include current principal amounts of
outstanding Certificates that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Certificates to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Certificates.
Any Certificates initially registered in the name of Cede, as nominee
of DTC, will be issued in fully registered, certificated form to
Certificateholders or their nominees ("Definitive Certificates"), rather than to
DTC or its nominee only under the events specified in the related Agreement.
Such events may include the following: (i) the Seller advises the Trustee in
writing that DTC is no longer willing or able to properly discharge its
responsibilities as Depository with respect to the Certificates, and the Trustee
or the Seller is unable to locate a qualified successor, (ii) the Seller, at its
option, elects to terminate the book-entry system through DTC, or (iii) after
the occurrence of an Event of Default (defined herein), Certificateholders
representing not less than 50% of the aggregate Current Principal Amount of the
Certificates advise the Trustee and DTC through Participants in writing that the
continuation of a book-entry system through DTC (or a successor thereto) is no
longer
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in the best interest of the Certificateholders. Upon the occurrence of
any of the events specified in the related Agreement, DTC will be required to
notify all Participants of the availability through DTC of Definitive
Certificates. Upon surrender by DTC of the certificates representing the
Certificates and instruction for re-registration, the Trustee will issue the
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as
Certificateholders. Thereafter, payments of principal of and interest on the
Certificates will be made by the Trustee directly to Certificateholders in
accordance with the procedures set forth herein and in the Agreement. The final
distribution of any Certificate (whether Definitive Certificates or Certificates
registered in the name of Cede), however, will be made only upon presentation
and surrender of such Certificates on the final Distribution Date at such office
or agency as is specified in the notice of final payment to Certificateholders.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Certificates or with respect to the Mortgage Assets in the
related Trust Fund. Credit enhancement may be in the form of (i) the
subordination of one or more classes of the Certificates of such Series, (ii)
the use of a Pool Insurance Policy, Special Hazard Insurance Policy, Bankruptcy
Bond, FHA Insurance, VA Guarantees, Reserve Accounts, a letter of credit, a
limited financial guaranty insurance policy, other third party guarantees,
interest rate or other swap agreements, caps, collars or floors, another method
of credit enhancement described in the related Prospectus Supplement, or the use
of a cross-support feature, or (iii) any combination of the foregoing. Unless
otherwise specified in the Prospectus Supplement, any credit enhancement will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Certificates and interest
thereon. If losses occur which exceed the amount covered by credit enhancement
or which are not covered by the credit enhancement, holders of one or more
classes of Certificates will bear their allocable share of deficiencies. If a
form of credit enhancement applies to several classes of Certificates, and if
principal payments equal to the Current Principal Amounts of certain classes
will be distributed prior to such distributions to other classes, the classes
which receive such distributions at a later time are more likely to bear any
losses which exceed the amount covered by credit enhancement. Unless otherwise
specified in the Prospectus Supplement, coverage under any credit enhancement
may be canceled or reduced by the Master Servicer or the Seller if such
cancellation or reduction would not adversely affect the rating or ratings of
the related Certificates.
SUBORDINATION
If so specified in the Prospectus Supplement, distributions in respect
of scheduled principal, Principal Prepayments, interest or any combination
thereof that otherwise would have been payable to one or more classes of
Subordinated Certificates of a Series will instead be payable to holders of one
or more classes of Senior Certificates under the circumstances and to the extent
specified in the Prospectus Supplement. If specified in the Prospectus
Supplement, delays in receipt of scheduled payments on the Mortgage Loans and
losses on defaulted Mortgage Loans will be borne first by the various classes of
Subordinated Certificates and thereafter by the various classes of Senior
Certificates, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate distributions
in respect of delinquent payments on the Mortgage Loans over the lives of the
Certificates or at any time, the aggregate losses in respect of defaulted
Mortgage Loans which must be borne by the Subordinated Certificates by virtue of
subordination and the amount of the distributions otherwise distributable to the
Subordinated Certificateholders that will be distributable to Senior
Certificateholders on any Distribution Date may be limited as specified in the
Prospectus Supplement. If aggregate distributions in respect of delinquent
payments on the Mortgage Loans or aggregate losses in respect of such Mortgage
Loans were to exceed the total amounts payable and available for distribution to
holders of Subordinated Certificates or, if applicable, were to exceed the
specified maximum amount, holders of Senior Certificates would experience losses
on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Distribution Date may
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instead be deposited into one or more Reserve Accounts established with the
Trustee. If so specified in the Prospectus Supplement, such deposits may be made
on each Distribution Date, on each Distribution Date for specified periods or
until the balance in the Reserve Account has reached a specified amount and,
following payments from the Reserve Account to holders of Senior Certificates or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Account to required levels, in each case as specified in the Prospectus
Supplement. If so specified in the Prospectus Supplement, amounts on deposit in
the Reserve Account may be released to the holders of the class of Certificates
specified in the Prospectus Supplement at the times and under the circumstances
specified in the Prospectus Supplement.
If so specified in the Prospectus Supplement, the same class of
Certificates may be Senior Certificates with respect to certain types of
payments or certain types of losses or delinquencies and Subordinated
Certificates with respect to other types of payment or types of losses or
delinquencies. If specified in the Prospectus Supplement, various classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement.
POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to a Mortgage Pool of
Single Family Loans or Cooperative Loans, a separate Pool Insurance Policy will
be obtained for the Mortgage Pool and issued by the insurer (the "Pool Insurer")
named in such Prospectus Supplement. Each Pool Insurance Policy will, subject to
the limitations described below, cover loss by reason of default in payment on
Single Family Loans or Cooperative Loans in the Mortgage Pool in an amount
specified in such Prospectus Supplement. As more fully described below, the
Master Servicer will present claims thereunder to the Pool Insurer on behalf of
itself, the Trustee and the holders of the Certificates. The Mortgage Pool
Insurance Policies, however, are not blanket policies against loss, since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent described below. Unless
otherwise specified in the Prospectus Supplement, a Pool Insurance Policy will
not cover losses due to a failure to pay or denial of a claim under a Primary
Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, each
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Insurance Policy is in effect for the defaulted
Mortgage Loan and a claim thereunder has been submitted and settled; (ii) hazard
insurance on the related Mortgaged Property has been kept in force and real
estate taxes and other protection and preservation expenses have been paid;
(iii) if there has been physical loss or damage to the Mortgaged Property, it
has been restored to its physical condition (reasonable wear and tear excepted)
at the time of issuance of the policy; and (iv) the insured has acquired good
and merchantable title to the Mortgaged Property free and clear of liens except
certain permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the Mortgaged Property at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the Mortgage Rate to the date of purchase and certain expenses incurred by the
Master Servicer on behalf of the Trustee and Certificateholders, or (b) to pay
the amount by which the sum of the principal balance of the defaulted Mortgage
Loan plus accrued and unpaid interest at the Mortgage Rate to the date of
payment of the claim and the aforementioned expenses exceeds the proceeds
received from an approved sale of the Mortgaged Property, in either case net of
certain amounts paid or assumed to have been paid under the related Primary
Insurance Policy. If any Mortgaged Property securing a defaulted Mortgage Loan
is damaged and proceeds, if any, from the related hazard insurance policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged Mortgaged Property to a condition sufficient to permit recovery under
the Pool Insurance Policy, the Master Servicer will not be required to expend
its own funds to restore the damaged Mortgaged Property unless it determines
that (i) such restoration will increase the proceeds to Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer for
its expenses and (ii) such
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expenses will be recoverable by it through proceeds of the sale of the Mortgaged
Property or proceeds of the related Pool Insurance Policy or any related Primary
Insurance Policy.
A Pool Insurance Policy generally will not insure (and many Primary
Insurance Policies do not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. If
so specified in the related Prospectus Supplement, an endorsement to the Pool
Insurance Policy, a bond or other credit support may cover fraud in connection
with the origination of Mortgage Loans. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to an event specified
in clause (i) or (ii) above might result in a breach of the related Lender's
representations described above and, in such event, might give rise to an
obligation on the part of such Lender to purchase the defaulted Mortgage Loan if
the breach cannot be cured by such Lender. No Pool Insurance Policy will cover
(and many Primary Insurance Policies do not cover) a claim in respect of a
defaulted Mortgage Loan occurring when the servicer of such Mortgage Loan, at
the time of default or thereafter, was not approved by the applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Certificates by the aggregate dollar amount of
claims paid less the aggregate of the net dollar amounts realized by the Pool
Insurer upon disposition of all foreclosed properties covered thereby. The
amount of claims paid will include certain expenses incurred by the Master
Servicer as well as accrued interest on delinquent Mortgage Loans to the date of
payment of the claim. Accordingly, if aggregate net claims paid under any Pool
Insurance Policy reach the original policy limit, coverage under that Pool
Insurance Policy will be exhausted and any further losses will be borne by the
Certificateholders.
The terms of any pool insurance policy relating to a pool of Contracts
will be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Mortgage Pool and will be
issued by the insurer (the "Special Hazard Insurer") named in such Prospectus
Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located or under a flood
insurance policy if the Mortgaged Property is located in a federally designated
flood area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "The Pooling and Servicing
Agreement-Hazard Insurance". Each Special Hazard Insurance Policy will not cover
losses occasioned by war, civil insurrection, certain governmental action,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the Mortgaged Property is located in
a federally designated flood area), chemical contamination and certain other
risks. The amount of coverage under any Special Hazard Insurance Policy will be
specified in the related Prospectus Supplement. Each Special Hazard Insurance
Policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the Mortgage Loan has been kept in
force and other protection and preservation expenses have been paid.
Subject to the foregoing limitations, each Special Hazard Insurance
Policy will provide that where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
the Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
Special Hazard Insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Master Servicer with respect to such property. If the
unpaid principal balance of a Mortgage Loan plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair of the property will further reduce
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coverage by such amount. So long as a Pool Insurance Policy remains in effect,
the payment by the Special Hazard Insurer of the cost of repair or of the unpaid
principal balance of the related Mortgage Loan plus accrued interest and certain
expenses will not affect the total insurance proceeds paid to
Certificateholders, but will affect the relative amounts of coverage remaining
under the related Special Hazard Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, since
each Special Hazard Insurance Policy will be designed to permit full recovery
under the Pool Insurance Policy in circumstances in which such recoveries would
otherwise be unavailable because property has been damaged by a cause not
insured against by a standard hazard policy and thus would not be restored, each
Agreement will provide that, if the related Pool Insurance Policy shall have
been terminated or been exhausted through payment of claims, the Master Servicer
will be under no further obligation to maintain such Special Hazard Insurance
Policy.
To the extent specified in the Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Certificates of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Special Hazard
Insurance Policy. The amount of any Special Hazard Insurance Policy or of the
deposit to the special trust account in lieu thereof relating to such
Certificates may be reduced so long as any such reduction will not result in a
downgrading of the rating of such Certificates by any such rating agency.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond
for proceedings under the federal Bankruptcy Code will be issued by an insurer
named in such Prospectus Supplement. Each Bankruptcy Bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Certificates of the related
Series in the Trust Fund to provide protection in lieu of or in addition to that
provided by a Bankruptcy Bond. See "Certain Legal Aspects of the Mortgage Loans
- -- Anti-Deficiency Legislation and Other Limitations on Lenders."
To the extent specified in the Prospectus Supplement, the Master
Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Certificates of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Bankruptcy Bond. The
amount of any Bankruptcy Bond or of the deposit to the special trust account in
lieu thereof relating to such Certificates may be reduced so long as any such
reduction will not result in a downgrading of the rating of such Certificates by
any such rating agency.
The terms of any Bankruptcy Bond relating to a pool of Contracts will
be described in the related Prospectus Supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Mortgage Loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Single Family Loans insured by
the FHA generally require a minimum down payment of approximately 5% of the
original principal amount of the loan. No FHA-insured Single Family Loan
relating to a Series may have an interest rate or original principal amount
exceeding the applicable FHA limits at the time of origination of such loan.
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The insurance premiums for Single Family Loans insured by the FHA are
collected by lenders approved by HUD or by the Master Servicer or any
Sub-Servicers and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or upon assignment of the defaulted
Mortgage Loan to HUD. With respect to a defaulted FHA-insured Single Family
Loan, the Master Servicer or any Sub- Servicer is limited in its ability to
initiate foreclosure proceedings. When it is determined, either by the Master
Servicer or any Sub-Servicer or HUD, that default was caused by circumstances
beyond the mortgagor's control, the Master Servicer or any Sub-Servicer is
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the mortgagor. Such
plans may involve the reduction or suspension of regular mortgage payments for a
specified period, with such payments to be made up on or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or beyond the maturity date. In addition, when a default caused by such
circumstances is accompanied by certain other criteria, HUD may provide relief
by making payments to the Master Servicer or any Sub-Servicer in partial or full
satisfaction of amounts due under the Mortgage Loan (which payments are to be
repaid by the mortgagor to HUD) or by accepting assignment of the loan from the
Master Servicer or any Sub-Servicer. With certain exceptions, at least three
full monthly installments must be due and unpaid under the Mortgage Loan, and
HUD must have rejected any request for relief from the mortgagor before the
Master Servicer or any Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal to
the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or Sub-Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Single Family Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any obligation to make any payment due under the Mortgage
and, upon assignment, from the date of assignment, to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Single Family Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's Readjustment
Act of 1944, as amended, permits a veteran (or in certain instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no Single Family Loan guaranteed by the VA
will have an original principal amount greater than five times the partial VA
guarantee for such Mortgage Loan.
The maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 3703(a), as
amended. As of January 1, 1993, the maximum guarantee that may be issued by the
VA under a VA-guaranteed mortgage loan of more than $144,000 is the lesser of
25% of the original principal amount of the mortgage loan and $46,000. The
liability on the guarantee is reduced or increased pro rata with any reduction
or increase in the amount of indebtedness, but in no event will the amount
payable on the guarantee exceed the amount of the original guarantee. The VA
may, at its option and without regard to the guarantee, make full payment to a
mortgage holder of unsatisfied indebtedness on a mortgage upon its assignment to
the VA.
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With respect to a defaulted VA-guaranteed Single Family Loan, the
Master Servicer or Sub-Servicer is, absent exceptional circumstances, authorized
to announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure mortgage loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of such mortgage loans made under Sections 221(d)(3)
and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of such
a mortgage loan may be up to 40 years and the ratio of loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, a dollar amount per apartment unit established from time to time by
HUD or, at the discretion of the Secretary of HUD, 25% of the value of the
property. In general the loan term may not exceed 35 years and a loan to value
ratio of no more than 85% is required for the purchase of a project and 70% for
the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of interest
from the date of the default.
RESERVE ACCOUNTS
If specified in the Prospectus Supplement, cash, U.S. Treasury
securities, instruments evidencing ownership of principal or interest payments
thereon, demand notes, certificates of deposit or a combination thereof in the
aggregate amount specified in the Prospectus Supplement will be deposited by the
Master Servicer or Seller on the date specified in the Prospectus Supplement in
one or more Reserve Accounts established with the Trustee. Such cash and the
principal and interest payments on such other instruments will be used to
enhance the likelihood of timely payment of principal of, and interest on, or,
if so specified in the Prospectus Supplement, to provide additional protection
against losses in respect of, the assets in the related Trust Fund, to pay the
expenses of the Trust Fund or for such other purposes specified in the
Prospectus Supplement. Whether or not the Master Servicer or Seller has any
obligation to make such a deposit, certain amounts to which the Subordinated
Certificateholders, if any, will otherwise be entitled may instead be deposited
into the Reserve Account from time to time and in the amounts as specified in
the Prospectus Supplement. Any cash in the Reserve Account and the proceeds of
any other instrument upon maturity will be invested, to the extent acceptable to
the applicable Rating Agency, in obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency ("Permitted Investments"). Unless otherwise specified in the
Prospectus Supplement, any instrument deposited in the Reserve Account will name
the Trustee, in its capacity as trustee for the holders of the Certificates, as
beneficiary and will be issued by an entity acceptable to the applicable Rating
Agency. Additional information with respect to such instruments deposited in the
Reserve Accounts will be set forth in the Prospectus Supplement.
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Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Account for distribution to the
holders of Certificates for the purposes, in the manner and at the times
specified in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may
include in lieu of some or all of the foregoing or in addition thereto letters
of credit, financial guaranty insurance policies, third party guarantees, and
other arrangements for maintaining timely payments or providing additional
protection against losses on the assets included in such Trust Fund, paying
administrative expenses, or accomplishing such other purpose as may be described
in the Prospectus Supplement. The Trust Fund may include a guaranteed investment
contract or reinvestment agreement pursuant to which funds held in one or more
accounts will be invested at a specified rate. If any class of Certificates has
a floating interest rate, or if any of the Mortgage Assets has a floating
interest rate, the Trust Fund may include an interest rate swap contract, an
interest rate cap agreement or similar contract providing limited protection
against interest rate risks.
CROSS SUPPORT
If specified in the Prospectus Supplement, the beneficial ownership of
separate groups of assets included in a Trust Fund may be evidenced by separate
classes of the related Series of Certificates. In such case, credit support may
be provided by a cross-support feature which requires that distributions be made
with respect to Certificates evidencing a beneficial ownership interest in other
asset groups within the same Trust Fund. The Prospectus Supplement for a Series
which includes a cross-support feature will describe the manner and conditions
for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of credit support may apply concurrently to two or more separate
Trust Funds. If applicable, the Prospectus Supplement will identify the Trust
Funds to which such credit support relates and the manner of determining the
amount of the coverage provided hereby and of the application of such coverage
to the identified Trust Funds.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity of the Certificates will be affected by the
amount and timing of principal payments on or in respect of the Mortgage Assets
included in the related Trust Funds, the allocation of available funds to
various Classes of Certificates, the Pass-Through Rate for various Classes of
Certificates and the purchase price paid for the Certificates.
The original terms to maturity of the Mortgage Loans in a given
Mortgage Pool will vary depending upon the type of Mortgage Loans included
therein. Each Prospectus Supplement will contain information with respect to the
type and maturities of the Mortgage Loans in the related Mortgage Pool. Unless
otherwise specified in the related Prospectus Supplement, Single Family Loans,
Cooperative Loans and Contracts may be prepaid without penalty in full or in
part at any time. Multifamily Loans may prohibit prepayment for a specified
period after origination, may prohibit partial prepayments entirely, and may
require the payment of a prepayment penalty upon prepayment in full or in part.
Unless otherwise provided in the related Prospectus Supplement, all
conventional Single Family Loans, Cooperative Loans and Contracts will contain
due-on-sale provisions permitting the mortgagee or holder of the Contract to
accelerate the maturity of the Mortgage Loan or Contract upon sale or certain
transfers by the mortgagor or obligor of the underlying Mortgaged Property. As
described in the related Prospectus Supplement, conventional Multifamily Loans
may contain due-on-sale provisions, due-on-encumbrance provisions, or both.
Mortgage Loans insured by the FHA, and Single Family Loans and Contracts
partially guaranteed by the VA, are assumable with the consent of the FHA and
the VA, respectively. Thus, the rate of prepayments on such Mortgage Loans may
be lower than that of conventional Mortgage Loans bearing comparable interest
rates. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the Mortgaged
Property and reasonably believes
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that it is entitled to do so under applicable law; provided, however, that the
Master Servicer will not take any enforcement action that would impair or
threaten to impair any recovery under any related insurance policy. See "The
Pooling and Servicing Agreement -- Collection Procedures" and "Certain Legal
Aspects of the Mortgage Loans" for a description of certain provisions of each
Agreement and certain legal developments that may affect the prepayment
experience on the Mortgage Loans.
When a full prepayment is made on a Single Family Loan or Cooperative
Loan, the Mortgagor is charged interest on the principal amount of the Mortgage
Loan so prepaid only for the number of days in the month actually elapsed up to
the date of the prepayment rather than for a full month. Similarly, upon
liquidation of a Mortgage Loan, interest accrues on the principal amount of the
Mortgage Loan only for the number of days in the month actually elapsed up to
the date of liquidation rather than for a full month. Unless otherwise specified
in the related Prospectus Supplement, the effect of prepayments in full and
liquidations will be to reduce the amount of interest passed through in the
following month to holders of Certificates because interest on the principal
amount of any Mortgage Loan so prepaid will be paid only to the date of
prepayment or liquidation. Interest shortfalls also could result from the
application of the Solders' and Sailors' Civil Relief Act of 1940, as amended,
as described under "Certain Legal Aspects of the Mortgage Loans -- Soldiers' and
Sailors' Civil Relief Act" herein. Partial prepayments in a given month may be
applied to the outstanding principal balances of the Mortgage Loans so prepaid
on the first day of the month of receipt or the month following receipt. In the
latter case, partial prepayments will not reduce the amount of interest passed
through in such month. Prepayment penalties collected with respect to
Multifamily Loans will be distributed to the holders of Certificates, or to
other persons entitled thereto, as described in the related Prospectus
Supplement.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or another person specified in the related
Prospectus Supplement may have the option to purchase the assets of a Trust Fund
thereby effecting earlier retirement of the related Series of Certificates. See
"The Pooling and Servicing Agreement -- Termination; Optional Termination."
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely, if
prevailing interest rates rise appreciably above the Mortgage Rates borne by the
Mortgage Loans, such Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below such Mortgage Rates. However,
there can be no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical,
social, tax, legal and additional factors. The rate of prepayment on Single
Family Loans, Cooperative Loans and Contracts may be affected by changes in a
mortgagor's housing needs, job transfers, unemployment, a borrower's net equity
in the mortgage properties, the enforcement of due-on-sale clauses and other
servicing decisions. Adjustable rate mortgage loans, bi-weekly mortgage loans,
graduated payment mortgage loans, growing equity mortgage loans, reverse
mortgage loans, buy-down mortgage loans and mortgage loans with other
characteristics may experience a rate of principal prepayments which is
different from that of fixed rate, monthly pay, fully amortizing mortgage loans.
The rate of prepayment on Multifamily Loans may be affected by other factors,
including Mortgage Loan terms (e.g., the existence of lockout periods,
due-on-sale and due-on-encumbrance clauses and prepayment penalties), relative
economic conditions in the area where the Mortgaged Properties are located, the
quality of management of the Mortgaged Properties and the relative tax benefits
associated with the ownership of income-producing real property.
The timing of payments on the Mortgage Assets may significantly affect
an investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Assets, the greater will be the effect on an investor's yield to
maturity.
As a result, the effect on an investor's yield of principal prepayments
occurring at a rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the Certificates will
not be offset by a subsequent like reduction (or increase) in the rate of
principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the
effective yield to Certificateholders will be slightly lower than the yield
otherwise produced by the applicable Pass-Through Rate and purchase price,
because while interest generally will accrue on each Mortgage Loan from the
first day of the month, the distribution of such interest will not be made
earlier than a specified date in the month following the month of accrual.
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In the case of any Certificates purchased at a discount, a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield. In the case of any Certificates purchased at a
premium, a faster than anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield. A discount or premium
would be determined in relation to the price at which a Certificate will yield
its Pass-Through Rate, after giving effect to any payment delay.
Factors other than those identified herein and in the Prospectus
Supplement could significantly affect principal prepayments at any time and over
the lives of the Certificates. The relative contribution of the various factors
affecting prepayment may also vary from time to time. There can be no assurance
as to the rate of payment of principal of the
Mortgage Assets at any time or over the lives of the Certificates.
The Prospectus Supplement relating to a Series of Certificates will
discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments) on the yield, weighted average lives and
maturities of such
Certificates.
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THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of certain provisions of each Agreement
which are not described elsewhere in this Prospectus. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, the provisions of each Agreement. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
ASSIGNMENT OF THE MORTGAGE LOANS. At the time of issuance of the
Certificates of a Series, the Seller will cause the Mortgage Loans comprising
the related Trust Fund to be sold and assigned to the Trustee, together with all
principal and interest received by or on behalf of the Seller on or with respect
to such Mortgage Loans after the Cut-off Date, other than principal and interest
due on or before the Cut-off Date and other than any Retained Interest specified
in the Prospectus Supplement. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Seller in exchange for the Mortgage
Loans. Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the related Agreement. Such schedule will include information as to
the outstanding principal balance of each Mortgage Loan after application of
payments due on the Cut-off Date, as well as information regarding the Mortgage
Rate or APR, the current scheduled monthly payment of principal and interest,
the maturity of the loan, the Loan-to-Value Ratio at origination and certain
other information.
In addition, unless otherwise specified in the Prospectus Supplement,
the Seller will deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Mortgage Loan, among other things,
(i) the mortgage note or Contract endorsed without recourse in blank or to the
order of the Trustee, (ii) in the case of Single Family Loans or Multifamily
Loans, the mortgage, deed of trust or similar instrument (a "Mortgage") with
evidence of recording indicated thereon (except for any Mortgage not returned
from the public recording office, in which case the Seller will deliver or cause
to be delivered a copy of such Mortgage together with a certificate that the
original of such Mortgage was or will be delivered to such recording office),
(iii) an assignment of the Mortgage or Contract to the Trustee, which assignment
will be in recordable form in the case of a Mortgage assignment, and (iv) such
other security documents as may be specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement, (i)
in the case of Single Family Loans or Multifamily Loans, the Seller or Master
Servicer will promptly cause the assignments of the related Mortgage Loans to be
recorded in the appropriate public office for real property records, except in
the discretion of the Seller in states in which, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in such loans against the claim of any subsequent transferee
or any successor to or creditor of the Seller or the originator of such loans,
and (ii) in the case of Contracts, the Seller or Master Servicer will promptly
make or cause to be made an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Trustee's ownership of the
Contracts.
With respect to any Mortgage Loans which are Cooperative Loans, the
Seller will cause to be delivered to the Trustee (or to the custodian
hereinafter referred to), the related original cooperative note endorsed without
recourse in blank or to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Seller will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review such
Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, if any such document is found to
be missing or defective in any material respect, the Trustee (or such custodian)
will notify the Master Servicer and the Seller, and the Master Servicer will
notify the related Lender. Unless otherwise specified in the related Prospectus
Supplement, if the Lender or an entity which sold the Mortgage Loan to the
Lender cannot cure the omission or defect within 60 days after receipt of such
notice, the Lender or such entity will be obligated to purchase the related
Mortgage Loan from the Trustee at the Purchase Price. There can be no assurance
that a Lender or such entity will fulfill this purchase obligation. Although the
Master Servicer may be obligated to enforce such obligation to the extent
described above under "Mortgage
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Loan Program -- Representations by Lenders; Repurchases," neither the Master
Servicer nor the Seller will be obligated to purchase such Mortgage Loan if the
Lender or such entity defaults on its purchase obligation, unless such breach
also constitutes a breach of the representations or warranties of the Master
Servicer or the Seller, as the case may be. Unless otherwise specified in the
related Prospectus Supplement, this purchase obligation constitutes the sole
remedy available to the Certificateholders or the Trustee for omission of, or a
material defect in, a constituent document. Certain rights of substitution for
defective Mortgage Loans may be provided with respect to a Series in the related
Prospectus Supplement.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
ASSIGNMENT OF AGENCY SECURITIES. The Seller will cause Agency
Securities to be registered in the name of the Trustee or its nominee, and the
Trustee concurrently will execute, countersign and deliver the Certificates.
Each Agency Security will be identified in a schedule appearing as an exhibit to
the Agreement, which will specify as to each Agency Security the original
principal amount and outstanding principal balance as of the Cut-off Date, the
annual pass-through rate (if any) and the maturity date.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES. The Seller will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee.
The Trustee (or the custodian) will have possession of any certificated Private
Mortgage-Backed Securities. Unless otherwise specified in the related Prospectus
Supplement, the Trustee will not be in possession of or be assignee of record of
any underlying assets for a Private Mortgage-Backed Security. See "The Trust
Fund -- Private Mortgage-Backed Securities" herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Mortgage-Backed Security conveyed to the
Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
Unless otherwise specified in the related Prospectus Supplement or
provided in the Agreement, each Master Servicer and Sub-Servicer servicing the
Mortgage Loans will be required to establish and maintain for one or more Series
of Certificates a separate account or accounts for the collection of payments on
the related Mortgage Assets (the "Protected Account"), which must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of such holding company) are rated in one of
the two highest rating categories by each Rating Agency rating the Series of
Certificates, (ii) an account or accounts the deposits in which are fully
insured by the FDIC, (iii) an account or accounts the deposits in which are
insured by the FDIC (to the limits established by the FDIC), and the uninsured
deposits in which are invested in Permitted Investments held in the name of the
Trustee, or (iv) an account or accounts otherwise acceptable to each Rating
Agency. A Protected Account may be maintained as an interest bearing account or
the funds held therein may be invested pending each succeeding Distribution Date
in Permitted Investments. Unless otherwise specified in the related Prospectus
Supplement, the related Master Servicer or Sub-Servicer or its designee will be
entitled to receive any such interest or other income earned on funds in the
Protected Account as additional compensation and will be obligated to deposit in
the Protected Account the amount of any loss immediately as realized. The
Protected Account may be maintained with the Master Servicer or Sub-Servicer or
with a depository institution that is an affiliate of the Master Servicer or
Sub-Servicer, provided it meets the standards set forth above.
Each Master Servicer and Sub-Servicer will be required to deposit or
cause to be deposited in the Protected Account for each Trust Fund on a daily
basis, to the extent applicable and unless otherwise specified in the related
Prospectus Supplement or provided in the Agreement, the following payments and
collections received or advances made by or on behalf of it subsequent to the
Cut-off Date (other than payments due on or before the Cut-off Date and
exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, prepayment
penalties, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
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(iii) to the extent specified in the related Agreement, all proceeds
(net of unreimbursed payments of property taxes, insurance premiums and similar
items ("Insured Expenses") incurred, and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) of the title insurance
policies, the hazard insurance policies and any Primary Insurance Policies, to
the extent such proceeds are not applied to the restoration of the property or
released to the Mortgagor in accordance with the Master Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts (net of unreimbursed expenses incurred in connection with liquidation or
foreclosure ("Liquidation Expenses") and unreimbursed advances made, by the
related Master Servicer or Sub-Servicer, if any) received and retained in
connection with the liquidation of defaulted Mortgage Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds received with
respect to any properties acquired on behalf of the Certificateholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased as described under "Mortgage Loan Program -- Representations by
Lenders; Repurchases" or " -- Assignment of Mortgage Assets" above;
(v) all payments required to be deposited in the Protected Account with
respect to any deductible clause in any blanket insurance policy described under
" -- Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer or
Sub-Servicer in connection with losses realized on investments for the benefit
of the Master Servicer or Sub-Servicer of funds held in any Accounts; and
(vii) all other amounts required to be deposited in the Protected
Account pursuant to the Agreement.
If acceptable to each Rating Agency rating the Series of Certificates,
a Protected Account maintained by a Master Servicer or Sub-Servicer may
commingle funds from the Mortgage Loans deposited in the Trust Fund with similar
funds relating to other mortgage loans which are serviced or owned by the Master
Servicer or Sub-Servicer. The Agreement may require that certain payments
related to the Mortgage Assets be transferred from a Protected Account
maintained by a Master Servicer or Sub-Servicer into another Account maintained
under conditions acceptable to each Rating Agency.
The Trustee will be required to establish in its name as Trustee for
one or more Series of Certificates a trust account or another account acceptable
to each Rating Agency (the "Certificate Account"). The Certificate Account may
be maintained as an interest bearing account or the funds held therein may be
invested pending each succeeding Distribution Date in Permitted Investments. If
there is more than one Master Servicer for the rated Series of Certificates,
there may be a separate Certificate Account or a separate subaccount in a single
Certificate Account for funds received from each Master Servicer. Unless
otherwise specified in the Prospectus Supplement, the related Master Servicer or
its designee will be entitled to receive any interest or other income earned on
funds in the Certificate Account or subaccount of the Certificate Account as
additional compensation and will be obligated to deposit in the Certificate
Account or subaccount the amount of any loss immediately as realized. The
Trustee will be required to deposit into the Certificate Account on the business
day received all funds received from the Master Servicer for deposit into the
Certificate Account and any other amounts required to be deposited into the
Certificate Account pursuant to the Agreement. In addition to other purposes
specified in the Agreement, the Trustee will be required to make withdrawals
from the Certificate Account to make distributions to Certificateholders. If the
Series includes one Trust Fund which contains a beneficial ownership interest in
another Trust Fund, funds from the Mortgage Assets may be withdrawn from the
Certificate Account included in the latter Trust Fund and deposited into another
Account included in the former Trust Fund prior to transmittal to
Certificateholders with a beneficial ownership interest in the former Trust
Fund. If specified in the related Prospectus Supplement, the Protected Account
and the Certificate Account may be combined into a single Certificate Account.
SUB-SERVICING BY LENDERS
Each Lender with respect to a Mortgage Loan or any other servicing
entity may act as the Master Servicer or the Sub-Servicer for such Mortgage Loan
pursuant to an agreement (each, a "Sub-Servicing Agreement"), which will not
contain any terms inconsistent with the related Agreement. While each
Sub-Servicing Agreement will be a contract solely between the Master Servicer
and the Sub-Servicer, the Agreement pursuant
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to which a Series of Certificates is issued will provide that, if for any reason
the Master Servicer for such Series of Certificates is no longer the Master
Servicer of the related Mortgage Loans, the Trustee or any successor Master
Servicer must recognize the Sub-Servicer's rights and obligations under such
Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers, but, unless otherwise
specified in the Prospectus Supplement, such Sub-Servicer will remain obligated
under the related Sub-Servicing Agreement. Each Sub-Servicer will be required to
perform the customary functions of a servicer of mortgage loans. Such functions
generally include collecting payments from mortgagors or obligors and remitting
such collections to the Master Servicer; maintaining hazard insurance policies
as described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder, subject in certain cases to the right of the Master
Servicer to approve in advance any such settlement; maintaining escrow or
impoundment accounts of mortgagors or obligors for payment of taxes, insurance
and other items required to be paid by the mortgagor or obligor pursuant to the
related Mortgage Loan; processing assumptions or substitutions, although, unless
otherwise specified in the related Prospectus Supplement, the Master Servicer is
generally required to exercise due-on-sale clauses to the extent such exercise
is permitted by law and would not adversely affect insurance coverage;
attempting to cure delinquencies; supervising foreclosures; inspecting and
managing Mortgaged Properties under certain circumstances; maintaining
accounting records relating to the Mortgage Loans; and, to the extent specified
in the related Prospectus Supplement, maintaining additional insurance policies
or credit support instruments and filing and settling claims thereunder. A Sub-
Servicer will also be obligated to make advances in respect of delinquent
installments of principal and interest on Mortgage Loans, as described more
fully above under " -- Payments on Mortgage Loans; Deposits to Accounts," and in
respect of certain taxes and insurance premiums not paid on a timely basis by
mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Mortgage Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer is also entitled to collect and retain,
as part of its servicing compensation, any prepayment or late charges provided
in the mortgage note or related instruments. Each Sub-Servicer will be
reimbursed by the Master Servicer for certain expenditures which it makes,
generally to the same extent the Master Servicer would be reimbursed under the
Agreement. The Master Servicer may purchase the servicing of Mortgage Loans if
the Sub-Servicer elects to release the servicing of such Mortgage Loans to the
Master Servicer. See " -- Servicing and Other Compensation and Payment of
Expenses."
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer will be required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan
pursuant to the terms of the Sub-Servicing Agreement for the entire term of such
Mortgage Loan, unless the Sub-Servicing Agreement is earlier terminated by the
Master Servicer or unless servicing is released to the Master Servicer. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
may terminate a Sub-Servicing Agreement without cause, upon written notice to
the Sub-Servicer.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Mortgage Loans or enter into
new Sub-Servicing Agreements with other sub-servicers. If the Master Servicer
acts as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be a
Lender or meet the standards for becoming a Lender or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Seller. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an assumption
will occur. In the event of such an assumption, the Master Servicer may in the
exercise of its business judgment release the terminated Sub-Servicer from
liability in respect of such representations and warranties. Any amendments to a
Sub-Servicing Agreement or new Sub-Servicing Agreements may contain provisions
different from those which are in effect in the original Sub-Servicing
Agreement. However, each Agreement will provide that any such amendment or new
agreement may not be inconsistent with or violate such Agreement.
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COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers,
will make reasonable efforts to collect all payments called for under the
Mortgage Loans and will, consistent with each Agreement and any Pool Insurance
Policy, Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard
Insurance Policy, Bankruptcy Bond or alternative arrangements, follow such
collection procedures as are customary with respect to mortgage loans that are
comparable to the Mortgage Loans. Consistent with the above, the Master Servicer
may, in its discretion, (i) waive any assumption fee, late payment or other
charge in connection with a Mortgage Loan and (ii) to the extent not
inconsistent with the coverage of such Mortgage Loan by a Pool Insurance Policy,
Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance
Policy, Bankruptcy Bond or alternative arrangements, if applicable, arrange with
a Mortgagor a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment or such other
period as is specified in the Agreement. Both the Sub-Servicer and the Master
Servicer remain obligated to make advances during any period of such an
arrangement.
Unless otherwise specified in the related Prospectus Supplement, in any
case in which property securing a conventional Mortgage Loan has been, or is
about to be, conveyed by the mortgagor or obligor, the Master Servicer will, to
the extent it has knowledge of such conveyance or proposed conveyance, exercise
or cause to be exercised its rights to accelerate the maturity of such Mortgage
Loan under any due-on-sale clause applicable thereto, but only if the exercise
of such rights is permitted by applicable law and will not impair or threaten to
impair any recovery under any related Primary Insurance Policy. If these
conditions are not met or if such Mortgage Loan is insured by the FHA or
partially guaranteed by the VA, the Master Servicer will enter into or cause to
be entered into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable for repayment of the Mortgage Loan and, to the extent permitted
by applicable law, the mortgagor remains liable thereon; provided, however, that
the Master Servicer will not enter into such an agreement if it would jeopardize
the tax status of the Trust Fund. Any fee collected by or on behalf of the
Master Servicer for entering into an assumption agreement will be retained by or
on behalf of the Master Servicer as additional servicing compensation. In the
case of Multifamily Loans, and unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will agree to exercise any right it
may have to accelerate the maturity of a Multifamily Loan to the extent it has
knowledge of any further encumbrance of the related Mortgaged Property effected
in violation of any due-on-encumbrance clause applicable thereto. See "Certain
Legal Aspects of the Mortgage Loans -- Due-on-Sale Clauses." In connection with
any such assumption, the terms of the related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Loans." This approval is usually based on the purchaser's income and
net worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the Trust Fund's ability to sell and realize the value of those
shares.
In general, a "tenant-stockholder" (as defined in Code Section
216(b)(2)) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Code Section 216(b)(1) is allowed a deduction
for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Code Section 216(a) to the
corporation under Code Sections 163 and 164. In order for a corporation to
qualify under Code Section 216(b)(1) for its taxable year in which such items
are allowable as a deduction to the corporation, such Section requires, among
other things, that at least 80% of the gross income of the corporation be
derived from its tenant- stockholders (as defined in Code Section 216(b)(2)).
By virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be
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allowable to tenant-stockholders under Code Section 216(a) with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Code Section
216(b)(1), the likelihood that such a failure would be permitted to continue
over a period of years appears remote.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each
Single Family Loan, Multifamily Loan or Contract to maintain a hazard insurance
policy providing for no less than the coverage of the standard form of fire
insurance policy with extended coverage customary for the type of Mortgaged
Property in the state in which such Mortgaged Property is located. Such coverage
will be in an amount not less than the replacement value of the improvements or
Manufactured Home securing such Mortgage Loan or the principal balance owing on
such Mortgage Loan, whichever is less. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Protected Account. In the event that the Master
Servicer maintains a blanket policy insuring against hazard losses on all the
Mortgage Loans comprising part of a Trust Fund, it will conclusively be deemed
to have satisfied its obligation relating to the maintenance of hazard
insurance. Such blanket policy may contain a deductible clause, in which case
the Master Servicer will be required to deposit from its own funds into the
related Protected Account the amounts which would have been deposited therein
but for such clause. Any additional insurance coverage for Mortgaged Properties
in a Mortgage Pool of Multifamily Loans will be specified in the related
Prospectus Supplement.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements or Manufactured
Home securing a Mortgage Loan by fire, lightning, explosion, smoke, windstorm
and hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Although the policies relating to the
Mortgage Loans may have been underwritten by different insurers under different
state laws in accordance with different applicable forms and therefore may not
contain identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the Mortgaged Property
securing a Mortgage Loan is located in a federally designated special flood area
at the time of origination, the Master Servicer will require the mortgagor or
obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the Mortgage
Loans typically contain a clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of the
full replacement value of the insured property in order to recover the full
amount of any partial loss. If the insured's coverage falls below this specified
percentage, then the insurer's liability in the event of partial loss will not
exceed the larger of (i) the actual cash value (generally defined as replacement
cost at the time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or (ii) such proportion of the loss, without
deduction for depreciation, as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements. Since
the amount of hazard insurance the Master Servicer may cause to be maintained on
the improvements securing the Mortgage Loans declines as the principal balances
owing thereon decrease, and since improved real estate generally has appreciated
in value over time in the past, the effect of this requirement in the event of
partial loss may be that hazard insurance proceeds will be insufficient to
restore fully the damaged property. If specified in the related Prospectus
Supplement, a special hazard insurance policy or an alternative form of credit
enhancement will be obtained to insure against certain of the uninsured risks
described above. See "Credit Enhancement -- Special Hazard Insurance Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and
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the related borrower on a Cooperative Loan do not maintain such insurance or
do not maintain adequate coverage or any insurance proceeds are not applied to
the restoration of damaged property, any damage to such borrower's cooperative
dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by other
credit support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
PRIMARY INSURANCE POLICIES. The Master Servicer will be required to
maintain or cause each Sub-Servicer to maintain, as the case may be, in full
force and effect, to the extent specified in the related Prospectus Supplement,
a Primary Insurance Policy with regard to each Single Family Loan for which such
coverage is required. The Master Servicer will be required not to cancel or
refuse to renew any such Primary Insurance Policy in effect at the time of the
initial issuance of a Series of Certificates that is required to be kept in
force under the applicable Agreement unless the replacement Primary Insurance
Policy for such canceled or nonrenewed policy is maintained with an insurer
whose claims-paying ability is sufficient to maintain the current rating of the
classes of Certificates of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Insurance Policy covering a
Mortgage Loan generally will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan, (iii) amounts expended but not approved by the issuer of the
related Primary Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
Primary Insurance Policies reimburse certain losses sustained by reason
of defaults in payments by borrowers. Primary Insurance Policies will not insure
against, and exclude from coverage, a loss sustained by reason of a default
arising from or involving certain matters, including (i) fraud or negligence in
origination or servicing of the Mortgage Loans, including misrepresentation by
the originator, borrower or other persons involved in the origination of the
Mortgage Loan; (ii) failure to construct the Mortgaged Property subject to the
Mortgage Loan in accordance with specified plans; (iii) physical damage to the
Mortgaged Property; and (iv) the related Master Servicer not being approved as a
servicer by the Primary Insurer.
RECOVERIES UNDER A PRIMARY INSURANCE POLICY. As conditions precedent to
the filing of or payment of a claim under a Primary Insurance Policy covering a
Mortgage Loan, the insured generally will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Mortgaged Property in at least as
good a condition as existed at the effective date of such Primary Insurance
Policy, ordinary wear and tear excepted, (3) Mortgaged Property sales expenses,
(4) any outstanding liens (as defined in such Primary Insurance Policy) on the
Mortgaged Property and (5) foreclosure costs, including court costs and
reasonable attorneys' fees; (ii) in the event of any physical loss or damage to
the Mortgaged Property, have restored and repaired the Mortgaged Property to at
least as good a condition as existed at the effective date of such Primary
Insurance Policy, ordinary wear and tear excepted; and (iii) tender to the
Primary Insurer good and merchantable title to and possession of the Mortgaged
Property.
In those cases in which a Single Family Loan is serviced by a
Sub-Servicer, the Sub-Servicer, on behalf of itself, the Trustee and
Certificateholders, will present claims to the Primary Insurer, and all
collections thereunder will be deposited in the Protected Account maintained by
the Sub-Servicer. In all other cases, the Master Servicer, on behalf of itself,
the Trustee and the Certificateholders, will present claims to the Primary
Insurer under each Primary Insurance Policy, and will take such reasonable steps
as are necessary to receive payment or to permit recovery thereunder with
respect to defaulted Mortgage Loans. As set forth above, all collections by or
on behalf of the Master Servicer under any Primary Insurance Policy and, when
the Mortgaged Property has not been restored, the hazard insurance policy, are
to be deposited in the Protected Account, subject to withdrawal as heretofore
described.
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If the Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related hazard insurance policy are insufficient
to restore the damaged Mortgaged Property to a condition sufficient to permit
recovery under the related Primary Insurance Policy, if any, the Master Servicer
is not required to expend its own funds to restore the damaged Mortgaged
Property unless it determines (i) that such restoration will increase the
proceeds to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Insurance Policy, the Master Servicer will be obligated to follow or cause to be
followed such normal practices and procedures as it deems necessary or advisable
to realize upon the defaulted Mortgage Loan. If the proceeds of any liquidation
of the Mortgaged Property securing the defaulted Mortgage Loan are less than the
principal balance of such Mortgage Loan plus interest accrued thereon that is
payable to Certificateholders, the Trust Fund will realize a loss in the amount
of such difference plus the aggregate of expenses incurred by the Master
Servicer in connection with such proceedings and which are reimbursable under
the Agreement.
If the Master Servicer or its designee recovers Insurance Proceeds
which, when added to any related Liquidation Proceeds and after deduction of
certain expenses reimbursable to the Master Servicer, exceed the principal
balance of such Mortgage Loan plus interest accrued thereon that is payable to
Certificateholders, the Master Servicer will be entitled to withdraw or retain
from the Protected Account amounts representing its normal servicing
compensation with respect to such Mortgage Loan. In the event that the Master
Servicer has expended its own funds to restore the damaged Mortgaged Property
and such funds have not been reimbursed under the related hazard insurance
policy, it will be entitled to withdraw from the Protected Account out of
related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. See "Credit Enhancement."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a
Master Servicer's primary servicing compensation with respect to a Series of
Certificates will come from the monthly payment to it, out of each interest
payment on a Mortgage Loan, of an amount equal to the percentage per annum
described in the Prospectus Supplement of the outstanding principal balance
thereof. Since the Master Servicer's primary compensation is a percentage of the
outstanding principal balance of each Mortgage Loan, such amounts will decrease
as the Mortgage Loans amortize. In addition to primary compensation, the Master
Servicer or the Sub-Servicers will be entitled to retain all assumption fees and
late payment charges, to the extent collected from Mortgagors, and, unless
otherwise provided in the related Prospectus Supplement or Agreement, any
prepayment penalties and any interest or other income which may be earned on
funds held in any Accounts. Unless otherwise specified in the related Prospectus
Supplement, any Sub-Servicer will receive a portion of the Master Servicer's
primary compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, to the extent
specified in the related Agreement, the Master Servicer will pay from its
servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment in
certain cases of premiums for insurance policies, guarantees, sureties or other
forms of credit enhancement, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in connection
with distributions and reports to Certificateholders, and payment of certain
other expenses. The Master Servicer will be entitled to reimbursement of
expenses incurred in enforcing the obligations of Sub-Servicers and Sellers
under certain limited circumstances. In addition, as indicated in the preceding
section, the Master Servicer will be entitled to reimbursement for certain
expenses incurred by it in connection with any defaulted Mortgage Loan as to
which it has determined that all recoverable Liquidation Proceeds and Insurance
Proceeds have been received.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such
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firm conducted substantially in compliance with the Uniform Single Audit Program
for Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans, agency
securities or private mortgage-backed securities, under pooling and servicing
agreements substantially similar to each other (including the related Agreement)
was conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Uniform
Single Audit Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FHLMC requires it to report. In rendering its statement such firm
may rely, as to matters relating to the direct servicing of mortgage loans,
agency securities or private mortgage-backed securities by Sub-Servicers, upon
comparable statements for examinations conducted substantially in compliance
with the Uniform Single Audit Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FHLMC or FNMA (rendered within one year of such
statement) of firms of independent public accountants with respect to the
related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by an
officer of each Master Servicer to the effect that such Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of each Master Servicer may be obtained by Certificateholders of the
related Series without charge upon written request to the Master Servicer at the
address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SELLER
One or more Master Servicers under each Agreement will be named in the
related Prospectus Supplement. Each entity serving as Master Servicer may have
normal business relationships with the Seller or the Seller's
affiliates.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that a Master Servicer may not resign from its
obligations and duties under the Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
in certain instances, the Seller nor any director, officer, employee, or agent
of the Master Servicer or the Seller will be under any liability to the Trustee,
the related Trust Fund or Certificateholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the
Agreement, or for errors in judgment; provided, however, that neither the Master
Servicer, the Seller nor any such person will be protected against any breach of
warranties or representations made in the Agreement or any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. Each Agreement will further
provide that the Master Servicer, in certain instances, the Seller and any
director, officer, employee or agent of the Master Servicer or the Seller will
be entitled to indemnification by the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that neither the Master
Servicer nor, in certain instances, the Seller will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. The Master Servicer or the Seller may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interests of the Certificateholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Master Servicer or the Seller, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to Certificateholders.
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Any person into which the Master Servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Master Servicer is a party, or any person succeeding to the business of the
Master Servicer, will be the successor of the Master Servicer under each
Agreement, provided that such person is qualified to sell mortgage loans to, and
service mortgage loans on behalf of, FNMA or FHLMC and further provided that
such merger, consolidation or succession does not adversely affect the then
current rating or ratings of the class or classes of Certificates of such Series
that have been rated.
EVENTS OF DEFAULT
Unless otherwise specified in the related Prospectus Supplement or
Agreement, "Events of Default" under each Agreement will include (i) any failure
by the Master Servicer to cause to be deposited in the Certificate Account any
amount so required to be deposited pursuant to the Agreement, and such failure
continues unremedied for two business days or such other time period as is
specified in the Agreement; (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any of its other covenants or
agreements in the Agreement which continues unremedied for sixty days or such
other time period as is specified in the Agreement after the giving of written
notice of such failure to the Master Servicer by the Trustee, or to the Master
Servicer and the Trustee by the holders of Certificates of any class evidencing
not less than 25% of the aggregate principal amount or interests ("Percentage
Interests") evidenced by such class; and (iii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar proceeding
and certain actions by or on behalf of the Master Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
If specified in the Prospectus Supplement, the Agreement will permit
the Trustee to sell the Mortgage Assets and the other assets of the Trust Fund
in the event that payments in respect thereto are insufficient to make payments
required in the Agreement. The assets of the Trust Fund will be sold only under
the circumstances and in the manner specified in the Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT
Except as otherwise specified in the related Agreement, so long as an
Event of Default under an Agreement remains unremedied, the Trustee may, and at
the direction of holders of Certificates evidencing Percentage Interests
aggregating not less than 25% of the principal of the related Trust Fund and
under such circumstances as may be specified in such Agreement, the Trustee
shall, terminate all of the rights and obligations of the Master Servicer under
the Agreement relating to such Trust Fund and in and to the Mortgage Loans,
whereupon, unless otherwise specified in the related Prospectus Supplement, the
Trustee will succeed to all of the responsibilities, duties and liabilities of
the Master Servicer under the Agreement, including, if specified in the
Prospectus Supplement, the obligation to make advances, and will be entitled to
similar compensation arrangements. In the event that the Trustee is unwilling or
unable so to act, it may appoint, or petition a court of competent jurisdiction
for the appointment of, a Mortgage Loan servicing institution with a net worth
of at least $10,000,000 to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
Except as otherwise specified in the related Agreement, no
Certificateholder, solely by virtue of such holder's status as a
Certificateholder, will have any right under any Agreement to institute any
proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Certificates of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interests constituting such class have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
AMENDMENT
Unless otherwise specified in the Prospectus Supplement, each Agreement
may be amended by the Seller, each Master Servicer and the Trustee, without the
consent of any of the Certificateholders, (i) to cure any ambiguity; (ii) to
correct or supplement any provision therein which may be defective or
inconsistent with any
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other provision therein; or (iii) to make any other revisions with respect to
matters or questions arising under the Agreement which are not inconsistent with
the provisions thereof, provided that such action will not adversely affect in
any material respect the interests of any Certificateholder. In addition, to the
extent provided in the related Agreement, an Agreement may be amended without
the consent of any of the Certificateholders, to change the manner in which the
Certificate Account, the Protected Account or any other Accounts are maintained,
provided that any such change does not adversely affect the then current rating
on the class or classes of Certificates of such Series that have been rated. In
addition, if a REMIC election is made with respect to a Trust Fund, the related
Agreement may be amended to modify, eliminate or add to any of its provisions to
such extent as may be necessary to maintain the qualification of the related
Trust Fund as a REMIC, provided that the Trustee has received an opinion of
counsel to the effect that such action is necessary or helpful to maintain such
qualification. Unless otherwise specified in the Prospectus Supplement, each
Agreement may also be amended by the Seller, each Master Servicer and the
Trustee with consent of holders of Certificates of such Series evidencing not
less than 66% of the aggregate Percentage Interests of each class affected
thereby for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or of modifying in any manner
the rights of the holders of the related Certificates; provided, however, that
no such amendment may (i) reduce in any manner the amount of or delay the timing
of, payments received on Mortgage Assets which are required to be distributed on
any Certificate without the consent of the holder of such Certificate, or (ii)
reduce the aforesaid percentage of Certificates of any class of holders which
are required to consent to any such amendment without the consent of the holders
of all Certificates of such class covered by such Agreement then outstanding. If
a REMIC election is made with respect to a Trust Fund, the Trustee will not be
entitled to consent to an amendment to the related Agreement without having
first received an opinion of counsel to the effect that such amendment will not
cause such Trust Fund to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
Unless otherwise specified in the related Agreement, the obligations
created by each Agreement for each Series of Certificates will terminate upon
the payment to the related Certificateholders of all amounts held in any
Accounts or by the Master Servicer and required to be paid to them pursuant to
such Agreement following the later of (i) the final payment or other liquidation
of the last of the Mortgage Assets subject thereto or the disposition of all
property acquired upon foreclosure or deed in lieu of foreclosure of any such
Mortgage Assets remaining in the Trust Fund and (ii) the purchase by the Master
Servicer or other entity specified in the related Prospectus Supplement
including, if REMIC treatment has been elected, by the holder of the residual
interest in the REMIC (see "Certain Federal Income Tax Consequences" below),
from the related Trust Fund of all of the remaining Mortgage Assets and all
property acquired in respect of such Mortgage Assets.
Unless otherwise specified in the related Prospectus Supplement, any
such purchase of Mortgage Assets and property acquired in respect of Mortgage
Assets evidenced by a Series of Certificates will be made at the option of the
Master Servicer or other entity at a price, and in accordance with the
procedures, specified in the Prospectus Supplement. The exercise of such right
will effect early retirement of the Certificates of that Series, but the right
of the Master Servicer or other entity to so purchase is subject to the
principal balance of the related Mortgage Assets being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Mortgage Assets at the Cut-off Date for the Series. The foregoing
is subject to the provision that if a REMIC election is made with respect to a
Trust Fund, any repurchase pursuant to clause (ii) above will be made only in
connection with a "qualified liquidation" of the REMIC within the meaning of
Section 860F(g)(4) of the Code.
THE TRUSTEE
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Seller, each Master Servicer
and any of their respective affiliates.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the Mortgage Loans. Because such
legal aspects are governed primarily by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete or to reflect
the laws of any particular state, or to encompass the laws of all states in
which the security for the Mortgage Loans is situated. The summaries are
qualified in their entirety by reference to the appropriate laws of the states
in which Mortgage Loans may be originated.
GENERAL
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. The Single Family Loans and
Multifamily Loans will be secured by mortgages, deeds of trust, security deeds
or deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to the loan is located. A mortgage creates a lien
upon the real property encumbered by the mortgage, which lien is generally not
prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. The mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
CONDOMINIUMS. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans.
The Cooperative (i) owns all the real property that comprises the project,
including the land and the apartment building comprised of separate dwelling
units and common areas or (ii) leases the land generally by a long-term ground
lease and owns the apartment building. The Cooperative is directly responsible
for project management and, in most cases, payment of real estate taxes and
hazard and liability insurance. If there is a blanket mortgage on the
Cooperative and/or underlying land, as is generally the case, the Cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the Cooperative in
connection with the construction or purchase of the Cooperative's apartment
building. The interest of the occupants under proprietary leases or occupancy
agreements to which the Cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
Cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the blanket mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the Cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by
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an individual tenant-stockholder of Cooperative shares or, in the case of a
Trust Fund including Cooperative Loans, the collateral securing the Cooperative
Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-stockholder's
pro rata share of the Cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying rights is financed through
a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and a
financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
CONTRACTS. Each Contract evidences both (a) the obligation of the
obligor to repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such loan. The
Contracts generally are "chattel paper" as defined in the UCC in effect in the
states in which the Manufactured Homes initially were registered. Pursuant to
the UCC, the rules governing the sale of chattel paper are similar to those
governing the perfection of a security interest in chattel paper. Unless
otherwise specified in the Prospectus Supplement, under the Agreement, the
Seller will transfer or cause the transfer of physical possession of the
Contracts to the Trustee or its custodian. In addition the Seller will make or
cause to be made an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be required to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. If the Master Servicer
fails, due to clerical errors or otherwise, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Trustee
may not have a first priority security interest in the Manufactured Home
securing a Contract.
As manufactured homes have become larger and often have been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a Manufactured Home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor does not violate this agreement, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or
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the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest originally retained by the Seller and transferred to the Seller.
The Seller will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Seller, the Master Servicer nor the Trustee will amend the certificates of title
to identify the Trustee, on behalf of the Certificateholders, as the new secured
party and, accordingly, the Seller or the Lender will continue to be named as
the secured party on the certificates of title relating to the Manufactured
Homes. In most states, such assignment is an effective conveyance of such
security interest without amendment of any lien noted on the related certificate
of title and the new secured party succeeds to the Seller's rights as the
secured party. However, in some states there exists a risk that, in the absence
of an amendment to the certificate of title, such assignment of the security
interest might not be held effective against creditors of the Seller or Lender.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest assigned to the Seller and the Trustee is not perfected, such security
interest would be subordinate to, among others, subsequent purchasers for value
of Manufactured Homes and holders of perfected security interests. There also
exists a risk in not identifying the Trustee, on behalf of the
Certificateholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Trustee could be
released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Seller will obtain the representation of the Lender that it has no knowledge of
any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises.
FORECLOSURE/REPOSSESSION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. Foreclosure of a deed of
trust is generally accomplished by a non-judicial sale under a specific
provision in the deed of trust which authorizes the trustee to sell the property
at public auction upon any default by the borrower under the terms of the note
or deed of trust. In some states, the trustee must record a notice of default
and send a copy to the borrower-trustor, to any person who has
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recorded a request for a copy of any notice of default and notice of sale, to
any successor in interest to the borrower-trustor, to the beneficiary of any
junior deed of trust and to certain other persons. Before such non-judicial sale
takes place, typically a notice of sale must be posted in a public place and
published during a specific period of time in one or more newspapers, posted on
the property, and sent to parties having an interest of record in the property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties. When
the mortgagee's right to foreclosure is contested, the legal proceedings
necessary to resolve the issue can be time-consuming. After the completion of a
judicial foreclosure proceeding, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property. In general, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws which apply to certain
tenants who elected to remain in the building but who did not purchase shares in
the Cooperative when the building was so converted.
COOPERATIVE LOANS. The Cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the Cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the Cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants
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required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant- stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant- stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
CONTRACTS. The Master Servicer on behalf of the Trustee, to the extent
required by the related agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, generally varying from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the Manufactured Home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral.
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RIGHTS OF REDEMPTION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. In some states, after sale
pursuant to a deed of trust or foreclosure of a mortgage, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. In some states, redemption may occur only
upon payment of the entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. The effect of a statutory
right of redemption would defeat the title of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
CONTRACTS. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have adopted statutory prohibitions restricting the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the real
property sold at the foreclosure sale. As a result of these prohibitions, it is
anticipated that in many instances the Master Servicer will not seek deficiency
judgments against defaulting mortgagors. Under the laws applicable in most
states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a Manufactured Home. However, some
states impose prohibitions or limitations on deficiency judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Mortgage Loans underlying a Series of Certificates and
possible reductions in the aggregate amount of such payments. Some states also
have homestead exemption laws which would protect a principal residence from a
liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state laws
impose specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
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Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Lender had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Lender to
repurchase the Contract because of a breach of its representation and warranty
that no claims or defenses exist which would affect the obligor's obligation to
make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
conventional Mortgage Loan will contain a due-on-sale clause which will
generally provide that if the mortgagor or obligor sells, transfers or conveys
the Mortgaged Property, the loan or contract may be accelerated by the mortgagor
or secured party. The Garn-St Germain Depository Institutions Act of 1982 (the
"Garn-St Germain Act"), subject to certain exceptions, preempts state
constitutional, statutory and case law prohibiting the enforcement of
due-on-sale clauses. As to loans secured by an owner-occupied residence (which
would include a Manufactured Home), the Garn-St Germain Act sets forth nine
specific instances in which a mortgagee covered by the Act may not exercise its
rights under a due-on-sale clause, notwithstanding the fact that a transfer of
the property may have occurred. The inability to enforce a due-on-sale clause
may result in transfer of the related Mortgaged Property to an uncreditworthy
person, which could increase the likelihood of default.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of Single Family Loans, Cooperative
Loans or Contracts with respect to prepayments on loans secured by liens
encumbering owner-occupied residential properties. Since many of the Mortgaged
Properties will be owner-occupied, it is anticipated that prepayment charges may
not be imposed with respect to many of the Single Family Loans, Cooperative
Loans and Contracts. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Single Family Loans, Cooperative Loans or Contracts
having higher Mortgage Rates or APR's, may increase the likelihood of
refinancing or other early retirement of such loans or contracts. Legal
restrictions, if any, on prepayment of Multifamily Loans will be described in
the related Prospectus Supplement.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of
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or foreclosure with respect to the related unit. Title V authorized any state to
reimpose limitations on interest rates and finance charges by adopting before
April 1, 1983 a law or constitutional provision which expressly rejects
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V was not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on loans covered by Title V. In any state in which application of
Title V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels will be included in
any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's mortgage loan (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the mortgage loan and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Master
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
Unless otherwise provided in the applicable Prospectus Supplement, any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the Certificates. In addition, the
Relief Act imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Mortgage Loan during the borrower's period
of active duty status. Thus, in the event that such a Mortgage Loan goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property in a timely fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted
alleging personal injury or property damage from the existence of certain
chemical substances which may be present in building materials. For example,
formaldehyde and asbestos have been and in some cases are incorporated into many
building materials utilized in manufactured and other housing. As a consequence,
lawsuits may arise from time to time asserting claims against manufacturers or
builders of the housing, suppliers of component parts, and related persons in
the distribution process. Plaintiffs have won such judgments in certain such
lawsuits.
Under the FTC Rule described above, the holder of any Contract secured
by a Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. Unless otherwise described in the related Prospectus
Supplement, the successful assertion of such claim constitutes a breach of a
representation or warranty of the Lender, and the Certificateholders would
suffer a loss only to the extent that (i) the Lender breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) the Lender, the Seller or the Trustee were unsuccessful in
asserting any claim of contribution or subrogation on behalf of the
Certificateholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde and certain other chemicals in
manufactured housing, with the result that recoveries from such manufacturers,
suppliers or other persons may be limited to their corporate assets without the
benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage
Loans may include installment sales contracts entered into with the builders of
the homes located on the Mortgaged Properties. The Mortgagors in some instances
may have claims and defenses against the builders which could be asserted
against the Trust Fund.
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ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets
and give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("Cleanup Costs") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of the Trust Fund and reduce the amounts
otherwise distributable to the Certificateholders if a Mortgaged Property
securing a Mortgage Loan became the property of the Trust Fund in certain
circumstances and if such Cleanup Costs were incurred. Moreover, certain states
by statute impose a lien for any Cleanup Costs incurred by such state on the
property that is the subject of such Cleanup Costs (a "Superlien"). All
subsequent liens on such property are subordinated to such Superlien and, in
some states, even prior recorded liens are subordinated to such Superliens. In
the latter states, the security interest of the Trustee in a property that is
subject to such a Superlien could be adversely affected.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain of the anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereby. The discussion, and the opinions referred to
below, are based on laws, regulations, rulings and decisions now in effect (or,
in the case of certain regulations, proposed), all of which are subject to
change or possibly differing interpretations. Because tax consequences may vary
based upon the status or tax attributes of the owner of a Certificate,
prospective investors should consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of Certificates. For purposes of this tax discussion
(except with respect to information reporting, or where the context indicates
otherwise), the terms "Certificateholder" and "holder" mean the beneficial owner
of a Certificate and the term "Mortgage Loan" includes Agency Securities and
Private Mortgage-Backed Securities.
REMIC ELECTIONS
Under the Code, an election may be made with respect to each Trust Fund
related to a series of Certificates to treat such Trust Fund or certain assets
of such Trust Fund as a REMIC. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election will be made with respect to
the related Trust Fund. To the extent provided in the Prospectus Supplement for
a series, Certificateholders may also have the benefit of a Reserve Account and
of certain agreements (each, a "Yield Supplement Agreement") under which payment
will be made from the Reserve Account in the event that interest accrued on the
Mortgage Loans at their Mortgage Rates is insufficient to pay interest on the
Certificates of such Series (a "Basis Risk Shortfall"). If a REMIC election is
to be made, the Prospectus Supplement will designate the Certificates of such
series or the interests composing such Certificates as "regular interests"
("REMIC Regular Certificates," which where the context so requires includes a
reference to each interest composing a Certificate where such interest has been
designated as a regular interest, in lieu of such Certificates) in the REMIC
(within the meaning of Section 860G(a)(l) of the Code) or as the REMIC Residual
Certificates in the REMIC (within the meaning of Section 860G(a)(2) of the
Code). The terms "REMIC Certificates" and "Non-REMIC Certificates" denote,
respectively, Certificates (or the interests composing Certificates) of a series
with respect to which a REMIC election will, or will not, be made. The
discussion below is divided into two parts, the first part applying only to
REMIC Certificates and the second part applying only to Non-REMIC Certificates.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will
agree in the Agreement to elect to treat the related Trust Fund or certain
assets of such Trust Fund as a REMIC. Qualification as a REMIC requires ongoing
compliance with certain conditions. Upon the issuance of each series of REMIC
Certificates, Stroock
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& Stroock & Lavan LLP or Thacher Proffitt & Wood, counsel to the Seller, will
deliver its opinion generally to the effect that, with respect to each series of
REMIC Certificates for which a REMIC election is to be made, under then existing
law, and assuming a proper and timely REMIC election and ongoing compliance with
the provisions of the Agreement and applicable provisions of the Code and
applicable Treasury regulations, the related Trust Fund or certain assets of
such Trust Fund will be a REMIC and the REMIC Certificates will be considered to
evidence ownership of "regular interests" or "residual interests" within the
meaning of the REMIC provisions of the Code.
To the extent provided in the Prospectus Supplement for a series,
holders of REMIC Regular Certificates who are entitled to payments from the
Reserve Account in the event of a Basis Risk Shortfall will be required to
allocate their purchase price between their beneficial ownership interests in
the related REMIC regular interests and Yield Supplement Agreements, and will be
required to report their income realized with respect to each, calculated taking
into account such allocation. In general, such allocation would be based on the
respective fair market values of the REMIC regular interests and the related
Yield Supplement Agreements on the date of purchase of the related REMIC Regular
Certificate. However, a portion of the purchase price of a REMIC Regular
Certificate should be allocated to accrued but unpaid interest. No
representation is or will be made as to the fair market value of the Yield
Supplement Agreements or the relative values of the REMIC regular interests and
the Yield Supplement Agreements, upon initial issuance of the related REMIC
Regular Certificates or at any time thereafter. Holders of REMIC Regular
Certificates are advised to consult their own tax advisors concerning the
determination of such fair market values. Under the Agreement, holders of
applicable REMIC Regular Certificates will agree that, for federal income tax
purposes, they will be treated as owners of the respective regular interests and
of the corresponding Yield Supplement Agreement.
STATUS OF REMIC CERTIFICATES. The REMIC Certificates will be "real
estate assets" for purposes of Section 856(c)(4)(A) of the Code and assets
described in Section 7701(a)(19)(C) of the Code (assets qualifying under one or
both of those sections, applying each section separately, "qualifying assets")
to the extent that the REMIC's assets are qualifying assets, but not to the
extent that the REMIC's assets consist of Yield Supplement Agreements. However,
if at least 95 percent of the REMIC's assets are qualifying assets, then 100
percent of the REMIC Certificates will be qualifying assets. Similarly, income
on the REMIC Certificates will be treated as "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, subject to the limitations of the preceding two sentences. In addition to
Mortgage Loans, the REMIC's assets will include payments on Mortgage Loans held
pending distribution to holders of REMIC Certificates, amounts in Reserve
Accounts (if any), other credit enhancements (if any), and possibly buydown
funds ("Buydown Funds"). The Mortgage Loans will be qualifying assets under the
foregoing sections of the Code except to the extent provided in the Prospectus
Supplement. The regulations under Sections 860A through 860G of the Code (the
"REMIC Regulations") treat credit enhancements as part of the mortgage or pool
of mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on Mortgage Loans and held pending
distribution to holders of REMIC Certificates ("cash flow investments") will be
treated as qualifying assets. It is unclear whether amounts in a Reserve Account
or Buydown Funds would also constitute qualifying assets. The Prospectus
Supplement for each series will indicate (if applicable) that it has Buydown
Funds. The REMIC Certificates will not be "residential loans" for purposes of
the residential loan requirement of Section 593(g)(4)(B) of the Code.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of Certificates, Stroock & Stroock & Lavan LLP or Thacher Proffitt & Wood
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Agreement and applicable provisions of the Code
and applicable Treasury regulations and rulings, the Tiered REMICs will each
qualify under then existing law as a REMIC and the REMIC Certificates issued by
the Tiered REMICs, respectively, will be considered to evidence ownership of
"regular interests" or "residual interests" in the related REMIC within the
meaning of the REMIC provisions of the Code.
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Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code,
and assets described in Section 7701(a)(19)(C) of the Code, and whether the
income on such Certificates is interest described in Section 856(c)(3)(B) of the
Code, the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
CURRENT INCOME ON REMIC REGULAR CERTIFICATES -- GENERAL. Except as
otherwise indicated herein, the REMIC Regular Certificates will be treated for
federal income tax purposes (but not necessarily for accounting or other
purposes) as debt instruments that are issued by the REMIC on the date of
issuance of the REMIC Regular Certificates and not as ownership interests in the
REMIC or the REMIC's assets. Holders of REMIC Regular Certificates who would
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Certificates under an accrual
method.
Payments of interest on REMIC Regular Certificates may be based on a
fixed rate, a variable rate as permitted by the REMIC Regulations, or may
consist of a specified portion of the interest payments on qualified mortgages
where such portion does not vary during the period the REMIC Regular Certificate
is outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID Regulations")
with certain modifications and permissible variations. See "REMIC Regular
Certificates -- Current Income on REMIC Regular Certificates -- Original Issue
Discount -- Variable Rate REMIC Regular Certificates," below, for a discussion
of the definition of a qualified floating rate for purposes of the OID
Regulations. In contrast to the OID Regulations, for purposes of the REMIC
Regulations, a qualified floating rate does not include any multiple of a
qualified floating rate (also excluding multiples of qualified floating rates
that themselves would constitute qualified floating rates under the OID
Regulations), and the characterization of a variable rate that is subject to a
cap, floor or similar restriction as a qualified floating rate for purposes of
the REMIC Regulations will not depend upon the OID Regulations relating to caps,
floors, and similar restrictions. See "REMIC Regular Certificates -- Current
Income on REMIC Regular Certificates -- Original Issue Discount -- Variable Rate
REMIC Regular Certificates," below, for a discussion of the OID Regulations
relating to caps, floors and similar restrictions. A qualified floating rate, as
defined above for purposes of the REMIC Regulations (a "REMIC qualified floating
rate"), qualifies as a variable rate for purposes of the REMIC Regulations if
such REMIC qualified floating rate is set at a "current rate" as defined in the
OID Regulations. In addition, a rate equal to the highest, lowest or an average
of two or more REMIC qualified floating rates qualifies as a variable rate for
REMIC purposes. A REMIC Regular Certificate may also have a variable rate based
on a weighted average of the interest rates on some or all of the qualified
mortgages held by the REMIC where each qualified mortgage taken into account has
a fixed rate or a variable rate that is permissible under the REMIC Regulations.
Further, a REMIC Regular Certificate may have a rate that is the product of a
REMIC qualified floating rate or a weighted average rate and a fixed multiplier,
is a constant number of basis points more or less than a REMIC qualified
floating rate or a weighted average rate, or is the product, plus or minus a
constant number of basis points, of a REMIC qualified floating rate or a
weighted average rate and a fixed multiplier. An otherwise permissible variable
rate for a REMIC Regular Certificate, described above, will not lose its
character as such because it is subject to a floor or a cap, including a "funds
available cap" as that term is defined in the REMIC Regulations. Lastly, a REMIC
Regular Certificate will be considered as having a permissible variable rate if
it has a fixed or otherwise permissible variable rate during one or more payment
or accrual periods and different fixed or otherwise permissible variable rates
during other payment or accrual periods.
ORIGINAL ISSUE DISCOUNT. REMIC Regular Certificates of certain series
may be issued with "original issue discount" within the meaning of Section
1273(a) of the Code. Holders of REMIC Regular Certificates issued with original
issue discount generally must include original issue discount in gross income
for federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
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Each Trust Fund will report original issue discount, if any, to the
holders of REMIC Regular Certificates based on the OID Regulations. OID
Regulations concerning contingent payment debt instruments do not apply to the
REMIC Regular Certificates.
The OID Regulations provide that, in the case of a debt instrument such
as a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "Payment Lag REMIC Regular
Certificates; Initial Period Considerations," and "Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Certificates (as defined
below) and accrual certificates, the stated redemption price at maturity of a
REMIC Regular Certificate is its principal amount. The issue price of a REMIC
Regular Certificate is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Certificates was sold. The issue price will be reduced if any portion of such
price is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Certificate on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Certificate
apparently is computed for purposes of this DE MINIMIS rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Certificate, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Certificate's stated redemption price at maturity. The OID Regulations provide
that holders will include any DE MINIMIS original issue discount ratably as
payments of stated principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "accrual period") that begins on the day
following a Distribution Date (or in the case of the first such period, begins
on the Closing Date) and ends on the next succeeding Distribution Date. The
original issue discount accruing during each accrual period is then allocated
ratably to each day during such period to determine the daily portion of
original issue discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual
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periods that were included in such REMIC Regular Certificate's stated redemption
price at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although not entirely free from doubt, such a holder may be entitled to
deduct a loss to the extent that its remaining basis would exceed the maximum
amount of future payments to which such holder is entitled. It is unclear
whether the Prepayment Assumption is taken into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued
with original issue discount at a cost that is less than its remaining stated
redemption price at maturity will also generally be required to include in gross
income, for each day on which it holds such REMIC Regular Certificate, the daily
portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such REMIC Regular Certificate, then such
daily portions will be reduced proportionately in determining the income of such
holder.
QUALIFIED STATED INTEREST. Interest payable on a REMIC Regular
Certificate which qualifies as "qualified stated interest" for purposes of the
OID Regulations will not be includable in the stated redemption price at
maturity of the REMIC Regular Certificate. Accordingly, if the interest on a
REMIC Regular Certificate does not constitute "qualified stated interest," the
REMIC Regular Certificate will have original issue discount. Interest payments
will not qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the terms
and conditions of the Mortgage Loans underlying the REMIC Regular Certificates
or the terms and conditions of the REMIC Regular Certificates are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered.
PREMIUM. A purchaser of a REMIC Regular Certificate that purchases
such REMIC Regular Certificate at a cost greater than its remaining stated
redemption price at maturity will be considered to have purchased such REMIC
Regular Certificate at a premium, and may, under Section 171 of the Code, elect
to amortize such premium under a constant yield method over the life of the
REMIC Regular Certificate. The Prepayment Assumption is probably taken into
account in determining the life of the REMIC Regular Certificate for this
purpose. Except as provided in regulations, amortizable premium will be treated
as an offset to interest income on the REMIC Regular Certificate.
PAYMENT LAG REMIC REGULAR CERTIFICATES; INITIAL PERIOD CONSIDERATIONS.
Certain REMIC Regular Certificates will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Certificates or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the DE
MINIMIS rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is DE MINIMIS, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
VARIABLE RATE REMIC REGULAR CERTIFICATES. Under the OID Regulations,
REMIC Regular Certificates paying interest at a variable rate (a "Variable Rate
REMIC Regular Certificate") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified DE MINIMIS
amount; (ii) it provides for stated interest, paid or compounded at
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least annually, at (a) one or more qualified floating rates, (b) a single fixed
rate and one or more qualified floating rates, (c) a single objective rate or
(d) a single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate, but which is subject to one or more restrictions such
as a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction is not reasonably expected as
of the issue date to significantly affect the yield of the Variable Rate REMIC
Regular Certificate.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. An interest rate on a
REMIC Regular Certificate that is the weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC should constitute an
objective rate. Despite the foregoing, a variable rate of interest on a Variable
Rate REMIC Regular Certificate will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Variable Rate REMIC Regular Certificate's term will be either significantly
less than or significantly greater than the average value of the rate during the
final half of the Variable Rate REMIC Regular Certificate's term. Further, an
objective rate does not include a rate that is based on information that is
within the control of the issuer (or a party related to the issuer) or that is
unique to the circumstances of the issuer (or a party related to the issuer). An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Certificate provides for stated interest at a fixed
rate for an initial period of less than one year followed by a variable rate
that is either a qualified floating rate or an objective rate and if the
variable rate on the Variable Rate REMIC Regular Certificate's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis points
of each other as determined on the Variable Rate REMIC Regular Certificate's
issue date, the variable rate will be conclusively presumed to approximate the
fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a
"variable rate debt instrument" under the OID Regulations and provide for
interest at either a single qualified floating rate, a single objective rate, a
Presumed Single Qualified Floating Rate or a Presumed Single Variable Rate
throughout the term (a "Single Variable Rate REMIC Regular Certificate"),
original issue discount is computed as described in "REMIC Regular Certificates
- -- Current Income on REMIC Regular Certificates -- Original Issue Discount"
based on the following: (i) stated interest on the Single Variable Rate REMIC
Regular Certificate which is unconditionally payable in cash or property (other
than debt instruments of the issuer) at least annually will constitute qualified
stated interest; (ii) by assuming that the variable rate on the Single Variable
Rate REMIC Certificate is a fixed rate equal to: (a) in the case of a Single
Variable Rate REMIC Regular Certificate with a qualified floating rate
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or a qualified inverse floating rate, the value, as of the issue date, of the
qualified floating rate or the qualified inverse floating rate or (b) in the
case of a Single Variable Rate REMIC Regular Certificate with an objective rate
(other than a qualified inverse floating rate), a fixed rate which reflects the
reasonably expected yield for such Single Variable Rate REMIC Regular
Certificate; and (iii) the qualified stated interest allocable to an accrual
period is increased (or decreased) if the interest actually paid during an
accrual period exceeds (or is less than) the interest assumed to be paid under
the assumed fixed rate described in (ii), above.
In general, any Variable Rate REMIC Regular Certificate other than a
Single Variable Rate REMIC Regular Certificate (a "Multiple Variable Rate REMIC
Regular Certificate") that qualifies as a "variable rate debt instrument" will
be converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. (A Multiple Variable Rate REMIC Regular
Certificate may not bear more than one objective rate.) In the case of a
Multiple Variable Rate REMIC Regular Certificate that qualifies as a "variable
rate debt instrument" and provides for stated interest at a fixed rate in
addition to either one or more qualified floating rates or a qualified inverse
floating rate, the fixed rate is initially converted into a qualified floating
rate (or a qualified inverse floating rate, if the Multiple Variable Rate REMIC
Regular Certificate provides for a qualified inverse floating rate). Under such
circumstances, the qualified floating rate or qualified inverse floating rate
that replaces the fixed rate must be such that the fair market value of the
Multiple Variable Rate REMIC Regular Certificate as of the Multiple Variable
Rate REMIC Regular Certificate's issue date is approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Multiple
Variable Rate REMIC Regular Certificate is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted
into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules,
the amounts of original issue discount and qualified stated interest, if any,
are determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates -- Current Income on REMIC
Regular Certificates -- Original Issue Discount". A holder of the Multiple
Variable Rate REMIC Regular Certificate will account for such original issue
discount and qualified stated interest as if the holder held the "equivalent"
fixed rate debt instrument. In each accrual period, appropriate adjustments will
be made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate REMIC Regular Certificate
during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. It is not clear under current law how a Variable Rate REMIC Regular
Certificate would be taxed if such REMIC Regular Certificate were treated as a
contingent payment debt obligation since the OID Regulations relating
to contingent payment debt obligations do not apply to REMIC regular interests.
INTEREST-ONLY REMIC REGULAR CERTIFICATES. The Trust Fund intends to
report income from interest-only REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Certificates will be treated as having original
issue discount.
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MARKET DISCOUNT. A holder that acquires a REMIC Regular Certificate at
a market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC Regular Certificateholder will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Certificate that has accrued but has not previously been
includable in income, and will recognize ordinary income to that extent. In
general terms, unless Treasury regulations when issued provide otherwise, market
discount on a REMIC Regular Certificate may be treated, at the REMIC
Certificateholder's election, as accruing either (i) under a constant yield
method, taking into account the Prepayment Assumption, or (ii) in proportion to
accruals of original issue discount (or, if there is no original issue discount,
in proportion to stated interest at the Pass-Through Rate).
In addition, a holder may be required to defer deductions for a portion
of the holder's interest expense on any debt incurred or continued to purchase
or carry a REMIC Regular Certificate purchased with market discount. The
deferred portion of any interest deduction would not exceed the portion of the
market discount on the REMIC Regular Certificate that accrues during the taxable
year in which such interest would otherwise be deductible and, in general, would
be deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "Current Income on REMIC Regular Certificates --
Original Issue Discount"), taking into account distributions (including
prepayments) prior to the date of acquisition of such REMIC Regular Certificate
by the subsequent purchaser. If market discount on a REMIC Regular Certificate
is treated as zero under this rule, the actual amount of such discount must be
allocated to the remaining principal distributions on the REMIC Regular
Certificate in proportion to the amounts of such principal distributions, and
when each such distribution is made, gain equal to the discount, if any,
allocated to the distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Holders of REMIC Regular Certificates
should consult their own tax advisors regarding the availability or advisability
of such an election.
SINGLE-CLASS REMICS. In the case of "single-class REMICs," certain
expenses of the REMIC will be allocated to the holders of the REMIC Regular
Certificates. The deductibility of such expenses may be subject to certain
limitations. See "Deductibility of Trust Fund Expenses" below.
SALES OF REMIC REGULAR CERTIFICATES. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includable in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includable in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC
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Regular Certificate was held by such seller, reduced by any market discount
includable in income under the rules described above under "Current Income on
REMIC Regular Certificates -- Market Discount."
REMIC Regular Certificates will be "evidences of indebtedness" within
the meaning of Section 582(c)(1) of the Code, so that gain or loss recognized
from a sale of a REMIC Regular Certificate by a bank or other financial
institution to which such section applies would be ordinary income or loss.
TERMINATION. The REMIC will terminate, if not earlier, shortly
following the REMIC's receipt of the final payment in respect of the underlying
qualified mortgages. The last distribution on a REMIC Regular Certificate should
be treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a
separate contractual right to payments under a Yield Supplement Agreement, and
the tax treatment of such payments, if any, will be addressed in the related
Prospectus Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the
amounts taken into account by holders of REMIC Residual Certificates, is
determined in the same manner as in the case of an individual, with certain
exceptions. The accrual method of accounting must be used and the taxable year
of the REMIC must be the calendar year. The basis of property contributed to the
REMIC in exchange for regular or residual interests is its fair market value
immediately after the transfer. The REMIC Regulations determine the fair market
value of the contributed property by deeming it equal to the aggregate issue
prices of all regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the
REMIC. Market discount on any of the Mortgage Loans held by the REMIC must be
included in the income of the REMIC as it accrues, rather than being included in
income only upon sale of the Mortgage Loans or as principal on the Mortgage
Loans is paid. The REMIC is not entitled to any personal exemptions or to
deductions for taxes paid to foreign countries and U.S. possessions, charitable
contributions or net operating losses, or to certain other deductions to which
individuals are generally entitled. Income or loss in connection with a
"prohibited transaction" is disregarded. See "Prohibited Transactions."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the related REMIC taxable income is also
uncertain. Although not entirely free from doubt, the related REMIC taxable
income may be recognized when the adjusted issue price of such REMIC Regular
Certificate would exceed the maximum amount of future payments with respect to
such REMIC Regular Certificate. It is unclear whether the Prepayment Assumption
is taken into account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that
is distinct from the REMIC's basis in its assets. The tax basis of a REMIC
Residual Certificate in its holder's hands will be its cost (i.e., the
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purchase price of the REMIC Residual Certificate), and will be reduced (but not
below zero) by the holder's share of cash distributions and losses and increased
by its share of taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC
Residual Certificate in any quarter may not exceed the holder's basis in its
REMIC Residual Certificate. Any excess losses may be carried forward
indefinitely to future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
MISMATCHING OF INCOME AND DEDUCTIONS; EXCESS INCLUSIONS. The taxable
income recognized by the holder of a REMIC Residual Certificate in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and discount income (or deductions for
amortization of premium) with respect to qualified mortgages, on the one hand,
and the timing of deductions for interest (including original issue discount) on
the REMIC Regular Certificates, on the other. In the case of multiple classes of
REMIC Regular Certificates issued at different yields, and having different
weighted average lives, taxable income recognized by the holders of REMIC
Residual Certificates may be greater than cash flow in earlier years of the
REMIC (with a corresponding taxable loss or less taxable income than cash flow
in later years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Mortgage Loans may not increase over time as a percentage of the
outstanding principal amount of the Mortgage Loans.
In the case of Tiered REMICs, the OID Regulations provide that the
regular interests in the REMIC which directly owns the Mortgage Loans (the
"Lower Tier REMIC") will be treated as a single debt instrument for purposes of
the original issue discount provisions. Therefore, the Trust Fund will calculate
the taxable income of Tiered REMICs by treating the Lower Tier REMIC regular
interests as a single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate
will be subject to certain special rules. The excess inclusions with respect to
a REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily accruals
for such quarterly period. The daily accrual for any day on which the REMIC
Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Certificates prior to
the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset
by other deductions, including net operating loss carryforwards, on a holder's
return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective
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for tax years beginning after December 31, 1986, a taxpayer may elect to have
these provisions apply only with respect to tax years beginning after August 20,
1996.
If the holder of a REMIC Residual Certificate is an organization
subject to the tax on unrelated business income imposed by Code Section 511, the
excess inclusions will be treated as unrelated business taxable income of such
holder for purposes of Code Section 511. In addition, the Code provides that
under Treasury regulations, if a real estate investment trust ("REIT") owns a
REMIC Residual Certificate, to the extent excess inclusions of the REIT exceed
its real estate investment trust taxable income (excluding net capital gains),
the excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income
it derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a qualified mortgage other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a qualified mortgage or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the qualified mortgages pending distribution on the
REMIC Certificates. In addition, a tax is imposed on the REMIC equal to 100
percent of the value of certain property contributed to the REMIC after its
"startup day." No REMIC in which interests are offered hereunder will accept
contributions that would cause it to be subject to such tax. This provision will
not affect a REMIC's ability in accordance with the Agreement to accept
substitute Mortgage Loans or to sell defective Mortgage Loans.
A REMIC is subject to a tax (deductible from its income) on any "net
income from foreclosure property" (determined in accordance with Section
857(b)(4)(B) of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed
on the Trust Fund initially would be borne by the REMIC Residual Certificates in
the related REMIC rather than by the REMIC Regular Certificates, unless
otherwise specified in the Prospectus Supplement.
DEALERS' ABILITY TO MARK TO MARKET REMIC RESIDUAL CERTIFICATES.
Treasury regulations provide that all REMIC Residual Certificates acquired on or
after January 4, 1995 are not securities and cannot be marked to market pursuant
to Section 475 of the Code.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
TAX ON DISPOSITION OF REMIC RESIDUAL CERTIFICATES. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although the tax treatment with respect to a REMIC Residual Certificate
that has unrecovered basis after all funds of the Trust Fund have been
distributed is unclear, the holder presumably would be entitled to claim a loss
in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations
(which have not yet been issued), if a holder sells a REMIC Residual Certificate
and acquires the same or other REMIC Residual Certificates, residual interests
in another REMIC, or any similar interests in a "taxable mortgage pool" (as
defined in Section 7701 (i) of the Code) during the period beginning six months
before, and ending six months after, the date of
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such sale, such sale will be subject to the "wash sale" rules of Section 1091 of
the Code. In that event, any loss realized by the seller on the sale generally
will not be currently deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to
a "disqualified organization." The tax is imposed on the transferor, or, where
the transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions for periods after such transfer with respect to the interest
transferred multiplied by the highest corporate rate of tax. The transferor (or
agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
TREATMENT OF PAYMENTS TO A TRANSFEREE IN CONSIDERATION OF TRANSFER OF A
REMIC RESIDUAL CERTIFICATE. The federal income tax consequences of any
consideration paid to a transferee on a transfer of an interest in a REMIC
Residual Certificate are unclear. The preamble to the REMIC Regulations
indicates that the Internal Revenue Service is considering the tax treatment of
these types of residual interests. A transferee of such an interest should
consult its own tax advisors.
RESTRICTIONS ON TRANSFER; HOLDING BY PASS-THROUGH ENTITIES. An entity
or segregated pool of assets cannot qualify as a REMIC absent reasonable
arrangements designed to ensure that (1) residual interests in such entity or
segregated pool are not held by disqualified organizations and (2) information
necessary to calculate the tax due on transfers to disqualified organizations
(i.e., a computation of the present value of the excess inclusions) is made
available by the REMIC. The governing instruments of a Trust Fund will contain
provisions designed to ensure the foregoing, and any transferee of a REMIC
Residual Certificate must execute and deliver an affidavit stating that neither
the transferee nor any person for whose account such transferee is acquiring the
REMIC Residual Certificate is a disqualified organization. In addition, as to
the requirement that reasonable arrangements be made to ensure that disqualified
organizations do not hold a residual interest in the REMIC, the REMIC
Regulations require that notice of the prohibition be provided either through a
legend on the certificate that evidences ownership, or through a conspicuous
statement in the prospectus or other offering document used to offer the
residual interest for sale. As to the requirement that sufficient information be
made available to calculate the tax on transfers to disqualified organizations
(or the tax, discussed below, on pass-through entities, interests in which are
held by disqualified organizations), the REMIC Regulations further require that
such information also be provided to the Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates and
subchapter T cooperatives. Except as provided in regulations, nominees holding
interests in a "pass-through entity" for another person will also be treated as
"pass-through entities" for this purpose. The tax is equal to the amount of
excess inclusions allocable to the disqualified organization for the taxable
year multiplied by the highest corporate rate of tax, and is deductible by the
"pass-through entity" against the gross amount of ordinary income of the entity.
The Agreement provides that any attempted transfer of a beneficial or
record interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to the Trustee an affidavit that such transferee
is not a disqualified organization.
For taxable years beginning after December 31, 1997, all partners of
certain "electing large partnerships" having 100 or more partners will be
treated as disqualified organizations for purposes of the tax imposed on
pass-through entities if such partnerships hold residual interests in a REMIC.
In addition, 70 percent of an electing large partnership's miscellaneous
itemized deductions, including deductions for servicing and guaranty
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fees and any expenses of the REMIC will be disallowed, although the remaining
deductions will not be subject to the 2 percent floor applicable to individual
partners. See "Deductibility of Trust Fund Expenses" below.
The REMIC Regulations provide that a transfer of a "noneconomic
residual interest" will be disregarded for all federal income tax purposes
unless impeding the assessment or collection of tax was not a significant
purpose of the transfer. A residual interest will be treated as a "noneconomic
residual interest" unless, at the time of the transfer (1) the present value of
the expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate, and (2)
the transferor reasonably expects that for each anticipated excess inclusion,
the transferee will receive distributions from the REMIC, at or after the time
at which taxes on such excess inclusion accrue, sufficient to pay the taxes
thereon. A significant purpose to impede the assessment or collection of tax
exists if the transferor, at the time of the transfer, either knew or should
have known (had "improper knowledge") that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
transferor will be presumed not to have improper knowledge if (i) the transferor
conducts, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
came due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future, and (ii) the
transferee represents to the transferor that (A) the transferee understands that
it might incur tax liabilities in excess of any cash received with respect to
the residual interest and (B) the transferee intends to pay the taxes associated
with owning the residual interest as they come due. Any transferee of a REMIC
Residual Certificate must execute and deliver to the transferor an affidavit
containing the representations described in (ii) above. A different formulation
of this rule applies to transfers of REMIC Residual Certificates by or to
foreign transferees. See "Foreign Investors" below.
DEDUCTIBILITY OF TRUST FUND EXPENSES
A holder of REMIC Certificates that is an individual, estate or trust
will be subject to the limitation with respect to certain itemized deductions
described in Code Section 67, to the extent that such deductions, in the
aggregate, do not exceed two percent of the holder's adjusted gross income, and
such holder may not be able to deduct such fees and expenses to any extent in
computing such holder's alternative minimum tax liability. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the Master Servicer of the
Mortgage Loans. These deductions will be allocated entirely to the holders of
the REMIC Residual Certificates in the case of REMIC Trust Funds with multiple
classes of REMIC Regular Certificates that do not pay their principal amounts
ratably. As a result, the REMIC will report additional taxable income to holders
of REMIC Residual Certificates in an amount equal to their allocable share of
such deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC," the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Certificates
and the REMIC Residual Certificates on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
the case of a holder of a REMIC Regular Certificate who is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including REITs), the deductibility of such expenses will be subject to the
limitations described above. The reduction or disallowance of these deductions
may have a significant impact on the yield of REMIC Regular Certificates to such
a holder. In general terms, a single-class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income purposes) or (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the
single-class REMIC rules.
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FOREIGN INVESTORS
REMIC REGULAR CERTIFICATES. Except as discussed below, a holder of a
REMIC Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "controlled foreign corporation" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise subject to federal income tax as a result
of any direct or indirect connection to the United States other than through its
ownership of a REMIC Regular Certificate. For these purposes, the term "United
States person" means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an estate
whose income is includable in gross income for United States federal income
taxation regardless of its source, and (iv) a trust for which one or more United
States fiduciaries have the authority to control all substantial decisions and
for which a court of the United States can exercise primary supervision over the
trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (iv) above, unless the trust elects to have its United
States status determined under the criteria set forth in (iv) above for tax
years ending after August 20, 1996. Recently issued Treasury regulations (the
"Final Withholding Regulations"), which are generally effective with respect to
payments made after December 31, 1998, consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payor. All holders
should consult their tax advisers regarding the application of the Final
Withholding Regulations.
REMIC RESIDUAL CERTIFICATES. The Conference Report to the Tax Reform
Act of 1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on interest does not apply, however, to
"portfolio interest" (if certain certifications as to beneficial ownership are
made, as discussed above under "Foreign Investors -- Regular Certificates") or
to the extent a tax treaty reduces or eliminates the tax. Treasury regulations
provide that amounts paid with respect to residual interests qualify as
portfolio interest only if interest on the qualified mortgages held by the REMIC
qualifies as portfolio interest. Generally, interest on Mortgage Loans held by a
Trust Fund will not qualify as portfolio interest, although interest on the
Private Mortgage-Backed Securities, other pass-through certificates, or REMIC
regular interests held by a Trust Fund may qualify. In any case, a holder of a
REMIC Residual Certificate will not be entitled to the portfolio interest
exception from the 30% withholding tax (or to any treaty exemption or rate
reduction) for that portion of a payment that constitutes excess inclusions.
Generally, the withholding tax will be imposed when REMIC gross income is paid
or distributed to the holder of a residual interest or there is a disposition of
the residual interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Mortgage Loans from 50 percent of the Prepayment Assumption to 200
percent of the Prepayment Assumption. A transfer by a foreign
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transferor to a domestic transferee will likewise be disregarded under the REMIC
Regulations if the transfer would have the effect of allowing the foreign
transferor to avoid the tax on accrued excess inclusions.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale
of REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowable as a credit
against the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust Fund (Form 1066 and
Schedules Q thereto) must be filed as if the Trust Fund were a partnership for
federal income tax purposes. Information on Schedule Q must be provided to
holders of REMIC Residual Certificates with respect to every calendar quarter.
Each holder of a REMIC Residual Certificate will be required to treat items on
its federal income tax returns consistently with their treatment on the Trust
Fund's information returns unless the holder either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from an incorrect schedule received from the Trust Fund. The Trust Fund also
will be subject to the procedural and administrative rules of the Code
applicable to partnerships, including the determination of any adjustments to,
among other things, items of REMIC taxable income by the Internal Revenue
Service. Holders of REMIC Residual Certificates will have certain rights and
obligations with respect to any administrative or judicial proceedings involving
the Internal Revenue Service. Under the Code and Regulations, a REMIC generally
is required to designate a tax matters person. Generally, subject to various
limitations, the tax matters person has authority to act on behalf of the REMIC
and the holders of the REMIC Residual Certificates in connection with
administrative determinations and judicial review respecting returns of taxable
income of the REMIC. Treasury regulations exempt from certain of these
procedural rules REMICs having no more than one residual interest holder.
Unless otherwise indicated in the Prospectus Supplement, and to the
extent allowable, the Seller or its designee will act as the tax matters person
for each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance
of its interest in the REMIC Residual Certificate, agrees that the Seller or its
designee will act as the holder's fiduciary in the performance of any duties
required of the holder in the event that the holder is the tax matters person.
NON-REMIC CERTIFICATES
The discussion under this heading applies only to a series of
Certificates with respect to which a REMIC election is not made.
TAX STATUS OF THE TRUST FUND. Upon the issuance of each series of
Non-REMIC Certificates, Stroock & Stroock & Lavan LLP or Thacher Proffitt &
Wood, counsel to the Seller, will deliver its opinion to the effect that, under
then current law, assuming compliance with the Agreement, the related Trust Fund
will be classified for federal income tax purposes as a grantor trust and not as
an association taxable as a corporation or a taxable mortgage pool. Accordingly,
each holder of a Non-REMIC Certificate will be treated for federal income tax
purposes as the owner of an undivided interest in the Mortgage Loans included in
the Trust Fund. As further described below, each holder of a Non-REMIC
Certificate therefore must report on its federal income tax return the gross
income from the portion of the Mortgage Loans that is allocable to such
Non-REMIC Certificate and may deduct the portion of the expenses incurred by the
Trust Fund that is allocable to such Non-REMIC Certificate, at the same time and
to the same extent as such items would be reported by such holder if it had
purchased and held directly such interest in the Mortgage Loans and received
directly its share of the payments on the Mortgage Loans and incurred directly
its share of expenses incurred by the Trust Fund when those amounts are received
or incurred by the Trust Fund.
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A holder of a Non-REMIC Certificate that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of such holder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. A holder of a Non-REMIC Certificate
that is not a corporation cannot deduct such expenses for purposes of the
alternative minimum tax (if applicable). Such deductions will include servicing,
guarantee and administrative fees paid to the servicer of the Mortgage Loans. As
a result, individuals, estates, or trusts holding Non-REMIC Certificates may
have taxable income in excess of the cash received.
STATUS OF THE NON-REMIC CERTIFICATES. The Non-REMIC Certificates
generally will be "real estate assets" for purposes of Section 856(c)(4)(A) of
the Code and "loans... secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C) (v) of the Code, and interest income on the
Non-REMIC Certificates generally will be "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. However, the Non-REMIC Certificates may not be qualifying assets under the
foregoing sections of the Code to the extent that the Trust Fund's assets
include Buydown Funds, amounts in a Reserve Account, or payments on mortgages
held pending distribution to Certificateholders. The Non-REMIC Certificates
should not be "residential loans made by the taxpayer" for purposes of the
residential loan requirement of Section 593(g)(4)(B) of the Code.
TAXATION OF NON-REMIC CERTIFICATES UNDER STRIPPED BOND RULES. The
federal income tax treatment of the Non-REMIC Certificates will depend on
whether they are subject to the rules of section 1286 of the Code (the "stripped
bond rules"). The Non-REMIC Certificates will be subject to those rules if
stripped interest-only Certificates are issued. In addition, whether or not
stripped interest-only Certificates are issued, the Internal Revenue Service may
contend that the stripped bond rules apply on the ground that the Master
Servicer's servicing fee, or other amounts, if any, paid to (or retained by) the
Master Servicer or its affiliates, as specified in the applicable Prospectus
Supplement, represent greater than an arm's length consideration for servicing
the Mortgage Loans. In Revenue Ruling 91-46, the Internal Revenue Service
concluded that retained interest in excess of reasonable compensation for
servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
If interest retained for the Master Servicer's servicing fee or other
interest is treated as a "stripped coupon," the Non-REMIC Certificates will
either be subject to the original issue discount rules or the market discount
rules. A holder of a Non-REMIC Certificate will account for any discount on the
Non-REMIC Certificate (other than an interest treated as a "stripped coupon") as
market discount rather than original issue discount if either (i) the amount of
original issue discount with respect to the Non-REMIC Certificate was treated as
zero under the original issue discount DE MINIMIS rule when the Non-REMIC
Certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off from the
Mortgage Loans. If neither of the above exceptions applies, the original issue
discount rules will apply to the Non-REMIC Certificates. See "REMIC Regular
Interests -- Current Income on REMIC Regular Interests -- Original Issue
Discount" and " -- Market Discount" above.
If the original issue discount rules apply, the holder of a Non-REMIC
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from the Non-REMIC Certificate in each taxable year equal
to the income that accrues on the Non-REMIC Certificate in that year calculated
under a constant yield method based on the yield of the Non-REMIC Certificate
(or, possibly, the yield of each Mortgage Loan underlying such Non-REMIC
Certificate) to such holder. Such yield would be computed at the rate that, if
used in discounting the holder's share of the payments on the Mortgage Loans,
would cause the present value of those payments to equal the price at which the
holder purchased the Non-REMIC Certificate. With respect to certain categories
of debt instruments, Section 1272(a)(6) of the Code requires that original issue
discount be accrued based on a prepayment assumption determined in a manner
prescribed by forthcoming regulations. The Taxpayer Relief Act of 1997 amended
the original issue discount provisions to provide that for "any pool of debt
instruments, the yield on which may be affected by reason of prepayments,"
original issue discount shall be accrued based on a prepayment assumption
determined in a manner prescribed by forthcoming regulations. This
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might require the use of the pricing prepayment assumption instead of the
prepayment assumptions used in the underlying transactions.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Mortgage Loans allocable to the Non-REMIC Certificate,
the use of a reasonable prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Non-REMIC Certificate acquired at a discount or
premium (that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Mortgage Loan that is allocable to the Non-REMIC
Certificate and the portion of the adjusted basis of the Non-REMIC Certificate
(see "Sales of Non-REMIC Certificates" below) that is allocable to the Mortgage
Loan.
Non-REMIC Certificates of certain series ("Variable Rate Non-REMIC
Certificates") may provide for a Pass- through Rate based on the weighted
average of the interest rates of the Mortgage Loans held by the Trust Fund,
which interest rates may be fixed or variable. In the case of a Variable Rate
Non-REMIC Certificate that is subject to the original issue discount rules, the
daily portions of original issue discount generally will be calculated in the
same manner as discussed above except the principles discussed in "REMIC Regular
Certificates -- Current Income on REMIC Regular Certificates -- Original Issue
Discounts -- Variable Rate REMIC Regular Certificates" will be applied.
TAXATION OF NON-REMIC CERTIFICATES IF STRIPPED BOND RULES DO NOT APPLY.
If the stripped bond rules do not apply to a Non-REMIC Certificate, then the
holder will be required to include in income its share of the interest payments
on the Mortgage Loans in accordance with its tax accounting method. In addition,
if the holder purchased the Non-REMIC Certificate at a discount or premium, the
holder will be required to account for such discount or premium in the manner
described below, as if it had purchased the Mortgage Loans directly. The
treatment of any discount will depend on whether the discount with respect to
the Mortgage Loans is original issue discount as defined in the Code and, in the
case of discount other than original issue discount, whether such other discount
exceeds a DE MINIMIS amount. In the case of original issue discount, the holder
(whether a cash or accrual method taxpayer) will be required to report as
additional interest income in each month the portion of such discount that
accrues in that month, calculated based on a constant yield method. In general
it is not anticipated that the amount of original issue discount to be accrued
in each month, if any, will be significant relative to the interest paid
currently on the Mortgage Loans. However, original issue discount could arise
with respect to a Mortgage Loan ("ARM") that provides for interest at a rate
equal to the sum of an index of market interest rates and a fixed number. The
original issue discount for ARMs generally will be determined under the
principals discussed in "REMIC Regular Certificates -- Current Income on REMIC
Regular Certificates -- Original Issue Discount -- Variable Rate REMIC Regular
Certificates."
If discount on the Mortgage Loans other than original issue discount
exceeds a DE MINIMIS amount (described below), the holder will also generally be
required to include in income in each month the amount of such discount accrued
through such month and not previously included in income, but limited, with
respect to the portion of such discount allocable to any Mortgage Loan, to the
amount of principal on such Mortgage Loan received by the Trust Fund in that
month. Because the Mortgage Loans will provide for monthly principal payments,
such discount may be required to be included in income at a rate that is not
significantly slower (and, under certain circumstances, faster) than the rate at
which such discount accrues (and therefore at a rate not significantly slower
than the rate at which such discount would be included in income if it were
original issue discount). The holder may elect to accrue such discount under a
constant yield method based on the yield of the Non-REMIC Certificate to such
holder. In the absence of such an election, it may be necessary to accrue such
discount under a more rapid straight-line method. Under the DE minimis rule,
market discount with respect to a Non-REMIC Certificate will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Mortgage Loans allocable to the Non-REMIC Certificate and (ii) the weighted
average life (determined using complete years) of the Mortgage Loans remaining
at the time of purchase of the Non- REMIC Certificate. See "REMIC Regular
Certificates -- Current Income on REMIC Regular Certificates -- Market
Discount."
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If a holder purchases a Non-REMIC Certificate at a premium, such holder
may elect under Section 171 of the Code to amortize, as an offset to interest
income, the portion of such premium that is allocable to a Mortgage Loan under a
constant yield method based on the yield of the Mortgage Loan to such holder,
provided that such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before that date should be
allocated among the principal payments on the Mortgage Loan and allowed as an
ordinary deduction as principal payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or
premium would be made based on the scheduled payments on the Mortgage Loans or
taking account of a reasonable prepayment assumption.
If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to the Non-REMIC Certificate and the
portion of the adjusted basis of the Non- REMIC Certificate (see "Sales of
Non-REMIC Certificates" below) that is allocable to the Mortgage Loan.
SALES OF NON-REMIC CERTIFICATES. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Non-REMIC Certificate.
In general, such adjusted basis will equal the holder's cost for the Non-REMIC
Certificate, increased by the amount of any income previously reported with
respect to the Non-REMIC Certificate and decreased by the amount of any losses
previously reported with respect to the Non-REMIC Certificate and the amount of
any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-REMIC Certificate were
held as capital assets, except that, for a Non-REMIC Certificate to which the
stripped bond rules do not apply and that was acquired with more than a DE
MINIMIS amount of discount other than original issue discount (see "Taxation of
Non- REMIC Certificates if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
FOREIGN INVESTORS. A holder of a Non-REMIC Certificate who is not a
"United States person" (as defined below) and is not subject to federal income
tax as a result of any direct or indirect connection to the United States other
than its ownership of a Non-REMIC Certificate will not be subject to United
States income or withholding tax in respect of payments of interest or original
issue discount on a Non-REMIC Certificate to the extent attributable to Mortgage
Loans that were originated after July 18, 1984, provided that the holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-REMIC
Certificate under penalties of perjury, certifying that such holder is not a
United States person and providing the name and address of such holder).
Recently issued Treasury regulations (the "Final Withholding Regulations"),
which are generally effective with respect to payments made after December 31,
1998, consolidate and modify the current certification requirements and means by
which a holder may claim exemption from United States federal income tax
withholding and provide certain presumptions regarding the status of holders
when payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. All holders should consult their tax
advisers regarding the application of the Final Withholding Regulations.
Interest or original issue discount on a Non-REMIC Certificate attributable to
Mortgage Loans that were originated prior to July 19, 1984 will be subject to a
30% withholding tax (unless such tax is reduced or eliminated by an applicable
tax treaty). For these purposes, the term "United States person" means a citizen
or a resident of the United States, a corporation, partnership or other entity
created or organized in, or under the laws of, the United States or any
political subdivision thereof, an estate the income of which is subject to
United States federal income taxation regardless of its source, and a trust for
which one or more United States fiduciaries have the authority to control all
substantial decisions and for which a court of the United States can exercise
primary supervision over the trust's administration. For years beginning before
January 1, 1997, the term "United States person" shall include a trust whose
income is includible in gross income for United States federal income taxation
regardless of source, in lieu of trusts just described, unless the trust elects
to have its United States status determined under the criteria described in the
previous sentence for tax years ending after August 20, 1996.
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TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable
mortgage pools" are subject to corporate level tax on their net income. A
"taxable mortgage pool" is generally defined as an entity that meets the
following requirements: (i) the entity is not a REMIC (or, after September 1,
1997 a FASIT, as defined in Section 860L of the Code), (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists of real estate mortgages (or interests therein), (iii)
the entity is the obligor under debt obligations with two or more maturities,
and (iv) payments on the debt obligations on which the entity is the obligor
bear a relationship to the payments on the debt obligations which the entity
holds as assets. With respect to requirement (iii), the Code authorizes the
Internal Revenue Service to provide by regulations that equity interests may be
treated as debt for purposes of determining whether there are two or more
maturities. If a Series of Non-REMIC Certificates were treated as obligations of
a taxable mortgage pool, the Trust Fund would be ineligible to file consolidated
returns with any other corporation and could be liable for corporate tax.
Treasury regulations do not provide for the recharacterization of equity as debt
for purposes of determining whether an entity has issued debt with two
maturities, except in the case of transactions structured to avoid the taxable
mortgage pool rules.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA, should consider the fiduciary
standards under ERISA in the context of the plan's particular circumstances
before authorizing an investment of a portion of such plan's assets in the
Certificates. Accordingly, pursuant to Section 404 of ERISA, such fiduciary
should consider among other factors (i) whether the investment is for the
exclusive benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the applicable diversification requirements; (iii) whether
the investment is in accordance with the documents and instruments governing the
plan; and (iv) whether the investment is prudent, considering the nature of the
investment. Fiduciaries of plans also should consider ERISA's prohibition on
improper delegation of control over, or responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code (each, a "Plan"), are prohibited from
engaging in a broad range of transactions involving Plan assets and persons
having certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes are imposed upon such
persons by Section 4975 of the Code. The Seller, Bear, Stearns & Co. Inc., each
Master Servicer or other servicer, any Pool Insurer, any Special Hazard Insurer,
the Trustee, and certain of their affiliates might be considered "parties in
interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition, holding or disposition of Certificates by or on behalf of such Plan
could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless an exemption is available. Furthermore, if
an investing Plan's assets were deemed to include the Mortgage Assets and not
merely an interest in the Certificates, transactions occurring in the management
of Mortgage Assets might constitute prohibited transactions and the fiduciary
investment standards of ERISA could apply to the assets of the Trust Fund,
unless an administrative exemption applies.
In DOL Regulation ss.2510.3-101 (the "Regulation"), the U.S. Department
of Labor has defined what constitutes Plan assets for purposes of ERISA and
Section 4975 of the Code. The Regulation provides that if a Plan makes an
investment in an "equity interest" in an entity, the assets of the entity will
be considered the assets of such Plan unless certain exceptions apply. The
Seller can give no assurance that the Certificates will qualify for any of the
exceptions under the Regulation. As a result, the Mortgage Assets may be
considered the assets of any Plan which acquires a Certificate, unless some
administrative exemption is available.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage
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pool pass-through certificates." A "mortgage pool" is defined as an investment
pool, consisting solely of interest bearing obligations secured by first or
second mortgages or deeds of trust on single-family residential property,
property acquired in foreclosure and undistributed cash. A "mortgage pool
pass-through certificate" is defined as a certificate which represents a
beneficial undivided interest in a mortgage pool which entitles the holder to
pass-through payments of principal and interest from the Mortgage Loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Seller and
the Trustee maintain a system of insurance or other protection for the Mortgage
Loans and the property securing such Mortgage Loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the Mortgage Loans, or 1% of
the principal balance of the largest covered pooled Mortgage Loan; (ii) the
Trustee may not be an affiliate of the Seller; and (iii) the payments made to
and retained by the Seller in connection with the Trust Fund, together with all
funds inuring to its benefit for administering the Trust Fund, represent no more
than "adequate consideration" for selling the Mortgage Loans, plus reasonable
compensation for services provided to the Trust Fund.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a
Plan with respect to which the Seller, the Special Hazard Insurer, the Pool
Insurer, the Master Servicer, or other servicer, or the Trustee is a party in
interest if the Plan does not pay more than fair market value for such
Certificate and the rights and interests evidenced by such Certificate are not
subordinated to the rights and interests evidenced by other Certificates of the
same pool. PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the Mortgage
Pool, provided that any payments made to the Master Servicer in connection with
the servicing of the Trust Fund are made in accordance with a binding agreement,
copies of which must be made available to prospective investors.
In the case of any Plan with respect to which the Seller, the Master
Servicer, the Special Hazard Insurer, the Pool Insurer, or the Trustee is a
fiduciary, PTCE 83-1 will only apply if, in addition to the other requirements:
(i) the initial sale, exchange or transfer of Certificates is expressly approved
by an independent fiduciary who has authority to manage and control those plan
assets being invested in Certificates; (ii) the Plan pays no more for the
Certificates than would be paid in an arm's length transaction; (iii) no
investment management, advisory or underwriting fee, sale commission, or similar
compensation is paid to the Seller with regard to the sale, exchange or transfer
of Certificates to the Plan; (iv) the total value of the Certificates purchased
by such Plan does not exceed 25% of the amount issued; and (v) at least 50% of
the aggregate amount of Certificates is acquired by persons independent of the
Seller, the Trustee, the Master Servicer, and the Special Hazard Insurer or Pool
Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm
that the Trust Fund is a "mortgage pool," that the Certificates constitute
"mortgage pool pass-through certificates," and that the conditions set forth in
PTCE 83-1 would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in PTCE 83-1, the Plan
fiduciary should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary also should consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates on
behalf of a Plan.
In addition to PTCE 83-1, the U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction Exemption 90-30 ("PTE 90-30"), to
Bear, Stearns & Co. Inc., which is applicable to Certificates which meet its
requirements whenever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate, or is the
selling or placement agent. PTE 90-30 generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that certain conditions set forth in PTE 90-30 are
satisfied. The exempted transactions include certain transactions relating to
the servicing and operation of investment trusts holding assets of the following
general categories: single and multifamily residential or commercial mortgages,
motor vehicle receivables, consumer or commercial receivables and guaranteed
government mortgage pool certificates and the purchase, sale and holding of
mortgage-backed or asset- backed pass-through certificates representing
beneficial ownership interests in the assets of such investment trusts.
PTE 90-30 sets forth seven general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Certificates
to be eligible for exemptive relief thereunder. First, the acquisition of
Certificates by certain Plans must be on terms that are at least as favorable to
the Plan as they would be in
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an arm's length transaction with an unrelated party. Second, the rights and
interests evidenced by the Certificates must not be subordinated to the rights
and interests evidenced by other certificates of the same trust. Third, the
Certificates at the time of acquisition by the Plan must be rated in one of the
three highest generic rating categories by Standard & Poor's Structured Rating
Group, Moody's Investors Service Inc., Duff & Phelps Credit Rating Co. or Fitch
Investors Services, L.P. ("National Credit Rating Agencies"). Fourth, the
Trustee cannot be an affiliate of any member of the "Restricted Group" which
consists of any underwriter as defined in PTE 90-30, the Seller, the Master
Servicer, each servicer, the Pool Insurer, the Special Hazard Insurer and any
obligor with respect to obligations or receivables constituting more than 5% of
the aggregate unamortized principal balance of the obligations or receivables as
of the date of initial issuance of the Certificates. Fifth, the sum of all
payments made to and retained by such underwriters must represent not more than
reasonable compensation for underwriting the Certificates; the sum of all
payments made to and retained by the Seller pursuant to the assignment of the
obligations or receivables to the related Trust Fund must represent not more
than the fair market value of such obligations; and the sum of all payments made
to and retained by the Master Servicer and any servicer must represent not more
than reasonable compensation for such person's services under the Trust
Agreement and reimbursement of such person's reasonable expenses in connection
therewith. Sixth, (i) the investment pool consists only of assets of the type
enumerated in the exemption and which have been included in other investment
pools; (ii) certificates evidencing interests in such other investment pools
have been rated in one of the three highest generic rating categories by one of
the National Credit Rating Agencies for at least one year prior to a Plan's
acquisition of certificates; and (iii) certificates evidencing interests in such
other investment pools have been purchased by investors other than Plans for at
least one year prior to a Plan's acquisition of certificates. Finally, the
investing Plan must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Commission under the Securities Act of 1933, as amended. The
Seller assumes that only Plans which are accredited investors under the federal
securities laws will be permitted to purchase the Certificates.
If the general conditions of PTE 90-30 are satisfied, such exemption
may provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of the
Certificates by Plans. However, no exemption is provided from the restrictions
of ERISA for the acquisition or holding of a Certificate on behalf of an
"Excluded Plan" by any person who is a fiduciary with respect to the assets of
such Excluded Plan. For purposes of the Certificates, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group. In addition, each Plan's
investment in each class of Certificates cannot exceed 25% of the outstanding
Certificates in the class, and after the Plan's acquisition of the Certificates,
no more than 25% of the assets over which the fiduciary has investment authority
are invested in Certificates of a trust containing assets which are sold or
serviced by the same entity. Finally, in the case of initial issuance (but not
secondary market transactions), at least 50% of each class of Certificates, and
at least 50% of the aggregate interests in the trust, must be acquired by
persons independent of the Restricted Group.
Before purchasing a Certificate in reliance on any of these exemptions
or any other exemption, a fiduciary of a Plan should itself confirm that
requirements set forth in such exemption would be satisfied.
One or more exemptions may be available, with respect to certain
prohibited transactions to which neither PTCE 83-1 nor PTE 90-30 is applicable,
depending in part upon the type of Plan fiduciary making the decision to acquire
Certificates and the circumstances under which such decision is made, including,
but not limited to PTCE 90-1 (regarding investments by insurance company pooled
separate accounts), PTCE 91-38 (regarding investments by bank collective
investments funds), PTCE 84-14 (regarding transactions effected by "qualified
professional asset managers"), PTCE 95-60 (regarding investments by insurance
company general accounts) and PTCE 96-23 (regarding transactions effected by
"in-house asset managers"). However, even if the conditions specified in either
of these exemptions are met, the scope of the relief provided by these
exemptions might or might not cover all acts which might be construed as
prohibited transactions.
Any Plan fiduciary considering whether to purchase a Certificate on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment.
Each Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to the related
Certificates.
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LEGAL INVESTMENT
SMMEA
Unless otherwise indicated in the related Prospectus Supplement and for
so long as they are rated in one of the two highest rating categories by a least
one nationally recognized statistical rating organization, the Certificates will
constitute "mortgage related securities" for purposes of SMMEA, and as such,
absent state legislation described below, will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to the same extent
that under applicable law obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any such entities with respect to "mortgage related securities,"
the Certificates will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Certain states adopted
legislation which limits the ability of insurance companies domiciled in these
states to purchase mortgage-related securities, such as the Certificates.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with Certificates without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in Certificates, and
national banks may purchase Certificates for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. ss. 24 (Seventh), subject in each case to such regulations as the
applicable federal regulatory authority may prescribe. In this connection,
federal credit unions should review the National Credit Union Administration
("NCUA") Letter to Credit Unions No. 96, as modified by Letter to Credit Unions
No. 108, which included guidelines to assist federal credit unions in making
investment decisions for mortgage related securities, and the NCUA's regulation
"Investment and Deposit Activities" (12 C.F.R. Part 703), (whether or not the
class of Certificates under consideration for purchase constitutes a "mortgage
related security").
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency and the Office of
Thrift Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Certificates by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
The Policy Statement provides that a "high-risk mortgage security" is
not suitable as an investment portfolio holding for a depository institution. A
high-risk mortgage security must be reported in the trading account at market
value or as an asset held for sale at the lower of cost or market value and
generally may only be acquired to reduce an institution's interest rate risk.
However, an institution with strong capital and earnings and adequate liquidity
that has a closely supervised trading department is not precluded from acquiring
high-risk mortgage securities for trading purposes.
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A depository institution must ascertain and document prior to purchase
and no less frequently than annually thereafter that a nonhigh-risk mortgage
security held for investment remains outside the high-risk category. If an
institution is unable to make these determinations through internal analysis, it
must use information derived from a source that is independent of the party from
whom the product is being purchased. The institution is responsible for ensuring
that the assumptions underlying the analysis and resulting calculations are
reasonable. Reliance on analyses and documentation from a securities dealer or
other outside party without internal analyses by the institution is
unacceptable.
In general, a high-risk mortgage security is a mortgage derivative
product possessing greater price volatility than a benchmark fixed rate 30-year
mortgage-backed pass-through security. Mortgage derivative products include
CMOs, REMICs, CMO and REMIC residuals and stripped mortgage-backed securities. A
mortgage derivative product that, at the time of purchase or at a subsequent
testing date, meets any one of three tests will be considered a high-risk
mortgage security. When the characteristics of a mortgage derivative product are
such that the first two tests cannot be applied (such as interest-only strips),
the mortgage derivative product remains subject to the third test.
The three tests of a high-risk mortgage security are as follows: (i)
the mortgage derivative product has an expected weighted average life greater
than 10.0 years; (ii) the expected weighted average life of the mortgage
derivative product: (a) extends by more than 4.0 years, assuming an immediate
and sustained parallel shift in the yield curve of plus 300 basis points, or (b)
shortens by more than 6.0 years, assuming an immediate and sustained parallel
shift in the yield curve of minus 300 basis points; and (iii) the estimated
change in the price of the mortgage derivative product is more than 17%, due to
an immediate and sustained parallel shift in the yield curve of plus or minus
300 basis points.
When performing the price sensitivity test, the same prepayment
assumptions and same cash flows that were used to estimate average life
sensitivity must be used. The discount rate assumptions should be determined by
(i) assuming that the discount rate for the security equals the yield on a
comparable average life U.S. Treasury security plus a constant spread, (ii)
calculating the spread over Treasury rates from the bid side of the market for
the mortgage derivative product, and (iii) assuming the spread remains constant
when the Treasury curve shifts up or down 300 basis points. Discounting the cash
flows by their respective discount rates estimates a price in the plus or minus
300 basis point environments. The initial price must be determined by the offer
side of the market and used as the base price from which the 17% price
sensitivity test will be measured.
Generally, a floating-rate debt class will not be subject to the
average life and average life sensitivity tests described above if it bears a
rate that, at the time of purchase or at a subsequent testing date, is below the
contractual cap on the instrument. An institution may purchase interest rate
contracts that effectively uncap the instrument. For purposes of the Policy
Statement, a CMO floating-rate debt class is a debt class whose rate adjusts at
least annually on a one-for-one basis with the debt class's index. The index
must be a conventional, widely-used market interest rate index such as the
London Interbank Offered Rate ("LIBOR"). Inverse floating rate debt classes are
not included in the definition of a floating rate debt class.
Securities and other products, whether carried on or off balance sheet
(such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total investment portfolio or total
capital of a depository institution are considered an imprudent investment
practice. Long-maturity generally means a remaining maturity exceeding 10 years.
GENERALLY
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates, to purchase
Certificates representing more than a specified percentage of the investor's
assets, or to purchase certain types of Certificates, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Certificates constitute
legal investments for such investors and comply with any other applicable
requirements.
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METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplements will
be offered in Series. The distribution of the Certificates may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Certificates will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by Bear, Stearns & Co. Inc. ("Bear, Stearns"), an affiliate of the Seller,
acting as underwriter with other underwriters, if any, named therein. In such
event, the Prospectus Supplement may also specify that the underwriters will not
be obligated to pay for any Certificates agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Seller. In connection with the
sale of the Certificates, underwriters may receive compensation from the Seller
or from purchasers of the Certificates in the form of discounts, concessions or
commissions. The Prospectus Supplement will describe any such compensation paid
by the Seller.
Alternatively, the Prospectus Supplement may specify that the
Certificates will be distributed by Bear, Stearns acting as agent or in some
cases as principal with respect to Certificates that it has previously purchased
or agreed to purchase. If Bear, Stearns acts as agent in the sale of
Certificates, Bear, Stearns will receive a selling commission with respect to
each Series of Certificates, depending on market conditions, expressed as a
percentage of the aggregate principal balance of the Certificates sold hereunder
as of the Cut-off Date. The exact percentage for each Series of Certificates
will be disclosed in the related Prospectus Supplement. To the extent that Bear,
Stearns elects to purchase Certificates as principal, Bear, Stearns may realize
losses or profits based upon the difference between its purchase price and the
sales price. The Prospectus Supplement with respect to any Series offered other
than through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the Seller and purchasers
of Certificates of such Series.
The Seller will indemnify Bear, Stearns and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Bear, Stearns and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Bear, Stearns and the Seller may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Seller's Mortgage Loans pending
the sale of such Mortgage Loans or interests therein, including the
Certificates.
The Seller anticipates that the Certificates will be sold primarily to
institutional investors. Purchasers of Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
The legality of the Certificates of each Series, including certain
federal income tax consequences with respect thereto, will be passed upon for
the Seller by Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038 or Thacher Proffitt & Wood, Two World Trade Center, New York, New York
10048.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies specified in the related Prospectus
Supplement.
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Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates under certain scenarios might fail to recoup
their underlying investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
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GLOSSARY
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
TERM PAGE
Accounts ..........................................................16
Accrual Certificates........................................................18
Agency Securities ...........................................................1
Agreement ..........................................................11
APR ...........................................................8
ARM ..........................................................68
Available Funds ..........................................................17
Bankruptcy Bond ..........................................................15
Basis Risk Shortfall........................................................51
Bear, Stearns ..........................................................75
Buydown Funds ..........................................................52
Buydown Loans ...........................................................6
Capitalized Interest Account................................................11
Cede ..........................................................21
Certificate Account.........................................................33
Certificate Register........................................................16
Certificateholders...........................................................1
Cleanup Costs ..........................................................50
CMOs ...........................................................9
Code ..........................................................17
Collateral Value ...........................................................3
Commission ...........................................................3
Contracts ...........................................................1
Cooperative Loans ...........................................................1
Cooperatives ...........................................................5
Current Principal Amount....................................................18
Cut-off Date ..........................................................12
Definitive Certificates.....................................................21
Detailed Description.........................................................1
Determination Date..........................................................17
Distribution Date ...........................................................3
DTC ..........................................................21
ERISA ..........................................................19
Events of Default ..........................................................40
FDIC ..........................................................14
FHA ...........................................................6
FHA Insurance ..........................................................16
FHA Loans ...........................................................5
FHLMC ...........................................................1
FHLMC Act ...........................................................8
FHLMC Certificate group......................................................8
FHLMC Certificates...........................................................8
Final Withholding Regulations...............................................65
FNMA ...........................................................1
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FNMA Certificates ...........................................................8
FTC Rule ..........................................................48
Garn-St Germain Act.........................................................48
GNMA ...........................................................1
GNMA Certificates ...........................................................8
GNMA Issuer ...........................................................6
Guaranty Agreement........................................................6, 7
Housing Act ...........................................................5
HUD ..........................................................10
Indirect Participant........................................................21
Insurance Proceeds..........................................................33
Insured Expenses ..........................................................32
Lender ...........................................................1
LIBOR ..........................................................74
Liquidation Expenses........................................................33
Liquidation Proceeds........................................................33
Loan-to-Value Ratio..........................................................3
lockout periods ...........................................................7
Lower Tier REMIC ..........................................................60
Manufactured Homes...........................................................5
Manufacturer's Invoice Price.................................................3
Master Servicer ...........................................................1
Mortgage ..........................................................31
Mortgage Assets ...........................................................1
Mortgage Loans ...........................................................5
Mortgage Pool ...........................................................5
Mortgage Rate ...........................................................6
Mortgaged Properties.........................................................1
Mortgagors ..........................................................17
Multifamily Loans ...........................................................1
Multiple Variable Rate REMIC Regular Certificate............................57
National Credit Rating Agencies.............................................71
NCUA ..........................................................73
Non-REMIC Certificates......................................................18
OID Regulations ..........................................................53
Participants ..........................................................21
Pass-Through Rate ...........................................................3
Percentage Interests........................................................40
Permitted Investments.......................................................28
Plan ..........................................................70
PMBS Agreement ..........................................................10
PMBS Issuer ..........................................................10
PMBS Servicer ..........................................................10
PMBS Trustee ..........................................................10
Policy Statement ..........................................................73
Pool Insurance Policy.......................................................14
Pool Insurer ..........................................................23
Pre-Funded Amount ..........................................................10
Pre-Funding Account.........................................................10
Pre-Funding Period..........................................................10
Prepayment Assumption.......................................................53
Presumed Single Qualified Floating Rate.....................................56
Presumed Single Variable Rate...............................................56
Primary Insurance Policy.....................................................1
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Primary Insurer ..........................................................37
Principal Prepayments.......................................................18
Private Mortgage-Backed Securities...........................................1
Protected Account ..........................................................32
PTCE 83-1 ..........................................................70
PTE 90-30 ..........................................................71
Purchase Price ..........................................................14
Rating Agency ..........................................................15
Record Date ..........................................................16
Refinance Loan ...........................................................3
Regulation ..........................................................70
REIT ..........................................................61
Relief Act ..........................................................49
REMIC ...........................................................2
REMIC Certificates..........................................................51
REMIC Regular Certificates..................................................17
REMIC Regulations ..........................................................52
REMIC Residual Certificates.................................................17
Reserve Account ...........................................................3
Restricted Group ..........................................................71
Retained Interest ..........................................................16
RICs ..........................................................61
Seller ...........................................................1
Senior Certificates.........................................................11
Single Family Loans..........................................................1
Single Variable Rate REMIC Regular Certificate..............................56
SMMEA ..........................................................17
Special Hazard Insurance Policy.............................................15
Special Hazard Insurer......................................................24
Sub-Servicer ..........................................................16
Sub-Servicing Agreement.....................................................33
Subordinated Certificates...................................................11
Superlien ..........................................................50
Terms ...............................................1, 15, 32, 74
Tiered REMICs ..........................................................52
Title V ..........................................................49
Trust Fund ...........................................................1
Trustee ...........................................................1
UCC ..........................................................21
United States person........................................................64
VA ...........................................................6
VA Guarantees ..........................................................16
VA Loans ...........................................................5
Variable Rate Non-REMIC Certificates........................................67
Variable Rate REMIC Regular Certificate.....................................55
Yield Supplement Agreement..................................................51
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