PROSPECTUS SUPPLEMENT
(To Prospectus dated November 24, 1998)
$82,751,959
(Approximate)
Structured Asset Mortgage Investments Inc.
Seller
STRUCTURED ASSET MORTGAGE INVESTMENTS TRUST 1999-5
Issuer
PASS-THROUGH CERTIFICATES, SERIES 1999-5
The Seller will form Structured Asset Mortgage Investments Trust 1999-5
(the "Issuer" or the "Trust"), and the Trust will issue the Certificates which
will represent the entire beneficial interest in the Trust. The assets of the
Trust will be primarily a pool of previously issued mortgage pass-through
certificates. Cashflow from the mortgage pass-through certificates will pay the
classes of Certificates.
Capitalized terms used herein are defined where indicated in the Index
of Principal Definitions.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-11 OF THIS
PROSPECTUS SUPPLEMENT AND ON PAGE 18 OF THE PROSPECTUS BEFORE PURCHASING ANY
CERTIFICATES. In addition, if you are purchasing a class that pays only
principal, you should consider the risk that a slower than assumed rate of
principal payments on the applicable mortgage pass-through certificates will
result in a yield lower than you anticipate.
The Certificates are obligations only of the Trust. Neither the
Certificates nor the mortgage pass-through certificates are insured or
guaranteed by any person. Distributions on the Certificates will be payable
solely from the assets transferred to the Trust for the benefit of
Certificateholders.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED IF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
$ 57,774,522 Adjustable Rate Class A-1 Certificates
$ 23,827,910 Adjustable Rate Class A-2 Certificates
$ 700,000 6.726% Class A-3 Certificates
$ 449,427 0.00%(1) Class PO Certificates
$ 100 6.726% Class R Certificates
- ------------------
(1) This class pays only principal and is not entitled to distributions of
interest.
Bear, Stearns & Co. Inc. (the "Underwriter") will offer the
Certificates set forth above, subject to certain conditions, from time to time
in negotiated transactions at varying prices to be determined at the time of
sale. See "Method of Distribution" herein.
The Underwriter will deliver to purchasers the Class R Certificates in
physical form, and the remaining Certificates set forth above in book-entry form
through The Depository Trust Company, in each case on or about December 29,
1999.
BEAR, STEARNS & CO. INC.
The date of this Prospectus Supplement is December 28, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
The Issuer provides information to you about the Certificates in two
separate documents that progressively provide more detail: (a) the accompanying
Prospectus, which provides general information, some of which may not apply to
your Certificates and (b) this Prospectus Supplement, which describes the
specific terms of your Certificates.
If the terms of your Certificates vary between this Prospectus
Supplement and the accompanying Prospectus, you should rely on the information
in this Prospectus Supplement.
The Issuer includes cross-references in this Prospectus Supplement and
the accompanying Prospectus to captions in these materials where you can find
further related discussions. The following Tables of Contents provide the pages
on which these captions are located.
The Issuer may have filed preliminary information regarding the Trust's
assets and the Certificates with the SEC. If so, the information contained in
this document supersedes all of that preliminary information, which was prepared
by the Underwriter for prospective investors.
Statements contained herein which do not relate to historic or current
information may be deemed to contain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the "1933
Act"). Actual results could differ materially from those contained in such
statements as a result of the matters set forth under "Summary of Terms-Yield
and Prepayment Considerations" and "Yield and Prepayment Considerations" and
elsewhere in this Prospectus Supplement.
The Seller's principal offices are located at 245 Park Avenue, New
York, New York 10167 and its telephone number is (212) 272-2000.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Caption Page
- ------- ----
<S> <C>
SUMMARY OF TERMS.................................................................................................................S-4
RISK FACTORS....................................................................................................................S-11
Geographic Concentration........................................................................................................S-11
Special Risks for Specific Classes..............................................................................................S-11
Other Risks.....................................................................................................................S-11
DESCRIPTION OF THE CERTIFICATES.................................................................................................S-11
General.........................................................................................................................S-11
Book-Entry Registration.........................................................................................................S-12
Distributions of Interest and Principal.........................................................................................S-13
Determination of LIBOR..........................................................................................................S-15
Subordination; Allocation of Losses.............................................................................................S-16
DESCRIPTION OF THE POOLED CERTIFICATES..........................................................................................S-16
General.........................................................................................................................S-16
The Underlying Mortgage Loans...................................................................................................S-17
Additional Information..........................................................................................................S-17
YIELD AND PREPAYMENT CONSIDERATIONS.............................................................................................S-18
General.........................................................................................................................S-18
Assumed Final Distribution Dates................................................................................................S-18
Weighted Average Lives..........................................................................................................S-18
Standard Prepayment Model.......................................................................................................S-19
Decrement Tables................................................................................................................S-19
Adjustable Rate Certificate Yield Considerations................................................................................S-23
Principal Only Certificate Yield Considerations.................................................................................S-24
THE POOLING AGREEMENT...........................................................................................................S-25
General.........................................................................................................................S-25
Assignment of Pooled Certificates...............................................................................................S-26
Accounts........................................................................................................................S-26
Reports to Certificateholders...................................................................................................S-26
Amendments......................................................................................................................S-27
Action With Respect to Underlying Series........................................................................................S-27
Certificateholder Action........................................................................................................S-27
Termination.....................................................................................................................S-28
Indemnification of the Trustee..................................................................................................S-28
Certain Matters Regarding the Trustee...........................................................................................S-28
FEDERAL INCOME TAX CONSIDERATIONS...............................................................................................S-28
ERISA CONSIDERATIONS............................................................................................................S-29
LEGAL INVESTMENT................................................................................................................S-31
RESTRICTIONS ON PURCHASE AND TRANSFER OF THE
RESIDUAL CERTIFICATES.......................................................................................................S-31
METHOD OF DISTRIBUTION..........................................................................................................S-31
LEGAL MATTERS...................................................................................................................S-31
RATING..........................................................................................................................S-32
INDEX OF PRINCIPAL DEFINITIONS..................................................................................................S-33
Annex 1 - Pooled Certificate Information.........................................................................................A-1
Annex 2 - Collateral Information.................................................................................................A-2
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
PROSPECTUS
Caption Page
- ------- ----
<S> <C>
Prospectus Supplement..............................................................................................................2
Available Information..............................................................................................................2
Incorporation of Certain Documents By Reference....................................................................................3
Reports to Securityholders.........................................................................................................3
Summary of Terms...................................................................................................................4
Risk Factors......................................................................................................................18
The Trust Fund....................................................................................................................21
The Mortgage Loans - General.................................................................................................21
Single Family and Cooperative Loans..........................................................................................24
Multi-family Loans...........................................................................................................24
Contracts....................................................................................................................24
Agency Securities............................................................................................................25
Private Mortgage-Backed Securities...........................................................................................29
U.S. Government Securities...................................................................................................31
FASITs.......................................................................................................................31
Substitution of Mortgage Assets..............................................................................................31
Use of Proceeds...................................................................................................................31
The Seller........................................................................................................................32
The Mortgage Loans................................................................................................................32
Underwriting Standards.......................................................................................................32
Qualifications of Lenders....................................................................................................33
Representations by Lenders; Repurchases......................................................................................33
Optional Purchase of Defaulted Loans.........................................................................................35
Description of the Securities.....................................................................................................35
General......................................................................................................................35
Distributions on Securities..................................................................................................36
Advances.....................................................................................................................38
Reports to Securityholders...................................................................................................38
Book-Entry Registration......................................................................................................39
Exchangeable Securities...........................................................................................................42
General......................................................................................................................42
Exchanges....................................................................................................................43
Procedures and Exchange Proportions..........................................................................................46
Credit Enhancement................................................................................................................47
General......................................................................................................................47
Subordination................................................................................................................47
Pool Insurance Policies......................................................................................................48
Special Hazard Insurance Policies............................................................................................49
Bankruptcy Bonds.............................................................................................................50
FHA Insurance; VA Guarantees.................................................................................................50
FHA Insurance on Multi-family Loans..........................................................................................52
Reserve and Other Accounts...................................................................................................52
Other Insurance, Guarantees and Similar Instruments or
Agreements...............................................................................................................53
Cross Support................................................................................................................53
Yield and Prepayment Considerations...............................................................................................53
Administration....................................................................................................................55
Assignment of Mortgage Assets................................................................................................55
Payments on Mortgage Loans; Deposits to
Accounts.................................................................................................................56
Sub-Servicing by Lenders.....................................................................................................58
Collection Procedures........................................................................................................59
Hazard Insurance.............................................................................................................60
Realization Upon Defaulted Mortgage Loans....................................................................................61
Servicing and Other Compensation and Payment
of Expenses..............................................................................................................62
Evidence as to Compliance....................................................................................................63
Certain Matters Regarding the Master Servicer
and the Seller...........................................................................................................63
Events of Default; Rights Upon Event of
Default..................................................................................................................64
The Trustee..................................................................................................................65
Duties of the Trustee........................................................................................................66
Resignation of Trustee.......................................................................................................66
Amendment....................................................................................................................66
Termination; Optional Termination............................................................................................67
Legal Aspects of the Mortgage Loans...............................................................................................67
General......................................................................................................................67
Foreclosure/Repossession.....................................................................................................70
Rights of Redemption.........................................................................................................72
Anti-Deficiency Legislation and Other
Limitations on Lenders...................................................................................................73
Due-on-Sale Clauses..........................................................................................................74
Prepayment Charges...........................................................................................................74
Applicability of Usury Laws..................................................................................................74
Soldiers' and Sailors' Civil Relief Act......................................................................................75
Product Liability and Related Litigation.....................................................................................75
Environmental Considerations.................................................................................................76
Federal Income Tax Consequences...................................................................................................76
General......................................................................................................................76
REMIC and FASIT Elections....................................................................................................77
REMIC Securities.............................................................................................................77
Tiered REMIC Structures......................................................................................................78
REMIC Regular Securities.....................................................................................................78
Tax Treatment of Yield Supplement
Agreements...............................................................................................................84
REMIC Residual Certificates..................................................................................................84
Transfers of REMIC Residual Certificates.....................................................................................87
Deductibility of Trust Fund Expenses.........................................................................................88
Foreign Investors in REMIC Securities........................................................................................89
Backup Withholding on REMIC Securities.......................................................................................90
REMIC Administrative Matters.................................................................................................90
FASIT Securities.............................................................................................................90
Qualification as a FASIT.....................................................................................................91
Tiered FASIT Structures......................................................................................................92
FASIT Regular Securities.....................................................................................................92
Tax Treatment of Yield Supplement
Agreements...............................................................................................................93
FASIT Ownership Certificate..................................................................................................93
Grantor Trusts...............................................................................................................95
Tax Characterization of the Trust as a
Partnership..............................................................................................................98
Tax Consequences to Holders of Debt
Securities Issued by a Partnership.......................................................................................98
Tax Consequences to Holders of Notes Issued
by a Partnership........................................................................................................100
Tax Consequences to Holders of Certificates
Issued by a Partnership.................................................................................................100
Taxation of Classes of Exchangeable
Securities..............................................................................................................104
Callable Classes............................................................................................................106
State Tax Consequences...........................................................................................................106
ERISA Considerations.............................................................................................................106
Legal Investment.................................................................................................................111
SMMEA.......................................................................................................................111
FFIEC Policy Statement......................................................................................................111
Generally...................................................................................................................112
Method of Distribution...........................................................................................................113
Legal Matters....................................................................................................................113
Financial Information............................................................................................................113
Rating...........................................................................................................................114
Glossary.........................................................................................................................115
</TABLE>
S-3
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION APPEARING IN GREATER
DETAIL ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING
PROSPECTUS. TO UNDERSTAND THE OFFERING, YOU SHOULD CAREFULLY READ THE ENTIRE
PROSPECTUS SUPPLEMENT AND PROSPECTUS. YOU CAN FIND THE LOCATION OF THE MEANING
ASSIGNED TO CAPITALIZED TERMS USED BUT NOT DEFINED IN THIS SUMMARY IN THE INDEX
OF PRINCIPAL DEFINITIONS HEREIN.
ISSUER..........................Structured Asset Mortgage Investments Trust
1999-5 (also called the "Trust").
SELLER..........................SAMI (formerly known as Bear Stearns Mortgage
Securities Inc.). See "Structured Asset Mortgage
Investments Inc." in the Prospectus.
TRUSTEE.........................U.S. Bank Trust National Association.
CUT-OFF DATE....................December 1, 1999.
CLOSING DATE....................On or about December 29, 1999.
THE CERTIFICATES
TITLE......................Mortgage Pass-Through Certificates, Series
1999-5 (the "Certificates"). The Trust will
issue the Certificates pursuant to a
Pooling Agreement (the "Agreement") to be
dated as of the Cut-off Date between SAMI
as depositor (the "Depositor") and the
Trustee.
CERTIFICATES...............The Classes of Certificates bearing interest at
the rates set forth on the cover page
hereto and as follows:
o the Class A-1 Certificates bear interest at
a pass-through rate equal to 6.2000% per
annum for the first Distribution Date, and
thereafter at an adjustable pass-through
rate equal to 0.80% per annum plus LIBOR,
subject to a minimum rate of 0.80% per
annum and a maximum rate equal to 9.50% per
annum;
o the Class A-2 Certificates bear interest at
a pass-through rate equal to approximately
8.0014% per annum for the first
Distribution Date, and thereafter at an
adjustable pass-through rate equal to (x)
approximately 21.0945205479% per annum
minus (y) approximately 2.4246575342
multiplied by LIBOR, subject to a minimum
rate of 0.00% per annum and a maximum rate
equal to approximately 21.0945205479% per
annum;
o the Class A-3 Certificates and Class R
Certificates bear interest at a
pass-through rate equal to 6.726% per
annum; and
o the Class PO Certificates will not be
entitled to distributions in respect of
interest.
The initial aggregate principal amount of each
Class of Certificates (each, an "Original
Principal Amount") is set forth on the
cover page hereof.
S-4
<PAGE>
OTHER DESIGNATIONS -
REGULAR CERTIFICATES.......All Classes of Certificates other than the
Residual Certificates.
ADJUSTABLE RATE
CERTIFICATES..........The Class A-1 and Class A-2 Certificates.
PRINCIPAL ONLY
CERTIFICATES..........The Class PO Certificates.
RESIDUAL CERTIFICATES......The Class R Certificates.
PHYSICAL CERTIFICATES......The Residual Certificates.
BOOK-ENTRY CERTIFICATES....All Certificates other than the Physical
Certificates.
DENOMINATIONS..............Certificates (other than the Residual
Certificates), $25,000 and increments of
$1.00 in excess thereof; and the Residual
Certificates, a single Certificate of $100.
REGISTRATION...............Each investor in a Class of Book-Entry
Certificates will hold beneficial interests
in such Certificates through DTC. The
Physical Certificates will be issued in
certificated fully-registered form.
DISTRIBUTION DATES.........The third Business Day after each Pooled
Certificate Distribution Date, beginning in
January 2000 (each, a "Distribution Date").
POOLED CERTIFICATE
DISTRIBUTION DATES.......The 25th day of each month, or if such day is
not a business day as defined in the
applicable Underlying Agreement (as defined
herein), then the next succeeding business
day (each, a "Pooled Certificate
Distribution Date").
RECORD DATE................With respect to each Distribution Date and the
Certificates (other than the Adjustable
Rate Certificates), the close of business
on the last Business Day of the month
preceding the month in which the related
Distribution Date occurs, and with respect
to each Distribution Date and the
Adjustable Rate Certificates, the 27th day
of the month in which the related
Distribution Date occurs; provided that for
this purpose the Distribution Date is
deemed to occur on the 28th of each month.
INTEREST ACCRUAL PERIOD....With respect to the Certificates (other than the
Adjustable Rate Certificates) and each
Distribution Date, the calendar month
preceding the month in which the
Distribution Date occurs, and with respect
to the Adjustable Rate Certificates and
each Distribution Date, the one-month
period commencing on the 28th day of the
month preceding the month in which such
Distribution Date occurs and ending on the
27th day of the month in which such
Distribution Date occurs, each beginning in
December 1999; provided that for this
purpose the Distribution Date is deemed to
occur on the 28th of each month.
POOLED CERTIFICATES.............The Trust will consist primarily of the Pooled
Certificates. Each of the Pooled
Certificates were issued as part of a
series which includes other certificates
(each, an "Underlying Series").
S-5
<PAGE>
The Pooled Certificates which back the
Certificates are set forth below and are
more fully described under "Description of
the Pooled Certificates--General" and in
Annex 1 hereto:
Pooled Certificates Class % in Trust
------------------- ----------------
AMAC 1998-04 36.26%
Class A-6
NSCOR 1998-26 100.00%
Class A-6
NSCOR 1998-26 49.92%
Class A-13
PHMSC 1993-47 23.34%
Class A-10
PNCMS 1999-08 95.88%
Class I-A-3
The Pooled Certificates evidence interests in
trusts ("Underlying Trusts") created
pursuant to pooling agreements
(collectively, the "Underlying Agreements")
which consist primarily of one or more
pools of conventional, fixed rate, one- to
four-family, fully amortizing, level
payment, first mortgage loans with original
maturities of up to approximately 30 years
(collectively, the "Mortgage Loans" and
applicable "Mortgage Pool" and with respect
to any Pooled Certificate, the "Underlying
Mortgage Loans"). Additional information
with respect to the Underlying Mortgage
Loans as of the related determination date
in November 1999 (the "Mortgage Loan
Information Date") is set forth in Annex 2
hereto.
Annex 1 and Annex 2 hereto set forth approximate
information for each of the Pooled
Certificates as of the Pooled Certificate
Information Date and the Underlying
Mortgage Loans as of the Mortgage Loan
Information Date. The tables and the
descriptions of the Pooled Certificates and
the Mortgage Loans herein are subject to
and qualified by reference to the
provisions of the Underlying Agreements and
the prospectuses and prospectus supplements
relating to the Pooled Certificates or the
other mortgage-backed securities issued as
part of the Underlying Series, as well as
any subsequent information related thereto
filed on a Current Report on Form 8-K with
the SEC following the closing of the
related Underlying Series. Copies of the
Prospectuses, Prospectus Supplements and
most recent Pooled Certificate Distribution
Date Statements relating to each Pooled
Certificate are available from the
Underwriter at 245 Park Avenue, New York,
New York 10167, Attention: Mortgage
Department
DISTRIBUTIONS ON THE
CERTIFICATES........... GENERAL. The Certificates (other than the
Principal Only Certificates) will accrue
interest during each applicable Interest
Accrual Period (as defined herein,) at the
applicable Pass-Through Rate set forth on
the cover page hereof and as described on
page S-4.
On each Distribution Date, holders of the
Certificates of each Class will be
S-6
<PAGE>
entitled to receive (i) interest (other
than the Principal Only Certificates) from
funds received as interest on the Pooled
Certificates, and (ii) principal from funds
received as principal on the Pooled
Certificates, as more fully described
herein under "Description of the
Certificates--Distributions of Interest and
Principal" and in Annex 1 hereto.
Distributions to Certificateholders will be made
from available funds related to the Pooled
Certificates as follows:
--------------------------------------------------------------
Step 1
Distribution of principal to the Class PO Certificates (1)
--------------------------------------------------------------
--------------------------------------------------------------
Step 2
Distribution of interest to the Certificates (other than the
Class PO Certificates)
--------------------------------------------------------------
--------------------------------------------------------------
Step 3
Distribution of principal to the Certificates (other than the
Class PO Certificates)
--------------------------------------------------------------
--------------------------------------------------------------
Step 4
Distribution of any remaining funds to the Residual
Certificates (2)
--------------------------------------------------------------
------------------
(1) The Class PO Certificates will receive only a
certain portion of principal payments
received on the NSCOR 1998-26, Class A-6
Pooled Certificates. See "Description of the
Certificates-Distributions of Interest and
Principal."
(2) It is very unlikely that any distributions
will be made to the Residual Certificates
under Step 4.
CREDIT ENHANCEMENT --
SUBORDINATION;
ALLOCATION OF
LOSSES..............Losses which are allocated to the Pooled
Certificates on a Pooled Certificate
Distribution Date in reduction of the
principal balance thereof will be allocated
to the Class A-3 Certificates before
allocating them to the Class A-1, Class
A-2, Class R and Class PO Certificates;
provided however, 25/1121 of losses on the
NSCOR 1998-26, Class A-6 Pooled
Certificates will be allocated to the Class
PO Certificates. A loss is allocated to a
Certificate by reducing its principal
amount by the amount of the loss.
Such subordination will provide such holders
protection against losses resulting from
defaults on the Underlying Mortgage Loans
allocable to the Pooled Certificates to the
extent described herein. See "Description
of the Certificates-Allocation of Losses;
Subordination" herein.
S-7
<PAGE>
YIELD AND PREPAYMENT
CONSIDERATIONS......The yield to maturity of each Class of
Certificates will be affected by the
following:
o the amount and timing of principal and interest
payments on the related Pooled Certificates,
o the payment priorities and other characteristics
of the related Pooled Certificates,
o the occurrence of an optional or mandatory
termination of the related Pooled Certificates,
o the applicable Pass-Through Rate for such Class
of Certificates,
o the purchase price paid for such Class of
Certificates, and
o losses and net interest shortfalls allocated to
such Class of Certificates.
The interaction of the foregoing factors may
have different effects on the various
Classes of Certificates and the effects on
any Class may vary at different times
during the life of such Class. No one can
currently determine the actual rate of
prepayments on the Underlying Mortgage
Loans, the amount and timing of losses or
net interest shortfalls or the yield to
maturity of any Certificates. You are urged
to consider your own estimates as to the
anticipated rate of future prepayments on
the Underlying Mortgage Loans and the
suitability of the Certificates to your
investment objectives. You should carefully
review the discussion under "Yield and
Prepayment Considerations" herein and in
the Prospectus.
Certain of the Pooled Certificates were
initially structured as targeted
amortization classes ("TAC Classes"),
scheduled amortization classes ("Scheduled
Classes"), or support or companion classes
("Support Classes") as described under
"Description of the Pooled
Certificates--General" and in Annex 2
hereto.
In general, TAC or Scheduled Classes will
receive distributions of principal on a
given distribution date in a predetermined
amount if prepayments on the Underlying
Mortgage Loans occur at a constant rate
within a certain range or at a certain
rate, thereby providing for relatively
stable distributions of principal, but will
receive principal payments at a greater or
lesser rate if prepayments on the
Underlying Mortgage Loans occur at
different rates or at non-constant rates
within the applicable range. However, no
Class of Pooled Certificates which was
originally a TAC or Scheduled Class
currently adheres to its schedule and
consequently, such schedules no longer
provide any prepayment protection.
A Support Class receives principal payments
on a distribution date only if scheduled
payments have been made on specified TAC
and/or Scheduled Classes in the related
series and receives all excess
distributions of principal to the extent
not required to make scheduled payments on
the related TAC or Scheduled Classes.
S-8
<PAGE>
LIQUIDITY..................There is currently no secondary market for the
Certificates, and you cannot be assured
that one will develop. Bear, Stearns & Co.
Inc. intends to establish a market in the
Certificates, but it is not obligated to do
so. Even if such a market is established,
it may not continue. Each Certificateholder
will receive monthly reports pertaining to
the Certificates as described under
"Administration--Reports to
Certificateholders" in the Prospectus.
There are a limited number of sources which
provide certain information about mortgage
pass-through certificates in the secondary
market, and they may not provide
information about the Certificates.
Investors should consider the effect of
limited information on the liquidity of the
Certificates.
FEDERAL INCOME TAX
CONSEQUENCES........For federal income tax purposes, an election
will be made to treat the assets of the
Trust as a REMIC (as defined herein). The
Certificates, other than the Class R
Certificates, will represent ownership of
regular interests in the REMIC. Such
Certificates will generally be treated as
representing ownership of debt for federal
income tax purposes. Certificateholders
will be required to include in income all
interest and original issue discount, if
any, on such Certificates in accordance
with the accrual method of accounting
regardless of the Certificateholders' usual
methods of accounting. The Class R
Certificates will be the residual interest
in a REMIC (as defined herein).
The Residual Certificates may constitute
"noneconomic" residual interests for
purposes of the REMIC Regulations.
Transfers of the Residual Certificates will
be restricted in a manner designed to
prevent a transfer of a noneconomic
residual interest from being disregarded
under the REMIC Regulations. See
"Restrictions on Purchase and Transfer of
the Residual Certificates" herein. The
Residual Certificateholders may be required
to report an amount of taxable income with
respect to the early years of the REMIC's
term that significantly exceeds
distributions on the Residual Certificates
during such years, with corresponding tax
deductions or losses deferred until the
later years of the REMIC's term.
Accordingly, on a present value basis, the
tax detriments occurring in the earlier
years may substantially exceed the sum of
any tax benefits in the later years. As a
result, the Residual Certificateholders'
after-tax rate of return may be zero or
negative, even if their pre-tax rate of
return is positive. See "Federal Income Tax
Consequences--Special Tax Considerations
Applicable to Residual Certificates" herein
and "Federal Income Tax Consequences--REMIC
Residual Certificates" in the Prospectus.
See "Federal Income Tax Considerations" herein
and "Federal Income Tax Consequences" in
the Prospectus for further information
regarding the federal income tax
consequences of investing in these
Certificates.
ERISA CONSIDERATIONS.......The Certificates (other than the Class A-3 and
the Residual Certificates) may be
considered eligible for purchase by persons
investing assets of employee benefit plans
or individual retirement accounts. Sales of
the Class A-3 Certificates and the Class R
Certificates to such plans or
S-9
<PAGE>
retirement accounts are prohibited, except
as permitted under "ERISA Considerations"
in this Prospectus Supplement. Investors in
the Class A- 3 Certificates will be deemed
to represent that they comply with the
restrictions described in this Prospectus
Supplement.
See "ERISA Considerations" in this Prospectus
Supplement and in the Prospectus.
RESTRICTIONS ON PURCHASER
AND TRANSFER OF THE
RESIDUAL
CERTIFICATES........If you wish to purchase or subsequently
transfer a Residual Certificate, you are
required to obtain the consent of the
Seller and you may not be, or transfer to,
a "disqualified organization" or a person
who is not a "United States person" under
the Code.
RATING.....................The Issuer will issue the Certificates only if
each respective Class receives the rating
set forth below from Moody's Investors
Service, Inc. ("Moody's") and Standard &
Poor's, a division of The McGraw-Hill
Companies, Inc. ("S&P"). Moody's and S&P
are also referred to herein as the "Rating
Agencies."
Class Rating
- ----- ------
Moody's S&P
------- ---
Class A-1 Aaa AAA
Class A-2 Aaa AAAr
Class A-3 -- AAA
Class PO Aaa AAAr
Class R -- AAA
You should evaluate the ratings of the
Certificates of any Class independently
from similar ratings on other types of
securities. A rating is not a
recommendation to buy, sell or hold
securities and may be subject to revision
or withdrawal at any time by the Rating
Agencies. The "r" symbol of the "AAAr"
rating of certain Classes of Certificates
by S&P is attached to highlight certain
obligations that S&P believes may
experience volatility or variability in
expected returns due to non-credit risks,
including interest only and principal only
mortgage securities which provide for
payment of only principal or only interest.
See "Rating" herein.
LEGAL INVESTMENT...........The Certificates will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") so long as they are rated
in one of the two highest rating categories
by a nationally recognized statistical
rating organization.
If your investment activities are subject to
legal investment laws and regulations or to
review by certain regulatory authorities,
you should consult your own legal advisors
to determine whether and to what extent
there may be restrictions on your ability
to invest in the Certificates. See "Legal
Investment" herein and in the Prospectus.
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<PAGE>
RISK FACTORS
GEOGRAPHIC CONCENTRATION. Approximately 54.43% of the Underlying
Mortgage Loans as of the Cut-off Date are secured by property in California.
Property in California may be more susceptible than properties located in other
parts of the country to certain types of uninsurable hazards, such as
earthquakes, floods, mudslides and other natural disasters. In addition:
o economic conditions in California (which may or may not affect
real property values) may affect the ability of borrowers to
repay their loans on time;
o declines in the California residential real estate market may
reduce the values of properties located in California, which
would result in an increase in the loan-to-value ratios; and
o any increase in the market value of properties located in
California would reduce the loan-to-value ratios and could,
therefore, make alternative sources of financing available to
the borrowers at lower interest rates, which could result in
an increased rate of prepayment of the mortgage loans.
SPECIAL RISKS FOR SPECIFIC CLASSES. Certain of the Certificates are
subject to special risks, described as follows.
o The Class A-1 and Class A-2 Certificates will accrue interest
at an adjustable rate determined separately for each
distribution date according to an index in the manner
described in this prospectus supplement under "Description of
the Certificates--Interest Distributions." THE INTEREST RATE
ON THE CLASS A-2 CERTIFICATES WILL VARY INVERSELY WITH A
MULTIPLE OF THE INDEX. Therefore, the yield to investors on
the Class A-1 Certificates will be sensitive, and the Class
A-2 Certificates will be extremely sensitive, to fluctuations
of the index.
o The Class PO Certificates will receive only a certain portion
of the principal payments made on the NSCOR 1998-26, Class A-6
Pooled Certificates. Therefore, the yield on the Class PO
Certificates is extremely sensitive to the rate and timing of
principal prepayments and defaults on the Underlying Mortgage
Loans related to the NSCOR 1998-26, Class A-6 Pooled
Certificates.
Investors in the Class PO Certificates should be aware that
mortgage loans with lower interest rates are less likely to be
prepaid than mortgage loans with higher interest rates. If
payments of principal on the Underlying Mortgage Loans related
to the NSCOR 1998-26, Class A-6 Pooled Certificates occur at a
rate slower than an investor assumed at the time of purchase,
the investor's yield may be adversely affected.
o 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.
OTHER RISKS. You should also review the risk factors beginning on page
18 of the Prospectus.
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
Each Class of Book-Entry Certificates will be represented initially by
a single certificate registered in the name of Cede & Co. ("Cede") as the
nominee of The Depository Trust Company ("DTC") and beneficial interests will be
held by investors through the book-entry facilities of DTC in the United States
or Cedel Bank, societe anonyme ("Cedel") or the Euroclear System ("Euroclear")
in Europe in minimum denominations of $25,000, in the case of the Certificates
(other than the Residual Certificates), and increments of $1.00 in excess
thereof. One Certificate of each such Class may be issued in a different
principal
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<PAGE>
amount to accommodate the remainder of the initial principal amount of the
Certificates of such Class. The Residual Certificates will be issued in
certificated fully-registered form in a single certificate of $100.
Distributions of principal and interest as set forth below initially
will be made by the Trustee to Cede, as the registered holder of the Book-Entry
Certificates, and to each holder of the Physical Certificates. Upon the issuance
of Definitive Certificates (as defined in "Description of the
Securities--Book-Entry Registration" in the Prospectus) to persons other than
Cede, distributions will be made by the Trustee to the persons in whose names
such Certificates are registered at the close of business on each Record Date,
which will be the last Business Day of the month preceding the month in which
the related Distribution Date occurs. Such distributions will be made (i) by
check mailed to each Certificateholder entitled thereto at the address appearing
in the Certificate Register to be maintained in accordance with the provisions
of the Agreement or (ii) upon timely receipt by the Trustee of written
instructions from a Certificateholder holding Certificates representing an
initial aggregate Current Principal Amount or Notional Amount of not less than
$1,000,000 (or a 100% percentage interest), by wire transfer to a United States
dollar account maintained by the payee at any United States depository
institution with appropriate facilities for receiving such a wire transfer,
provided, however, that the final payment in respect of each Class of
Certificates will be made only upon presentation and surrender of such
respective Certificates at the office or agency of the Trustee specified in the
notice to Certificateholders of such final payment.
A "Business Day" is generally any day other than a Saturday, a Sunday
or a day on which the New York Stock Exchange is closed or on which banking
institutions in New York City or in the jurisdiction in which the Trustee or the
related servicer of the Underlying Series is located or obligated by law or
executive order to be closed.
The Certificates will not be listed on any securities exchange or
quoted in the automated quotation system of any registered securities
association. As a result, investors in the Certificates may experience limited
liquidity. See "Risk Factors--Limited Liquidity" in the Prospectus.
BOOK-ENTRY REGISTRATION
The Book-Entry Certificates will be issued in one or more certificates
which equal the initial Current Principal Amount of the Certificates (other than
the Physical Certificates) and will initially be registered in the name of Cede.
Cedel and Euroclear will hold omnibus positions on behalf of their Participants
through customers' securities account in Cedel's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Unless and until Definitive Certificates are issued, it is anticipated
that the only "Certificateholder" of the Book-Entry Certificates will be Cede &
Co. Beneficial owners of the Book-Entry Certificates will not be
Certificateholders, as that term is used in the Agreement. Beneficial owners are
only permitted to exercise the rights of Certificateholders indirectly through
Participants. Monthly and annual reports to the Trust provided to Cede, as
nominee of DTC, may be made available to beneficial owners upon request, in
accordance with the rules, regulations and procedures creating and affecting DTC
and to Participants to whose DTC accounts the Book-Entry Certificates are
credited. For a description of the features of the book-entry registration
system, see "Description of the Securities--Book-Entry Registration" in the
Prospectus.
DTC management is aware that some computer applications, systems, and
the like for processing data (the "DTC Systems") that are dependent upon
calendar dates, including dates before, on, and after January 1, 2000, may
encounter "Year 2000 problems." DTC has informed its Participants and other
members of the financial community (the "Industry") that it has developed and is
implementing a program so that the DTC Systems, as the same relate to the timely
payment of distributions (including principal and income payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC
("DTC Services"), continue to function appropriately. This program includes a
technical assessment and a remediation plan, each of which is complete.
Additionally, DTC's plan includes a testing phase, which is expected to be
completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom DTC
acquires services to: (i) impress upon them the importance of such services
being Year 2000 compliant; and (ii) determine the extent of their efforts for
Year 2000 remediation (and, as appropriate, testing) of their services.
In addition,
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<PAGE>
DTC is in the process of developing such contingency plans as it deems
appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided to the Industry for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of any
kind.
Physical Certificates and Definitive Certificates will be transferable
and exchangeable on a "Certificate Register" to be maintained by the Trustee at
the office or agency of the Trustee maintained for that purpose. Physical
Certificates and Definitive Certificates surrendered to the Trustee for
registration or transfer or exchange must be accompanied by a written instrument
or transfer in form satisfactory to the Trustee. No service charge may be made
for any registration of transfer or exchange of Physical Certificates and
Definitive Certificates, but payment of a sum sufficient to cover any tax or
other governmental charge may be required. Such office or agency of the Trustee
is currently located at 180 East Fifth Street, St. Paul, Minnesota 55101.
Certain representations will be required in connection with the transfer of
REMIC Residual Certificates. See "Restrictions on Purchase and Transfer of the
Residual Certificates."
DISTRIBUTIONS OF INTEREST AND PRINCIPAL
Distributions of principal and interest on the Certificates with
respect to a month will be made on the day (each, a "Distribution Date") which
is the third Business Day (as defined below) after the last distribution date in
such month with respect to any class of Pooled Certificates (each, a "Pooled
Certificate Distribution Date"). Each Pooled Certificate Distribution Date is
the 25th day of each month or if any such day is not a business day as defined
in the applicable Underlying Agreement, then the next succeeding business day,
as so defined in each case. The first Distribution Date is expected to be
January 28, 2000. In addition, if the Trustee has not received a distribution
on, or the distribution date statement (each, a "Pooled Certificate Distribution
Date Statement") with respect to, the Pooled Certificates by 3:00 p.m. on the
second Business Day following the Pooled Certificate Distribution Date (the
"Determination Time"), the distribution allocable to the related Class of
Certificates will not be made on the immediately following Distribution Date,
but, (i) if such distribution and such Pooled Certificate Distribution Date
Statement are received by 3:00 p.m. on the fifth Business Day after the
Determination Time, it will be made on the next succeeding Business Day after
the Determination Time (a "Supplemental Distribution Date") or (ii) if received
after 3:00 p.m. on the fifth Business Day after the Determination Time, it will
be made on the next succeeding Distribution Date, and in neither case will
additional interest be paid thereon. It is anticipated that payments on all
Pooled Certificates will be made to the Trustee by wire transfer. The Pooled
Certificates are book entry securities so that payment is first made to Cede &
Co., as nominee for DTC before being paid to the Trustee, which may result in a
delay in receipt by the Trustee. Notwithstanding the foregoing, for accounting
purposes, each Distribution Date is deemed to occur in the same month as the
immediately preceding Pooled Certificate Distribution Date.
Distributions will be made on each Distribution Date to holders of
record as of the close of business on the last Business Day of the calendar
month preceding the month in which such Distribution Date occurs; provided that
for this purpose the Distribution Date is deemed to occur on the 28th of each
month, without regard to whether such day is a Business Day (the
"Record Date").
The Certificates (other than the Adjustable Rate Certificates) will
accrue interest during each one-month period ending on the last day of the month
preceding the month in which a Distribution Date occurs, and the Adjustable Rate
Certificates will accrue interest during the one-month period commencing on the
28th day of the month preceding the month in which such Distribution Date occurs
and ending on the 27th day of the month in which such Distribution Date occurs
(each, an "Interest Accrual Period"); provided that for this purpose the
Distribution Date is deemed to occur on the 28th of each month at the Pass-
Through Rates set forth on the cover page hereof and as set forth below.
The Pass-Through Rates on the Adjustable Rate Certificates are
calculated as follows:
(1) the Pass-Through Rate on the Class A-1 Certificates with
respect to the initial Interest Accrual Period is 6.2000% per annum,
and as to any Interest Accrual Period thereafter, will be a per annum
rate equal to 0.80% plus the arithmetic mean of the London interbank
offered rate quotations for one-month Eurodollar deposits, determined
monthly as set forth herein ("LIBOR") (subject to a maximum rate of
9.50% per annum and a minimum rate of 0.80% per annum).
(2) the Pass-Through Rate on the Class A-2 Certificates with
respect to the initial Interest Accrual Period is approximately 8.0014%
per annum, and as to any Interest Accrual Period thereafter, will be a
per annum rate equal
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<PAGE>
to approximately 21.0945205479% minus the product of LIBOR and
approximately 2.4246575342 (subject to a maximum rate of approximately
21.0945205479% per annum and a minimum rate of 0.000% per annum).
The Pass-Through Rates on the Adjustable Rate Certificates for the
current and immediately preceding calendar month may be obtained by telephoning
the Trustee at (651) 244-0011.
The Principal Only Certificates are principal only Certificates and
will not bear interest.
On each Distribution Date, holders of each Class of Certificates (other
than the Class PO Certificates) will be entitled to receive interest from funds
received as interest on the related Pooled Certificates and principal from funds
received as principal on the Pooled Certificates. The Class PO Certificates will
be entitled only to a certain portion of the principal payments received on the
NSCOR 1998-26, Class A-6 Pooled Certificates as described below. See Annex 1
hereto.
The Trustee shall establish and maintain in the name of the Trustee,
for the benefit of the Certificateholders, an account (the "Certificate
Account") which shall meet the requirements for an Eligible Account as set forth
in the Agreement. The Trustee will cause all distributions received on the
Pooled Certificates by the Trustee in its capacity as holder of the Pooled
Certificates, from whatever source, to be deposited directly into the
Certificate Account.
On each Distribution Date, the Trustee will apply the Available Funds
(as defined herein) on deposit in the Certificate Account as of such
Distribution Date, first, to pay the trustee fee ("Trustee Fee") which will be
equal to 0.024% per annum of the aggregate Pooled Certificate Principal Balance
of the Pooled Certificates immediately prior to such Distribution Date, and
then, to make payment to the Certificateholders in the following manner and
order of priority:
(A) from the Class PO Principal Distribution Amount (as defined
herein), to the Certificateholders of the Principal Only Certificates as
distributions of principal, until the Current Principal Amount thereof has been
reduced to zero;
(B) from amounts with respect to interest received on the Pooled
Certificates, to the Certificateholders of the Certificates (other than the
Principal Only Certificates) as distributions of interest, an amount equal to
interest for such Class accrued at the applicable per annum Pass-Through Rate
during the Interest Accrual Period preceding such Distribution Date on its
Current Principal Amount (as defined herein) immediately prior to such
Distribution Date, LESS the sum of any Prepayment Interest Shortfalls and the
interest portion of any losses allocated to the Pooled Certificates, PLUS the
portion, if any, of interest accrued for such Class for any prior Distribution
Date which remains unpaid; and
(C) from the Non-PO Principal Distribution Amount (as defined herein),
to the Certificateholders of the Residual Certificates as distributions of
principal, until the Current Principal Amount thereof has been reduced to zero;
and
(D) from the Non-PO Principal Distribution Amount in the following
order of priority:
(i) FIRST, concurrently on a pro rata basis, to the
Certificateholders of the Adjustable Rate
Certificates as distributions of principal, until the
Current Principal Amounts thereof have been reduced
to zero; and
(ii) SECOND, to the Certificateholders of the Class A-3
Certificates as distributions of principal, until the
Current Principal Amount thereof has been reduced to
zero.
Following payment in full of the Certificates, any amounts remaining in
the Certificate Account (other than investment income) shall be paid to the
Class R Certificateholders. It is not anticipated that there will be any such
amounts so
remaining.
"Available Funds" means with respect to any Distribution Date, the
aggregate amount on deposit in the Certificate Account as of the immediately
prior Determination Time (other than investment income).
The "Class PO Principal Distribution Amount" as of any Distribution
Date will be an amount equal to 25/1121 (the "Class PO Percentage") of the
principal payments received on the NSCOR 1998-26, Class A-6 Pooled Certificates.
The "Non-PO Principal Distribution Amount" as of any Distribution Date will be
an amount equal to the sum of (i) the principal payments received on the Pooled
Certificates (other than the NSCOR 1998-26, Class A-6 Pooled Certificates) and
(ii) an amount equal to 1096/1121 of the principal payments received on the
NSCOR 1998-26, Class A-6 Pooled Certificates.
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<PAGE>
"Pro rata" distributions among Classes of Certificates will be made in
proportion to the then Current Principal Amount of such Classes.
The Pooled Certificates underlying each Class of Certificates are
discussed under "Description of the Pooled Certificates" herein and in Annex 1.
The full name of each abbreviated Underlying Series is set forth under
"Description of the Pooled Certificates -- General." Copies of the "Underlying
Agreements" have been filed with the Securities and Exchange Commission and also
are available from the Underwriter, at 245 Park Avenue New York, New York,
Attention: Mortgage Department.
The "Current Principal Amount" for any Class of Certificates means the
aggregate principal amount of such Class of Certificates outstanding as of any
date of determination, which is equal to the Original Principal Amount of such
Class of Certificates minus the sum of (i) all distributions of principal
previously made on such Class of Certificates pursuant to the distribution
provisions of the Agreement and (ii) the principal portion of any losses
allocated thereto as described herein.
The sole sources of payment on a Class of Certificates will be
distributions on the Pooled Certificates. The Certificates will not be
guaranteed by the Depositor, Bear, Stearns & Co. Inc., the Trustee, any
government agency or instrumentality, or any
other person.
On any Distribution Date, Prepayment Interest Shortfalls will be
allocated among the Certificates (other than the Class PO Certificates) in
proportion to the respective amounts of interest accrued that would have been
allocated thereto in the absence of such Prepayment Interest Shortfalls for the
related Distribution Date. On any Distribution Date, the interest portion of
losses on the Pooled Certificates will be allocated first, to the Class A-3
Certificates, and second, to the Class A-1, Class A-2 and Class R Certificates
on a pro rata basis in proportion to the respective amounts of interest accrued
that would have been allocated thereto in the absence of such losses for the
related Distribution Date.
DETERMINATION OF LIBOR
The Pass-Through Rates on the Adjustable Rate Certificates for any
Interest Accrual Period after the initial Interest Accrual Period will be
determined as described below.
On each Distribution Date, LIBOR shall be established by the Trustee
and as to any Interest Accrual Period, LIBOR will equal the rate for United
States dollar deposits for one month which appears on the Dow Jones Telerate
Screen Page 3750 as of 11:00 A.M., London time, two LIBOR Business Days prior to
the first day of such Interest Accrual Period ("LIBOR Rate Adjustment Date").
"Telerate Screen Page 3750" means the display designated as page 3750 on the
Telerate Service (or such other page as may replace page 3750 on that service
for the purpose of displaying London interbank offered rates of major banks). If
such rate does not appear on such page (or such other page as may replace that
page on that service, or if such service is no longer offered, such other
service for displaying LIBOR or comparable rates as may be selected by the
Trustee), the rate will be the Reference Bank Rate. The "Reference Bank Rate"
will be determined on the basis of the rates at which deposits in U.S. Dollars
are offered by the reference banks (which shall be three major banks that are
engaged in transactions in the London interbank market, selected by the Trustee
as of 11:00 A.M., London time, on the day that is two LIBOR Business Days prior
to the immediately preceding Distribution Date to prime banks in the London
interbank market for a period of one month in amounts approximately equal to the
aggregate Current Principal Amount of the Adjustable Rate Certificates then
outstanding. The Trustee will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Trustee, as of 11:00 A.M., New York City time, on
such date for loans in U.S. Dollars to leading European banks for a period of
one month in amounts approximately equal to the aggregate Current Principal
Amount of the Adjustable Rate Certificates then outstanding. If no such
quotations can be obtained, the rate will be LIBOR for the prior Distribution
Date, or in the case of the first LIBOR Rate Adjustment Date, 5.40%; provided
however, if, under the priorities described above, LIBOR for a Distribution Date
would be based on LIBOR for the previous Distribution Date for the third
consecutive Distribution Date, the Trustee shall select an alternative
comparable index (over which the Trustee has no control), used for determining
one-month Eurodollar lending rates that is calculated and published (or
otherwise made available) by an independent party. "LIBOR Business Day" means
any day other than (i) a Saturday or a Sunday or (ii) a day on which banking
institutions in the city of London, England or New York City are required or
authorized by law to be closed.
The establishment of LIBOR by the Trustee and the Trustee's subsequent
calculation of the Pass-Through Rates
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<PAGE>
applicable to the Adjustable Rate Certificates for the relevant Interest Accrual
Period, in the absence of manifest error, will be final and binding.
SUBORDINATION; ALLOCATION OF LOSSES
Losses which are allocated to the Pooled Certificates on a Pooled
Certificate Distribution Date in reduction of the principal amount thereof will
be allocated first, to the Class A-3 Certificates, and second, to the Class A-1,
Class A-2 and Class R Certificates on a pro rata basis, based on the principal
amounts thereof; provided however, that 25/1121 of losses on the NSCOR 1998-26,
Class A-6 Pooled Certificates will be allocated to the Class PO Certificates.
As a result of the subordination of the Class A-3 Certificates, such
Class of Certificates will be more sensitive than the Class A-1, Class A-2 and
Class PO Certificates to the rate of delinquencies and defaults on the
Underlying Mortgage Loans attributable to the Pooled Certificates.
DESCRIPTION OF THE POOLED CERTIFICATES
GENERAL
The Certificates will represent, in the aggregate, the entire
beneficial ownership interest in the Trust containing primarily the Pooled
Certificates. The following is a list of the Pooled Certificates:
<TABLE>
<CAPTION>
ABBREVIATION CLASS %
FULL NAME OF SERIES USED HEREIN IN TRUST
------------------- ----------- --------
<S> <C> <C>
ABN AMRO Mortgage Corporation, Multi-Class Mortgage Pass-Through AMAC 1998-04 36.26%
Certificates, Series 1998-04, Class A-6
Norwest Asset Securities Corporation, Mortgage Pass-Through NSCOR 1998-26 100.00%
Certificates, Series 1998-26, Class A-6
Norwest Asset Securities Corporation, Mortgage Pass-Through NSCOR 1998-26 49.92%
Certificates, Series 1998-26, Class A-13
The Prudential Home Mortgage Securities Company, Inc., Mortgage Pass- PHMSC 1993-47 23.34%
Through Certificates, Series 1993-47, Class A-10
PNC Mortgage Securities Corp., Mortgage Pass-Through Certificates, PNCMS 1999-08 95.88%
Series 1999-08, Class I-A-3
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Each Pooled Certificate is a pass-through certificate. Each Pooled
Certificate received a rating upon its original public sale of "AAA" or its
equivalent from two nationally recognized statistical rating organizations as
set forth in Annex 1 hereto. None of such ratings has been downgraded or
withdrawn.
Each of the Pooled Certificates is a "Senior Certificate" which means
with respect to an Underlying Series, a certificate which has rights which are
senior to those of another class or classes of certificates. Senior Certificates
are sometimes referred to as Class A Certificates although they may include
certificates with descriptions which do not contain the letter A, such as
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<PAGE>
residual or Class R Certificates. Each Underlying Series of which a Pooled
Certificate is a part includes one or more Subordinate Certificates (sometimes
referred to as "Class B Certificates") and most Underlying Series also include
one or more Mezzanine Certificates (sometimes referred to as "Class M
Certificates"). "Mezzanine Certificates" have rights which are subordinate to
those of the Senior Certificates, but senior to those of the Subordinate
Certificates. "Subordinate Certificates" have rights which are subordinate to
both Senior Certificates and Mezzanine Certificates, if any. Certain classes of
each type of certificate may be senior to other classes of the same type of
certificate.
In general, the "Subordination" is effected by Senior Certificates
being entitled to receive distributions due to such classes prior to
distributions being made on Mezzanine Certificates and Subordinate Certificates,
and Realized Losses (subject to certain limitations as described in Annex 1
hereto) being allocated to Subordinate Certificates and then to Mezzanine
Certificates, if any, until the principal amounts of such classes have been
reduced to zero before allocating such losses to the Senior Certificates.
"Realized Losses" means, in general, losses realized when Mortgage Loans are
liquidated and include "Special Hazard Losses" (losses not covered by standard
hazard insurance policies, with certain additional exceptions), "Fraud Losses"
(in general losses resulting from a mortgage insurer's failure to pay a claim
with respect to a Mortgage Loan on the grounds of fraud, dishonesty or
misrepresentation in connection with the origination of the Mortgage Loan) and
"Bankruptcy Losses" (losses attributable to certain actions which may be taken
by a bankruptcy court in connection with a Mortgage Loan, including a reduction
of the principal balance of, or interest rate on, a Mortgage Loan or an
extension of its maturity).
The Pooled Certificates initially were structured as targeted
amortization classes ("TAC Classes"), scheduled amortization classes ("Scheduled
Classes"), or support or companion classes ("Support Classes"), as described in
Annex 2 hereto.
A TAC Class is designed to receive principal payments using a
predetermined principal balance schedule (a "Targeted Balance") derived by
assuming a single CONSTANT prepayment rate for the Underlying Mortgage Loans. A
Scheduled Class is designed to receive principal payments using a predetermined
principal balance schedule (a "Scheduled Balance") but is not designated as a
planned amortization class ("PAC Class") or TAC Class. In many cases, the
schedule is derived by assuming two CONSTANT prepayment rates for the Underlying
Mortgage Loans. These two rates are the endpoints for the "structuring range"
for the Scheduled Class. A Support Class receives principal payments on a
distribution date only if scheduled payments have been made on specified PAC,
TAC and/or Scheduled Classes and receives all excess distributions of principal
to the extent not required to make scheduled payments on the related PAC, TAC or
Scheduled Classes. In some cases, the Support Classes may also receive principal
payments from the accreted interest from specified accrual Classes.
In general, since TAC or Scheduled Classes will receive distributions
of principal on a given distribution date in a pre-determined amount if
prepayments on the Underlying Mortgage Loans occur within a certain range or at
a certain rate, distributions of principal should in such cases be relatively
stable. If prepayments on the Underlying Mortgage Loans occur at different
rates, principal payments will be received at a greater or lesser rate. However,
no Class of Pooled Certificates which was originally a TAC or Scheduled Class
currently adheres to its schedule and consequently, such schedules no longer
provide any prepayment protection.
Additional characteristics of the Pooled Certificates are described in
Annex 1 and Annex 2 hereto.
THE UNDERLYING MORTGAGE LOANS
The Mortgage Loans included in the Underlying Trusts consist of
conventional, fixed rate, one- to four-family, fully-amortizing, level monthly
payment, first mortgage loans with original maturities of up to approximately 30
years.
Additional information regarding the characteristics of the Mortgage
Loans included in each of the Underlying Trusts is set forth in Annex 2 hereto.
ADDITIONAL INFORMATION
The descriptions of the Pooled Certificates and the Mortgage Loans do
not purport to be complete. Copies of the respective Prospectus Supplements and
Prospectuses relating to the Pooled Certificates and the November 1999 and
December 1999 Pooled Certificate Distribution Date Statements may be obtained
from the Underwriter at 245 Park Avenue, New York,
New York 10167, Attention: Mortgage Department.
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YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield to maturity and weighted average life of each Class of
Certificates will be affected by, among other things, the amount and timing of
interest and principal payments, including prepayments, and the severity of
losses with respect to the Underlying Mortgage Loans, the payment priorities and
other characteristics of the Pooled Certificates, the occurrence of an optional
or mandatory termination with respect to the Pooled Certificates and the
purchase price paid for such Certificates. No representation is made as to the
anticipated rate of prepayments on the Underlying Mortgage Loans in any Mortgage
Pool or the anticipated yield to maturity of any Class of Certificates.
Prospective investors are urged to consider their own estimates as to the
anticipated rate of future prepayments on the Underlying Mortgage Loans and the
suitability of the Certificates to their investment objectives. If prevailing
mortgage rates fall significantly below the mortgage rates on the Underlying
Mortgage Loans, the Underlying Mortgage Loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the mortgage rates
on the Underlying Mortgage Loans. Other factors affecting prepayments of
Underlying Mortgage Loans include changes in mortgagors' housing needs, job
transfers, unemployment, net equity in the mortgaged properties and servicing
decisions. The Underlying Mortgage Loans may be prepaid at any time without
penalty and generally have due-on-sale clauses.
The timing and amount of payments, including prepayments, on the
related Underlying Mortgage Loans may significantly affect an investor's yield.
In general, the earlier a prepayment of principal on an Underlying Mortgage
Loan, 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.
Since interest generally will be due on each Underlying Mortgage Loan
on the first day of the month, but the distribution of such interest will not be
made until the Pooled Certificate Distribution Dates and then the amounts
received with respect to a Pooled Certificate Distribution Date will not be
distributed until the related Distribution Date, the yield to investors in the
Certificates will be lower than the yield produced without such delays. Since
the amount of the distributions is based on information from the Underlying
Trustees, if such information is not received in a timely manner, the yield to
investors may be lower than the yield produced if such information had been
received in a timely manner. In addition, the yield to investors in the related
Class of Certificates will be reduced by interest shortfalls resulting from
prepayments, liquidation and the Soldiers' and Sailors' Civil Relief Act of
1940, as amended, (the "Relief Act") to the extent not covered by compensating
interest or Subordination provided for in the related Underlying Agreement (a
"Prepayment Interest Shortfall").
In the case of any Certificates purchased at a discount, a slower than
anticipated rate of principal payments, other things being equal, 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, other things being equal, could result in an actual yield that is
lower than the anticipated yield.
Since prevailing interest rates are subject to fluctuation, there can
be no assurance that investors in the Certificates will be able to reinvest the
payments 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. Prospective investors in the
Certificates should consider the related reinvestment risks in light of other
investments that may be available to such investors.
The Pooled Certificates are subject to optional redemption to the
extent described in Annex 1 hereto. Any such optional redemptions with respect
to Pooled Certificates will result in an earlier payment of the related Class of
Certificates.
ASSUMED FINAL DISTRIBUTION DATES
The "Assumed Final Distribution Date" for distributions on each Class
of Certificates is the Distribution Date deemed to be in December 2029. Since
the rate of payment of principal on the Underlying Mortgage Loans can be
expected to exceed the rate of payments used in calculating such final scheduled
distribution, the date of the final distribution on each class of Certificates
is expected to be earlier, and could be substantially earlier, than the Assumed
Final Distribution Date.
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
S-18
<PAGE>
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 amount of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution Date,
(b) summing the results and (c) dividing the sum by the aggregate amount of the
reductions in the principal amount of such Certificate referred to in clause
(a). The weighted average lives of the Certificates will be influenced by, among
other factors, the rate at which principal is paid on the related Underlying
Mortgage Loans. Principal payments of Underlying 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 an Underlying Mortgage
Loan in advance of its stated maturity as required or permitted by the
Underlying Agreement. In general, the Underlying Mortgage Loans may be prepaid
by the Mortgagors at any time and without payment of any prepayment fee or
penalty. The actual weighted average life and term to maturity of each Class of
Certificates, in general, will be shortened if the level of such prepayments of
principal on the Underlying Mortgage Loans increase.
STANDARD PREPAYMENT MODEL
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this Prospectus
Supplement (the "Prepayment Assumption") represents an assumed rate of
prepayment each month relative to the then outstanding principal balance of a
pool of mortgage loans. SPA DOES NOT PURPORT TO BE EITHER A HISTORICAL
DESCRIPTION OF THE PREPAYMENT EXPERIENCE OF ANY POOL OF MORTGAGE LOANS OR A
PREDICTION OF THE ANTICIPATED RATE OF PREPAYMENT OF ANY POOL OF MORTGAGE LOANS,
INCLUDING THE UNDERLYING MORTGAGE LOANS. 100% SPA assumes prepayment rates of
0.2% per annum of the then outstanding principal balance of such mortgage loans
in the first month of the life of the mortgage and an additional 0.2% per annum
in each month thereafter (for example, 0.4% per annum in the second month) until
the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the mortgage loans, 100% SPA assumes a constant
prepayment rate of 6% per annum. Multiples will be calculated from these
prepayment rates; for example, 250% SPA assumes prepayment rates will be
approximately 0.50% per annum in month one, approximately 1% per annum in month
two, reaching approximately 15% per annum in month 30 and remaining constant at
approximately 15% per annum thereafter. 0% SPA assumes no prepayments on the
related mortgage loans.
DECREMENT TABLES
The following tables indicate the percentages of the initial principal
amount of each Class of Certificates outstanding after certain dates and the
weighted average lives (in years) of each Class of Certificates, assuming
various constant percentages of SPA.
For each of the following tables it was assumed, among other things,
that (i) the Trust consists of the Pooled Certificates in the principal amounts
as of the Pooled Certificate Information Date described on Annex 1 hereto after
giving effect to distributions payable thereon in November 1999; (ii) the
principal balance of each Mortgage Loan is as of the Mortgage Loan Information
Date and is based on the Pooled Certificate Distribution Date Statement for
November 1999; (iii) the initial principal amount of each class of Certificates
will be as follows: for the Class A-1 Certificates, $57,819,034.00, for the
Class A-2 Certificates, $23,846,268.00, for the Class A-3 Certificates,
$700,000.00, for the Class PO Certificates, $450,243.00, and for the Class R
Certificates, $100.00, less the aggregate principal distribution on the Pooled
Certificates in December 1999 based upon the specified percentage of SPA; (iv)
Distribution Dates on the Certificates occur on the 28th of the month commencing
in January 2000; (v) each Mortgage Loan has a mortgage rate, remaining term to
maturity and loan age based on information provided by the Underlying Trustees,
paying agents or Servicers as of the Mortgage Loan Information Date; (vi) the
Mortgage Loans prepay at the constant percentages of SPA specified in the tables
and all principal prepayments constitute prepayments in full of the Mortgage
Loans and are received on the last day of each month commencing November 30,
1999; (vii) all amounts due with respect to the Mortgage Loans underlying the
Pooled Certificates are applied to the payment of such Pooled Certificates on
the 25th day of each month, (viii) there have occurred no delinquencies or
losses on the Mortgage Loans after the time period covered by the Pooled
Certificate Distribution Date Statements for November 1999; (ix) there are no
optional terminations of the Pooled Certificates; (x) the Trustee Fee is 0.024%
per annum; (xi) the Closing Date is December 29, 1999; (xii) each month consists
of 30 days; and (xiii) any reinvestment income on funds in the Certificate
Account will be paid to the Trustee and will not be available to make principal
and interest payments on the Certificates (clauses (i) through (xiii), the
"Structuring Assumptions").
S-19
<PAGE>
<TABLE>
<CAPTION>
Percent of Initial Principal Amount Outstanding
Class A-1 and Class A-2 Certificates
---------------------------------------------------------------------------------------------
Prepayment Assumption Percentage
---------------------------------------------------------------------------------------------
0% 100% 175% 350% 500%
-- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.................... 100 100 100 100 100
December 2000......................... 100 100 96 84 74
December 2001......................... 100 100 91 68 50
December 2002......................... 100 100 88 57 43
December 2003......................... 100 100 86 51 32
December 2004......................... 100 100 84 50 7
December 2005......................... 100 100 82 37 4
December 2006......................... 100 100 79 24 2
December 2007......................... 100 98 75 16 1
December 2008......................... 100 94 73 14 *
December 2009......................... 100 91 70 12 0
December 2010......................... 99 88 68 10 0
December 2011......................... 99 84 60 8 0
December 2012......................... 99 82 52 6 0
December 2013......................... 99 79 44 4 0
December 2014......................... 99 76 35 2 0
December 2015......................... 99 74 25 1 0
December 2016......................... 99 71 19 * 0
December 2017......................... 99 64 15 0 0
December 2018......................... 99 52 12 0 0
December 2019......................... 99 40 9 0 0
December 2020......................... 99 29 6 0 0
December 2021......................... 90 18 3 0 0
December 2022......................... 76 11 1 0 0
December 2023......................... 69 8 * 0 0
December 2024......................... 62 5 0 0 0
December 2025......................... 52 2 0 0 0
December 2026......................... 30 0 0 0 0
December 2027......................... 2 0 0 0 0
December 2028......................... 0 0 0 0 0
December 2029......................... 0 0 0 0 0
Weighted Average Life (in years)**.... 25.2 18.2 12.3 5.0 2.6
</TABLE>
- ------------
* Indicates a number that is greater than zero but less than 0.5%.
** 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-20
<PAGE>
<TABLE>
<CAPTION>
Percent of Initial Principal Amount Outstanding
Class A-3 Certificates
---------------------------------------------------------------------------------------------
Prepayment Assumption Percentage
---------------------------------------------------------------------------------------------
0% 100% 175% 350% 500%
-- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.................... 100 100 100 100 100
December 2000......................... 100 100 100 100 100
December 2001......................... 100 100 100 100 100
December 2002......................... 100 100 100 100 100
December 2003......................... 100 100 100 100 100
December 2004......................... 100 100 100 100 100
December 2005......................... 100 100 100 100 100
December 2006......................... 100 100 100 100 100
December 2007......................... 100 100 100 100 100
December 2008......................... 100 100 100 100 100
December 2009......................... 100 100 100 100 71
December 2010......................... 100 100 100 100 47
December 2011......................... 100 100 100 100 35
December 2012......................... 100 100 100 100 30
December 2013......................... 100 100 100 100 30
December 2014......................... 100 100 100 100 30
December 2015......................... 100 100 100 100 21
December 2016......................... 100 100 100 100 13
December 2017......................... 100 100 100 72 8
December 2018......................... 100 100 100 46 4
December 2019......................... 100 100 100 28 2
December 2020......................... 100 100 100 15 1
December 2021......................... 100 100 100 6 *
December 2022......................... 100 100 100 * *
December 2023......................... 100 100 100 0 0
December 2024......................... 100 100 24 0 0
December 2025......................... 100 100 0 0 0
December 2026......................... 100 78 0 0 0
December 2027......................... 100 0 0 0 0
December 2028......................... 0 0 0 0 0
December 2029......................... 0 0 0 0 0
Weighted Average Life (in years)**.... 28.3 27.2 24.8 19.2 12.5
</TABLE>
- ------------
* Indicates a number that is greater than zero but less than 0.5%.
** 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-21
<PAGE>
<TABLE>
<CAPTION>
Percent of Initial Principal Amount Outstanding
Class PO Certificates
---------------------------------------------------------------------------------------------
Prepayment Assumption Percentage
---------------------------------------------------------------------------------------------
0% 100% 175% 350% 500%
-- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial Percentage.................... 100 100 100 100 100
December 2000......................... 100 100 93 73 56
December 2001......................... 100 100 86 46 14
December 2002......................... 100 100 80 27 0
December 2003......................... 100 100 76 16 0
December 2004......................... 100 100 74 14 0
December 2005......................... 100 100 70 13 0
December 2006......................... 100 100 64 12 0
December 2007......................... 100 95 57 11 0
December 2008......................... 100 88 52 11 0
December 2009......................... 99 83 48 11 0
December 2010......................... 99 77 44 11 0
December 2011......................... 99 72 40 9 0
December 2012......................... 99 67 37 7 0
December 2013......................... 99 62 35 5 0
December 2014......................... 99 58 31 3 0
December 2015......................... 99 53 26 2 0
December 2016......................... 99 49 22 1 0
December 2017......................... 99 45 18 0 0
December 2018......................... 98 40 14 0 0
December 2019......................... 98 34 11 0 0
December 2020......................... 98 29 9 0 0
December 2021......................... 91 24 6 0 0
December 2022......................... 81 19 4 0 0
December 2023......................... 71 14 2 0 0
December 2024......................... 58 10 1 0 0
December 2025......................... 42 6 0 0 0
December 2026......................... 24 2 0 0 0
December 2027......................... 6 0 0 0 0
December 2028......................... 0 0 0 0 0
December 2029......................... 0 0 0 0 0
Weighted Average Life (in years)**.... 25.1 16.8 10.5 3.2 1.2
</TABLE>
- ------------
* Indicates a number that is greater than zero but less than 0.5%.
** 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-22
<PAGE>
ADJUSTABLE RATE CERTIFICATE YIELD CONSIDERATIONS
The yield to investors on the Class A-1 Certificates will be sensitive,
and the Class A-2 will be extremely sensitive, to fluctuations in the level of
LIBOR. The Pass-Through Rate on the Class A-1 Certificates will vary with LIBOR
and the Pass-Through Rate on the Class A-2 Certificates will vary inversely and
at a multiple of LIBOR. The Pass-Through Rates on the Adjustable Rate
Certificates are subject to maximum and minimum Pass-Through Rates, and are
therefore subject to limitation despite changes in LIBOR in certain
circumstances. Changes in the level of LIBOR may not correlate with changes in
prevailing mortgage interest rates or changes in other indices. It is possible
that lower prevailing mortgage interest rates, which might be expected to result
in faster prepayments, could occur concurrently with an increased level of
LIBOR. Investors in the Adjustable Rate Certificates should also fully consider
the effect on the yields on such Certificates of changes in the level of LIBOR.
To illustrate the significance of changes in the level of LIBOR and
prepayments on the yield to maturity on the Class A-2 Certificates, the
following table indicate the approximate pre-tax yields to maturity (on a
corporate bond equivalent basis) under the different constant percentages of SPA
for the Underlying Mortgage Loans and varying levels of LIBOR indicated. Because
the rate of distribution of principal on the Certificates will be related to the
actual amortization (including prepayments) of the Underlying Mortgage Loans,
which will include Underlying Mortgage Loans that have remaining terms to
maturity shorter or longer than assumed and Mortgage Rates higher or lower than
assumed, the pre-tax yields to maturity on the Class A-2 Certificates are likely
to differ from those shown in the following table, even if all the Underlying
Mortgage Loans prepay at constant percentages of SPA and the level of LIBOR and
the weighted average remaining term to maturity of the Underlying Mortgage Loans
are as assumed. Any differences between such assumptions and the actual
characteristics and performance of the Underlying Mortgage Loans and of the
Certificates may result in yields being different from those shown in such
tables. Discrepancies between assumed and actual characteristics and performance
underscore the hypothetical nature of the tables, which are provided only to
give a general sense of the sensitivity of yields in varying prepayment
scenarios and different levels of LIBOR. In addition, it is highly unlikely that
the Underlying Mortgage Loans will prepay at a constant level of SPA until
maturity, that all of the Underlying Mortgage Loans will prepay at the same
rate, or that the level of LIBOR will remain constant. The timing of changes in
the rate of prepayments may significantly affect the actual yield to maturity to
an investor, even if the average rate of principal prepayments is consistent
with an investor's expectation. In general, the earlier the payment of principal
of the Underlying Mortgage Loans, the greater 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 equally offset by a subsequent like reduction (or
increase) in the rate of principal prepayments.
The table set forth below is based on the Structuring Assumptions
(including the assumptions regarding the characteristics and performance of the
Underlying Mortgage Loans, the Pooled Certificates and of the Certificates,
which may differ from the actual characteristics and performance thereof), and
assuming further that (i) on each LIBOR Rate Adjustment Date, LIBOR will be at
the level shown, (ii) the purchase price of the Class A-2 Certificates is
78.375% of the initial principal amount of such Certificates, not including
accrued interest, and (iii) the initial Pass-Through Rate on the Class A-2
Certificates is set forth in "Description of the Certificates--Distributions of
Interest and Principal" herein. There can be no assurance that the Underlying
Mortgage Loans will have the assumed characteristics, will prepay at any of the
rates shown in the tables or at any other particular rate, that the pre-tax
yield to maturity on the Class A-2 Certificates will correspond to any of the
pre-tax yields to maturity shown herein, that the level of LIBOR will correspond
to the levels shown in the table or that the aggregate purchase price of the
Class A-2 Certificates will be as assumed. In addition to any other factors an
investor may deem material, each investor must make its own decision as to the
appropriate prepayment assumption to be used and the appropriate levels of LIBOR
to be assumed in deciding whether or not to purchase a Class A-2 Certificate.
S-23
<PAGE>
<TABLE>
<CAPTION>
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS A-2 CERTIFICATES TO PREPAYMENTS AND LIBOR
PERCENTAGE OF PREPAYMENT ASSUMPTION
LIBOR 0% 100% 175% 350% 500%
----- -- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
4.400% 13.8% 14.2% 15.1% 19.1% 23.8%
5.400% 10.7% 11.0% 11.9% 15.8% 20.5%
6.400% 7.6% 8.0% 8.8% 12.6% 17.3%
7.400% 4.7% 5.1% 5.8% 9.4% 14.1%
8.700% and above 1.0% 1.4% 2.1% 5.4% 10.1%
</TABLE>
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class A-2 Certificates, would
cause the discounted present value of such assumed stream of cash flows to equal
the assumed purchase price for such Certificates. Accrued interest is added to
the assumed purchase price in computing the corporate bond equivalent yields
shown. These yields do not take into account the different interest rates at
which investors may be able to reinvest funds received by them as distributions
on the Class A-2 Certificates, and thus do not reflect the return on any
investment in the Class A-2 Certificates when any reinvestment rates other than
the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Underlying Mortgage Loans will be prepaid
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the pre-tax yield to maturity on
the Class A-2 Certificates is likely to differ from those shown in the tables,
even if all of the Underlying Mortgage Loans prepay at the indicated constant
percentages of SPA over any given time period or over the entire life of the
Certificates.
There can be no assurance that the Underlying Mortgage Loans will
prepay at any particular rate or that the yield on the Class A-2 Certificates
will conform to the yields described herein. Moreover, the various remaining
terms to maturity of the Underlying Mortgage Loans could produce slower or
faster principal distributions than indicated in the preceding table at the
various constant percentages of SPA specified, even if the weighted average
remaining term to maturity of the Underlying Mortgage Loans is as assumed.
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment under a variety of
scenarios.
PRINCIPAL ONLY CERTIFICATE YIELD CONSIDERATIONS
The yield on the Class PO Certificates will be adversely affected by
slower than expected payments of principal (including prepayments, defaults,
liquidations and purchases of Underlying Mortgage Loans due to a breach of a
representation and warranty) on the Underlying Mortgage Loans related to the
NSCOR 1998-26, Class A-6 Pooled Certificates to the extent such payments result
in a slower than expected rate of principal payments.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Class PO Certificates to various constant rates of prepayment on
the related Underlying Mortgage Loans by projecting the monthly aggregate
payments on the Class PO Certificates and computing the corresponding pre-tax
yields to maturity on a corporate bond equivalent basis, based on the
Structuring Assumptions including the assumptions regarding the characteristics
and performance of such Underlying Mortgage Loans which differ from the actual
characteristics and performance thereof and assuming an aggregate purchase price
equal to 49.78125% of the initial principal amount of such Certificates. Any
differences between such assumptions and the actual characteristics and
performance of the related Underlying Mortgage Loans and of such Certificates
may result in yields being different from those shown in such tables.
Discrepancies between assumed and actual characteristics and performance
underscore the hypothetical nature of the tables, which are provided only to
give a general sense of the sensitivity of yields in varying prepayment
scenarios.
S-24
<PAGE>
<TABLE>
<CAPTION>
PRE-TAX YIELD TO MATURITY OF THE CLASS PO
CERTIFICATES AT THE FOLLOWING PREPAYMENT ASSUMPTION PERCENTAGES
0% 100% 175% 350% 500%
-- ---- ---- ---- ----
<S> <C> <C> <C> <C>
2.8% 4.4% 8.2% 39.3% 78.9%
</TABLE>
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class PO Certificates, would
cause the discounted present value of such assumed stream of cash flows to equal
the assumed purchase price listed in the tables. These yields do not take into
account the different interest rates at which investors may be able to reinvest
funds received by them as distributions on the Class PO Certificates and thus do
not reflect the return on any investment in the Class PO Certificates when any
reinvestment rates other than the discount rates set forth in the preceding
tables are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Underlying Mortgage Loans will be prepaid
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the pre-tax yield to maturity on
the Class PO Certificates is likely to differ from those shown in the tables
above, even if the average prepayment rate on all of the related Underlying
Mortgage Loans equals the constant percentages of SPA, indicted in the tables
above over any given time period or over the entire life of the Certificates. A
lower than anticipated rate of principal prepayments on such Underlying Mortgage
Loans will have a material adverse effect on the yield to maturity of the Class
PO Certificates.
There can be no assurance that the related Underlying Mortgage Loans
will prepay at any particular rate or that the yield on the Class PO
Certificates will conform to the yields described herein. Moreover, the various
remaining terms to maturity of the related Underlying Mortgage Loans could
produce slower or faster principal distributions than indicted in the preceding
table at the various constant percentages of SPA specified, even if the weighted
average remaining term to maturity and weighted average Mortgage Rate of the
Underlying Mortgage Loans are as assumed. Investors are urged to make their
investment decisions based on their determinations as to anticipated rates of
prepayment under a variety of scenarios. Investors in the Class PO Certificates
should fully consider the risk that a rapid rate of prepayments on the related
Underlying Mortgage Loans could result in the failure of such investors to fully
recover their investments.
For additional consideration relating to the yield on the Certificates,
see "Yield and Prepayment Considerations" in the Prospectus.
ACTUAL EXPERIENCE WILL VARY FROM ASSUMPTIONS
Discrepancies will exist between the characteristics of the actual Pooled
Certificates and Underlying Mortgage Loans and characteristics of the Pooled
Certificates and Underlying Mortgage Loans assumed in preparing the tables
contained herein. To the extent that Pooled Certificates and Underlying Mortgage
Loans have characteristics which differ from those assumed in preparing the
tables, the related Class of Certificates may mature earlier or later than
indicated by the tables, and the weighted average life and the cash flows on
such Class of Certificates may also differ. In addition, it is unlikely that the
Underlying Mortgage Loans will prepay at any constant rate. The timing of
changes in the rate of prepayment may significantly affect the yield realized by
a holder of Certificates.
THE POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling Agreement between
SAMI as depositor and U.S. Bank Trust National Association as Trustee (the
"Agreement"). 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
S-25
<PAGE>
Investments Inc., 245 Park Avenue, New York, New York 10167.
ASSIGNMENT OF POOLED CERTIFICATES
At the time of issuance of the Certificates, the Depositor will cause the
Pooled Certificates to be assigned to the Trustee. The Depositor will represent,
among other things, that as of the Closing Date (i) it is the owner of the
Pooled Certificates free and clear of any lien or adverse interests of any
person and (ii) that it has acquired its ownership in the Pooled Certificates in
good faith without notice of any adverse claim.
Upon discovery or receipt of notice by either the Depositor or the
Trustee of a breach of any of the representations and warranties regarding the
Pooled Certificates which materially and adversely affects the interests of the
Certificateholders, the Depositor or the Trustee, the party discovering such
breach will give prompt notice to the other. Within thirty days of the earlier
of either discovery by or notice to the Depositor of any such breach, the
Depositor shall use its best efforts promptly to cure such breach in all
material respects and, if such breach cannot be cured, the Depositor shall, at
the election of the Majority Certificateholders (as defined herein), repurchase
each Pooled Certificate affected by the breach, each at a repurchase price equal
to the outstanding Pooled Certificate Principal Balance thereof as of the date
of repurchase plus interest thereon at the applicable Pooled Certificate
Pass-Through Rates through the next succeeding Pooled Certificate Distribution
Date unless the repurchase is made on a Pooled Certificate Distribution Date,
then interest through such date (net of interest received by the Trust on such
Pooled Certificates on such date).
Notwithstanding the foregoing, for a period of two years following the
Closing Date, in lieu of repurchasing Pooled Certificates as described above,
the Depositor may substitute therefor one or more pass-through mortgage related
securities issued by the same depositor or the Government National Mortgage
Association ("GNMA"), Fannie Mae or Freddie Mac (each, a "Substitute Pooled
Certificate") which meet the following criteria: (i) the rate shall be the same
as the pass-through rate of the related Certificate, (ii) the sum of the
outstanding principal amounts of the Substitute Pooled Certificates equals or
exceeds the sum of the outstanding principal amounts of the Pooled Certificates
being substituted for and (iii) for any Pooled Certificate being substituted
for, the Substitute Pooled Certificate as of the date of substitution, (a) has
Underlying Mortgage Loans with a weighted average gross coupon no more than 50
basis points below or no more than 50 basis points above the weighted average
gross coupon of the Underlying Mortgage Loans relating to the Pooled Certificate
being substituted for, (b) has Underlying Mortgage Loans consisting of
conventional, fixed rate, one- to four-family, fully amortizing, level payment,
first mortgage loans with original maturities of up to 30 years, (c) if not
issued by GNMA, Fannie Mae or Freddie Mac, is rated as of the date of
substitution in at least the same rating category as the Pooled Certificate
being substituted for is rated as of the date of substitution, in each case, by
the Rating Agencies, (d) the inclusion of which in the Trust Fund will not
result in a withdrawal or downgrading in the ratings assigned to the
Certificates by the Rating Agencies, written confirmation of which shall be
provided by the Rating Agencies to the Trustee and (e) will not cause the assets
of the Trust as to which a REMIC election has been made to lose their status as
a REMIC for federal income tax purposes as indicated in an opinion of counsel to
be provided to the Trustee.
ACCOUNTS
The Trustee shall establish and maintain the Certificate Account in the
name of the Trustee for the benefit of the Certificateholders. The Certificate
Account shall be an Eligible Account as defined in the Agreement. The Trustee
will cause all distributions received on the Pooled Certificates by the Trustee
in its capacity as holder of the Pooled Certificates, from whatever source, to
be deposited directly into the Certificate Account. Amounts on deposit in the
Certificate Account will be invested in certain investments permitted by the
Agreement ("Permitted Investments"). Any income on such investments will be paid
to the Trustee as additional compensation and losses on such investments shall
be reimbursed by the Trustee from its own funds.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date and on each Supplemental Distribution Date
(with respect only to each Class as to which a distribution is then being made),
the Trustee will prepare, and will forward by mail, a statement to each
Certificateholder and to
the Depositor stating:
(i) the Available Funds for each Class of Certificates for such
Distribution Date;
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<PAGE>
(ii) the amount of interest and principal being distributed on each
Class of Certificates for such Distribution Date;
(iii) the Class Balances for each Class of Certificates before and after
applying payments on such Distribution Date; and
(iv) the outstanding principal amount immediately prior to and after
taking into account distributions made on the immediately prior
Pooled Certificate Distribution Date of, and the current interest
rate, and Realized Losses allocated to, each of the Pooled
Certificates on the immediately prior Pooled Certificate
Distribution Date.
In the case of the information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall also be expressed as a dollar amount per single
Certificate.
In addition, the Trustee promptly will furnish to the Depositor and, upon
request, to each Certificateholder, copies of any notices, statements, reports
or other information, including, without limitation the Pooled Certificate
Distribution Date Statement received by the Trustee in its capacity as the
holder of the Pooled Certificates.
On or before March 31st of each calendar year, commencing in 2000, the
Trustee will prepare and deliver by first class mail to the Depositor and each
person who at any time during the prior calendar year was a Certificateholder of
record a statement containing the information required to be contained in the
regular monthly report to Certificateholders, as set forth in clause (ii) above
aggregated for such prior calendar year or in the case of a Certificateholder,
the applicable portion thereof during which such person was a Certificateholder.
Such obligation of the Trustee will be satisfied to the extent that
substantially comparable information is provided by the Trustee pursuant to any
requirements of the Internal Revenue Code of 1986, as amended, and regulations
thereunder as from time to time are in force.
AMENDMENTS
The Agreement may be amended by the Depositor and the Trustee, without
the prior written consent of any Certificateholder (i) to cure any ambiguity or
mistake, (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein, (iii) to make any other
provisions with respect to matters or questions arising under the Agreement that
are not materially inconsistent with other provisions of the Agreement and (iv)
to make such modifications as may be required in connection with a substitution
or repurchase of a Pooled Certificate permitted under the Agreement; provided,
however, that such amendment will not, as evidenced by an opinion of counsel
delivered to the Trustee, adversely affect in any material respect the interests
of any Certificateholder. In addition, the 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 assets as to which a REMIC election has been
made 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. The Agreement may also be amended by the Depositor and the
Trustee and the holders of Certificates evidencing more than 50% of the
aggregate Current Principal Amount of the Certificates (or, with respect to any
amendment affecting only one Class of Certificates, with the consent of the
holders of Certificates evidencing more than 50% of the Current Principal Amount
of the affected Class) (as applicable, the "Majority Certificateholders") for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Agreement or modifying in any manner the rights of
Certificateholders; provided, however, that no such amendment may (i) reduce in
any manner the amount of, or delay the timing of, amounts required to be
distributed on any Certificate without the consent of the holder of such
Certificate; (ii) modify the provisions of the section of the Agreement
governing amendments of the Agreement, without the consent of the holders of all
Certificates; or (iii) be made unless the Trustee has received an opinion of
counsel (at the expense of the party seeking such amendment) that such amendment
will not adversely affect the status of certain assets of the Trust as to which
a REMIC election has been made, as a REMIC for federal income tax purposes.
ACTION WITH RESPECT TO UNDERLYING SERIES
The Trustee will exercise all voting rights provided to the holders of
the Pooled Certificates pursuant to an Underlying Agreement (by directing Cede &
Co.) solely upon the direction of Majority Certificateholders of the related
Class of Certificateholders.
CERTIFICATEHOLDER ACTION
No Certificateholder will have any right to institute any action, suit or
proceeding in equity or at law upon or under or with
S-27
<PAGE>
respect to the Agreement unless such holder previously has given to the Trustee
and the Depositor a written notice of default and unless also the Majority
Certificateholders have made written request upon the Trustee to institute such
action, suit or proceeding in its own name as Trustee thereunder and have
offered to the Trustee such reasonable indemnity as the Trustee may require
against the costs, expenses and liabilities to be incurred therein or thereby,
and the Trustee, for 30 days after its receipt of such notice, request and offer
of indemnity, will have neglected or refused to institute any such action, suit
or proceeding.
TERMINATION
The respective obligations and responsibilities of the Depositor and the
Trustee created by the Agreement will terminate upon the final distribution to
Certificateholders by the Trustee of all amounts required to be distributed
pursuant to the Agreement.
INDEMNIFICATION OF THE TRUSTEE
The Trustee and its directors, officers, employees and agents, will be
indemnified by the Trust against any loss, liability or expense arising out of
or incurred in connection with, the exercise and performance of any powers and
duties of the Trustee under the Agreement, with certain exceptions described in
the Agreement. The Trustee and its directors, officers, employees and agents
will not be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or negligence in the performance of the
obligations and duties of the Trustee.
CERTAIN MATTERS REGARDING THE TRUSTEE
The Trustee for the Certificates will be U.S. Bank Trust National
Association. The Trustee's corporate office is located at 180 East Fifth Street,
St. Paul, Minnesota 55101, Attention: Structured Finance Department, and its
telephone number is (651) 244-0011.
The Trustee may at any time resign and be discharged from the trust by
giving 30 days' written notice thereof to the Depositor and the
Certificateholders. Upon receiving such notice of resignation, the Depositor
shall promptly appoint a successor trustee. If no successor trustee has been so
appointed and has accepted appointment within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee. If at any time the
Trustee fails to meet the eligibility requirements or is incapable of acting, or
certain insolvency events occur, then the Depositor shall remove the Trustee and
appoint a successor trustee. The Majority Certificateholders may at any time
remove the Trustee and appoint a successor trustee. No resignation, discharge or
removal of the Trustee will become effective until a successor trustee shall
have assumed the Trustee's responsibilities and obligations under the Agreement.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based on the assumption that all of the
Pooled Certificates are REMIC regular interests. Such assumption is based upon
information contained in each of the prospectuses (each, an "Underlying
Prospectus") and in each of the prospectus supplements (each, an "Underlying
Prospectus Supplement") pursuant to which the Pooled Certificates were initially
offered. Neither the Depositor nor the Underwriter has independently
investigated any of the Underlying Trusts (whether through review of
organizational documentation or investigation of events occurring subsequent to
the dates of the related Underlying Prospectuses or Underlying Prospectus
Supplements or otherwise) to determine whether all the Underlying Trusts
actually qualify as REMICs and the related Pooled Certificates actually qualify
as REMIC regular interests.
An election will be made to treat certain assets of the Trust as a REMIC
for federal income tax purposes. The Certificates (other than the Class R
Certificates) will be designated as regular interests in the REMIC
(collectively, the "Regular Certificates" or the "REMIC Regular Certificates"),
and the Class R Certificates will be designated as the residual interest in the
REMIC (collectively the "Residual Certificates" or the "REMIC Residual
Certificates"). All Certificateholders are advised to see "Federal Income Tax
Consequences" in the Prospectus for a discussion of the anticipated federal
income tax consequences of the purchase, ownership and disposition of the REMIC
Regular Certificates and the REMIC Residual Certificates.
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
the Regular Certificates, including original issue discount with respect to any
Regular Certificates issued with original issue discount, will
S-28
<PAGE>
be taxable to Certificateholders in accordance with the accrual method of
accounting. Some or all of the Classes of Regular Certificates may be subject to
the original issue discount provisions. See "Federal Income Tax
Consequences--REMIC Regular Certificates--Current Income on REMIC Regular
Certificates--Original Issue Discount" in the Prospectus. All purchasers of
REMIC Regular Certificates are urged to consult their tax advisors for advice
regarding the effect, in any, of the original issue discount provisions and
regulations on the purchase of the Regular Certificates. In determining the rate
of accrual of original issue discount with respect to the Certificates a
prepayment assumption of 175% SPA will be used. See "Yield and Prepayment
Considerations--Standard Prepayment Model" herein for a description of the
standard prepayment assumption model. However, no representation is made as to
the rate at which prepayments actually will occur. In addition, certain Classes
of Regular Certificates may be treated as having been issued as a premium. See
"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. One such circumstance may occur if certain of the Pooled
Certificates have negative yields which may not be taken into account when
determining the taxable income of the holders of the Residual Certificates.
Another such circumstance may occur as a result of income on the Pooled
Certificates being reported to the REMIC using faster prepayment assumptions
than those used with respect to the Certificates.
The Certificates (including the Residual Certificates) will be treated as
"regular" or "residual interests" in a REMIC for domestic building and loan
associations, and "real estate assets" for real estate investment trusts
("REITs") subject to the limitations described in "Federal Income Tax
Consequences--REMIC Certificates--Status of REMIC Certificates as Real Property
Loans" in the Prospectus. Similarly, interest on such Certificates will be
considered "interest on obligations secured by mortgages on real property" for
REITs, subject to the limitations described in "Federal Income Tax
Consequences--REMIC Certificates--Status of REMIC Certificates as Real Property
Loans" in the Prospectus.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") should consider the
ERISA fiduciary investment standards before authorizing an investment by a plan
in the Certificates. In addition, fiduciaries of employee benefit plans subject
to Title I of ERISA, as well as certain plans or other retirement arrangements
not subject to ERISA, but which are subject to Section 4975 of the Code (such as
individual retirement accounts and Keogh plans covering only a sole proprietor,
or partners), or any entity whose underlying assets include plan assets by
reason of a plan or account investing in such entity, including an insurance
company general account (collectively, "Plan(s)"), should consult with their
legal counsel to determine whether an investment in the Certificates will cause
the assets of the Trust ("Trust Assets") to be considered plan assets pursuant
to the plan asset regulations set forth at 29 C.F.R. ss.2510.3-101 (the "Plan
Asset Regulations"), thereby subjecting the Plan to the prohibited transaction
rules with respect to the Trust Assets and the Trustee 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 an exemption granted by
the Department of Labor applies to the purchase, sale, transfer or holding of
the Certificates and the operation and management of the Trust and its assets.
Prohibited Transaction Exemption 90-30 ("PTE 90-30") may be applicable to
the purchase, sale or transfer of the Certificates (other than the Class A-3 and
the Residual Certificates) and the operation and management of the Trust and its
assets. The Department of Labor (the "DOL") has clarified that the definition of
a trust to which an individual prohibited transaction exemption such as PTE
90-30 will be applicable includes a "two-tiered" trust structure under which
certificates (such as the Pooled Certificates) are issued by a trust (such as
each of the Underlying Trusts) which contain a pool of receivables (such as the
Underlying Mortgage Loans) and then are transferred to another trust (such as
the Trust) which issues certificates which are sold to Plans; provided that the
certificates issued by an underlying trust are not subordinated to any other
class of certificates issued by the same underlying trust. SAMI believes that
none the Pooled Certificates which are being transferred to the Trust are
subordinated to any other class of certificates which were issued by any of the
same Underlying Trusts. However, any Plan fiduciary which proposes to cause a
Plan to purchase Certificates (other than the Class A-3 and the Residual
Certificates) should
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<PAGE>
make its own determination as to the availability of exemptive relief under PTE
90-30, both in the context of a two-tiered trust structure and with regard to
whether all of the specific and general conditions of PTE 90-30 are satisfied
with respect to any potential prohibited transaction relating to the purchase,
sale and transfer of the Certificates (other than the Class A-3 and the Residual
Certificates) and the operation management of the Trust and its assets.
Insurance companies contemplating the investment of general account
assets in the Certificates should consult with their legal advisors with respect
to the applicability of Section 401(c) of ERISA. The DOL issued proposed
regulations under Section 401(c) on December 22, 1997, but the required final
regulations have not been issued as of the date of this Prospectus
Supplement.
Because the exemptive relief afforded by the exemption or any similar
exemption that may be available will not likely apply to the purchase, sale or
holding of the Class A-3 Certificates, no Class A-3 Certificate or any interest
therein may be acquired or held by any ERISA plan, any trustee or other person
acting on behalf of any ERISA plan, or any other person using ERISA plan assets
to effect such acquisition or holding-- a plan investor--unless: (i) the
acquirer or holder is an insurance company; (ii) the source of funds used to
acquire or hold the Certificate or interest therein is an "insurance company
general account," as defined in U.S. Department of Labor Prohibited Transaction
Class Exemption 95-60; and (iii) the conditions of PTCE 95-60 have been
satisfied.
Each beneficial owner of a Class A-3 Certificate or any interest therein
shall be deemed to have represented, by virtue of its acquisition or holding of
that Certificate or interest therein, that either (i) it is not a plan investor
or (ii) (1) it is an insurance company, (2) the source of funds used to acquire
or hold the Certificate or interest therein is an "insurance company general
account", as such term is defined in PTCE 95-60, and (3) the conditions in
Sections I and III of PTCE 95-60 have been satisfied.
If any Class A-3 Certificate or Residual Certificate or any interest
therein is acquired or held in violation of the provisions of the preceding
paragraph, the next preceding permitted beneficial owner will be treated as the
beneficial owner of that Class A-3 Certificate or Residual Certificate,
retroactive to the date of transfer to the purported beneficial owner. Any
purported beneficial owner whose acquisition or holding of any such Certificate
or interest therein was effected in violation of the provisions of the preceding
paragraph shall indemnify and hold harmless the Issuer and the Trustee from and
against any and all liabilities, claims, costs or expenses incurred by those
parties as a result of that acquisition or holding.
Because the exemptive relief afforded by the exemption or any similar
exemption that might be available also will not likely apply to the purchase,
sale or holding of the Residual Certificates, transfers of those Certificates to
any plan investor will not be registered by the Trustee unless the transferee
provides the Trustee with an opinion of counsel satisfactory to the Trustee,
which opinion will not be at the expense of the Trustee, that the purchase of
those Certificates by or on behalf of the plan investor: (i) is permissible
under applicable law; (ii) will not constitute or result in a non-exempt
prohibited transaction under ERISA or Section 4975 of the Internal Revenue Code;
and (iii) will not subject the Trustee to any obligation in addition to those
undertaken in the pooling and servicing agreement.
Any fiduciary or other investor of ERISA plan assets that proposes to
acquire or hold the Certificates on behalf of or with ERISA plan assets of any
ERISA plan should consult with its counsel with respect to: (i) whether the
specific and general conditions and the other requirements in the exemption
would be satisfied, or whether any other prohibited transaction exemption would
apply, and (ii) the potential applicability of the general fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Internal Revenue Code to the proposed investment.
See "ERISA Considerations" in the prospectus.
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 Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of such
investment under applicable fiduciary or other investment standards, and the
need for the availability of any exemptive relief under any Similar Law.
The sale of any Certificates to a Plan is in no respect a representation
by the Underwriter that such an investment meets all relevant legal requirements
with respect to investments by Plans generally or any particular Plan or that
such an investment is appropriate for Plans generally or any particular Plan.
See "ERISA Considerations" in the Prospectus.
S-30
<PAGE>
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 legal advisors in determining whether and to what extent
there may be restrictions on its ability to invest in the Certificates. The
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. 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 "Federal Income Tax
Consequences--Transfers of REMIC Residual Certificates--Tax on Disposition of
REMIC Residual Certificates" and "--Restrictions on Transfer; Holding by
Pass-Through Entities" in the Prospectus.
A Residual Certificate (or interests therein) may not be transferred
without the prior express written consent of the holder of the Residual
Certificate who is a "Tax Matters Person" as defined in the Code and by SAMI.
SAMI will not give its consent to any proposed transfer to a disqualified
organization, including any publicly traded partnership. As a prerequisite to
such consent to any other transfer, the proposed transferee must provide the Tax
Matters Person, the Trustee and SAMI with an affidavit that the proposed
transferee is not a disqualified organization or publicly traded partnership
(and, unless the Tax Matters Person and SAMI consent to the transfer to a person
who is not a U.S. Person (as defined below), an affidavit that it is a U.S.
Person). Notwithstanding the fulfillment of the prerequisites described above,
the Tax Matters Person or SAMI may withhold its consent to a transfer, but only
to the extent necessary to avoid a risk of REMIC disqualification or REMIC-level
tax. In the event that legislation is enacted which would subject the Trust to
tax (or disqualify any REMIC as a REMIC) on the transfer of an interest in the
Residual Certificate to any other person or persons, the Tax Matters Person and
SAMI may, without action on the part of Holders, amend the Agreement to restrict
or prohibit prospectively such transfer. A transfer in violation of the
restrictions set forth herein may subject a Residual Certificateholder to
taxation. See "Federal Income Tax Consequences--REMIC Residual
Certificates--Transfers of REMIC Residual Certificates--Tax on Disposition of
REMIC Residual Certificates" and "--Restrictions on Transfer; Holding by
Pass-Through Entities" in the Prospectus. Moreover, certain transfers of a
Residual Certificate that are effective to transfer legal ownership may
nevertheless be ineffective to transfer ownership for federal income tax
purposes, if at the time of the transfer the Residual Certificate represents a
"non-economic residual interest" as defined in the REMIC Regulations and if
avoiding or impeding the assessment or collection of tax is a significant
purpose of the transfer. See "Federal Income Tax Consequences--REMIC Residual
Certificates--Transfers of REMIC Residual Certificates" and "--Restrictions on
Transfer; Holding by Pass-Through Entities" in the Prospectus. Further, unless
the Tax Matters Person and SAMI consent in writing (which consent may be
withheld in the Tax Matters Person's or SAMI's sole discretion), 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 Certificates are being purchased from SAMI by the Underwriter, an
affiliate of SAMI, upon issuance. 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. In connection with the purchase and sale of
the Certificates, the Underwriter may be deemed to have received compensation
from SAMI in the form of underwriting discounts. SAMI will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
1933 Act, or will contribute to payments the Underwriter may be required to make
in respect thereof.
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon
for SAMI and the Underwriter by Thacher Proffitt
& Wood, New York, New York.
S-31
<PAGE>
RATING
As a condition to their issuance, each Class of Certificates will be
rated by Moody's and S&P as follows:
Class Rating
- ----- ------
Moody's S&P
------- ---
Class A-1 Aaa AAA
Class A-2 Aaa AAAr
Class A-3 -- AAA
Class PO Aaa AAAr
Class R -- AAA
The ratings assigned by Moody's to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage loans
by the related certificateholders under the agreements pursuant to which such
certificates were issued. Moody's ratings take into consideration the credit
quality of the related mortgage pool, structural and legal aspects associated
with such certificates, and the extent to which the payment stream in the
mortgage pool is adequate to make payments required under such certificates.
Moody's ratings on such certificates do not, however, constitute a statement
regarding frequency of prepayments on the mortgages.
The ratings assigned by S&P address the likelihood of the receipt of all
distributions to which such Certificates are entitled. S&P's ratings take into
consideration the credit qualify of the related mortgage pool, structural and
legal aspects associated with such certificates, and the extent to which the
payment stream in the mortgage pool is adequate to make payments required under
such certificates. S&P's ratings on such Certificates do not, however,
constitute a statement regarding frequency of prepayments on the mortgages. The
"r" symbol of the "AAAr" rating of certain Classes of the Certificates by S&P is
attached to highlight certain obligations that S&P believes may experience
volatility in expected returns due to non-credit risks, including interest only
and principal only mortgage securities.
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. In the event that the ratings initially assigned to the
Certificates are subsequently lowered for any reason, no person or entity is
obligated to provide any additional credit support or credit enhancement with
respect to the Certificates.
SAMI has not requested a rating of the Certificates by any rating agency
other than Moody's and S&P. However, there can be no assurance as to whether any
other rating agency will rate any Class of Certificates or, in such event, what
rating would be assigned by such other rating agency. The rating assigned by
such other rating agency may be lower than the rating assigned by Moody's or
S&P.
S-32
<PAGE>
<TABLE>
<CAPTION>
INDEX OF PRINCIPAL DEFINITIONS
TERM PAGE
- ---- ----
<S> <C>
1933 Act................................................................................................................S-2
Agreement.........................................................................................................S-4, S-25
Assumed Class Final Distribution Date..................................................................................S-18
Available Funds........................................................................................................S-14
Bankruptcy Losses......................................................................................................S-17
Book-Entry Certificates.................................................................................................S-5
Business Day...........................................................................................................S-12
Cede...................................................................................................................S-11
Cedel..................................................................................................................S-11
Certificate Account....................................................................................................S-14
Certificate Register...................................................................................................S-13
Certificates............................................................................................................S-4
Class B Certificates...................................................................................................S-17
Class M Certificates...................................................................................................S-17
Class PO Percentage....................................................................................................S-14
Class PO Principal Distribution Amount.................................................................................S-14
Closing Date............................................................................................................S-4
Code...................................................................................................................S-28
Current Principal Amount...............................................................................................S-15
Cut-off Date............................................................................................................S-4
Determination Time.....................................................................................................S-13
Distribution Date.................................................................................................S-5, S-13
DTC....................................................................................................................S-11
DTC Services...........................................................................................................S-12
DTC Systems............................................................................................................S-12
ERISA..................................................................................................................S-29
Euroclear..............................................................................................................S-11
Fraud Losses...........................................................................................................S-17
GNMA...................................................................................................................S-26
Industry...............................................................................................................S-12
Interest Accrual Period................................................................................................S-13
Issuer.............................................................................................................S-1, S-4
LIBOR..................................................................................................................S-13
LIBOR Business Day.....................................................................................................S-15
LIBOR Rate Adjustment Date.............................................................................................S-15
Majority Certificateholders............................................................................................S-27
Mezzanine Certificates.................................................................................................S-17
Mortgage Loan Information Date..........................................................................................S-6
Non-PO Principal Distribution Amount...................................................................................S-14
Original Principal Amount...............................................................................................S-4
Permitted Investments..................................................................................................S-26
Physical Certificates...................................................................................................S-5
Plan Asset Regulations.................................................................................................S-29
Plan(s)................................................................................................................S-29
Pooled Certificate Distribution Date..............................................................................S-5, S-13
Pooled Certificate Distribution Date Statement.........................................................................S-13
Prepayment Assumption..................................................................................................S-19
Prepayment Interest Shortfall..........................................................................................S-18
Pro rata...............................................................................................................S-15
PTE 90-30..............................................................................................................S-29
Rating Agency..........................................................................................................S-10
S-33
<PAGE>
Realized Losses........................................................................................................S-17
Record Date............................................................................................................S-13
Reference Bank Rate....................................................................................................S-15
Regular Certificates...................................................................................................S-28
REITs..................................................................................................................S-29
Relief Act.............................................................................................................S-18
REMIC Regular Certificates.............................................................................................S-28
REMIC Residual Certificates............................................................................................S-28
Residual Certificates.............................................................................................S-5, S-28
S&P....................................................................................................................S-10
Scheduled Classes.......................................................................................................S-8
Seller..................................................................................................................S-4
Senior Certificate.....................................................................................................S-16
Senior Certificates.....................................................................................................S-5
Similar Law............................................................................................................S-30
SMMEA............................................................................................................S-10, S-31
Special Hazard Losses..................................................................................................S-17
Subordinate Certificates...............................................................................................S-17
Subordination..........................................................................................................S-17
Substitute Pooled Certificate..........................................................................................S-26
Supplemental Distribution Date.........................................................................................S-13
Support Classes.........................................................................................................S-8
TAC Classes.............................................................................................................S-8
Telerate Screen Page 3750..............................................................................................S-15
Trust..............................................................................................................S-1, S-4
Trust Assets...........................................................................................................S-29
Trustee.................................................................................................................S-4
Trustee Fee............................................................................................................S-14
U.S. Person............................................................................................................S-31
Underlying Agreements...................................................................................................S-6
Underlying Mortgage Loans...............................................................................................S-6
Underlying Prospectus..................................................................................................S-28
Underlying Prospectus Supplement.......................................................................................S-28
Underlying Series.......................................................................................................S-5
Underlying Trusts.......................................................................................................S-6
Underwriter.............................................................................................................S-1
United States person...................................................................................................S-31
</TABLE>
S-34
<PAGE>
ANNEX 1
The descriptions of the Pooled Certificates were created using the
Prospectuses and the Underlying Agreements as well as any subsequent information
related thereto filed on a Current Report on Form 8-K with the SEC following the
closing of the related Underlying Series. Copies of the respective Prospectuses,
Underlying Agreements and the Pooled Certificate Distribution Date Statements
for November 1999 or December 1999 may be obtained from the Underwriter at 245
Park Avenue, New York, New York 10167, Attention: Mortgage Department.
1-1
<PAGE>
ANNEX 1(A)
PAYMENT TERMS OF THE AMAC 1998-4 CERTIFICATES
SERIES INFORMATION
Series Information...................................................AMAC 1998-4
Pooled Certificates....................................................Class A-6
Pooled Certificates
Ratings at Date of Issuance................."AAA" by S&P and "AAA" by Fitch
Issue Date .....................................................October 27, 1998
Cut-off Date.....................................................October 1, 1998
Pooled Certificate Trustee.............Chase Bank of Texas, National Association
Pooled Certificate Master Servicer............ LaSalle Home Mortgage Corporation
Remaining Subordination Coverage as of Pooled
Certificate Information Date for:
Special Hazard Losses.........................................$4,796,879.00
Fraud Losses....................................................$140,000.00
Bankruptcy Losses.............................................$3,598,356.00
DESCRIPTION OF CERTIFICATES
Principal Balance as of
Certificate Stated Initial Certificate Pooled Certificate
Class Designations Rate Principal Balance Information Date
- ------------------ ------------ ---------------------- -----------------------
Class A-1 5.90% $ 16,413,000.00 $ 15,933,419.89
Class A-2 5.60% $ 25,740,000.00 $ 24,987,889.35
Class A-3 6.00% $ 44,700,000.00 $ 44,289,465.63
Class A-4 6.50% $ 2,112,000.00 $ 2,112,000.00
Class A-5 6.75% $ 11,497,044.00(1) $ 11,262,900.58
Class A-6 6.75% $ 43,144,000.00 $ 34,383,933.40
Class A-7 6.62% $ 51,500,000.00 $ 41,043,310.07
Class A-8 8.00% $ 5,356,000.00 $ 4,268,504.25
Class A-9 6.75% $ 14,000,000.00 $ 0.00
Class A-10 6.75% $ 5,500,000.00 $ 0.00
Class A-11 6.75% $ 1,035,000.00 $ 1,113,273.30
Class A-12 6.75% $ 41,760,000.00 $ 41,760,000.00
Class A-13 6.35% $ 51,318,000.00 $ 39,775,981.75
Class A-14 8.00% $ 16,418,000.00 $ 12,724,624.82
Class A-15 6.75% $ 15,050,000.00 $ 15,050,000.00
Class A-16 6.75% $ 9,750,000.00 $ 9,750,000.00
Class A-X 6.75% $ 16,137,992.00(2) $ 12,331,470.27
Class A-P 0.00% $ 1,643,016.00(3) $ 1,559,477.82
Class M 6.75% $ 6,837,000.00 $ 6,763,630.62
Class B-1 6.75% $ 3,059,000.00 $ 3,026,173.20
Class B-2 6.75% $ 1,620,000.00 $ 1,602,599.52
Class B-3 6.75% $ 1,080,000.00 $ 1,068,410.27
Class B-4 6.75% $ 900,000.00 $ 890,341.91
Class B-5 6.75% $ 900,454.11 $ 890,791.13
Class R 6.75% $ 100.00 $ 0.00
______________________________
1. The Class A-P Certificates are principal only certificates and do not bear
interest.
1(a)-1
<PAGE>
2. The Class A-5 Certificates are interest-only certificates, have no
principal balance and bear interest on the Class A-5 Notional Amount equal
to the sum of (i) approximately 17/135 of the outstanding principal balance
of the Class A-1 Certificates, (ii) approximately 23/135 of the outstanding
principal balance of the Class A-2 Certificates, (iii) approximately 1/9 of
the outstanding principal balance of the Class A-3 Certificates and (iv)
approximately 1/27 of the outstanding principal balance of the Class A-4
Certificates, immediately prior to the Pooled Certificate Distribution Date
(initially approximately $11,497,044).
3. Interest will accrue on the Class A-X Certificates during each applicable
Interest Accrual Period in an amount equal to the product of (i) 1/12 of
the difference between (a) the weighted average of the rates on the related
mortgage loans with a net rate (i.e., the rate stated in the related
mortgage note minus the servicing fee rate of 0.25% per annum) as of the
first day of such month and (b) 6.75% and (ii) the Class A-X Notional
Amount. The Class A-X Notional Amount is equal to the aggregate scheduled
principal balances of the mortgage loans (originally, $16,137,992.00 and as
of the Pooled Certificate Information Date, $12,331,470.27).
Mortgage Loans................... The mortgage loans are conventional, fixed
rate, one- to four-family, fully-amortizing,
level monthly payment, first mortgage loans
with terms to maturity of approximately 30
years from the date of origination or
modification, which may include loans secured
by shares issued by cooperative housing
corporations.
Priority of Distributions of
the Certificates................. The amount available for distribution is
allocated among the Class A Certificates (i)
first, to the Class A-P Certificates an
amount equal to the principal received on
each mortgage loan with a rate of less than
6.75% (the "Discount Loans") multiplied by a
fraction (the "Discount Fraction"), the
numerator of which is 6.75% minus the rate on
each such mortgage loan and the denominator
equal to 6.75% (ii) second, pro rata based
upon the respective amounts of interest
accrued thereon during the related interest
accrual period in an amount up to the sum of
interest so accrued (except as provided
below), (iii) third, pro rata based on the
respective amounts thereof, any unpaid
interest (without interest thereon) from
prior Pooled Certificate Distribution Dates,
and (iv) fourth, to the principal amounts due
such Class A Certificates (other than the
Class A-P Certificates).
The aggregate amount of interest accrued on
the Class A-9, Class A-10 and Class A-11
Certificates (as applicable) will be payable
as principal to the following classes of
certificates in the following order of
priority until the respective times indicated
below:
(1) to the Class A-6, Class A-7 and Class A-8
Certificates, pro rata, to the extent
necessary to reduce the principal
balances of such certificates to the
first targeted principal balances;
(2) to the Class A-9 Certificates, until
retired; (3) to the Class A-6, Class A-7
and Class A-8 Certificates, pro rata, to
the extent necessary to reduce the
principal balances of such certificates
to the second targeted principal
balances;
(4) to the Class A-10 Certificates, until
retired;
(5) to the Class A-6, Class A-7 and Class A-8
Certificates, pro rata, without regard to
their targeted principal balances until
retired; and
(6) to the Class A-11 Certificates, until
retired.
1(a)-2
<PAGE>
The Senior Certificates entitled to principal
(other than the Class A-P Certificates) an
amount up to the Senior Principal Amount for
such Pooled Certificate Distribution Date
shall be distributed as follows:
(1) first, to the Class R Certificate, until
its principal balance has been reduced to
zero;
(2) second, to the Class A Certificates
concurrently as follows:
(A) 73.0840382087% of the Senior
Principal Amount remaining,
sequentially as follows:
1. first, to the Class A-12
Certificates, until its principal
balance is reduced to zero, the
lesser of:
(a) 73.0840382087% of the Class A-12
Priority Amount; and
(b) 98.6% of the portion of the
Senior Principal Amount available
under this clause (2)(A);
2. second, concurrently, 29.2030674519%
to the Class A-1 Certificates,
45.7982669964% to the Class A-2
Certificates and 24.9986655517% to
the Class A-3 Certificates, to the
extent necessary to reduce the Class
A-1 and Class A-2 Certificate
principal balances to their
respective planned principal
balances;
3. third, to the Class A-3 Certificates,
to the extent necessary to reduce its
principal balance to its planned
principal balance;
4. fourth, to the Class A-4
Certificates, to the extent necessary
to reduce the Class A-4 Certificate
principal balance to its planned
principal balance;
5. fifth, to the Class A-6, Class A-7
and Class A-8 Certificates, pro rata,
to the extent necessary to reduce
their principal balances to their
respective first targeted principal
balances;
6. sixth, to the Class A-9 Certificates,
until its principal balance has been
reduced to zero;
7. seventh, to the Class A-6, Class A-7
and Class A-8 Certificates, pro rata,
to the extent necessary to reduce
their principal balances to their
second targeted principal balances;
8. eighth, to the Class A-10
Certificates, until its principal
balance has been reduced to zero;
9. ninth, to the Class A-6, Class A-7
and Class A-8 Certificates, pro rata,
without regard to their targeted
principal balances until the
principal balances thereof have been
reduced to zero;
10. tenth, to the Class A-11
Certificates, until its principal
balance has been reduced to zero;
11. eleventh, concurrently,
29.2030674519% to the Class A-1
Certificates, 45.7982669964% to the
1(a)-3
<PAGE>
Class A-2 Certificates and
24.9986655517% to the Class A-3
Certificates, without regard to their
planned principal balances until the
principal balances of the Class A-1
and Class A-2 Certificates have been
reduced to zero;
12. twelfth, to the Class A-3
Certificates, without regard to its
planned principal balance, until its
principal balance has been reduced to
zero;
13. thirteenth, to the Class A-4
Certificates, without regard to its
planned principal balance, until its
principal balance has been reduced to
zero;
14. fourteenth, to the Class A-12
Certificates, until its principal
balance has been reduced to zero.
(B) 26.9159617913% of the Senior
Principal Amount remaining,
sequentially as follows:
1. first, to the Class A-16
Certificates, 26.9159617913% of the
Class A-16 Priority Amount until its
principal balance been reduced to
zero;
2. second, to the Class A-13 and Class
A-14 Certificates, pro rata, until
their respective principal balances
have been reduced to zero;
3. third, to the Class A-15
Certificates, until its principal
balance has been reduced to zero;
4. fourth, to the Class A-16
Certificates, until its principal
balance has been reduced to zero.
After the amounts are distributed as
described above, amounts available for
distribution is allocated to the Class A-P
Certificates up to the Discount Fraction
Principal Shortfall (i.e., the Discount
Fraction of any loss on a Discount Loan other
than excess losses and any such loss amount
previously distributed and not reimbursed),
but not more than an amount equal to the
subordinate principal amount.
The Class R Certificate receive the remainder
of the available funds to the extent not
necessary to reduce certificate principal
balances of the subordinate certificates to
zero.
Following the reduction of the principal
balance of the Class A-6, Class A-7 and Class
A-8 Certificates to zero, interest accrued on
the Class A-9 Certificates will be payable as
interest to the Class A-9 Certificates rather
than added to principal. Following reduction
of the principal balance of the Class A-6,
Class A-7, Class A-8 and Class A-9
Certificates to zero, interest accrued on the
Class A-10 Certificates will be payable as
interest to the Class A-10 Certificates
rather than added to principal. Following
reduction of the principal balance of the
Class A-6, Class A-7, Class A-8, Class A-9
and Class A-10 Certificates to zero, interest
accrued on the Class A-11 Certificates will
be payable as interest to the Class A-11
Certificates rather than added to principal.
1(a)-4
<PAGE>
On each Pooled Certificate Distribution Date
on or after the date on which the subordinate
certificates are reduced to zero (the "Credit
Support Depletion Date") with respect to the
Senior Certificates, to the extent of
available funds on such Pooled Certificate
Distribution Date, distributions will be made
in the order and priority as follows:
first, to the Class A-P Certificates, the
Discount Fraction of all principal received
on or in respect of each Discount Loan;
second, to the senior certificates accrued
and unpaid interest;
third, to the senior certificates (other than
the Class A-P certificates), principal, pro
rata, according to their respective class
principal balances;
fourth, to each class of senior certificates,
on a pro rata basis, the amount of
unreimbursed losses previously allocated to
each class; and
fifth, to the Class A Certificates, pro rata,
according to their respective class principal
balances, the amount of any unreimbursed
losses previously allocated to such
certificates.
"Class A-12 Priority Amount" for any Pooled
Certificate Distribution Date will equal the
sum of (i) the Adjusted Class A-12 Percentage
of the amount of principal available to be
paid to the certificates (the "Principal
Payment Amount") (exclusive of the portion
attributable to the Discount Fraction of
principal received on the Discount Loans (the
"Discount Fractional Principal Amount"), (ii)
the Class A-12 Prepayment Percentage of the
"Principal Prepayment Amount" (i.e., the sum
of all partial principal prepayments and all
prepayments in full which were received
during the applicable Prepayment Period)
(exclusive of the portion attributable to the
Discount Fractional Principal Amount) and
(iii) the Class A-12 Liquidation Amount.
The "Adjusted Class A-12 Percentage" will
equal (i) for any Pooled Certificate
Distribution Date prior to November 2003, 0%,
and (ii) for any Pooled Certificate
Distribution Date occurring on or after
November 2003, the product of (a) the Senior
Percentage and (b) the Class A-12 Percentage.
"Class A-12 Prepayment Percentage" for any
Pooled Certificate Distribution Date will
equal the product of (i) the Senior
Percentage, (ii) the Class A-12 Percentage
and (iii) the applicable Step Down
Percentage.
"Class A-12 Percentage" will equal for any
Pooled Certificate Distribution Date (i) the
principal balance of the Class A-12
Certificates plus $17,400,000, divided by
(ii) 73.0840382087% of the aggregate
principal balances of the Senior Certificates
(exclusive of the Class A-P Certificates).
1(a)-5
<PAGE>
"Class A-12 Liquidation Amount" is the
aggregate, for each mortgage loan which
became a liquidated loan during the calendar
month preceding the month of the Pooled
Certificate Distribution Date, of the lesser
of (i) The Class A-12 Percentage of the
principal balance of such mortgage loan
(exclusive of the Discount Fraction thereof,
if applicable) and (ii) either (a) for any
Pooled Certificate Distribution Date prior to
November 2003, the Class A-12 Percentage of
the principal portion of liquidation proceeds
received with respect to each mortgage loan
which became a liquidated loan during the
calendar month preceding the month of such
Pooled Certificate Distribution Date,
exclusive of the portion thereof attributable
to the Discount Fraction (the "Liquidation
Principal") with respect to such mortgage
loan, or (b) for any Pooled Certificate
Distribution Date occurring on or after
November 2003, the Class A-12 Prepayment
Percentage of the Liquidation Principal with
respect to such mortgage loan.
"Class A-16 Priority Amount" for any Pooled
Certificate Distribution Date will equal the
sum of (i) the Adjusted Class A-16 Percentage
of the Principal Payment Amount (exclusive of
the portion attributable to the Discount
Fractional Principal Amount), (ii) the Class
A-16 Prepayment Percentage of the Principal
Prepayment Amount (exclusive of the portion
attributable to the Discount Fractional
Principal Amount) and (iii) the Class A-16
Liquidation Amount.
The "Adjusted Class A-16 Percentage" will
equal (i) for any Pooled Certificate
Distribution Date prior to November 2003, 0%,
and (ii) for any Pooled Certificate
Distribution Date occurring on or after
November 2003, the product of (a) the Senior
Percentage and (b) the Class A-16 Percentage.
"Class A-16 Prepayment Percentage" for any
Pooled Certificate Distribution Date will
equal the product of (i) the Senior
Percentage, (ii) the Class A-16 Percentage
and (iii) the applicable Step Down
Percentage.
"Class A-16 Percentage" will equal for any
Pooled Certificate Distribution Date (i) the
principal balance of the Class A-16
Certificates, divided by (ii) 26.9159617913%
of the aggregate principal balances of the
Senior Certificates (exclusive of the Class
A-P Certificates).
"Class A-16 Liquidation Amount" is the
aggregate, for each mortgage loan which
became a liquidated loan during the calendar
month preceding the month of the Pooled
Certificate Distribution Date, of the lesser
of (i) The Class A-16 Percentage of the
principal balance of such mortgage Loan
(exclusive of the Discount Fraction thereof,
if applicable) and (ii) either (a) for any
Pooled Certificate Distribution Date prior to
November 2003, the Class A-16 Percentage of
the Liquidation Principal with respect to
such mortgage loan, or (b) for any Pooled
Certificate Distribution Date occurring in or
after November 2003, the Class A-16
Prepayment
1(a)-6
<PAGE>
Percentage of the Liquidation Principal with
respect to such mortgage loan.
The "Step Down Percentage" for any Pooled
Certificate Distribution Date is equal to 0%
during the five years beginning in November
1998 and gradually increasing over a five
year period thereafter to equal 100%.
The planned principal balances or targeted
principal balances for each Pooled
Certificate Distribution Date are set forth
in a schedule to the related pooling and
servicing agreement.
For any Pooled Certificate Distribution Date,
the Senior Certificates will be allocated the
Senior Principal Amount equal to the sum of:
(A) the Senior Percentage of (i) scheduled
payments of principal on the mortgage loans
for such Pooled Certificate Distribution Date
(exclusive of the principal amount to be
distributed to the Class PO Certificates),
less, the principal portion of any reduction
in the amount of monthly payments due to
certain bankruptcy proceeding that is in
excess of any remaining subordination
coverage for Bankruptcy Losses, (ii) the
principal portion of repurchase proceeds
received with respect to any Loan which was
repurchased during the calendar month
preceding the month of such Pooled
Certificate Distribution Date and (iii) any
other unscheduled payments of principal which
were received on the mortgage loans during
the preceding calendar month, other than
prepayments in full, partial principal
prepayments or Liquidation Principal;
(B) The Senior Prepayment Percentage (equal
to 100% during the five years beginning in
November 1998 and, subject to certain loss
and delinquency tests, gradually reducing
over a five year period thereafter to equal
the Senior Percentage except reverting to
100% if on any applicable measuring date, the
Senior Percentage exceeds the original Senior
Percentage) of the sum of all principal
partial prepayments and all prepayments in
full which were received during the
applicable prepayment period (exclusive of
the principal amount to be distributed to the
Class PO Certificates); and
(C) the Senior Percentage of the principal
balance of each liquidated loan (exclusive of
the principal amount to be distributed to the
Class PO Certificates with respect to any
Discount Loan) and the Senior Prepayment
Percentage of the Liquidation Principal for
each such liquidated loan.
For any Pooled Certificate Distribution Date
occurring prior to the Credit Support
Depletion Date, the "Senior Percentage" is
derived by dividing the principal balance of
the Senior Certificates by the aggregate
scheduled principal balances of all mortgage
loans. For any Pooled Certificate
Distribution Date occurring on or after the
Credit Support Depletion Date, the Senior
Percentage is 100%.
The rights of the subordinate certificates to
receive distributions of both interest and
principal are subordinated to the rights of
the
1(a)-7
<PAGE>
Senior Certificates to receive distributions
of interest and principal.
External First-Loss Coverage..... None
Allocation of Losses and
Shortfalls....................... Subject to the limitations set forth below,
realized losses (other than excess special
hazard losses, excess fraud losses or excess
bankruptcy losses) on the mortgage loans will
be allocated first, to the Class B
Certificates until the principal balance
thereof is reduced to zero, and then to the
Class M Certificates until the principal
balance thereof is reduced to zero.
Thereafter, the principal portion of any
realized loss will be allocated among the
outstanding Class A Certificates pro rata in
accordance with their outstanding principal
balances and the interest portion of realized
losses will be allocated amount the
outstanding Class A Certificates pro rata in
accordance with the amount of interest
accrued by each. The aggregate amounts of
realized losses which may be allocated by
means of subordination to the Class B and
Class M Certificates to cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses as
of the Pooled Certificate Information Date is
set forth above and is subject to periodic
reduction. Any Special Hazard Losses, Fraud
Losses and Bankruptcy Losses in excess of the
respective amounts of subordinated
certificate coverage therefor will be
allocated on a pro rata basis among the
Senior, Class M and Class B Certificates, and
any such losses allocated to the Class A
Certificates will be allocated among the
outstanding Class A Certificates (i) with
respect to the principal portion of such
losses, pro rata in accordance with their
outstanding principal balances and (ii) with
respect to the interest portion of such
losses, the amount of interest accrued by
each.
Prepayment interest shortfalls resulting from
principal prepayments in full of mortgage
loans will be offset to the extent of the
aggregate servicing fees relating to
mortgagor payments or other recoveries
distributed on the related Pooled Certificate
Distribution Date. Any prepayment interest
shortfalls in excess of such offsets will be
allocated pro rata among the Senior, Class M
and Class B Certificates based upon their
then-outstanding respective principal
balances, and any such losses allocated to
the Class A Certificates will be allocated
among the outstanding Class A Certificates
pro rata on the basis of the amount of
interest accrued by each for such Pooled
Certificate Distribution Date. Interest
shortfalls resulting from the timing of the
receipt of partial principal prepayments will
not be offset by servicing fees and will, on
each Pooled Certificate Distribution Date
occurring prior to the Credit Support
Depletion Date, be allocated first to the
Class B Certificates and then to the Class M
Certificates before being borne by the Class
A Certificates. Thereafter, such interest
shortfalls resulting from the timing of
receipt of partial principal prepayments will
be allocated among the Class A Certificates
as described above.
Early Termination Provisions..... At its option, on any Pooled Certificate
Distribution Date when the aggregate
scheduled principal balance of the mortgage
loans is less than 10% of the aggregate
balance of the mortgage loans as of the
1(a)-8
<PAGE>
Cut-off Date, related servicer may purchase
from the trust estate all remaining mortgage
loans and other assets thereof, and thereby
effect early retirement of the Series 1998-4
Certificates. The purchase price will,
generally, be equal to the greater of (i) the
unpaid principal balance of each mortgage
loan plus the fair market value of the
property in the trust estate and (ii) the
fair market value of the trust estate's
assets plus, in each case, accrued interest.
Advanced Obligations............. The related servicer is obligated to make
advances in respect of delinquent payments of
principal and interest on the mortgage loans
to the extent that such advances are deemed
recoverable.
1(a)-9
<PAGE>
ANNEX 1(B)
PAYMENT TERMS OF THE NSCOR 1998-26 CERTIFICATES
SERIES INFORMATION
Series Information.................................................NSCOR 1998-26
Pooled Certificates.....................................Class A-6 and Class A-13
Pooled Certificates
Ratings at Date of Issuance..................."AAA" by S&P and "AAA" by DCR
Issue Date .....................................................October 29, 1998
Cut-off Date.....................................................October 1, 1998
Pooled Certificate Trustee...............United States Trust Company of New York
Pooled Certificate
Master Servicer.................. Norwest Bank Minnesota, National Association
Remaining Subordination Coverage as of Pooled
Certificate Information Date for:
Special Hazard Losses...........................................$224,446.04
Fraud Losses..................................................$4,327,653.55
Bankruptcy Losses.............................................$4,327,653.55
DESCRIPTION OF CERTIFICATES
Principal Balance
as of Pooled
Certificate Stated Initial Certificate Certificate
Class Designations Rate Principal Balance Information Date
- ------------------ ----------------- --------------------- --------------------
Class A-PO Principal Only(1) $ 1,006,914.12 $ 978,513.96
Class A-1 6.00% $ 83,400,000.00 $ 80,232,787.04
Class A-2 6.10% $ 54,579,000.00 $ 54,579,000.00
Class A-3 5.85% $ 24,850,000.00 $ 24,850,000.00
Class A-4 6.75% $ (2) $ (2)
Class A-5 6.75% $ 99,567,000.00 $ 84,282,884.81
Class A-6 6.60% $ 23,850,000.00 $ 20,188,885.90
Class A-7 6.50% $ 19,900,000.00 $ 16,845,233.94
Class A-8 8.00% $ 6,842,000.00 $ 5,791,713.10
Class A-9 6.75% $ 19,300,000.00 $ 0.00
Class A-10 6.75% $ 8,705,000.00 $ 0.00
Class A-11 6.75% $ 700,000.00 $ 752,951.22
Class A-12 6.75% $ 10,464,000.00 $ 9,479,462.78
Class A-13 6.75% $ 41,157,000.00(3) $ 30,154,469.86
Class A-14 6.75% $ 3,942,000.00 $ 0.00
Class A-15 6.75% $ 237,000.00 $ 254,927.77
Class A-16 6.75% $ 79,000,000.00 $ 79,000,000.00
Class A-R 6.75% $ 100.00 $ 100.00
Class A-LR 6.75% $ 100.00 $ 100.00
Class B-1 6.75% $ 8,750,000.00 $ 8,656,852.79
Class B-2 6.75% $ 7,250,000.00 $ 7,172,820.88
Class B-3 6.75% $ 2,250,000.00 $ 2,226,047.86
Class B-4 6.75% $ 1,500,000.00 $ 1,484,031.91
Class B-5 6.75% $ 1,500,000.00 $ 1,484,031.91
Class B-6 6.75% $ 1,250,118.57 $ 1,236,810.57
__________________________
1. The Class A-PO Certificates are principal only certificates and do not bear
interest.
1(b)-1
<PAGE>
2. The Class A-4 Certificates are interest-only certificates, have no
principal balance and bear interest on the Class A-4 Notional Amount equal
to the sum of (i) approximately 11.1111111111% of the outstanding principal
balance of the Class A-1 Certificates, (ii) approximately 9.6296296296% of
the outstanding principal balance of the Class A-2 Certificates and (iii)
approximately 13.3333333333% of the outstanding principal balance of the
Class A-3 Certificates, immediately prior to the Pooled Certificate
Distribution Date (initially approximately $17,835,755).
3. Composed of two components:
Component Principal Balance
Initial Component as of Pooled Certificate
Component Designations Principal Balance Information Date
- -------------------------------------------------------------------------------
Class A-13-A Component $ 25,554,924.42 $ 25,417,171.94
Class A-13-B Component $ 4,814,871.31 $ 4,737,297.92
Mortgage Loans................... The mortgage loans are conventional, fixed
rate, one- to four-family, fully-amortizing,
level monthly payment, first mortgage loans
with terms to maturity of approximately 30
years from the date of origination or
modification, which may include loans secured
by shares issued by cooperative housing
corporations.
Priority of Distributions of
the Certificates................. Distributions will be made on the Pooled
Certificates on each Pooled Certificate
Distribution Date from available funds in the
following order of priority: (i) to interest
on each interest bearing Class of Senior
Certificates an amount equal to interest at
the Pass- Through Rate on the related
principal balance (as to each such Class, the
"Interest Accrual Amount") such Pooled
Certificate Distribution Date, provided that,
prior to the related Accretion Termination
Date, an amount equal to the amount that
would otherwise be distributable in respect
of interest shortfalls on the Class A-9,
Class A-10, Class A-11, Class A-14 and Class
A-15 Certificates (the "Accrual Distribution
Amount") will instead be distributed in
accordance with the priorities set forth
below; (ii) the sum of amounts, if any, by
which the amount described in clause (i)
above on each prior Pooled Certificate
Distribution Date exceeded the amount
actually distributed as interest on such
prior Pooled Certificate Distribution Dates
and not subsequently distributed ("Unpaid
Interest Shortfall Amounts") provided that,
prior to the related Accretion Termination
Date, an amount equal to the amount that
would otherwise be distributable in respect
of interest shortfalls on the Class A-9,
Class A-10, Class A-11, Class A-14 and Class
A-15 Certificates will instead be distributed
in accordance with the priorities set forth
below; and (iii) to principal on the Classes
of Senior Certificates then entitled to
receive distributions of principal, in the
order and subject to the priorities set forth
below, in each case in an aggregate amount up
to the maximum amount of principal to be
distributed on such Class on such Pooled
Certificate Distribution Date (the "Class A
Non-PO Principal Distribution Amount" with
respect to the Class A Certificates (other
than the Class PO Certificates) and the
"Class A-PO Distribution Amount" with respect
to the Class PO
1(b)-2
<PAGE>
Certificates), and to any Class PO Deferred
Amounts with respect to the Class PO
Certificates.
The "Accretion Termination Date" (A) for the
Class A-9 Certificates will be the earlier to
occur of (i) the Pooled Certificate following
the Pooled Certificate Distribution Date on
which the principal balances of the Class
A-5, Class A-6, Class A-7 and Class A-8
Certificates have been reduced to zero or
(ii) the date on which the Class B
Certificates have been reduced to zero (the
"Cross-Over Date"); (B) for the Class A-10
Certificates will be the earlier to occur of
(i) the Pooled Certificate Distribution Date
following the Pooled Certificate Distribution
Date on which the principal balances of the
Class A-5, Class A-6, Class A-7, Class A-8
and Class A-9 Certificates have been reduced
to zero or (ii) the Cross-Over Date, (C) for
the Class A-11 Certificates will be the
earlier to occur of (i) the Pooled
Certificate Distribution Date following the
Pooled Certificate Distribution Date on which
the principal balance of the Class A-5, Class
A-6, Class A-7, Class A- 8, Class A-9 and
Class A-10 Certificates have been reduced to
zero or (ii) the Cross-Over Date, (D) for the
Class A-14 Certificates will be the earlier
to occur of (i) the Pooled Certificate
Distribution Date following the Pooled
Certificate Distribution Date on which the
principal balances of the Class A-12 and
Class A-13 Certificates have been reduced to
zero or (ii) the Cross-Over Date; and (E) for
the Class A-15 Certificates will be the
earlier to occur of (i) the Pooled
Certificate Distribution Date following the
Pooled Certificate Distribution Date on which
the principal balances of the Class A-12,
Class A-13 and Class A-14 Certificates have
been reduced to zero or (ii) the Cross-Over
Date.
The Class PO Certificates are principal only
certificates and will not bear interest.
All payments and other amounts received in
respect of principal on the mortgage loan are
allocated between (i) the Senior Certificates
(other than the Class PO Certificates) and
the Subordinated Certificates and (ii) the
Class PO Certificates, in each case based on
the applicable Non-PO Fraction and the
applicable PO Fraction, respectively, of such
amounts.
The Non-PO Fraction with respect to any
mortgage loan with an adjusted net mortgage
rate ("ANMR") less than 6.50% (a "Discount
Mortgage Loan") is equal to ANMR / 6.50%. The
Non-PO Percentage with respect to any
mortgage loan with an ANMR equal to or
greater than 6.50% (a "Non-Discount Mortgage
Loan") is 100%. The PO Percentage with
respect to any Discount Mortgage Loan is
equal to (6.50% - ANMR) / 6.50%. On each
Pooled Certificate Distribution Date,
available funds will be distributed as
principal on the Senior Certificates (other
than the Class PO Certificates), in an
aggregate amount up to the Class A Non-PO
Optional Principal Amount as described below.
The "Class A Non-PO Optimal Principal Amount"
for each Class of Class A Certificates (other
than the Class PO Certificates) and
1(b)-3
<PAGE>
the "Class A-PO Optimal Principal Amount" for
the Class PO Certificates with respect to
each Pooled Certificate Distribution Date
will be an amount equal to the product of (1)
the Non-PO Fraction in the case of each
mortgage loan with respect to the Class A
Certificates (other than the Class PO
Certificates), or the PO Fraction in the case
of each mortgage loan with respect to the
Class PO Certificates; and (2) the sum of:
(i) the applicable Class Percentage of (x)
the scheduled payment of principal due on
such mortgage loan on the first day of the
month in which the Pooled Certificate
Distribution Date occurs, less (y) if the
Bankruptcy Loss Amount is zero, the principal
portion of the Debt Service Reductions with
respect to such mortgage loan;
(ii) the applicable Class Prepayment
Percentage of all partial and full
prepayments and all proceeds acquired in
respect thereof or liquidated pursuant to the
related pooling and servicing agreement and
all other unscheduled receipts received in
respect of principal of the related mortgage
loans ("Unscheduled Principal Receipts") that
were received by a Servicer with respect to
such mortgage loan during the Unscheduled
Principal Receipt Period relating to such
Pooled Certificate Distribution Date for each
applicable type of Unscheduled Principal
Receipt;
(iii) the applicable Class Prepayment
Percentage of the scheduled principal balance
of such mortgage loan which, during the month
preceding the month of such Pooled
Certificate Distribution Date was repurchased
by the Seller; and
(iv) the applicable Class Percentage of the
excess of the unpaid principal balance of any
defective mortgage loan for which a mortgage
loan was substituted during the month
preceding the month in which such Pooled
Certificate Distribution Date occurs over the
unpaid principal balance of such substituted
mortgage loan, less the amount allocable to
the principal portion of any unreimbursed
advances in respect of such defective
mortgage loan.
The "Class Percentage" will equal (i) the
Class A Percentage obtained by dividing the
Class A Non-PO principal balance by the
Non-PO Fraction of the pool balance, in the
case of the calculation of the Class A Non-PO
Optimal Principal Amount and (ii) 100% in the
case of the calculation of the Class A-PO
Optimal Principal Amount.
The "Class A-PO Deferred Amount" for any
Pooled Certificate Distribution Date prior to
the Cross-Over Date will equal the difference
between (A) the sum of (i) the amount by
which the Class A-PO Optimal Principal Amount
for all prior Pooled Certificate Distribution
Dates exceeds the amounts distributed to the
Class A-PO Certificates on such prior Pooled
Certificate Distribution Dates, but only to
the extent such shortfall is not attributable
to realized losses allocated to the Class
A-PO Certificates and (ii) the sum of the
product for each Discount Mortgage Loan which
became a liquidated loan at any time on or
1(b)-4
<PAGE>
prior to the last day of the applicable
Unscheduled Principal Receipt Period for the
current Pooled Certificate Distribution Date
of (a) the PO Fraction for such Discount
Mortgage Loan and (b) an amount equal to the
principal portion of realized losses (other
than Bankruptcy Losses due to Debt Service
Reductions) incurred with respect to such
Discount Mortgage Loan other than excess
losses and (B) amounts distributed on the
Class A-PO Certificates on prior Pooled
Certificate Distribution Dates. On or after
the Cross-Over Date, the Class A-PO Deferred
Amount will be zero. No interest will accrue
on any Class A-PO Deferred Amount.
On each Pooled Certificate Distribution Date
occurring prior to the date on which the
principal amounts of Class B Certificates
have been reduced to zero (the "Cross-Over
Date"), the Class A Non- PO Principal
Distribution Amount will be allocated among
and distributed in reduction of the principal
amounts of the Class A Certificates (other
than the Class A-PO Certificates) in
accordance with the following priorities:
I. On each Pooled Certificate Distribution
Date occurring prior to the applicable
Accretion Termination Date for the Class A-9,
Class A-10 and Class A-11 Certificates, the
amount that would otherwise be distributable
in respect of interest to the Class A-9,
Class A-10 and Class A-11 Certificates will
instead be allocated as follows:
FIRST, concurrently, to the Class A-5, Class
A-6, Class A-7 and Class A-8 Certificates,
pro rata, up to their respective Schedule I
Reduction Amounts for such Pooled Certificate
Distribution Date;
SECOND, to the Class A-9 Certificates, until
the principal amount thereof has been reduced
to zero;
THIRD, concurrently, to the Class A-5, Class
A-6, Class A-7 and Class A-8 Certificates,
pro rata, up to their respective Schedule II
Reduction Amounts for such Pooled Certificate
Distribution Date;
FOURTH, to the Class A-10 Certificates, until
the principal amount thereof has been reduced
to zero;
FIFTH, concurrently, to the Class A-5, Class
A-6, Class A-7 and Class A-8 Certificates,
pro rata, without regard to their respective
Schedule I or Schedule II Reduction Amounts
for such Pooled Certificate Distribution
Date, until the principal amount of each such
Class has been reduced to zero; and
SIXTH, to the Class A-11 Certificates, until
the principal amount thereof has been reduced
to zero;
II. On each Pooled Certificate Distribution
Date occurring prior to the applicable
Accretion Termination Date for the Class A-14
and Class A-15 Certificates, the sum of the
Accrual Distribution Amounts for the Class
A-14 and Class A-15 Certificates will be
allocated as follows:
1(b)-5
<PAGE>
FIRST, concurrently, to the Class A-12
Certificates and the Class A- 13-A Component,
pro rata, up to their respective Schedule I
Reduction Amounts for such Pooled Certificate
Distribution Date;
SECOND, to the Class A-13-B Component up to
its Reduction Amount for such Pooled
Certificate Distribution Date;
THIRD, concurrently, to the Class A-12
Certificates and the Class A- 13-A Component,
pro rata, up to their respective Schedule II
Reduction Amounts for such Pooled Certificate
Distribution Date;
FOURTH, to the Class A-14 Certificates, until
the principal amount thereof has been reduced
to zero;
FIFTH, to the Class A-13-B Component, without
regard to its Reduction Amount, until the
principal amount thereof has been reduced to
zero;
SIXTH, concurrently, to the Class A-12
Certificates and the Class A- 13-A Component,
pro rata, without regard to their respective
Schedule I or Schedule II Reduction Amounts
for such Pooled Certificate Distribution
Date, until the principal amounts of such
Class and such Component have been reduced to
zero; and
SEVENTH, to the Class A-15 Certificates,
until the principal amount thereof has been
reduced to zero; and
III. The Class A Non-PO Principal Amount will
be allocated as follows:
FIRST, the lesser of (i) the Class A-16
Priority Amount and (ii) approximately 98.6%
of the Class A Non-PO Principal Amount to the
Class A-16 Certificates;
SECOND, to the Class A-1 Certificates up to
their PAC Principal Amount for such Pooled
Certificate Distribution Date;
THIRD, to the Class A-2 Certificates, up to
their PAC Principal Amount for such Pooled
Certificate Distribution Date, until the
principal balance thereof is equal to
approximately $30,618,000;
FOURTH, concurrently, to the Class A-2 and
Class A-3 Certificates, as follows:
(A) approximately 55.1993942453% to the Class
A-2 Certificates, up to their PAC Principal
Amount for such Pooled Certificate
Distribution Date; and
(B) approximately 44.8006057547% to the Class
A-3 Certificates, up to their PAC Principal
Amount for such Pooled Certificate
Distribution Date;
FIFTH, concurrently, the amount to be
distributed under this priority III FIFTH (A)
and priority III FIFTH (B), as follows:
1(b)-6
<PAGE>
(A) approximately 76.2213206968%,
sequentially, as follows:
(i) concurrently, to the Class A-5, Class
A-6, Class A-7 and Class A-8 Certificates,
pro rata, up to their respective Schedule I
Reduction Amounts for such Pooled Certificate
Distribution Date;
(ii) to the Class A-9 Certificates, until the
principal amount thereof has been reduced to
zero;
(iii) concurrently, to the Class A-5, Class
A-6, Class A-7 and Class A-8 Certificates,
pro rata, up to their respective Schedule II
Reduction Amounts for such Pooled Certificate
Distribution Date;
(iv) to the Class A-10 Certificates, until
the principal amount thereof has been reduced
to zero;
(v) concurrently, to the Class A-5, Class
A-6, Class A-7 and Class A-8 Certificates,
pro rata, without regard to their respective
Schedule I and Schedule II Reduction Amounts
for such Pooled Certificate Distribution
Date, until the principal amount of each such
Class has been reduced to zero; and
(vi) to the Class A-11 Certificates, until
the principal amount thereof has been reduced
to zero; and
(B) approximately 23.7786793032%,
sequentially, as follows:
(i) concurrently, to the Class A-12
Certificates and the Class A- 13-A Component,
pro rata, up to their respective Schedule I
Reduction Amounts for such Pooled Certificate
Distribution Date;
(ii) to the Class A-13-B Component up to its
Reduction Amount for such Distribution;
(iii) concurrently, to the Class A-12
Certificates and the Class A- 13-A Component,
pro rata, up to their respective Schedule II
Reduction Amounts for such Pooled Certificate
Distribution Date;
(iv) to the Class A-14 Certificates, until
the principal amount thereof has been reduced
to zero;
(v) to the Class A-13-B Component, without
regard to its Reduction Amount, until the
principal amount thereof has been reduced to
zero;
(vi) concurrently, to the Class A-12
Certificates and the Class A- 13-A Component,
pro rata, without regard to their respective
Schedule I and Schedule II Reduction Amounts
for such Pooled Certificate Distribution
Date, until the principal amount of such
Class and such Component have been reduced to
zero; and
(vii) to the Class A-15 Certificates, until
the principal amount thereof has been reduced
to zero;
1(b)-7
<PAGE>
SIXTH, to the Class A-1 Certificates without
regard to their PAC Principal Amount for such
Pooled Certificate Distribution Date until
the principal amount has been reduced to
zero;
SEVENTH, to the Class A-2 Certificates,
without regard to their PAC Principal Amount
for such Pooled Certificate Distribution
Date, until the principal amount thereof is
equal to approximately $30,618,000;
EIGHTH, concurrently, to the Class A-2 and
Class A-3 Certificates, as follows:
(A) approximately 55.1993942453% to the Class
A-2 Certificates, without regard to their PAC
Principal Amount for such Pooled Certificate
Distribution Date, until the principal amount
thereof has been reduced to zero; and
(B) approximately 44.8006057547% to the Class
A-3 Certificates, without regard to their PAC
Principal Amount for such Pooled Certificate
Distribution Date, until the principal amount
thereof has been reduced to zero;
NINTH, sequentially, to the Class A-R and
Class A-LR Certificates, in that order, until
the principal amount of each such class has
been reduced to zero; and
TENTH, to the Class A-16 Certificates, until
the principal amount thereof has been reduced
to zero.
The "Class A-16 Priority Amount" for any
Pooled Certificate Distribution Date means
the lesser of (i) the principal balance of
the Class A-16 Certificates and (ii) the sum
of (A) the product of (1) the Priority
Percentage, (2) the Shift Percentage and (3)
the Scheduled Principal Amount and (B) the
product of (1) the Priority Percentage, (2)
the Prepayment Shift Percentage and (3) the
Unscheduled Principal Amount.
The "Priority Percentage" means the lesser of
(i) 100% or (ii) the sum of the principal
balance of the Class A-16 Certificates and
$32,000,000 divided by the Non-PO Fraction of
the pool balance.
The "Scheduled Principal Amount" means the
sum of the product of (A) the Non-PO Fraction
for each mortgage loan and (B) the sum of the
amounts described in clauses 2(i) and 2(iv)
of the definition of "Class A Non-PO Optimal
Principal Amount" but without that amount
being multiplied by the Class A Percentage.
The "Unscheduled Principal Amount" means the
sum of the product of (A) the Non-PO Fraction
for each mortgage loan and (B) the sum of the
amounts described in clauses 2(ii) and 2(iii)
of the definition of "Class A Non-PO Optimal
Principal Amount" but without that amount
being multiplied by the Class A Prepayment
Percentage.
1(b)-8
<PAGE>
The "Shift Percentage" for any Pooled
Certificate Distribution Date will be during
the five years beginning on November 1998 and
100% beginning on November 2003 and
thereafter.
The "Prepayment Shift Percentage" for any
Pooled Certificate Distribution Date will be
equal to 0% during the five years beginning
on November 1998 and gradually increasing
over a five year period up to 100%.
The "PAC Principal Amount" for any Pooled
Certificate Distribution Date and for any
Class of PAC Certificates means the amount,
if any, that would reduce the principal
balance of such class to the percentage of
its initial principal balance shown in the
tables set forth in the related pooling and
servicing agreement with respect to such
Pooled Certificate Distribution Date.
The "Reduction Amount" for any Pooled
Certificate Distribution Date and for the
Class A-13-B Component means the amount, if
any, that would reduce the principal balance
of such Component to the percentage of its
initial principal balance shown in the
related table set forth in the related
pooling and servicing agreement with respect
to such Pooled Certificate Distribution Date.
The "Schedule I Reduction Amount" for any
Pooled Certificate Distribution Date and for
the Class A-13-A Component and the Class A-5,
Class A-6, Class A-7, Class A-8, and Class
A-12 Certificates means the amount, if any,
that would reduce the principal balances of
such Component or Classes to the percentage
of their respective initial principal
balances shown in the related Schedule I
table set forth in the related pooling and
servicing agreement with respect to such
Pooled Certificate Distribution Date.
The "Schedule II Reduction Amount" for any
Pooled Certificate Distribution Date and for
the Class A-13-A Component and the Class A-5,
Class A-6, Class A-7, Class A-8, and Class
A-12 Certificates means the amount, if any,
that would reduce the principal balances of
such Component or Classes to the percentage
of their respective initial principal
balances shown in the related Schedule II
tables set forth in the related pooling and
servicing agreement with respect to such
Pooled Certificate Distribution Date.
Notwithstanding the foregoing, on each Pooled
Certificate Distribution Date occurring on or
after the Cross-Over Date, the Class A Non-PO
Principal Distribution Amount will be
distributed among the Classes of Class A
Certificates (other than the Class A- PO
Certificates) pro rata in accordance with
their respective outstanding principal
balances without regard to the priorities set
forth above.
The rights of the Class B Certificates to
receive distributions of both interest and
principal are subordinated to the rights of
the
1(b)-9
<PAGE>
Class A Certificates to receive distributions
of interest and principal.
If there is any recovery of an amount in
respect of principal which had previously
been allocated as a realized loss to the
Class A Certificates, the Class A
Certificates then outstanding will be
entitled to their pro rata share of such
recovery in an amount up to the amount by
which their principal balances were reduced
as a result of such realized loss.
External First-Loss Coverage..... None
Allocation of Losses and
Shortfalls..................... Subject to the limitations set forth below,
realized losses (other than excess special
hazard losses, excess fraud losses or excess
bankruptcy losses) on the mortgage loans will
be allocated first, to the Class B
Certificates until the principal balance
thereof is reduced to zero. Thereafter, the
principal portion of any realized loss will
be allocated among the outstanding Class A
Certificates (other than the Class PO
Certificates) pro rata in accordance with
their outstanding principal balances and the
interest portion of realized losses will be
allocated amount the outstanding Class A
Certificates pro rata in accordance with the
amount of interest accrued by each. The
aggregate amounts of realized losses which
may be allocated by means of subordination to
the Class B Certificates to cover Special
Hazard Losses, Fraud Losses and Bankruptcy
Losses as of the Pooled Certificate
Information Date is set forth above and is
subject to periodic reduction. Any Special
Hazard Losses, Fraud Losses and Bankruptcy
Losses in excess of the respective amounts of
subordinated certificate coverage therefor
will be allocated (i) with respect to the
principal portion of such losses (a) to the
outstanding Class A Certificates (other than
the Class A-PO Certificates) and Class B
Certificates pro rata based on their
outstanding principal balances in proportion
to the Non-PO Fraction of such losses and (b)
in respect of Discount Mortgage Loans, to the
Class A-PO Certificates in proportion to the
PO Fraction of such losses and (ii) with
respect to the interest portion of such
losses, to the Class A and Class B
Certificates pro rata based on interest
accrued by reducing their respective Interest
Accrual Amounts. The principal portion of any
such losses so allocated to the Class A
Certificates (other than the Class A-PO
Certificates) will be allocated to such
outstanding Class A Certificates (other than
the Class A-13 Certificates) and the Class
A-13 Components pro rata in accordance with
their then-outstanding principal balances or,
in the case of a Class of accrual
certificates, their initial principal
balance, if lower.
Prepayment Interest Shortfalls resulting from
principal prepayments in full of mortgage
loans will be offset to the extent of the
aggregate servicing fees relating to
mortgagor payments or other recoveries
distributed on the related Pooled Certificate
Distribution Date. Any Prepayment Interest
Shortfalls in excess of such offsets will be
allocated pro rata among the Class A and
Class B Certificates based upon their
then-outstanding respective
1(b)-10
<PAGE>
principal balances, and any such losses
allocated to the Class A Certificates will be
allocated among the outstanding Class A
Certificates pro rata on the basis of the
amount of interest accrued by each for such
Pooled Certificate Distribution Date.
Interest shortfalls resulting from the timing
of the receipt of partial principal
prepayments will not be offset by servicing
fees and will, on each Pooled Certificate
Distribution Date occurring prior to the
Cross-Over Date, be allocated to the Class B
Certificates before being borne by the Class
A Certificates. Thereafter, such interest
shortfalls resulting from the timing of
receipt of partial principal prepayments will
be allocated among the Class A Certificates
as described above.
Early Termination Provisions..... At its option, on any Pooled Certificate
Distribution Date when the aggregate
scheduled principal balance of the mortgage
loans is less than 10% of the aggregate
balance of the mortgage loans as of the
Cut-off Date, the related servicer may
purchase from the trust estate all remaining
mortgage loans and other assets thereof, and
thereby effect early retirement of the Series
1998-26 Certificates. The purchase price
will, generally, be equal to the greater of
(i) the unpaid principal balance of each
mortgage loan plus the fair market value of
the property in the trust estate and (ii) the
fair market value of the trust estate's
assets plus, in each case, accrued interest.
Advanced Obligations............. The related servicer is obligated to make
advances in respect of delinquent payments of
principal and interest on the mortgage loans
to the extent that such advances are deemed
recoverable.
1(b)-11
<PAGE>
ANNEX 1(C)
PAYMENT TERMS OF THE PHMSC 1993-47 CERTIFICATES
SERIES INFORMATION
Series Information.................................................PHMSC 1993-47
Pooled Certificates...................................................Class A-10
Pooled Certificates
Ratings at Date of Issuance............."Aaa" by Moody's and "AAA" by Fitch
Issue Date ....................................................November 29, 1993
Cut-off Date....................................................November 1, 1993
Pooled Certificate Trustee..................... First Trust National Association
Pooled Certificate Master Servicer....The Prudential Home Mortgage Company, Inc.
Remaining Subordination Coverage as of Pooled
Certificate Information Date for:
Special Hazard Losses...........................................$118,700.00
Fraud Losses..................................................$6,008,160.96
Bankruptcy Losses............................................$10,342,970.65
DESCRIPTION OF CERTIFICATES
Principal Balance
as of Pooled
Certificate Stated Initial Certificate Certificate
Class Designations Rate Principal Balance Information Date
- ------------------ ----------------- --------------------- -------------------
Class A-1 6.75% $ 336,975,000.00 $ 23,760,086.70
Class A-2 6.75% $ 29,320,000.00 $ 26,968,762.66
Class A-3 6.75% $ 84,590,000.00 $ 84,590,000.00
Class A-4 6.75% $ (1) $ 0.00
Class A-5 6.75% $ 17,780,000.00 $ 17,780,000.00
Class A-6 6.75% $ 7,480,000.00 $ 7,480,000.00
Class A-7 Floating Rate (2) $ 144,146,250.00 $ 131,526,866.99
Class A-8 Floating Rate (2) $ 25,785,167.00 $ 23,527,786.75
Class A-9 Floating Rate (2) $ 43,618,583.00 $ 39,799,964.02
Class A-10 6.75% $ 50,776,000.00 $ 50,776,000.00
Class A-11 6.10% $ 24,700,000.00 $ 24,700,000.00
Class A-12 6.75% $ 19,220,000.00 $ 0.00
Class A-13 6.75% $ 44,000,000.00 $ 0.00
Class A-14 6.75% $ 15,520,000.00 $ 5,551,952.58
Class A-15 Variable Rate (3) $ 1,000.00 $ 517.18
Class A-R 6.75% $ 200,000.00 $ 103,437.78
Class A-LR 6.75%(4) $ 100,000.00 $ 51,718.89
Class M 6.75% $ 2,252,000.00 $ 1,959,407.16
Class B 6.75% $ 54,029,665.07 $ 47,009,819.01
_______________________
1. The Class A-4 Certificates are interest-only certificates, have no
principal balance and bear interest on the Class A-4 Notional Amount equal
to the sum of approximately 9.62962963% of the outstanding principal
balance of the Class A-11 Certificates immediately prior to the Pooled
Certificate Distribution Date.
2. Each Class listed below will accrue interest during the applicable Interest
Accrual Period at the respective Pass- Through Rates set forth below, and
will accrue interest during each subsequent such period at the respective
rates determined as set forth below:
1(c)-1
<PAGE>
<TABLE>
<CAPTION>
Formula for Interest
Initial Pass- Minimum Pass- Maximum Pass- Calculation of Pass- Accrual
Class Through Rate Through Rate Through Rate Through Rate Period
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A-7 5.1980% 1.20% 10.0000% COFI + 1.20% (a)
49.1944% -
Class A-8 10.0625% 0.00% 10.0625%(b) (5.5903 x COFI) (a)
23.1329% -
Class A-9 9.9207% 0.00% 23.1329% (3.3047 x COFI) (a)
</TABLE>
______________________
(a) Each one-month period ending on the 1st day of the month preceding the
month in which the Pooled Certificate Distribution Date occurs.
(b) If COFI is less than or equal to approximately 7.00%, the Pass-Through
Rate for the Class A-8 Certificates will remain at the maximum rate of
10.0625%.
1. Interest will accrue on the Class A-15 Certificates during each applicable
interest accrual period in an amount equal to the product of (i) 1/12 of
the difference between (a) the weighted average of the "Net Rates" (i.e.,
the rate stated in the related mortgage note minus the servicing fee rate
of 0.20% per annum) of the related mortgage loans as of the first day of
such month) and (b) 6.50% and (ii) the Class A-15 Notional Amount. The
Class A-15 Notional Amount is equal to the aggregate scheduled principal
balances of the mortgage loans (originally $900,396,968.17 and as of the
Pooled Certificate Information Date $485,586,319.72).
2. The Class A-LR Certificates bear interest on the Class A-LR Notional
Amount, which is equal to the sum of the outstanding principal balances of
the Class A-LR Certificates and the Class A-15 Certificates, originally
$101,000.
Mortgage Loans................... The mortgage loans are conventional, fixed
rate, one- to four-family, fully-amortizing,
level monthly payment, first mortgage loans
with terms to maturity of approximately 30
years from the date of origination or
modification, which may include loans secured
by shares issued by cooperative housing
corporations.
Priority of Distributions of
the Certificates................. The amount available for distribution is
allocated among the Class A Certificates (i)
first, pro rata based upon the respective
amounts of interest accrued thereon during
the related interest accrual period in an
amount up to the sum of interest so accrued,
(ii) second, pro rata based on the respective
amounts thereof, any unpaid interest (without
interest thereon) from prior Pooled
Certificate Distribution Dates, and (iii)
third, to the principal amounts due such
Class A Certificates.
The Class A-4 Certificates are interest only
certificates and are not entitled to
principal distributions.
On each Pooled Certificate Distribution Date
prior to the date on which the principal
amounts of the Class M and Class B
Certificates have been reduced to zero (the
"Cross-Over Date"), 0.03564467% of the amount
of funds available to be distributed as
principal to the Class A Certificates (the
"Class A Principal Distribution Amount") will
be distributed in reduction of the principal
balances of the Class A-15, Class A-R and
Class A-LR
1(c)-2
<PAGE>
Certificates, pro rata based on their
respective principal balances, and the
remainder thereof will be allocated among and
distributed in reduction of the principal
balances of the other Class A Certificates as
follows:
FIRST, concurrently, approximately
81.05913907% to the Class A-1 Certificates
and sequentially, approximately 18.94086093%
to the Class A-12, Class A-13 and Class A-14
Certificates, up to their respective PAC
Principal Amounts for such Pooled Certificate
Distribution Date;
SECOND, sequentially, to the Class A-2 and
Class A-3 Certificates, up to their
respective PAC Principal Amounts for such
Pooled Certificate Distribution Date;
THIRD, concurrently, to the Class A-5 and
Class A-11 Certificates, pro rata, up to
their respective PAC Principal Amounts for
such Pooled Certificate Distribution Date;
FOURTH, to the Class A-6 Certificates, up to
its PAC Principal Amount with respect to such
Pooled Certificate Distribution Date;
FIFTH, concurrently, to the Class A-7, Class
A-8 and Class A-9 Certificates, pro rata,
until the principal balances thereof have
been reduced to zero;
SIXTH, to the Class A-10 Certificates, until
the principal balance thereof has been
reduced to zero;
SEVENTH, sequentially, to the Class A-2 and
Class A-3 Certificates, without regard to
their respective PAC Principal Amounts and
until the principal balances thereof have
been reduced to zero;
EIGHTH, concurrently, to the Class A-5 and
Class A-11 Certificates, pro rata, without
regard to their respective PAC Principal
Amounts and until the principal balances
thereof have been reduced to zero;
NINTH, to the Class A-6 Certificates, without
regard to its PAC Principal Amount and until
the principal balance thereof has been
reduced to zero; and
TENTH, concurrently, approximately
81.05913907% to the Class A-1 Certificates
and sequentially, approximately 18.94086093%
to the Class A-12, Class A-13 and Class A-14
Certificates, without regard to their
respective PAC Principal Amounts and until
the principal balances thereof have been
reduced to zero.
The "PAC Principal Amount" means the
respective amounts which would reduce the
principal balance of the applicable class to
the principal balance for such Pooled
Certificate Distribution Date set forth in a
schedule to the Pooling and Servicing
Agreement.
On each Pooled Certificate Distribution Date
occurring on or after the Cross-Over Date,
the amounts distributable to the Class A
Certificates will be distributed among the
Class A Certificates pro
1(c)-3
<PAGE>
rata in accordance with their respective
principal balances without regard to the
foregoing priorities.
The rights of the Class M and Class B
Certificates to receive distributions of both
interest and principal are subordinated to
the rights of the Class A Certificates to
receive distributions of interest and
principal.
Allocation of Scheduled
Principal Payments on Mortgage
Loans to Pooled Certificates..... For any Pooled Certificate Distribution Date,
the Class A Certificates will be allocated
the Class A Percentage of scheduled payments
of principal on the mortgage loans for such
Pooled Certificate Distribution Date, less,
if the Bankruptcy Loss Amount is zero, the
principal portion of any reductions in the
amount of monthly payments due to certain
bankruptcy proceedings, other than any
permanent forgiveness of principal ("Debt
Service Reduction"). For any Pooled
Certificate Distribution Date occurring prior
to the Cross-Over Date, the "Class A
Percentage" is derived generally by dividing
the principal balance of the Class A
Certificates by the aggregate scheduled
principal balances of all mortgage loans. For
any Pooled Certificate Distribution Date
occurring on or after the Cross-Over Date,
the Class A Percentage is 100%.
Allocation of Non-Scheduled
Principal Payments on Mortgage
Loans to Pooled Certificates..... On each Pooled Certificate Distribution Date,
with respect to non-scheduled principal
payments, the Class A Certificates will be
allocated the sum of, (A) the Class A
Prepayment Percentage (equal to 100% during
the five years beginning in December 1993
and, subject to certain loss and delinquency
tests, gradually reducing over a five year
period thereafter to equal the Class A
Percentage except reverting to 100% if on any
applicable measuring date, the Class A
Percentage exceeds the original Class A
Percentage) of (i) the scheduled principal
balance of repurchased mortgage loans, (ii)
the aggregate net liquidation proceeds on all
mortgage loans that became liquidated during
the preceding month (excluding the portion
thereof, if any, constituting Net Foreclosure
Profits), less certain amounts allocable to
principal of unreimbursed advances and the
portion of net liquidation proceeds allocable
to interest, (iii) the principal portion of
realized losses (other than Bankruptcy Losses
due to Debt Service Reductions) incurred in
the preceding month, other than excess
special hazard losses, excess fraud losses
and excess bankruptcy losses, (iv) the
scheduled principal balance of each mortgage
loan prepaid in full during the preceding
month and (v) all partial principal
prepayments received on or after the
determination date in the prior month and
prior to the determination date in the month
in which the Pooled Certificate Distribution
Date occurs, and (B) the Class A Percentage
of the difference between the unpaid
principal balance of any mortgage loan
substituted for a defective mortgage loan
during the preceding month and the unpaid
principal balance of such defective mortgage
1(c)-4
<PAGE>
loan, less amounts allocable to principal of
unreimbursed advances with respect to such
defective mortgage loan.
In addition, if there is any recovery of an
amount in respect of principal which had
previously been allocated as a realized loss
to the Class A Certificates, the Class A
Certificates then outstanding will be
entitled to their pro rata share of such
recovery in an amount up to the amount by
which their principal balances were reduced
as a result of such realized loss.
External First-Loss Coverage..... None
Allocation of Losses and
Shortfalls....................... Subject to the limitations set forth below,
realized losses (other than excess special
hazard losses, excess fraud losses or excess
bankruptcy losses) on the mortgage loan will
be allocated first, to the Class B
Certificates until the principal balance
thereof is reduced to zero, and then to the
Class M Certificates until the principal
balance thereof is reduced to zero.
Thereafter, the principal portion of any
realized loss will be allocated among the
outstanding Class A Certificates pro rata in
accordance with their outstanding principal
balances and the interest portion of realized
losses will be allocated among the
outstanding Class A Certificates pro rata in
accordance with the amount of interest
accrued by each. The aggregate amounts of
realized losses which may be allocated by
means of subordination to the Class B and
Class M Certificates to cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses as
of the Pooled Certificate Information Date is
set forth above and is subject to periodic
reduction. Any Special Hazard Losses, Fraud
Losses and Bankruptcy Losses in excess of the
respective amounts of subordinated
certificate coverage therefor will be
allocated on a pro rata basis among the Class
A, Class M and Class B Certificates, and any
such losses allocated to the Class A
Certificates will be allocated among the
outstanding Class A Certificates (i) with
respect to the principal portion of such
losses, pro rata in accordance with their
outstanding principal balances and (ii) with
respect to the interest portion of such
losses, the amount of interest accrued by
each.
Prepayment interest shortfalls resulting from
principal prepayments in full of mortgage
loans will be offset to the extent of the
aggregate servicing fees relating to
mortgagor payments or other recoveries
distributed on the related Pooled Certificate
Distribution Date. Any prepayment interest
shortfalls in excess of such offsets will be
allocated pro rata among the Class A, Class M
and Class B Certificates based upon their
then-outstanding respective principal
balances, and any such losses allocated to
the Class A Certificates will be allocated
among the outstanding Class A Certificates
pro rata on the basis of the amount of
interest accrued by each for such Pooled
Certificate Distribution Date. Interest
shortfalls resulting from the timing of the
receipt of partial principal prepayments will
not be offset by servicing fees and will, on
each Pooled Certificate Distribution Date
occurring prior to the Cross-Over Date, be
allocated first to the Class B Certificates
and then to the Class M
1(c)-5
<PAGE>
Certificates before being borne by the Class
A Certificates. Thereafter, such interest
shortfalls resulting from the timing of
receipt of partial principal prepayments will
be allocated among the Class A Certificates
as described above.
Early Termination Provisions..... At its option, on any Pooled Certificate
Distribution Date when the aggregate
scheduled principal balance of the mortgage
loans is less than 10% of the aggregate
balance of the mortgage loans as of the
Cut-off Date, the related servicer may
purchase from the trust estate all remaining
mortgage loans and other assets thereof, and
thereby effect early retirement of the Series
1993-47 Certificates. The purchase price
will, generally, be equal to the greater of
(i) the unpaid principal balance of each
mortgage loan plus the fair market value of
the property in the trust estate and (ii) the
fair market value of the trust estate's
assets plus, in each case, accrued interest.
Advanced Obligations............. The related servicer is obligated to make
advances in respect of delinquent payments of
principal and interest on the mortgage loan
to the extent that such advances are deemed
recoverable. If Moody's revises its
assessment of the ability of the related
servicer to make advances, a reserve fund may
be established to be drawn upon if the
related servicer fails to make a required
advance.
1(c)-6
<PAGE>
ANNEX 1(D)
PAYMENT TERMS OF THE PNCMS 1999-8 CERTIFICATES
SERIES INFORMATION
Series Information..................................................PNCMS 1999-8
Pooled Certificates..................................................Class I-A-3
Pooled Certificates
Ratings at Date of Issuance..................."AAA" by S&P and "AAA" by DCR
Issue Date ........................................................July 29, 1999
Cut-off Date........................................................July 1, 1999
Pooled Certificate Trustee.................. State Street Bank and Trust Company
Pooled Certificate Master Servicer................ PNC Mortgage Securities Corp.
DESCRIPTION OF CERTIFICATES
Principal Balance as of
Certificate Stated Initial Certificate Pooled Certificate
Class Designations Rate Principal Balance Information Date
- --------------------------------------------------------------------------------
Class I-A-1 6.75% $ 17,080,000.00 $ 16,258,471.21
Class I-A-2 6.75% $ 40,430,000.00 $ 40,430,000.00
Class I-A-3 6.75% $ 24,255,000.00 $ 24,255,000.00
Class I-A-4 6.75% $ 33,349,283.00 $ 33,349,283.00
Class I-A-5 6.75% $ 25,000,000.00 $ 23,811,524.92
Class I-A-6 7.00% $ 5,000,000.00 $ 5,000,000.00
Class I-A-7 6.65% $ 12,500,000.00 $ 12,500,000.00
Class I-A-8 7.25% $ 5,707,000.00 $ 5,707,000.00
Class I-A-9 7.25% $ 1,783,000.00 $ 1,783,000.00
Class I-A-10 0.00% $ 554,815.00 $ 554,815.00
Class I-A-11 6.75% $ 705,000.00 $ 705,000.00
Class I-A-12 6.75% $ 16,920,000.00 $ 16,920,000.00
Class I-A-13 6.75% $ 80,000,000.00 $ 77,686,963.85
Class I-A-14 6.75% $ 62,000,000.00 $ 59,829,373.12
Class I-A-15 7.25% $ 38,063,000.00 $ 38,063,000.00
Class I-A-16 0.00% $ 2,819,481.00 $ 2,819,481.00
Class II-A-1 7.25% $ 65,375,587.00 $ 61,706,743.26
Class III-A-1 7.50% $ 166,157,257.00 $ 161,070,348.87
Class IV-A-1 7.75% $ 94,318,459.00 $ 90,604,093.57
Class V-A-1 7.00% $ 153,707,752.00 $ 150,205,720.93
Class I-X 6.75% $ 7,669,342.00(2) $ 7,263,940.81(2)
Class C-X-1 7.00% $ 3,314,237.00(2) $ 3,190,955.63(2)
Class C-X-2 7.00% $ 10,017,330.00(2) $ 9,409,814.73(2)
Class I-P 0.00% $ 2,248,980.00(3) $ 2,229,524.92
Class V-P 0.00% $ 1,416,558.00(3) $ 1,399,871.69
Class I-B-1 6.75% $ 8,872,838.00 $ 8,843,620.72
Class I-B-2 6.75% $ 3,664,867.00 $ 3,652,799.00
Class I-B-3 6.75% $ 1,543,103.00 $ 1,538,021.73
Class I-B-4 6.75% $ 1,350,214.00 $ 1,345,767.89
Class I-B-5 6.75% $ 964,439.00 $ 961,263.22
Class I-B-6 6.75% $ 964,439.00 $ 961,263.76
Class C-B-1 7.3538%(3) $ 16,853,593.00 $ 16,805,262.71
Class C-B-2 7.3538%(3) $ 8,297,153.00 $ 8,273,359.63
1(d)-1
<PAGE>
Principal Balance as of
Certificate Stated Initial Certificate Pooled Certificate
Class Designations Rate Principal Balance Information Date
- ------------------- ----------- --------------------- -----------------------
Class C-B-3 7.3538%(3) $ 4,667,149.00 $ 4,653,765.22
Class C-B-4 7.3538%(3) $ 3,630,006.00 $ 3,619,596.39
Class C-B-5 7.3538%(3) $ 1,296,429.00 $ 1,292,711.43
Class C-B-6 7.3538%(3) $ 2,852,149.00 $ 2,843,970.16
Class R-1 6.75% $ 50.00 $ 0.00
Class R-2 6.75% $ 50.00 $ 0.00
___________________________
1. The Class I-P and Class V-P Certificates are principal only certificates
and do not bear interest.
2. The Class I-X, Class C-X-1 and Class C-X-2 Certificates will accrue
interest at the applicable Pass-Through Rate on the related notional amount
which is equal to the product of (i) the aggregate scheduled principal
balance of the related Premium Rate Mortgage Loans and (y) a fraction, the
numerator of which is the weighted average of the Stripped Interest Rates
for the related Premium Rate Mortgage Loans as of such due date and the
denominator of which is 6.750% in the case of the Class I-X Certificates
and 7.000% in the case of the Class C-X-1 and Class C-X-2 Certificates. The
Class I-X Premium Rate Mortgage Loans are the Group I Loans which have a
pass-through rate in excess of 6.750%. The Class C-X Premium Rate Mortgage
Loans are the Group II, Group III, Group IV and Group V Loans which have a
pass-through rate less than or equal to 8.500% and, in the case of the
Group V Loans, a pass-through rate in excess of 7.000%. The Stripped
Interest Rate is the rate in excess over 6.750% for the Group I Loans, the
excess over 7.250%for the Group II Loans, the excess over 7.500% for the
Group III Loans, the excess over 7.750% for the Group IV Loans and the
excess over 7.000% for the Group V Loans.
3. The interest rate on the Class C-B-1, Class C-B-2, Class C-B-3, Class
C-B-4, Class C-B-5 and Class C-B-6 Certificates will equal on any Pooled
Certificate Distribution Date, a quotient expressed as a percentage of (a)
the sum of (i) the product of (x) 7.250% and (y) the Subordinate Component
Balance for Loan Group II immediately prior to such date, (ii) the product
of (x) 7.500% and (y) the Subordinate Component Balance for Loan Group III
immediately prior to such date, (iii) the product of (x) 7.750% and (y) the
Subordinate Component Balance for Loan Group IV immediately prior to such
date and (iv) the product of (x) 7.050% and (y) the Subordinate Component
Balance for Loan Group V immediately prior to such date, divided by (b) the
sum of the Subordinate Component Balances for Loan Group II, Loan Group
III, Loan Group IV and Loan Group V immediately prior to such date. The
"Subordinate Component Balance" for such Loan Groups as of any date of
determination is equal to the outstanding aggregate stated principal
balance of the mortgage loans in such Loan Group (less, with respect to
Loan Group V, the applicable Class V-P Fraction of any Class V-P Mortgage
Loans) minus the outstanding aggregate principal balance of the related
Class A Certificates.
Mortgage Loans................... The mortgage loans are conventional, fixed
rate, one- to four-family, fully-amortizing,
level monthly payment, first mortgage loans
with terms to maturity of approximately 30
years from the date of origination or
modification, which may include loans secured
by shares issued by cooperative housing
corporations.
Priority of Distributions of
the Certificates................. The amount available for distribution is
allocated to the Senior Certificates in each
Loan Group, prior to the date on which the
principal balances of the related subordinate
certificates are reduced to zero (the related
"Credit Support Depletion Date") to the
extent
1(d)-2
<PAGE>
of available funds for such Loan Group, if
any, on such Pooled Certificate Distribution
Date:
FIRST, to the Class P Certificates in any
Loan Group, the related Class P Fraction of
all principal received on or in respect of
each Class P Mortgage Loan in such Loan
Group;
SECOND, to the Senior Certificates entitled
to interest and the Residual Certificates in
each Loan Group, pro rata, accrued and unpaid
interest;
THIRD, to the Senior Certificates and
Residual Certificates in each Loan Group, as
principal, the related Senior Principal
Distribution Amount in the order described
below;
FOURTH, to the related Class P Certificates,
to the extent of amounts otherwise available
to pay the related Subordinate Principal
Distribution Amount (without regard to clause
(B) of such definition) on such Pooled
Certificate Distribution Date, the sum of (a)
principal in an amount equal to the related
Class P Fraction of any loss on a Class P
Mortgage Loan in such Loan Group (other than
a loss that has been allocated pro rata) and
(b) the sum of amounts, if any, by which the
amount previously distributed as described
above on each prior Pooled Certificate
Distribution Date exceeded the amount
actually distributed in respect thereof on
such prior Pooled Certificate Distribution
Dates and not subsequently distributed;
PROVIDED, HOWEVER, that any amounts
distributed in respect of losses pursuant to
this paragraph shall not cause a further
reduction in the related Class P Principal
Balance;
FIFTH, to the related subordinate
certificates in order of seniority, accrued
and unpaid interest, and then, their pro rata
share of the related Subordinate Principal
Distribution Amount;
SIXTH, to each of the related subordinate
certificates in order of seniority, the
remaining portion, if any, of available funds
for such Loan Group, up to the amount of
unreimbursed realized losses previously
allocated to such Class, if any; PROVIDED,
HOWEVER, that any amounts distributed
pursuant to this paragraph shall not cause a
further reduction in the principal balances
of any of such certificates; and
SEVENTH, to the related Residual
Certificates, the remaining portion, if any,
of available funds for such Loan Group on
such Pooled Certificate Distribution Date;
Notwithstanding the above, with respect to
the Group C-B, Class V-P and Class R-1
Certificates, prior to the related Credit
Support Depletion Date, subject to the
payment of the Group II, Group III, Group IV
and Group V Certificates as described above,
and to the extent of available funds for Loan
Group II, Loan Group III, Loan Group IV and
Loan Group V remaining following prior
distributions, if any, on such Pooled
Certificate Distribution Date:
1(d)-3
<PAGE>
first, to the Class V-P Certificates, to the
extent of amounts otherwise available to pay
the related Subordinate Principal
Distribution Amount on such Pooled
Certificate Distribution Date, the sum of (a)
principal in an amount equal to the
applicable Class V-P Fraction of any loss on
a Class V-P Mortgage Loan (other than a loss
that has been allocated pro rata) and (b) the
sum of amounts, if any, by which the amount
distributed to the Group I Certificates
described above on each prior Pooled
Certificate Distribution Date exceeded the
amount actually distributed in respect
thereof on such prior Pooled Certificate
Distribution Dates and not subsequently
distributed; PROVIDED, HOWEVER, that any
amounts distributed in respect of losses
pursuant to this paragraph shall not cause a
further reduction in the Class V-P principal
balance;
second, to the Class C-B Certificates in
order of seniority, accrued and unpaid
interest at the interest rate on the related
principal balance and then, to the Class C-B
Certificates, their pro rata share of the
related subordinate principal distribution
amount;
third, to each Class of the Group C-B
Certificates in order of seniority, the
remaining portion, if any, of available funds
for Loan Group II, Loan Group III, Loan Group
IV and Loan Group V, up to the amount of
unreimbursed realized losses previously
allocated to such Class, if any, PROVIDED,
HOWEVER, that any amounts distributed
pursuant to this paragraph shall not cause a
further reduction in the principal balances
of any of the Group C-B Certificates; and
fourth, to the Class R-1 Certificates, the
remaining portion, if any, of available funds
for Loan Group II, Loan Group III, Loan Group
IV and Loan Group V for such Pooled
Certificate Distribution Date.
With respect to the Group I-B and Group C-B
Certificates, on any Pooled Certificate
Distribution Date on which the Subordination
Level for any Class of Class B Certificates
is less than such percentage as of the
Closing Date, the portion of the Group I
Subordinate Principal Prepayments
Distribution Amount or Group C-B Subordinate
Principal Prepayments Distribution Amount ,
as applicable, otherwise allocable to the
class or classes of the Class B Certificates
in the related Certificate Group junior to
such class will be allocated to the most
senior class of Class B Certificates in such
Certificate Group for which the Subordination
Level is less than such percentage as of the
Issue Date and to the class or classes of
Class B Certificates in such Certificate
Group senior thereto, pro rata according to
the principal balances of such classes.
The "Subordination Level" on any specified
date is (i) with respect to any Class of
Group I-B Certificates, the percentage
obtained by dividing the sum of the principal
balances of all classes of Group I-B
Certificates which are subordinate in right
of payment to such class by the sum of the
principal balances of all classes of Group I
Certificates as of such date prior to giving
effect to distributions or allocations of
realized losses on the Group I Loans on such
date and
1(d)-4
<PAGE>
(ii) with respect to any class of Group C-B
Certificates, the percentage obtained by
dividing the sum of the principal balances of
all classes of Group C-B Certificates which
are subordinate in right of payment to such
class by the sum of the principal balances of
all Classes of Group II, Group III, Group IV,
Group V and Group C-B Certificates as of such
date prior to giving effect to distributions
or allocations of realized losses on the
Group II, Group III, Group IV and Group V
Loans on such date.
On each Pooled Certificate Distribution Date
on or after the related Credit Support
Depletion Date, distributions will be made
with respect to the Certificates in each Loan
Group as follows, subject, in each case, to
the extent of available funds for such Loan
Group remaining following prior
distributions, if any, on such Pooled
Certificate Distribution Date:
first, to the Class P Certificates in any
Loan Group, the related Class P Fraction of
all principal received on or in respect of
each Class P Mortgage Loan in such Loan
Group;
second, to the Senior Certificates entitled
to interest and the Residual Certificates in
such Loan Group, the Class I-X Certificates,
pro rata, accrued and unpaid interest;
third, to the Senior Certificates and
Residual Certificates in such Loan Group, pro
rata, the related Senior Principal
Distribution Amount; and
fourth, to the Class R-I Certificates, the
remaining portion, if any, of available funds
for such Loan Group for such Pooled
Certificate Distribution Date.
Distributions to the Group I, Group II, Group
III, Group IV and Group V Certificates will
be based solely on payments received or
advanced with respect to the related mortgage
loans.
On each Pooled Certificate Distribution Date,
the Class I-P Certificates will receive a
portion of available funds for Loan Group I
(the "Class I-P Principal Distribution
Amount") attributable to principal received
on or in respect of any Group I Loan with a
Pass-Through Rate of less than 6.75% per
annum (a "Class I-P Mortgage Loan"), equal to
the amount of such principal so attributable
multiplied by a fraction, the numerator of
which is 6.75% minus the Pass-Through Rate on
such Class I-P Mortgage Loan and the
denominator of which is 6.75% (the "Class I-P
Fraction"). In addition, on each Pooled
Certificate Distribution Date for so long as
any of the Group I-B Certificates remain
outstanding, the Class I-P Certificates will
also be allocated principal to cover certain
principal losses on the Class I-P Mortgage
Loans.
On each Pooled Certificate Distribution Date,
the Class V-P Certificates will receive a
portion of available funds for Loan Group V
(the "Class V-P Principal Distribution
Amount") attributable to principal received
on or in respect of any Group V
1(d)-5
<PAGE>
Loan with a Pass-Through Rate of less than
7.00% per annum (a "Class V-P Mortgage
Loan"), equal to the amount of such principal
so attributable multiplied by a fraction, the
numerator of which is 7.00% minus the
Pass-Through Rate on such Class V-P Mortgage
Loan and the denominator of which is 7.00%
(the "Class VI-P Fraction"). In addition, on
each Pooled Certificate Distribution Date for
so long as any of the Group C-B Certificates
remain outstanding, the Class V-P
Certificates will also be allocated principal
to cover certain principal losses on the
Class V-P Mortgage Loans.
On each Pooled Certificate Distribution Date
prior to the related Credit Support Depletion
Date, an amount, up to the amount of the
Group I Senior Principal Distribution Amount
for such Pooled Certificate Distribution
Date, will be distributed as principal, as
follows:
first, to the Class I-A-4 and Class I-A-11
Certificates, pro rata, an amount, up to the
amount of the Lockout Priority Amount for
such Pooled Certificate Distribution Date,
until their respective principal balances
have each been reduced to zero;
second, sequentially, to the Class R-1 and
Class R-2 Certificates, until their
respective principal balances have each been
reduced to zero;
third, concurrently, until the Class I-A-3
principal balance has been reduced to zero,
as follows: (A) 81.6979357583%, sequentially,
as follows:
(1) first, concurrently, until the Class
I-A-15 principal balance has been reduced
to zero, as follows:
(a) 15.4853738019%, sequentially, as
follows:
(I) first, to the Class I-A-1
Certificates, until the Class
I-A-1 principal balance has been
reduced to zero; and
(II) second, to the Class I-A-15
and Class I-A-16 Certificates,
pro rata, until their respective
principal balances have each been
reduced to zero;
(b) 40.9151441714%, sequentially, as
follows:
(I) first, to the Class I-A-14
Certificates, until the Class
I-A-14 principal balance has been
reduced to zero;
(II) second, to the Class I-A-1
Certificates, until the Class
I-A-1 principal balance has been
reduced to zero; and
1(d)-6
<PAGE>
(III) third, to the Class I-A-15
and Class I-A-16 Certificates,
pro rata, until their respective
principal balances have each been
reduced to zero; and
(c) 43.5994820267%, sequentially, as
follows:
(I) first, to the Class I-A-13
Certificates, until the Class
I-A-13 principal balance has been
reduced to zero; and
(II) second, to the Class I-A-12
Certificates; and
(2) second, concurrently,
76.7344743586% to the Class I- A-3
Certificates and 23.2655256414% to
the Class I-A-2 Certificates: and
(B) 18.3020642417%, sequentially, as
follows:
(1) first, to the Class I-A-5
Certificates, until the Class I- A-5
principal balance has been reduced to
zero;
(2) second, to the Class I-A-6 and
Class I-A-7 Certificates, pro rata,
until their respective principal
balances have each been reduced to
zero; and
(3) third, concurrently, until the
Class I-A-10 principal balance has
been reduced to zero, as follows:
(a) 4.5365772091% to the Class
I-A-10 Certificates;
(b) 61.2437718804%, sequentially,
as follows:
(I) first, to the Class I-A-8
Certificates, until the Class
I-A-8 principal balance has been
reduced to zero; and
(II) second, to the Class I-A-9
Certificates, until the Class
I-A-9 principal balance has been
reduced to zero; and
(c) 34.2196509105%, to the Class
I-A-12 Certificates, until the
Class I-A-12 principal balance
has been reduced to zero;
fourth, to the Class I-A-2 Certificates,
until the Class I-A-2 principal balance has
been reduced to zero; and
fifth, to the Class I-A-4 and Class I-A-11
Certificates, pro rata, until their
respective principal balances have each been
reduced to zero.
The "Lockout Priority Amount" for any Pooled
Certificate Distribution Date will equal the
sum of (i) the Lockout Adjusted
1(d)-7
<PAGE>
Percentage of the Principal Payment Amount
for Loan Group I (exclusive of the portion
thereof attributable to the Class I-P
Principal Distribution Amount), (ii) the
Lockout Prepayment Percentage of the
Principal Prepayment Amount for Loan Group I
(exclusive of the portion thereof
attributable to the Class I-P Principal
Distribution Amount) and (iii) the Lockout
Liquidation Amount.
The "Lockout Adjusted Percentage" will equal
(i) 0% for any Pooled Certificate
Distribution Date occurring prior to the
Pooled Certificate Distribution Date in
August 2004 and (ii) the Lockout Percentage
for the Pooled Certificate Distribution Date
occurring in August 2004 and each Pooled
Certificate Distribution Date thereafter.
The "Lockout Percentage" for any Pooled
Certificate Distribution Date will equal the
aggregate principal balance of the Class
I-A-4 and Class I-A-11 Certificates divided
by the aggregate principal balance of the
Group I Certificates (less the Class I-P
Principal Balance), in each case immediately
prior to the Pooled Certificate Distribution
Date.
The "Lockout Liquidation Amount" will equal
the aggregate, for each Group I Loan that
became a Liquidated Mortgage Loan during the
calendar month preceding the month of the
Pooled Certificate Distribution Date, of the
lesser of (i) the Lockout Percentage of the
stated principal balance of such mortgage
loan (exclusive of the Class I-P Fraction
thereof, with respect to any Class I-P
Mortgage Loan) and (ii) the Lockout
Percentage of the liquidation principal with
respect to such mortgage loan.
The "Lockout Prepayment Percentage" for any
Pooled Certificate Distribution Date will
equal the product of (a) the Lockout
Percentage and (b) the Step Down Percentage.
The "Step Down Percentage" for any Pooled
Certificate Distribution Date until July 2004
will be equal to 0% and gradually will
increase to 100% 100%.
The"Senior Principal Distribution Amount" for
each Loan Group on any Pooled Certificate
Distribution Date will equal the sum of (i)
the related Senior Percentage of the
Principal Payment Amount for such Loan Group,
(ii) the related Senior Prepayment Percentage
of the Principal Prepayment Amount for such
Loan Group and (iii) the related Senior
Liquidation Amount.
The"Senior Percentage" for each Loan Group on
any Pooled Certificate Distribution Date will
equal the lesser of (a) 100% and (b) the
aggregate principal balance for the related
Senior Certificates divided by the aggregate
stated principal balance of the mortgage
loans in such Loan Group, in each case
immediately prior to the Pooled Certificate
Distribution Date. The "Subordinate
Percentage" for each Loan Group on any Pooled
Certificate Distribution Date will equal the
excess of 100% over the related
1(d)-8
<PAGE>
Senior Percentage for such date.
The related "Senior Liquidation Amount" will
equal the aggregate, for each mortgage loan
that became a liquidated mortgage loan in
such Loan Group during the calendar month
preceding the month of the Pooled Certificate
Distribution Date, of the lesser of (i) the
related Senior Percentage of the stated
principal balance of such mortgage loan and
(ii) the related Senior Prepayment Percentage
of the liquidation principal with respect to
such mortgage loan.
On each Pooled Certificate Distribution Date
occurring on or after the Cross-Over Date,
the amounts distributable to the Class A
Certificates will be distributed among the
Class A Certificates pro rata in accordance
with their respective principal balances
without regard to the foregoing priorities.
The rights of the subordinate certificates to
receive distributions of both interest and
principal are subordinated to the rights of
the related senior certificates to receive
distributions of interest and principal.
External First-Loss Coverage..... None
Cross-Collateralization.......... On each Pooled Certificate Distribution Date
prior to the Credit Support Depletion Date
for the subordinate certificates in Group C-
B, but after the date on which the principal
balance the Class II-A-1 principal balance,
Class III-A-1 principal balance, Class IV-A-1
principal balance or Class V-A-1 principal
balance has been reduced to zero, all
principal received or advanced with respect
to the mortgage loans in the Loan Group or
Groups relating to the Class A Certificates
that have been paid in full will be paid as
principal (after distributions of principal
to the Class V-P Certificates if the Class
V-A-1 Certificates have been paid in full) to
the remaining Class A Certificates of the
other Certificate Group or Groups rather than
to the Group C-B Certificates; provided,
however, that if there are two or more
Certificate Groups with outstanding Class A
Certificates, then principal will be
distributed among those class of Class A
Certificates pro rata; provided further, that
principal will not be distributed as
described in this paragraph if on such Pooled
Certificate Distribution Date (a) the Group
C-B Percentage for such Pooled Certificate
Distribution Date is greater than or equal to
200% of the Group C-B Percentage as of the
Issue Date and (b) the average outstanding
principal balance of the mortgage loans in
each Loan Group II, Loan Group III, Loan
Group IV and Loan Group V delinquent 60 days
or more over the last six months, as a
percentage of the related Subordinate
Component Balance is less than 50%.
Realized losses on the Loan Groups II through
V are allocated as described below. However,
under certain circumstances
undercollateralization may occur due to an
allocation of losses in excess of the
Subordinate Component Balance for such Loan
Group. On any such Pooled Certificate
Distribution Date, available funds for the
overcollateralized Loan Group or Groups, to
the extent
1(d)-9
<PAGE>
remaining following distributions of interest
and principal to the Senior Certificates in
Loan Groups II through V will be paid in the
following priority:
first, to the undercollateralized Loan Group,
up to an amount (the "Total Transfer Amount")
equal to the sum of the Interest Transfer
Amount and Principal Transfer Amount for each
such undercollateralized Loan Group, pro rata
according to the Total Transfer Amount, such
amount to be distributed to the Class A
Certificates of each such undercollateralized
Loan Group and to the Group C-B Certificates
in payment of accrued but unpaid interest
(but, in the case of the Class C-X
Certificates, only in payment of the portion
of such accrued but unpaid interest derived
from such undercollateralized Loan Group) and
then to the Class A Certificates related to
each such undercollateralized Loan Group as
principal; and
second, any remaining amount will be
distributed to the subordinate certificates.
The "Interest Transfer Amount" for each
undercollateralized Loan Group will equal one
month's interest on the applicable Transfer
Amount at 7.250% per annum if such
undercollateralized Loan Group is Loan Group
II, at 7.500% per annum if such
undercollateralized Loan Group is Loan Group
III, at 7.750% per annum if such
undercollateralized Loan Group is Loan Group
IV and at 7.000% per annum if such
undercollateralized Loan Group is Loan Group
V, plus any interest shortfall of interest on
the Senior Certificates of such
undercollateralized Loan Group. The
"Principal Transfer Amount" for each
undercollateralized Loan Group will equal the
excess of the aggregate principal balance of
the Class A Certificates in such
undercollateralized Loan Group over the
aggregate stated principal balance of the
mortgage loans in such Loan Group (less, with
respect to Loan Group V, the applicable V-P
Fraction of any Class V-P Mortgage Loans).
After the aggregate principal balance of the
Group C-B Certificates has been reduced to
zero, a shortfall in principal may be
allocated to the Class A Certificates of such
undercollateralized Loan Group.
Allocation of Losses and
Shortfalls.........................Subject to the limitations set forth below,
realized losses (other than excess special
hazard losses, excess fraud losses or excess
bankruptcy losses) on the mortgage loans will
be allocated as follows:
(a) With respect to the Group I Senior
Certificates, such losses will be allocated
first to the Group I-B Certificates until the
principal balance thereof is reduced to zero.
Thereafter, the principal portion of any
realized loss will be allocated among the
outstanding Class A Certificates in such Loan
Group pro rata in accordance with their
outstanding Class A principal balances and
the interest portion of realized losses will
be allocated amount the outstanding Class A
Certificates pro rata in accordance with the
amount of interest
1(d)-10
<PAGE>
accrued by each. In addition, all losses that
would be otherwise allocatable to the Class
I-A-11 Certificates will be allocated to the
Class I-A-2 Certificates.
(b)With respect to the Senior Certificates in
Loan Group II through V, such losses will be
allocated first to the Group C-B Certificates
until the principal balance thereof is
reduced to zero. Thereafter, the principal
portion of any realized loss will be
allocated among the outstanding Class A
Certificates in such Loan Group or Groups pro
rata in accordance with their outstanding
Class A principal balances and the interest
portion of realized losses will be allocated
amount the outstanding Class A Certificates
pro rata in accordance with the amount of
interest accrued by each.
Any Special Hazard Losses, Fraud Losses and
Bankruptcy Losses in excess of the respective
amounts of subordinated certificate coverage
therefor will be allocated on a pro rata
basis among the Class A and related
subordinate Certificates for such Loan
Groups, and any such losses allocated to the
Class A Certificates in each such Loan Group
will be allocated among the outstanding Class
A Certificates (i) with respect to the
principal portion of such losses, pro rata
(other than the Class I-X and Class I-P
Certificates, with respect to Loan Group I,
and other than the Class V-P Certificates,
with respect to Loan Group V) in accordance
with their outstanding principal balances,
(ii) with respect to the interest portion of
such losses (other than the Class I-P
Certificates, with respect to Loan Group I,
and other than the Class V-P Certificates,
with respect to Loan Group V), the amount of
interest accrued by each, except as described
above and (iii) with respect to the Class I-P
Certificates and Class V-P Certificates, any
loss recognized with respect to the related
Class P Mortgage Loans, the applicable Class
P Fraction of such loss shall be allocated to
the Class I-P and Class V-P Certificates, as
applicable and the remainder will be
allocated to the related subordinate
certificates.
Prepayment interest shortfalls resulting from
principal prepayments in full of mortgage
loans will be offset to the extent of the
aggregate servicing fees relating to
mortgagor payments or other recoveries
distributed on the related Pooled Certificate
Distribution Date. Any prepayment interest
shortfalls in excess of such offsets will be
allocated pro rata among the Class A
Certificates and subordinate certificates
related to each Loan Group based upon their
then-outstanding respective principal
balances, and any such losses allocated to
the Class A Certificates in each Loan Group
will be allocated among the outstanding Class
A Certificates in each such Loan Group pro
rata on the basis of the amount of interest
accrued by each for such Pooled Certificate
Distribution Date. Interest shortfalls
resulting from the timing of the receipt of
partial principal prepayments will not be
offset by servicing fees and will, on each
Pooled Certificate Distribution Date
occurring prior to the CrossOver Date, be
allocated to the related subordinate
certificates before being borne by the Class
A Certificates. Thereafter, such interest
shortfalls resulting from the timing of
receipt of partial principal prepayments will
be allocated among the Class A Certificates
in each Loan Group as described above.
1(d)-11
<PAGE>
Early Termination Provisions..... At its option, on any Pooled Certificate
Distribution Date when the aggregate
scheduled principal balance of the mortgage
loans is less than 5% of the aggregate
balance of the mortgage loans as of the
Cut-off Date, the related servicer may
purchase from the trust estate all remaining
mortgage loans and other assets thereof, and
thereby effect early retirement of the Series
1999-8 Certificates. Such early termination
of the trust may occur even if the aggregate
scheduled principal balance of the mortgage
loans in one or more Loan Groups is less than
5% of the aggregate balance of the mortgage
loans as of the Cut-off Date. The purchase
price will, generally, be equal to the
greater of (i) the unpaid principal balance
of each mortgage loan plus the fair market
value of the property in the trust estate and
(ii) the fair market value of the trust
estate's assets plus, in each case, accrued
interest.
Advanced Obligations............. The related servicer is obligated to make
advances in respect of delinquent payments of
principal an d interest on the mortgage loans
to the extent that such advances are deemed
recoverable.
1(d)-12
<PAGE>
ANNEX 2
COLLATERAL INFORMATION
The table in this Annex 2 sets forth information for each of the
Pooled Certificates concerning such Pooled Certificates and the related mortgage
loans. The table and the descriptions of the Pooled Certificates herein are
subject to and qualified by reference to the information with respect to the
Pooled Certificates set forth on Annex 1 and to the provisions of the Underlying
Agreements and the prospectuses and prospectus supplements related to the Pooled
Certificates, as well as any subsequent information related thereto filed on a
Current Report on Form 8-K with the Securities and Exchange Commission following
the closing of the related Underlying Series. The information set forth in the
table and elsewhere herein that is peculiarly within the knowledge of the
various Underlying Trustees, paying agents and servicers for the Underlying
Trusts has been derived from data provided by them, including regular periodic
reports provided to holders of Pooled Certificates and loan-by-loan information
provided in tape form from the related servicers or underlying issuers or
depositors, but such information has not been independently represented to the
Depositor or the Underwriter as being accurate or complete nor has it been
independently verified by the Depositor or the Underwriter. This information
comprises all material information on the subject that the Depositor and the
Underwriter possess or can acquire without unreasonable expense or effort.
All of the information provided herein as to the Pooled Certificates
(and any related securities issued as part of the same Underlying Series) is
provided as of the Pooled Certificate Information Date. Generally, all of the
information provided herein as to the mortgage loans is provided as of the
Mortgage Loan Information Date. Unless otherwise noted, "weighted average"
numbers are calculated based on the loan balances as of the Mortgage Loan
Information Date.
A key to the abbreviations used for each underlying Series and Class
designation for the Pooled Certificates is contained under "Description of the
Pooled Certificates--General".
The following is a description of each item reported in the following
table. The table should be read in conjunction with these descriptions and with
certain additional information contained in Annex 1.
1. Shelf, Series, and Des. These first three columns indicate,
collectively, the "shelf" name and series designation of each
Underlying Series and the designation of the Pooled Certificate
for such Underlying Series. For the full name of each Pooled
Certificate, see "Description of the Pooled
Certificates--General".
2. Current Coupon. This column indicates the Pass-Through Rate on
each Pooled Certificate as of the Pooled Certificate Information
Date. Each Pooled Certificate bears interest according to the
formula presented for such Pooled Certificate in Annex 1 hereto.
3. Cert Type. This column indicates whether the Pooled Certificate
is a Floating Rate Pooled Certificate in which case the code
"FLT" is inserted, or is an Inverse Floating Rate Pooled
Certificate, in which case the code "INV" is inserted and whether
it is a Planned Amortization Class ("PAC") Targeted Amortization
Class ("TAC"), Scheduled Amortization Class ("SCH") or Companion
or Support Class ("SUP").
4. Class Original Balance. This column lists the original principal
balance for the Pooled Certificate as of the related Issue Date
as set forth in Annex 1.
5. Class Current Balance. This column shows the outstanding balance
of the Pooled Certificate as of the Pooled Certificate
Information Date.
6. Class % in Trust. This column shows, for each Pooled Certificate,
the percent of the entire Class of the Underlying Series
represented by such Pooled Certificate.
2-1
<PAGE>
7. Original Mortgage Loan Balance. This is the aggregate Scheduled
Principal Balance of the Mortgage Loans underlying each Pooled
Certificate as of the respective Underlying Series Cut-Off Date
as set forth in Annex 1.
8. Current Mortgage Loan Balance. This is the aggregate Scheduled
Principal Balance of the Mortgage Loans underlying each Pooled
Certificate as of the Mortgage Loan Information Date.
9. Original Senior %. Under this heading is the percentage of
certificates of each Underlying Series, of which the Pooled
Certificate is a part, that were issued as Senior Certificates
(excluding any principal only certificate) as of the date of
issuance.
10. Current Senior %. Under this heading is the percentage of
certificates of each Underlying Series, of which the Pooled
Certificates is a part, that are Senior Certificates (excluding
any principal only certificate) as of the Pooled Certificate
Information Date.
11. CWLTV. Under this heading is the current weighted loan-to-value
ratio of the Mortgage Loans underlying each Pooled Certificate.
12. CA %. Under this heading is the percentage of Mortgage Loans
concentrated in California.
13. CGWAC. Under this heading is the current weighted average of the
note rates on the Mortgage Loans underlying each Pooled
Certificate.
14. WAM. Under this heading is the current weighted average of the
remaining terms to maturity of the Mortgage Loans underlying each
Pooled Certificate (in months).
15. AGE. Under this heading is the weighted average months since
origination for the Mortgage Loans underlying each Pooled
Certificate.
2-2
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CLASS CLASS CLASS ORIGINAL CURRENT
CURRENT CERT. ORIGINAL CURRENT % MORTGAGE LOAN MORTGAGE LOAN
SHELF SERIES DES COUPON TYPE BALANCE BALANCE IN TRUST BALANCE BALANCE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMAC 9804 A6 6.7500 TAC 15,644,000.00 12,467,602.77 36.26% 359,835,570.11 302,993,830.85
NSCOR 9826 A6 6.6000 SCH 23,850,000.00 20,188,885.95 100.00% 500,000,232.69 429,651,626.28
NSCOR 9826 A13 6.7500 CPT 20,547,000.00 15,054,155.90 49.92% 500,000,232.69 429,651,626.28
PHMSC 9347 A10 6.7500 SUP 11,850,000.00 11,850,000.00 23.34% 900,493,665.07 485,586,319.73
PNCMS 9908 IA3 6.7500 SEQ 23,255,000.00 23,255,000.00 95.88% 385,775,559.97 379,205,173.75
TOTALS 4 5 95,146,000.00 82,815,644.63 2,146,105,027.84 1,597,436,950.61
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
ORIGINAL CURRENT
SENIOR SENIOR CW CA
SHELF % % LTV % CGWAC WAM AGE
- --------------------------------------------------------------------------------
AMAC 95.98% 95.28% 75.30 35.01% 7.240 343 15
NSCOR 95.49% 94.81% 77.72 51.53% 7.304 342 15
NSCOR 95.49% 94.81% 77.72 51.53% 7.304 342 15
PHMSC 93.75% 89.92% 72.14 72.56% 7.301 274 73
PNCMS 95.47% 95.41% 73.44 50.01% 7.217 351 6
TOTALS 74.55 54.43% 7.270 324 30
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
MORTGAGE-BACKED CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
STRUCTURED ASSET MORTGAGE INVESTMENTS INC.
SELLER
=============================
This Prospectus relates to Mortgage-Backed Certificates (the
"Certificates") and Mortgage-Backed Notes (the "Notes" and, collectively with
the Certificates, the "Securities") which may be sold from time to time in one
or more series (each, a "Series") on terms determined at the time of sale and
described in the related Prospectus Supplement for the Series. The Securities of
a Series will evidence either beneficial ownership of one or more trusts (each a
"Trust Fund") or the debt obligations of a Trust Fund. As specified in the
related Prospectus Supplement, a Trust Fund for a Series of Securities will
include certain mortgage-related assets (the "Mortgage Assets") consisting of
(i) mortgage loans or participations therein secured by one- to four-family
residential properties ("Single Family Loans"), (ii) mortgage loans or
participations therein secured by multifamily residential properties
("Multifamily Loans"), (iii) loans or participations therein secured by security
interests or similar liens on shares in cooperative housing corporations and the
related proprietary leases or occupancy agreements ("Cooperative Loans"), (iv)
conditional sales contracts and installment sales or loan agreements or
participations therein secured by manufactured housing ("Contracts"), (v)
mortgage pass-though securities (the "Agency Securities") issued or guaranteed
by the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("Fannie Mae"), Freddie Mac (formerly, the Federal Home
Loan Mortgage Corporation) ("Freddie Mac") or other government agencies or
government-sponsored agencies or (vi) privately issued mortgage-backed
securities ("Private Mortgage-Backed Securities"). If specified in the related
Prospectus Supplement, certain Securities will evidence the entire beneficial
ownership interest in, or the debt obligations of, a Trust Fund that will
contain a beneficial ownership interest in another Trust Fund which will contain
the Mortgage Assets. The Mortgage Assets will be acquired by Structured Asset
Mortgage Investments Inc. (formerly, Bear Stearns Mortgage Securities Inc.) (the
"Seller") from one or more institutions which may be affiliates of the Seller
(each, a "Lender") and conveyed by the Seller to the related Trust Fund. In
addition to Mortgage Assets, a Trust Fund may include United States Treasury
securities and other securities issued by the U.S. Government, any of its
agencies or other issuers established by federal statute (collectively, "U.S.
Government Securities"), insurance policies, cash accounts, letters of credit,
financial guaranty insurance policies, third party guarantees or other assets to
the extent described in the related Prospectus Supplement (collectively, the
"Trust Assets").
Each Series of Securities will include either one or more classes of
Certificates or, if Notes are issued as part of a Series, one or more classes of
Notes and one or more classes of Certificates, as set forth in the related
Prospectus Supplement. Each class of Securities of a Series will evidence
beneficial ownership of a specified percentage (which may be 0%) or portion of
future interest payments and a specified percentage (which may be 0%) or portion
of future principal payments on the Trust Assets in the related Trust Fund or
will evidence the obligations of the related Trust Fund to make payments from
amounts received on the Trust Assets in the related Trust Fund. A Series of
Securities may include one or more senior classes that receive certain
preferential treatment with respect to one or more other classes of Securities
of such Series. One or more classes of Securities of a Series may be entitled to
receive distributions of principal, interest or any combination thereof prior to
one or more other classes of Securities of such Series or after the occurrence
of specified events or may be required to absorb one or more types of losses
prior to one or more other classes of Securities, in each case as specified in
the related Prospectus Supplement. Certain Series will provide for the issuance
of one or more classes of "Exchangeable Securities," or "Callable Securities"
and "Call Securities," as provided in this Prospectus. See "Summary of
Terms--Description of the Securities."
Distributions to holders of Securities ("Securityholders") will be made
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the Securities
of a Series will be made only from the assets of the related Trust Fund and any
other assets specified in the related Prospectus Supplement.
The Securities will not represent an obligation of or interest in the
Seller or any affiliate thereof and will not be insured or guaranteed by any
governmental agency or instrumentality and will be insured or guaranteed by
another person only if specified in the related Prospectus Supplement. In
general, with respect to a Series of Securities, the Seller will obtain certain
representations and warranties from the Lender or Lenders from which it acquired
the Mortgage Assets or other third parties and will assign its rights with
respect to such representations and warranties to the Trust Fund for the related
Series of Securities. The Seller will have obligations with respect to a Series
only to the extent specified in the related Prospectus Supplement. The principal
obligations of one or more master servicers (each, a "Master Servicer") named in
the Prospectus Supplement with respect to the related Series of Securities will
be limited to its or their contractual servicing obligations, including any
obligation to advance delinquent payments on the Mortgage Assets in the related
Trust Fund. (CONTINUED ON NEXT PAGE)
=============================
FOR A DISCUSSION OF SIGNIFICANT FACTORS AFFECTING INVESTMENTS IN THE
SECURITIES, SEE "RISK FACTORS" ON PAGE 19 HEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
=============================
Prior to issuance there will have been no market for the Securities of any
Series and there can be no assurance that a secondary market for any Securities
will develop. This Prospectus may not be used to consummate sales of a Series of
Securities unless accompanied by a Prospectus Supplement.
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described under "Method
of Distribution" herein and in the related Prospectus Supplement. To the extent
Securities are underwritten, Securities will be distributed by, or sold by
underwriters managed by:
BEAR, STEARNS & CO. INC.
The date of this Prospectus is November 24, 1998.
<PAGE>
The yield on each class of Securities of a Series will be affected by the
rate of payment of principal (including prepayments) on the Mortgage Assets in
the related Trust Fund and the timing of receipt of such payments as described
herein and in the related Prospectus Supplement. Certain classes of Securities
may be subject to call and a Trust Fund may be subject to early termination
under the circumstances described herein and in the related Prospectus
Supplement. See "Administration--Termination; Optional Termination."
If specified in a Prospectus Supplement, one or more elections may be made
to treat each Trust Fund or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") or a "financial asset securitization
investment trust" ("FASIT") for federal income tax purposes. See "Federal Income
Tax Consequences."
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or
subscriptions.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Securities of each
Series to be offered hereunder will, among other things, set forth with respect
to such Securities, as appropriate: (i) a description of the class or classes of
Securities; (ii) the rate of interest or method of determining the amount of
interest, if any, to be paid to each such class; (iii) the aggregate principal
amount, if any, relating to each such class; (iv) the distribution dates (each a
"Distribution Date") for interest and principal distributions and, if
applicable, the initial and final scheduled Distribution Dates for each class;
(v) if applicable, the aggregate original percentage ownership interest in the
Trust Fund to be evidenced by each class of Securities; (vi) information as to
the nature and extent of subordination with respect to any class of Securities
that is subordinate to any other class; (vii) information as to the assets
comprising the Trust Fund, including the general characteristics of the Mortgage
Assets included therein and, if applicable, the amount and source of any reserve
fund (a "Reserve Account"), and the insurance, letters of credit, guarantees, or
other instruments or agreements included in the Trust Fund; (viii) the
circumstances, if any, under which the Trust Fund may be subject to early
termination; (ix) additional information with respect to the plan of
distribution of such Securities; (x) whether one or more REMIC or FASIT
elections will be made and designation of the regular interests and residual
interests; (xi) information as to the Trustee; and (xii) information as to any
Master Servicer.
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus and the Prospectus
Supplement relating to each Series of Securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the Registration Statement of which
this Prospectus is a part. For further information, reference is made to such
Registration Statement and the exhibits thereto. Such Registration Statement and
exhibits can be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: 500 West Madison Street, Chicago, Illinois 60661; and Seven World
Trade Center, New York, New York 10048. The Commission maintains an Internet Web
site that contains reports, proxy and information statements and other
information regarding the registrants that file electronically with the
Commission, including the Seller. The address of such Internet Web site is
(http://www.sec.gov).
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by Structured Asset Mortgage Investments Inc.
(formerly, Bear Stearns Mortgage Securities Inc.) (the "Seller") pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, with respect to a Series of Securities subsequent to the date of this
Prospectus and the related Prospectus Supplement and prior to the termination of
the offering of such Series of Securities shall be deemed to be incorporated by
reference in this Prospectus as supplemented by the related Prospectus
Supplement from the date of filing of such documents. If so specified in any
such documents, such document shall also be deemed to be incorporated by
reference
<PAGE>
in the Registration Statement of which this Prospectus forms a part.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
) or in the accompanying Prospectus Supplement) or in any other subsequently
filed document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus and the related Prospectus Supplement.
The Seller will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus and the related Prospectus
Supplement is delivered, on the written or oral request of any such person, a
copy of any and all of the documents incorporated herein by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to the President, Structured Asset Mortgage Investments Inc.,
245 Park Avenue, New York, New York 10167. Telephone requests for such copies
should be directed to the President at (212) 272-2000.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund will be
provided to the Securityholders. See "Description of the Securities-Reports to
Securityholders."
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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 Securities.
Title of Securities Mortgage-Backed Certificates (the
"Certificates") and Mortgage-Backed Notes (the
"Notes" and, together with the Certificates,
the "Securities"), issuable from time to time
in Series.
Seller Structured Asset Mortgage Investments Inc., a
Delaware corporation and a wholly-owned
subsidiary of Bear Stearns Mortgage Capital
Corporation. See "The Seller."
Issuer The trust created pursuant to the Pooling and
Servicing Agreement (each, a "Pooling and
Servicing Agreement") among the Seller, the
Master Servicer(s), if applicable, and the
Trustee for the related Series or the owner
trust created pursuant to the Deposit Trust
Agreement (each, a "Trust Agreement") among the
Seller, the Master Servicer(s), if applicable,
and the Trustee for the related Series, as
applicable.
Trustee The trustee under the applicable
Pooling and Servicing Agreement, Trust
Agreement or Indenture (as herein defined) and
named as such in the related Prospectus
Supplement.
Master Servicer
One or more entities named as a Master Servicer
in the related Prospectus Supplement, which may
be an affiliate of the Seller. See
"Administration-Certain Matters Regarding the
Master Servicer and the Seller."
Trust Fund Assets A Trust Fund for a Series of Securities will
include the Mortgage Assets consisting of (i) a
pool (a "Mortgage Pool") of Single Family
Loans, Multifamily Loans, Cooperative Loans or
Contracts (collectively, the "Mortgage Loans"),
(ii) Agency Securities or (iii) Private
Mortgage-Backed Securities, together with
payments in respect of such Mortgage Assets and
certain other accounts, obligations or
agreements, such as United States Treasury
securities and other securities issued by the
U.S. Government, any of its agencies or other
issuers established by federal statute
(collectively, "U.S. Government Securities"),
in each case as specified in the related
Prospectus Supplement. The assets of a Trust
Fund will be purchased by such Trust Fund under
the terms of the related Pooling and Servicing
Agreement or the related Trust Agreement, as
applicable.
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<PAGE>
A. Single Family, Cooperative\
and Multifamily Loans Single Family Loans will be secured by mortgage
liens on one- to four-family residential
properties or by other liens specified in the
related Prospectus Supplement. Cooperative
Loans generally will be secured by security
interests in shares issued by private,
nonprofit, cooperative housing corporations
("Cooperatives") and in the related proprietary
leases or occupancy agreements granting
exclusive rights to occupy specific dwelling
units in such Cooperatives' buildings. Single
Family Loans and Cooperative Loans may be
conventional loans (I.E., loans that are not
insured or guaranteed by any governmental
agency), insured by the Federal Housing
Authority ("FHA") or partially guaranteed by
the Veterans Administration ("VA") as specified
in the related Prospectus Supplement. Single
Family Loans and Cooperative Loans will all
have individual principal balances at
origination of not less than $25,000 and not
more than $1,000,000, and original terms to
stated maturity of 15 to 40 years, or such
other individual principal balances at
origination and/or original terms to stated
maturity as are specified in the related
Prospectus Supplement.
Multifamily Loans will be secured by mortgage
liens on rental apartment buildings or projects
containing five or more residential units,
including apartment buildings owned by
Cooperatives. Such loans may be conventional
loans or insured by the FHA, as specified in
the related Prospectus Supplement. Multifamily
Loans will all have individual principal
balances at origination of not less than
$25,000 and original terms to stated maturity
of not more than 40 years, or such other
individual principal balances at origination
and/or original terms to stated maturity as are
specified in the related Prospectus Supplement.
The payment terms of the Mortgage Loans to be
included in a Trust Fund will be described in
the related Prospectus Supplement and may
include any of the following features or
combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a
rate adjustable from time to time in
relation to an index, a rate that is fixed
for a period of time or under certain
circumstances and is followed by an
adjustable rate, a rate that otherwise
varies from time to time, or a rate that
is convertible from an adjustable rate to
a fixed rate. Changes to an adjustable
rate may be subject to periodic
limitations, maximum rates, minimum rates
or a combination of such limitations.
Accrued interest may be deferred and added
to the principal of a Mortgage Loan for
such periods and under such circumstances
as may be specified in the related
Prospectus Supplement. Mortgage Loans may
provide for
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<PAGE>
the payment of interest at a rate lower
than the specified interest rate on the
Mortgage Loan (the "Mortgage Rate") for a
period of time or for the life of the
Mortgage Loan, and the amount of any
difference may be contributed from funds
supplied by the seller of the Mortgaged
Property or another source ("Buydown
Loans") or may be treated as accrued
interest and added to the principal of the
Mortgage Loan.
(b) Principal may be payable on a level debt
service basis to fully amortize the
Mortgage Loan over its term, may be
calculated on the basis of an assumed
amortization schedule that is
significantly longer than the original
term to maturity or on an interest rate
that is different from the interest rate
on the Mortgage Loan or may not be
amortized during all or a portion of the
original term. Payment of all or a
substantial portion of the principal may
be due on maturity ("balloon payments").
Principal may include interest that has
been deferred and added to the principal
balance of the Mortgage Loan.
(c) Payments of principal and interest may be
fixed for the life of the Mortgage Loan,
may increase over a specified period of
time or may change from period to period.
Mortgage Loans may include limits on
periodic increases or decreases in the
amount of monthly payments and may include
maximum or minimum amounts of monthly
payments.
(d) Prepayments of principal may be subject to
a prepayment fee, which may be fixed for
the life of the Mortgage Loan or may
decline over time, and may be prohibited
for the life of the Mortgage Loan or for
certain periods ("lockout periods").
Certain Mortgage Loans may permit
prepayments after expiration of the
applicable lockout period and may require
the payment of a prepayment fee in
connection with any such subsequent
prepayment. Other Mortgage Loans may
permit prepayments without payment of a
fee unless the prepayment occurs during
specified time periods. The Mortgage Loans
may include due-on-sale clauses which
permit the mortgagee to demand payment of
the entire Mortgage Loan in connection
with the sale or certain transfers of the
related Mortgaged Property. Other Mortgage
Loans may be assumable by persons meeting
the then applicable underwriting standards
of the Lender.
Certain Mortgage Loans may be originated or
acquired in connection with employee relocation
programs. The real property
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<PAGE>
constituting security for repayment of a
Mortgage Loan may be located in any one of the
fifty states, the District of Columbia, Guam,
Puerto Rico or any other territory of the
United States. The Mortgage Loans generally
will be covered by standard hazard insurance
policies insuring against losses due to fire
and various other causes. The Mortgage Loans
will be covered by primary mortgage insurance
policies to the extent provided in the related
Prospectus Supplement. All Mortgage Loans will
have been purchased by the Seller, either
directly or through an affiliate, from Lenders.
B. Contracts Contracts will consist of conditional sales and
installment sales or loan agreements secured by
new or used Manufactured Homes (as defined
herein). Contracts may be conventional loans,
insured by the FHA or partially guaranteed by
the VA, as specified in the related Prospectus
Supplement. Each Contract will be fully
amortizing and will bear interest at a fixed
accrual percentage rate ("APR") or will
amortize on another basis, and bear interest at
another APR, as specified in the related
Prospectus Supplement. Contracts will all have
individual principal balances at origination of
not less than $10,000 and not more than
$1,000,000 and original terms to stated
maturity of 5 to 30 years, or such other
individual principal balances at origination
and/or original terms to stated maturity as are
specified in the related Prospectus Supplement.
C. Agency Securities The Agency Securities will consist of (i) fully
modified pass-through mortgage-backed
certificates guaranteed as to timely payment of
principal and interest by the Government
National Mortgage Association ("GNMA
Certificates"), (ii) Guaranteed Mortgage
Pass-Through Certificates issued and guaranteed
as to timely payment of principal and interest
by the Federal National Mortgage Association
("Fannie Mae Certificates"), (iii) Mortgage
Participation Certificates issued and
guaranteed as to timely payment of interest and
ultimate (but generally not timely) payment of
principal by Freddie Mac (formerly, the Federal
Home Loan Mortgage Corporation) ("Freddie Mac
Certificates"), (iv) stripped mortgage-backed
securities representing an undivided interest
in all or a part of either the principal
distributions (but not the interest
distributions) or the interest distributions
(but not the principal distributions) or in
some specified portion of the principal and
interest distributions (but not all of such
distributions) on certain GNMA, Fannie Mae,
Freddie Mac or other government agency or
government-sponsored agency certificates and
generally guaranteed to the same extent as the
underlying securities, (v) another type of
guaranteed pass-through certificate issued or
guaranteed by GNMA, Fannie Mae, Freddie Mac or
another government agency or
government-sponsored agency and described in
the related Prospectus Supplement, or (vi) a
combination of such Agency Securities. All GNMA
Certificates will be backed by the full faith
and credit of the United States. No Fannie Mae
or Freddie Mac
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<PAGE>
will be backed, directly or indirectly, by the
full faith and credit of the United States.
However, to the extent any Fannie Mae or
Freddie Mac Certificates are backed by GNMA
Certificates, such Fannie Mae or Freddie Mac
Certificates benefit from the backing of the
underlying GNMA Certificates by the full faith
and credit of the United States. The Agency
Securities may consist of pass-through
securities issued under the GNMA I Program, the
GNMA II Program, Freddie Mac's Cash or
Guarantor Program or another program specified
in the related Prospectus Supplement. The
payment characteristics of the Mortgage Loans
underlying the Agency Securities will be
described in the related Prospectus Supplement.
D. Private Mortgage-Backed
Securities Private Mortgage-Backed Securities may include
(i) mortgage participation or pass-through
certificates representing beneficial interests
in certain Mortgage Loans or (ii)
Collateralized Mortgage Obligations ("CMOs")
secured by such Mortgage Loans. Private
Mortgage-Backed Securities may include stripped
mortgage-backed securities representing an
undivided interest in all or a part of any of
the principal distributions (but not the
interest distributions) or the interest
distributions (but not the principal
distributions) or in some specified portion of
the principal and interest distributions (but
not all of such distributions) on certain
mortgage loans. Although individual Mortgage
Loans underlying a Private Mortgage-Backed
Security may be insured or guaranteed by the
United States or an agency or instrumentality
thereof, they need not be, and the Private
Mortgage-Backed Securities themselves will not
be so insured or guaranteed. See "The Trust
Fund-Private Mortgage-Backed Securities."
Payments on the Private Mortgage-Backed
Securities will be distributed directly to the
Trustee as registered owner of such Private
Mortgage-Backed Securities or as otherwise
specified in the related Prospectus Supplement.
See "The Trust Fund-Private Mortgage-Backed
Securities."
The Prospectus Supplement for a Series will
specify (i) the aggregate approximate principal
amount, if any, and type of any Private
Mortgage-Backed Securities to be included in
the Trust Fund for such Series; (ii) certain
characteristics of the Mortgage Loans which
comprise the underlying assets for the Private
Mortgage-Backed Securities including to the
extent available (A) the payment features of
such Mortgage Loans, (B) the approximate
aggregate principal amount, if known, of the
underlying Mortgage Loans which are insured or
guaranteed by a governmental entity, (C) the
servicing fee or range of servicing fees with
respect to the Mortgage Loans, (D) the minimum
and maximum stated maturities of the Mortgage
Loans at origination and (E) delinquency
experience with respect to the Mortgage Loans;
(iii) the pass-through or certificate rate or
ranges thereof for the Private Mortgage-Backed
Securities and the method of determination
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<PAGE>
thereof; (iv) the issuer of the Private
Mortgage-Backed Securities (the "PMBS Issuer"),
the servicer of the Private Mortgage-Backed
Securities (the "PMBS Servicer") and the
trustee of the Private Mortgage-Backed
Securities (the "PMBS Trustee"); (v) certain
characteristics of credit support, if any, such
as subordination, reserve funds, insurance
policies, letters of credit, financial guaranty
insurance policies or third party guarantees,
relating to the Mortgage Loans underlying the
Private Mortgage-Backed Securities, or to such
Private Mortgage-Backed Securities themselves;
(vi) the terms on which underlying Mortgage
Loans for such Private Mortgage-Backed
Securities, or such Private Mortgage-Backed
Securities themselves, may, or are required to,
be repurchased prior to stated maturity; and
(vii) the terms on which substitute Mortgage
Loans or substitute Private Mortgage-Backed
Securities may be delivered to replace those
initially deposited with the PMBS Trustee or
the Trustee. See "The Trust Fund." Such
securities will (i) either (a) have been
previously registered under the Securities Act
of 1933, as amended or (b) will at the time be
eligible for sale under Rule 144(k) under such
act; and (ii) will be acquired in bona fide
secondary market transactions not from an
issuer or seller that is an affiliate of the
Seller.
E. U.S. Government Securities If specified in the related Prospectus
Supplement, United States Treasury securities
and other securities issued by the U.S.
Government, any of its agencies or other
issuers established by federal statute
(collectively, "U.S. Government Securities")
may be included in the Trust Assets. Such
securities will be backed by the full faith and
credit of the United States or will represent
the obligations of the U.S. Government or such
agency or such other issuer or obligations
payable from the proceeds of U.S. Government
Securities, as specified in the related
Prospectus Supplement.
F. Pre-Funding and
Capitalized Interest
Accounts If specified in the related Prospectus
Supplement, a Trust Fund will include one or
more segregated trust accounts (each, a
"Pre-Funding Account") established and
maintained with the Trustee for the related
Series. If so specified, on the closing date
for such Series, a portion of the proceeds of
the sale of the Securities of such Series (such
amount to be equal to the excess of (x) the
principal amounts of Securities being sold over
(y) the principal balance (as of the related
Cut-off Date) of the Trust Assets on the
Closing Date, the "Pre-Funded Amount") will be
deposited in the Pre-Funding Account and may be
used to purchase additional Mortgage Loans
during the period of time, not to exceed six
months, specified in the related Prospectus
Supplement (the "Pre-Funding Period"). The
Mortgage Loans to be so purchased will be
required to have certain characteristics
specified in the related Prospectus Supplement.
Each additional Mortgage Loan so purchased must
conform to the representations and warranties
set forth in the applicable Agreement.
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<PAGE>
Therefore, the characteristics of the Trust
Assets at the end of the Pre-Funding Period
will conform in all material respects to the
characteristics of the Trust Assets on the
Closing Date. If any Pre-Funded Amount remains
on deposit in the Pre-Funding Account at the
end of the Pre-Funding Period, such amount will
be applied in the manner specified in the
related Prospectus Supplement to prepay the
Securities of the applicable Series. Pending
the acquisition of additional assets during the
Pre-Funding Period, all amounts in the
Pre-Funding Account will be invested in
Permitted Investments, as defined under "Credit
Enhancement--Reserve and other Accounts"
herein. It is expected that substantially all
of the funds deposited in the Pre-Funding
Account will be used during the related
Pre-Funding Period to purchase additional
assets as described above. If, however, amounts
remain in the Pre-Funding Account at the end of
the Pre-Funding Period, such amounts will be
distributed to the Securityholders, as
described in the related Prospectus Supplement.
If a Pre-Funding Account is established, one or
more segregated trust accounts (each, a
"Capitalized Interest Account") may be
established and maintained with the Trustee for
the related Series. On the closing date for
such Series, a portion of the proceeds of the
sale of the Securities of such Series will be
deposited in the Capitalized Interest Account
and used to fund the excess, if any, of (x)_
the sum of (i) the amount of interest accrued
on the Securities of such Series and (ii) if
specified in the related Prospectus Supplement,
certain fees or expenses during the Pre-Funding
Period such as trustee fees and credit
enhancement fees, over (y)_ the amount of
interest available therefor from the Mortgage
Assets or other assets in the Trust Fund. Any
amounts on deposit in the Capitalized Interest
Account at the end of the Pre-Funding Period
that are not necessary for such purposes will
be distributed to the person specified in the
related Prospectus Supplement.
Description of the
Securities A Series will include either one or more
classes of Certificates or, if Notes are issued
as part of a Series, one or more classes of
Notes and one or more classes of Certificates.
Each Certificate will represent a beneficial
ownership interest in a trust (a "Trust Fund")
created by the Seller pursuant to a Pooling and
Servicing Agreement or a Trust Agreement for
the related Series. Each Note will represent a
debt obligation of a Trust Fund created
pursuant to an Indenture for such Notes. The
Securities of any Series may be issued in one
or more classes as specified in the related
Prospectus Supplement. A Series of Securities
may include one or more classes of senior
Securities (collectively, the "Senior
Securities") which receive certain preferential
treatment specified in the related Prospectus
Supplement with respect to one or more classes
of subordinate Securities (collectively, the
"Subordinated Securities"). Certain Series or
classes of Securities may be covered by U.S.
Government Securities,
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<PAGE>
insurance policies, cash accounts, letters of
credit, financial guaranty insurance policies,
third party guarantees or other forms of credit
enhancement as described herein and in the
related Prospectus Supplement.
One or more classes of Securities of each
Series (i) may be entitled to receive
distributions allocable only to principal, only
to interest or to any combination thereof; (ii)
may be entitled to receive distributions only
of prepayments of principal throughout the
lives of the Securities or during specified
periods; (iii) may be subordinated in the right
to receive distributions of scheduled payments
of principal, prepayments of principal,
interest or any combination thereof to one or
more other classes of Securities of such Series
throughout the lives of the Securities or
during specified periods or may be subordinated
with respect to certain losses or
delinquencies; (iv) may be entitled to receive
such distributions only after the occurrence of
events specified in the related Prospectus
Supplement; (v) may be entitled to receive
distributions in accordance with a schedule or
formula or on the basis of collections from
designated portions of the assets in the
related Trust Fund; (vi) as to Securities
entitled to distributions allocable to
interest, may be entitled to receive interest
at a fixed rate or a rate that is subject to
change from time to time; and (vii) as to
Securities entitled to distributions allocable
to interest, may be entitled to such
distributions only after the occurrence of
events specified in the related Prospectus
Supplement and may accrue interest until such
events occur, in each case as specified in the
related Prospectus Supplement. The timing and
amounts of such distributions may vary among
classes, over time, or otherwise as specified
in the related Prospectus Supplement.
In addition, certain Series may provide for the
issuance of one or more classes of of
exchangeable certificates (each an "ES Class"
or "Exchangeable Security") as provided in the
related Prospectus Supplement. The holders of
such ES Classes will be entitled to exchange
all or a portion of such ES Classes for
proportionate interests in other related
classes of Exchangeable Securities. See
"Exchangeable Securities--General." Further, if
so provided in the related Prospectus
Supplement, one or more classes of Securities
(each, a "Callable Class") may be callable at
the option of one or more other classes of
securities (each, a "Call Class"). A Call Class
and its related Callable Class or Classes will
be issued pursuant to a separate trust
agreement. A Callable Class generally will not
be called unless the market value of the assets
in the trust fund for such Callable Class
exceeds the outstanding principal balance of
such assets. If so provided in the related
Prospectus Supplement, after the issuance of
the Callable Class, there may be a specified
"lock-out period" during which such Securities
could not be called. It is anticipated that
Call Classes generally will be offered only on
a private basis. See "Description of the
Securities--General."
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The related Prospectus Supplement will specify
whether application will be made to list any
Securities on a securities exchange or to quote
the Securities in the automated quotation
system of a registered securities association.
Distributions on the
Securities Distributions on the Securities entitled
thereto will be made monthly, quarterly,
semi-annually or at such other intervals and on
such other Distribution Dates specified in the
related Prospectus Supplement solely out of the
payments received in respect of the assets of
the related Trust Fund or other assets pledged
for the benefit of the Securities as specified
in the related Prospectus Supplement. The
amount allocable to distributions of principal
and interest on any Distribution Date will be
determined as specified in the related
Prospectus Supplement. All distributions will
be made pro rata to Securityholders of the
class entitled thereto or as otherwise
specified in the related Prospectus Supplement,
and the aggregate original principal balance of
the Securities will equal the aggregate
distributions allocable to principal that such
Securities will be entitled to receive. If
specified in the related Prospectus Supplement,
the Securities will have an aggregate original
principal balance equal to or less than the
aggregate unpaid principal balance of the Trust
Assets (plus amounts held in a Pre-Funding
Account) as of a date specified in the
Prospectus Supplement related to the creation
of the Trust Fund (the "Cut-off Date") and will
bear interest in the aggregate at a rate (the
"Interest Rate") equal to the interest rate
borne by the underlying Mortgage Loans, Agency
Securities or Private Mortgage-Backed
Securities, net of the aggregate servicing fees
and any other amounts specified in the related
Prospectus Supplement. If specified in the
related Prospectus Supplement, the aggregate
original principal balance of the Securities
and interest rates on the classes of Securities
will be determined based on the cash flow on
the Trust Assets. The Interest Rate at which
interest will be paid to holders of Securities
entitled thereto may be a fixed rate or a rate
that is subject to change from time to time
from the time and for the periods, in each case
as specified in the related Prospectus
Supplement. Any such rate may be calculated on
a loan-by-loan, weighted average or other
basis, in each case as described in the related
Prospectus Supplement.
Credit Enhancement The assets in a Trust Fund or the Securities of
one or more classes in the related Series may
have the benefit of one or more types of credit
enhancement described in the related Prospectus
Supplement. The protection against losses
afforded by any such credit support will be
limited. Such credit enhancement may include
one or more of the following types:
A. Subordination The rights of the holders of the Subordinated
Securities of a Series
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<PAGE>
to receive distributions with respect to the
assets in the related Trust Fund will be
subordinated to such rights of the holders of
the Senior Securities of the same Series to the
extent described in the related Prospectus
Supplement. This subordination is intended to
enhance the likelihood of regular receipt by
holders of Senior Securities of the full amount
of payments which such holders would be
entitled to receive if there had been no losses
or delinquencies. The protection afforded to
the holders of Senior Securities of a Series by
means of the subordination feature may be
accomplished by (i) the preferential right of
such holders to receive, prior to any
distribution being made in respect of the
related Subordinated Securities, the amounts of
principal and interest due them on each
Distribution Date out of the funds available
for distribution on such date in the related
Securities Account and, to the extent described
in the related Prospectus Supplement, by the
right of such holders to receive future
distributions from the assets in the related
Trust Fund that would otherwise have been
payable to the Subordinated Securityholders;
(ii)_ reducing the ownership interest of
the related Subordinated Securities; (iii)_ a
combination of clauses (i) and (ii) above;
or (iv) as otherwise described in the related
Prospectus Supplement. The protection afforded
to the holders of Senior Securities of a Series
by means of the subordination feature also may
be accomplished by allocating certain types of
losses or delinquencies to the Subordinated
Securities to the extent described in the
related Prospectus Supplement.
If so specified in the related Prospectus
Supplement, the same class of Securities may be
Senior Securities with respect to certain types
of payments or certain types of losses or
delinquencies and Subordinated Securities with
respect to other types of payments or types of
losses or delinquencies. If so specified in the
related Prospectus Supplement, subordination
may apply only in the event of certain types of
losses not covered by other forms of credit
support, such as hazard losses not covered by
standard hazard insurance policies or losses
due to the bankruptcy of the borrower. If
specified in the related Prospectus Supplement,
a reserve fund may be established and
maintained by the deposit therein of
distributions allocable to the holders of
Subordinated Securities until a specified level
is reached. The related Prospectus Supplement
will set forth information concerning the
amount of subordination of a class or classes
of Subordinated Securities in a Series, the
circumstances in which such subordination will
be applicable, the manner, if any, in which the
amount of subordination will decrease over
time, the manner of funding the related reserve
fund, if any, and the conditions under which
amounts in any such reserve fund will be used
to make distributions to holders of Senior
Securities or released from the related Trust
Fund.
B. Reserve Accounts One or more Reserve Accounts may be established
and maintained for each Series. The related
Prospectus Supplement will specify
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whether or not any such Reserve Account will be
included in the corpus of the Trust Fund for
such Series and will also specify the manner of
funding the related Reserve Account and the
conditions under which the amounts in any such
Reserve Account will be used to make
distributions to holders of Securities of a
particular class or released from the related
Trust Fund.
C. Pool Insurance Policy A mortgage pool insurance policy or policies
(the "Pool Insurance Policy") may be obtained
and maintained for each Series pertaining to
Single Family Loans, Cooperative Loans or
Contracts, limited in scope, covering defaults
on the related Single Family Loans, Cooperative
Loans or Contracts in an initial amount equal
to a specified percentage of the aggregate
principal balance of all Single Family Loans,
Cooperative Loans or Contracts included in the
Mortgage Pool as of the Cut-off Date or such
other date as is specified in the related
Prospectus Supplement.
D. Special Hazard Insurance Policy In the case of Single Family Loans,
Cooperative Loans or Contracts, certain
physical risks that are not otherwise insured
against by standard hazard insurance policies
may be covered by a special hazard insurance
policy or policies (the "Special Hazard
Insurance Policy"). Each Special Hazard
Insurance Policy generally will be limited in
scope and will cover losses in an initial
amount equal to the greatest of (i) a specified
percentage of the aggregate principal balance
of the Single Family Loans, Cooperative Loans
or Contracts as of the related Cut-off Date,
(ii) twice the unpaid principal balance as of
the related Cut-off Date of the largest Single
Family Loan, Cooperative Loan or Contract in
the related Mortgage Pool, or (iii) the
aggregate principal balance of Single Family
Loans, Cooperative Loans or Contracts as of the
Cut-off Date secured by property in any single
zip code concentration.
E. Bankruptcy Bond A bankruptcy bond or bonds (the "Bankruptcy
Bond") may be obtained covering certain losses
resulting from action which may be taken by a
bankruptcy court in connection with a Single
Family Loan, Cooperative Loan or Contract. The
level of coverage of each Bankruptcy Bond will
be specified in the related Prospectus
Supplement.
F. FHA Insurance and VA
Guarantee All or a portion of the Mortgage Loans in a
Mortgage Pool may be insured by FHA insurance
and all or a portion of the Single Family Loans
or Contracts in a Mortgage Pool may be
partially guaranteed by the VA.
G. Other Arrangements Other arrangements as described in the related
Prospectus Supplement including, but not
limited to, one or more U.S. Government
Securities, letters of credit, financial
guaranty insurance
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policies or third party guarantees, interest
rate or other swap agreements, caps, collars or
floors, may be used to provide coverage for
certain risks of defaults or losses. These
arrangements may be in addition to or in
substitution for any forms of credit support
described in the Prospectus. Any such
arrangement must be acceptable to each
nationally recognized rating agency that rates
the related Series of Securities (the "Rating
Agency").
H. Cross Support If specified in the related Prospectus
Supplement, separate groups of assets or
separate Trust Funds may be beneficially owned
by separate classes of the related Series of
Securities or separate groups of assets or
separate Trust Funds may be available for the
payment of principal and interest on certain
classes of Securities. In any such case, credit
support may be provided by a cross-support
feature which requires that distributions be
made with respect to certain Securities
relating to one or more asset groups or Trust
Funds out of funds received with respect to
other asset groups or Trust Funds prior to
distributions to other Securities relating to
such other asset groups or Trust Funds or that
losses be allocated in such manner as to
provide such cross-support. If specified in the
related Prospectus Supplement, the coverage
provided by one or more forms of credit support
may apply concurrently to two or more separate
Trust Funds, without priority among such Trust
Funds, until the credit support is exhausted.
If specified in the related Prospectus
Supplement, one or more asset groups or Trust
Funds relating to certain securities could be
initially free of cross-support but later might
become subject to cross-support. If applicable,
the related Prospectus Supplement will identify
the asset groups or Trust Funds to which such
credit support relates and the manner of
determining the amount of the coverage provided
thereby and of the application of such coverage
to the identified asset groups or Trust Funds.
Advances Each Master Servicer and, if applicable, each
mortgage servicing institution that services a
Mortgage Loan in a Mortgage Pool on behalf of a
Master Servicer (a "Sub-Servicer") generally
will be obligated to advance amounts
corresponding to delinquent principal and
interest payments on such Mortgage Loan until
the date on which the related Mortgaged
Property is sold at a foreclosure sale or the
related Mortgage Loan is otherwise liquidated.
Any such obligation to make advances may be
limited to amounts due holders of Senior
Securities of the related Series, to amounts
deemed to be recoverable from late payments or
liquidation proceeds, for specified periods or
any combination thereof, or as otherwise
specified in the related Prospectus Supplement.
See "Description of the Securities-Advances."
Advances will be reimbursable to the extent
described herein and in the related Prospectus
Supplement.
Optional Termination The Seller, a Master Servicer, the holders of
the residual interests in a REMIC, a FASIT or
any other entity specified in the related
Prospectus Supplement may have the option to
effect early
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retirement of a Series of Securities through
the purchase of the Mortgage Assets and other
assets in the related Trust Fund under the
circumstances and in the manner described in
"Administration-Termination; Optional
Termination."
Legal Investment The related Prospectus Supplement for each
Series of Securities will specify which, if
any, of the classes of Securities offered will
constitute "mortgage-related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") and, as such,
will be legal investments for certain types of
institutional investors to the extent provided
in SMMEA, subject, in any case, to any other
regulations which may govern investments by
such institutional investors. See "Legal
Investment."
Institutions whose investment activities are
subject to legal investment laws and
regulations or to review by certain regulatory
authorities may be subject to restrictions on
investment in the Securities. Any such
institution should consult its own legal
advisors in determining whether and to what
extent there may be restrictions on its ability
to invest in the Securities. See "Legal
Investment" herein.
Federal Income Tax
Consequences. The income tax consequences of the purchase,
ownership and disposition of the Securities of
each Series will depend on whether an election
is made to treat the corresponding Trust Fund
(or certain assets of the Trust Fund) as either
a REMIC or a FASIT under the Internal Revenue
Code of 1986, as amended (the "Code"), or
whether the Trust Fund will be treated as
either a grantor trust or a partnership for
federal income tax purposes.
REMIC. If an election is to be made to treat
the Trust Fund for a Series of Securities as a
REMIC for federal income tax purposes, the
related Prospectus Supplement will specify
which class or classes thereof will be
designated as regular interests in the REMIC
("REMIC Regular Securities") and which class of
Certificates will be designated as the residual
interest in the REMIC ("REMIC Residual
Certificates").
For federal income tax purposes, REMIC Regular
Securities generally will be treated as debt
obligations of the Trust Fund with payment
terms equivalent to the terms of such
Securities. Holders of REMIC Regular Securities
will be required to report income with respect
to such Securities under an accrual method,
regardless of their normal tax accounting
method. Original issue discount, if any, on
REMIC Regular Securities will be includible in
the income of the holders thereof as it
accrues, in advance of receipt of the cash
attributable thereto, which rate of accrual
will be determined based on a reasonable
assumed prepayment rate. The REMIC Residual
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Certificates generally will not be treated as
evidences of indebtedness for federal income
tax purposes, but instead, as representing
rights to the taxable income or net loss of the
REMIC.
Each holder of a REMIC Residual Certificate
will be required to take into account
separately its pro rata portion of the REMIC's
taxable income or loss. Certain income of a
REMIC (referred to as "excess inclusions")
generally may not be offset by such a holder's
net operating loss carryovers or other
deductions, and in the case of a tax-exempt
holder of a REMIC Residual Certificate will be
treated as "unrelated business taxable income".
In certain situations, particularly in the
early years of a REMIC, holders of a REMIC
Residual Certificate may have taxable income,
and possibly tax liabilities with respect to
such income, in excess of cash distributed to
them. Certain "disqualified organizations (as
defined under "Federal Income Tax
Consequences--Transfers of REMIC Residual
Certificates--Restrictions on Transfer; Holding
by Pass-Through Entities") are prohibited from
acquiring or holding any beneficial interest in
the REMIC Residual Certificates. In certain
cases, a transfer of a REMIC Residual
Certificate will not be effective for federal
income tax purposes.
FASIT. If an election is to be made to treat
the Trust Fund for a Series of Securities as a
FASIT for federal income tax purposes, the
related Prospectus Supplement will specify
which class or classes thereof will be
designated as regular interests in the FASIT
("FASIT Regular Securities"), which class or
classes of FASIT Regular Securities constitute
"High-Yield Interests" and which class of
Certificates will be designated as the
ownership interest in the FASIT ("FASIT
Ownership Certificate").
For federal income tax purposes, FASIT Regular
Securities generally will be treated as debt
obligations of the Trust Fund with payment
terms equivalent to the terms of such
Securities. Holders of FASIT Regular Securities
will be required to report income with respect
to such Securities under an accrual method,
regardless of their normal tax accounting
method. Original issue discount, if any, on
FASIT Regular Securities will be includible in
the income of the holders thereof as it
accrues, in advance of receipt of the cash
attributable thereto, which rate of accrual
will be determined based on a reasonable
assumed prepayment rate. Holders of High-Yield
Interests may not use net operating losses to
offset any non-FASIT income derived from the
High-Yield Interest, and in certain cases, a
transfer of a High-Yield Interest will not be
recognized for federal income tax purposes.
The FASIT Ownership Certificate generally will
not be treated as an evidence of indebtedness
for federal income tax purposes, but instead,
as representing rights to the taxable income or
net loss of
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<PAGE>
the FASIT. The holder of the FASIT Ownership
Certificate will be required to take into
account all of the income or loss of the FASIT
under an accrual method regardless of its
normal accounting method. In certain
situations, particularly in the early years of
a FASIT, the holder of the FASIT Ownership
Certificate may have taxable income, and
possibly tax liabilities with respect to such
income, in excess of cash distributed to it.
Certain "disqualified holders" are prohibited
from acquiring or holding the FASIT Ownership
Certificate.
GRANTOR TRUST. If a determination is to be made
to treat the Trust Fund for a Series of
Certificates as a grantor trust, the Trust Fund
will be classified as a grantor trust for
federal income tax purposes and not as an
association or taxable mortgage pool taxable as
a corporation. Holders of Certificates issued
by a grantor trust ("Non-Electing Securities")
will be treated for such purposes, subject to
the possible application of the stripped bond
rules, as owners of undivided interests in the
related Trust Assets and generally will be
required to report as income their pro rata
share of the entire gross income (including
amounts paid as reasonable servicing
compensation) from the Trust Assets and will be
entitled, subject to certain limitations, to
deduct their pro rata share of expenses of the
Trust Fund.
PARTNERSHIPS. If a Prospectus Supplement for a
Series indicates that a Trust Fund is to be
treated as a partnership, assuming that all the
provisions of the applicable Agreement are
complied with, the Trust Fund will not be
treated as an association, taxable mortgage
pool, or a publicly traded partnership taxable
as a corporation. If a Prospectus Supplement
indicates that one or more classes of
Securities of the related Series are to be
treated as indebtedness for federal income tax
purposes, assuming that all of the provisions
of the applicable Agreement are complied with,
the Securities so designated will be considered
indebtedness for federal income tax purposes.
Each holder of a Note, by the acceptance of a
Note of a given Series, will agree to treat
such Note as indebtedness, and each holder of a
Certificate, by the acceptance of a Certificate
of a given Series, will agree to treat the
related Trust Fund for federal tax purposes as
a partnership in which such holder is a partner
if there is more than one holder of
Certificates for federal income tax purposes,
or to disregard the Trust Fund as an entity
separate from the holder of Certificates if
there is only one such holder for federal
income tax purposes. Alternative
characterizations of such Trust Fund and such
Securities are possible, but would not result
in materially adverse tax consequences to
holders of Securities. See "Federal Income Tax
Consequences."
Generally, gain or loss will be recognized on a
sale of Securities in the amount equal to the
difference between the amount realized and the
seller's tax basis in the Securities sold. The
material federal
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income tax consequences for investors
associated with the purchase, ownership and
disposition of the Securities are set forth
herein under "Federal Income Tax Consequences."
The material federal income tax consequences
for investors associated with the purchase,
ownership and disposition of Securities of any
particular Series will be set forth under the
heading "Federal Income Tax Consequences" in
the related Prospectus Supplement. See "Federal
Income Tax Consequences."
ERISA Considerations. A fiduciary of any employee benefit plan or
other retirement plan or arrangement subject to
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and/or Section 4975
of the Code should carefully review with its
legal advisors whether the purchase, holding or
disposition of Securities could give rise to a
prohibited transaction under ERISA or the Code
or subject the assets of the Trust Fund to the
fiduciary investment standards of ERISA. See
"ERISA Considerations."
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RISK FACTORS
LIMITED LIQUIDITY. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Securities of such
Series. The market value of the Securities will fluctuate with changes in
prevailing rates of interest. Consequently, the sale of Securities in any market
that may develop may be at a discount from the Securities' par value or purchase
price. Owners of Securities generally have no right to request redemption of
Securities, and the Securities are subject to redemption only under the limited
circumstances, if any, described in the related Prospectus Supplement. It is not
intended to list any class of Securities on any securities exchange or to quote
the Securities in the automated quotation system of a regulated securities
association. However, if such listing or such quotation is intended with respect
to some or all of the Securities in a Series, relevant information will be
included in the related Prospectus Supplement. If the Securities are not so
listed or quoted, investors may experience more limited liquidity. The
Prospectus Supplement for a Series may indicate that an underwriter specified
therein intends to establish a secondary market in some or all of the Securities
of such Series. However, no underwriter will be obligated to do so.
BOOK-ENTRY SECURITIES. If Securities are issued in a book-entry form,
investors may experience delay in receipt of their payments and/or reports since
payments and reports will initially be made to the book-entry depository or its
nominee. In addition, the issuance of Securities in book-entry form may reduce
the liquidity of such Securities in the secondary trading market since some
investors may be unwilling to purchase Securities for which they cannot receive
physical certificates. See "The Securities--Book-Entry Registration".
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS. The yield to maturity
and weighted average life of the Securities of each series will depend on the
rate and timing of principal payments (including prepayments, liquidations due
to defaults, and repurchases due to conversion of adjustable rate loans to fixed
interest rate loans or breaches of representations and warranties) on the
Mortgage Loans and the price paid by Securityholders. Such yield may be
adversely affected by a higher or lower than anticipated rate of prepayments or
level of losses on the related Mortgage Loans. The yield to maturity on
Securities purchased at a discount to their principal amounts (including any
principal only Securities) will be lower than anticipated if prepayments occur
at a slower than anticipated rate and the yield to maturity on Securities
purchased at a premium to their principal amounts or on interest only
Securities, will be lower than anticipated if prepayments occur at a faster than
anticipated rate. In the case of certain interest only Securities, a faster rate
of prepayments may result in a loss of investment. In addition, the yield to
maturity on certain other types of classes of Securities, including accrual
Securities, Securities with a pass-through rate which fluctuates inversely with
an index or certain other classes in a series including more than one class of
Securities, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Securities. Prepayments are
influenced by a number of factors, including prevailing mortgage market interest
rates, local and regional economic conditions and homeowner mobility. Any losses
allocated to the Securities will have a negative effect on the yield to maturity
of such Securities. See "Yield and Prepayment Considerations" herein.
OPTIONAL TERMINATION MAY ADVERSELY AFFECT YIELD. As described under
"Administration--Termination; Optional Termination", a Trust Fund may be subject
to optional termination. Any such optional termination may adversely affect the
yield to maturity on the related Series of Securities. In addition, if the
Mortgage Assets include properties which have been acquired by the related Trust
Fund through foreclosure or deed-in-lieu of foreclosure, the purchase price paid
to exercise the optional termination may be less than the outstanding principal
balances of the related Series of Securities. In such event, the Holders of one
or more classes of Securities may incur a loss.
SUBORDINATION OF THE SUBORDINATED SECURITIES; EFFECT OF LOSSES ON THE
MORTGAGE ASSETS. The rights of Holders of Subordinated Securities to receive
distributions to which they would otherwise be entitled with respect to the
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Mortgage Assets will be subordinated to the rights of the Holders of the Senior
Securities to the extent described in the related Prospectus Supplement. As a
result of the foregoing, investors must be prepared to bear the risk that they
may be subject to delays in payment and may not recover their initial
investments in the Subordinated Securities.
The yields on the Subordinated Securities may be extremely sensitive
to the loss experience of the Mortgage Assets and the timing of any such losses.
If the actual rate and amount of losses experienced by the Mortgage Assets
exceed the rate and amount of such losses assumed by an investor, the yields to
maturity on the Subordinated Securities may be lower than anticipated.
LIMITED OBLIGATIONS. The Securities will not represent an interest in
or obligation of the Seller, a Master Servicer or any of their affiliates. The
only obligations of the foregoing entities with respect to the Securities or any
Mortgage Assets will be the obligations (if any) of the Seller and a Master
Servicer pursuant to certain limited representations and warranties made with
respect to the Mortgage Assets, a Master Servicer's servicing obligations under
the related Pooling and Servicing Agreement (including its limited obligation to
make certain advances) and pursuant to the terms of any Mortgage Assets, and, if
and to the extent expressly described in the related Prospectus Supplement,
certain limited obligations of a Master Servicer in connection with a swap,
yield supplement agreement or purchase obligation. If an affiliate of the Seller
has originated any Mortgage Loan, such affiliate will only have an obligation
with respect to the representations and warranties of the Seller, as described
herein. Neither the Securities nor the underlying Mortgage Assets will be
guaranteed or insured by any governmental agency or instrumentality, or by the
Seller, a Master Servicer or any of their affiliates. Proceeds of the assets
included in the related Trust Fund (including the Mortgage Assets and any form
of credit enhancement) will be the sole source of payments on the Securities,
and there will be no recourse to the Seller, a Master Servicer or any other
entity in the event that such proceeds are insufficient or otherwise unavailable
to make all payments provided for under the Securities.
DECLINING REAL ESTATE MARKET; GEOGRAPHICAL CONCENTRATION. If the
residential real estate market in general or a regional or local area where real
property securing Mortgage Loans constituting or underlying the Mortgage Assets
for a Trust Fund are concentrated should experience an overall decline in
property values, or a significant downturn in economic conditions, rates of
delinquencies, foreclosures and losses could be higher than those then generally
experienced in the mortgage lending industry. See "The Trust Fund--The Mortgage
Loans-General".
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. Credit
enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of the related Series, a Pool Insurance Policy,
a Special Hazard Insurance Policy, Bankruptcy Bond, FHA Insurance, VA
Guarantees, Reserve Accounts, other insurance, guaranties and similar
instruments and agreements, or any combination thereof. See "Credit
Enchancement". Regardless of the credit enhancement provided, the coverage
provided may be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. Furthermore, such credit
enhancement may provide only very limited coverage as to certain types of losses
and may provide no coverage as to certain other types of losses. The Trustee may
be permitted to reduce, terminate or substitute all or a portion of the credit
enhancement for any Series of Securities, if the applicable rating agencies
indicate that the then-current rating thereof will not be adversely affected.
RISKS RELATED TO FINANCIAL INSTRUMENTS. A Trust Fund may include one
or more financial instruments such as interest rate or other swap agreements and
interest rate cap or floor agreements. See "Credit Enchancement". These
financial instruments provide protection against certain types of risks or
provide certain cashflow characteristics for one or more classes of a Series.
The protection or benefit to be provided by any such financial instrument will
be dependent on, among other things, the performance of the provider of such
financial instrument. If such provider were to be unable or unwilling to perform
its obligations under the related financial instrument, the Securityholders of
the applicable class or classes would bear the effects of such non-performance,
including the possibility of a material adverse effect on the yield to maturity,
the market price and liquidity for such class or Series. Even if the provider of
a financial instrument
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performs its obligations thereunder, a withdrawal or reduction in a credit
rating assigned to such provider may adversely affect the market price and
liquidity of the applicable class or classes of Securities. To the extent that a
financial instrument is intended to provide an approximate or partial hedge for
certain risks or cashflow characteristics, the Securityholders of the applicable
class or classes will bear the risk that such an imperfect hedge may result in a
material adverse effect on the yield to maturity, the market price and liquidity
for such class or classes.
ENVIRONMENTAL CONSIDERATIONS. Real property pledged as security for a
mortgage loan may be subject to certain environmental risks. There are many
federal and state environmental laws concerning hazardous waste and other
substances that may affect the property securing Mortgage Assets. Under certain
federal and state laws, a person who takes a deed in lieu of foreclosure or
purchases a mortgaged property in foreclosure may become liable for remedial
action to remove hazardous waste and other substances from such property. It is
possible that such costs could become a liability of the Trust Fund and reduce
the amounts otherwise distributable to the Securityholders if a Mortgaged
Property securing a Mortgage Loan constituting part of or underlying the
Mortgage Assets became the property of the Trust Fund in certain circumstances
and if the costs of such remediation were incurred. Moreover, certain states by
statute impose a priority lien for any such remediation costs incurred by such
state on such property. In such states, even prior recorded liens are
subordinated to such state liens. In these states, the security interest of the
Trustee in a property that is subject to such a state lien could be adversely
affected. See "Legal Aspects of the Mortgage Loans--Environmental
Considerations".
SECURITY INTERESTS IN MANUFACTURED HOMES MAY BE LOST. The method of
perfecting a security interest in a Manufactured Home depends on the laws of the
state in which the Manufactured Home is located and, in some cases, the facts
and circumstances surrounding the location of the Manufactured Home (for
example, whether the Manufactured Home has become permanently affixed to its
site). If a Manufactured Home is moved from one state to another, steps must be
taken to re-perfect the security interest under the laws of the new state.
Generally the Sub-Servicer would become aware of the need to take such steps
following notice due to the notation of the Lender's lien on the applicable
certificate of title. However, if through fraud or administrative error such
steps were not taken in a timely manner, the perfected status of the lien on the
related Manufactured Home could be lost.
Similarly, if a Manufactured Home were to become or be deemed to be
permanently affixed to its site, additional steps may have to be taken to
maintain the priority and/or perfection of the security interest granted by the
related Contract. Although the borrower will have agreed not to permit the
Manufactured Homes to become or to be deemed to be permanently affixed to the
site, there can be no assurance that the borrower will comply with this
agreement. In such cases, the Sub-Servicer would be unlikely to obtain knowledge
thereof which would permit the Sub-Servicer to take additional steps, if any,
required under applicable law to maintain the priority and/or perfection of the
lien on the Manufactured Home.
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THE TRUST FUND
A Trust Fund for a Series of Securities will include the Mortgage
Assets consisting of (A) a Mortgage Pool1* comprised of (i)_ Single Family
Loans, (ii)_ Multifamily Loans, (iii) Cooperative Loans or (iv)_ Contracts, (B)_
Agency Securities, or (C)_ Private Mortgage-Backed Securities, in each case, as
specified in the related Prospectus Supplement, together with payments in
respect of such Mortgage Assets and certain other accounts, obligations or
agreements, such as U.S. Government Securities, in each case as specified in the
related Prospectus Supplement.
The Securities will be entitled to payment only from the assets of the
related Trust Fund and any other assets specified in the related Prospectus
Supplement, but will not be entitled to payments in respect of the assets of any
other trust fund established by the Seller. If specified in the related
Prospectus Supplement, certain Securities in a Series will evidence the entire
beneficial ownership interest in, or the debt obligations of, a trust fund, and,
in turn the assets of such trust fund will consist of a beneficial ownership
interest in another trust fund which will contain the underlying trust assets,
as would be the case, for example, in a Series that includes Exchangeable
Secuirites. For a further discussion of such a structure, see "Exchangeable
Securities--General".
The Mortgage Assets will be acquired by the Seller, either directly or
through affiliates, from Lenders and conveyed by the Seller to the related Trust
Fund. The Lenders may have originated the Mortgage Assets or acquired the
Mortgage Assets from the originators or other entities. See "The Mortgage
Loans--Underwriting Standards."
As used herein, "Agreement" means, (i) with respect to the
Certificates of a Series, the Pooling and Servicing Agreement or the Trust
Agreement and (ii) with respect to the Notes of a Series, the Indenture or the
Master Servicing Agreement, as the context requires.
The following is a brief description of the Trust Assets expected to
be included in a Trust Fund. If specific information respecting the Trust Assets
is not known at the time the related Series of Securities initially is offered,
more general information of the nature described below will be provided in the
related Prospectus Supplement, and specific information will be set forth in a
report on Form_8-K to be filed with the Commission within fifteen days
after the initial issuance of such Securities (the "Detailed Description"). A
copy of the Pooling and Servicing Agreement or the Trust Agreement and/or the
Indenture, as applicable, with respect to each Series of Securities will be
attached to the Form 8-K and will be available for inspection at the corporate
trust office of the Trustee specified in the related Prospectus Supplement. A
schedule of the Mortgage Assets relating to such Series will be attached to the
Agreement delivered to the Trustee upon delivery of the Securities.
THE MORTGAGE LOANS-GENERAL
The real property and Manufactured Homes, as the case may be, which
secure repayment of the Mortgage Loans (the "Mortgaged Properties") may be
located in any one of the fifty states or the District of Columbia, Guam,
__________________
1
* Whenever the terms "Mortgage Pool" and "Securities" are used in this
Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Mortgage Pool and the Securities
representing certain undivided interests in, or the debt obligations of, a
single Trust Fund consisting primarily of the Mortgage Loans in such
Mortgage Pool. Similarly, the term "Interest Rate" will refer to the
Interest Rate borne by the Securities of one specific Series and the term
"Trust Fund" will refer to one specific Trust Fund.
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Puerto Rico or any other territory of the United States. Certain Mortgage Loans
may be conventional loans (I.E., loans that are not insured or guaranteed by any
governmental agency), insured by the FHA or partially guaranteed by the VA, as
specified in the related Prospectus Supplement and described below. Mortgage
Loans with certain Loan-to-Value Ratios (as defined herein) or certain principal
balances may be covered wholly or partially by primary mortgage guaranty
insurance policies (each, a "Primary Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the related Prospectus
Supplement.
Mortgage Loans in a Mortgage Pool will provide for payments to be made
monthly or bi-weekly or as specified in the related Prospectus Supplement. All
of the monthly-pay Mortgage Loans in a Mortgage Pool will have payments due on
the first day of each month or such other day as is specified in the related
Prospectus Supplement. The payment terms of the Mortgage Loans to be included in
a Trust Fund will be described in the related Prospectus Supplement and may
include any of the following features or combination thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an index, a rate that is
fixed for period of time or under certain circumstances and is
followed by an adjustable rate, a rate that otherwise varies from time
to time, or a rate that is convertible from an adjustable rate to a
fixed rate. Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the
principal of a Mortgage Loan for such periods and under such
circumstances as may be specified in the related Prospectus
Supplement. Mortgage Loans may provide for the payment of interest at
a rate lower than the Mortgage Rate for a period of time or for the
life of the Mortgage Loan, and the amount of any difference may be
contributed from funds supplied by the seller of the Mortgaged
Property or another source or may be treated as accrued interest added
to the principal of the Mortgage Loan.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an assumed amortization schedule that is significantly
longer than the original term to maturity or on an interest rate that
is different from the interest rate on the Mortgage Loan or may not be
amortized during all or a portion of the original term. Payment of all
or a substantial portion of the principal may be due on maturity
("balloon" payments). Principal may include interest that has been
deferred and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the Mortgage Loan, may increase over a specified period of
time or may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments. Certain Mortgage Loans, sometimes called graduated payment
mortgage loans, may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred
payment of a portion of the interest due monthly during such period,
and recoup the deferred interest through negative amortization whereby
the difference between the scheduled payment of interest and the
amount of interest actually accrued is added monthly to the
outstanding principal balance. Other Mortgage Loans, sometimes
referred to as growing equity mortgage loans, may provide for periodic
scheduled payment increases for a specified period with the full
amount of such increases being applied to principal. Other Mortgage
Loans, sometimes referred to as reverse mortgages, may provide for
monthly payments to the borrowers with interest and principal payable
when the borrowers move or die. Reverse mortgages typically are made
to older persons who have substantial equity in their homes.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Mortgage Loan or may decline
over time, and may be prohibited for the life of the Mortgage Loan or
for certain periods ("lockout periods"). Certain Mortgage Loans may
permit prepayments after expiration of the
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applicable lockout period and may require the payment of a prepayment
fee in connection with any such subsequent prepayment. Other Mortgage
Loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The Mortgage Loans
may include due-on-sale clauses which permit the mortgagee to demand
payment of the entire Mortgage Loan in connection with the sale or
certain transfers of the related Mortgaged Property. Other Mortgage
Loans may be assumable by persons meeting the then applicable
underwriting standards of the Lender.
Each Prospectus Supplement will contain information, as of the date of
such Prospectus Supplement and to the extent then specifically known to the
Seller, with respect to the Mortgage Loans contained in the related Mortgage
Pool, including, generally (i) the aggregate outstanding principal balance and
the average outstanding principal balance of the Mortgage Loans as of the
applicable Cut-off Date, (ii) the type of property securing the Mortgage Loans
(E.G., one- to four-family houses, vacation and second homes, Manufactured
Homes, multifamily apartments or other real property), (iii) the original terms
to maturity of the Mortgage Loans, (iv) the largest original principal balance
and the smallest original principal balance of any of the Mortgage Loans, (v)
the earliest origination date and latest maturity date of any of the Mortgage
Loans, (vi) the aggregate principal balance of Mortgage Loans having
Loan-to-Value Ratios at origination exceeding 80%, (vii) the Mortgage Rates or
APR's or range of Mortgage Rates or APR's borne by the Mortgage Loans, and
(viii) the geographical distribution of the Mortgage Loans on a state-by-state
basis. If specific information respecting the Mortgage Loans is not known to the
Seller at the time the related Securities are initially offered, more general
information of the nature described above will be provided in the related
Prospectus Supplement and specific information will be set forth in the Detailed
Description.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is the
ratio, expressed as a percentage, of the then outstanding principal balance of
the Mortgage Loan to the Collateral Value of the related Mortgaged Property. The
"Collateral Value" of a Mortgaged Property, other than with respect to Contracts
and certain Mortgage Loans the proceeds of which were used to refinance an
existing mortgage loan (each, a "Refinance Loan"), generally is the lesser of
(a) the appraised value determined in an appraisal obtained by the originator at
origination of such Mortgage Loan and (b) the sales price for such property. In
the case of Refinance Loans, the Collateral Value of the related Mortgaged
Property generally is the appraised value thereof determined in an appraisal
obtained at the time of refinancing. For purposes of calculating the
Loan-to-Value Ratio of a Contract relating to a new Manufactured Home, the
Collateral Value generally is no greater than the sum of a fixed percentage of
the list price of the unit actually billed by the manufacturer to the dealer
(exclusive of freight to the dealer site) including "accessories" identified in
the invoice (the "Manufacturer's Invoice Price"), plus the actual cost of any
accessories purchased from the dealer, a delivery and set-up allowance,
depending on the size of the unit, and the cost of state and local taxes, filing
fees and up to three years prepaid hazard insurance premiums. The Collateral
Value of a used Manufactured Home generally is the least of the sales price,
appraised value, and National Automobile Dealer's Association book value plus
prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the residential real estate market should experience
an overall decline in property values such that the outstanding principal
balances of the Mortgage Loans, and any secondary financing on the Mortgaged
Properties, in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Mortgage Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to any Mortgage Pool. In the case of
Multifamily Loans, such other factors could include excessive building resulting
in an oversupply of rental housing stock or a decrease in employment reducing
the demand for rental units in an area; federal, state or local regulations and
controls affecting rents; prices of goods and energy; environmental
restrictions; increasing labor and material costs; and the relative
attractiveness to tenants of the Mortgaged Properties.
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To the extent that such losses are not covered by credit enhancements, such
losses will be borne, at least in part, by the holders of the Securities of the
related Series.
The Seller will cause the Mortgage Loans comprising each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Pooling and Servicing Agreement or, if the Series includes Notes, pursuant to a
Master Servicing Agreement among the Seller, the Master Servicer and the related
Trust Fund (the "Master Servicing Agreement") and will receive a fee for such
services. See "The Mortgage Loans" and "Administration". With respect to
Mortgage Loans serviced by a Master Servicer through a Sub-Servicer, the Master
Servicer will remain liable for its servicing obligations under the applicable
Agreement, as if the Master Servicer alone were servicing such Mortgage Loans.
In general, the Seller with respect to a Series of Securities will
obtain certain representations and warranties from the Lenders or other third
parties and will assign its rights with respect to such representations and
warranties to the Trustee for such Series of Securities. The Seller will have
obligations with respect to a Series only to the extent specified in the related
Prospectus Supplement. See "Administration-Assignment of Mortgage Assets." The
obligations of each Master Servicer with respect to the Mortgage Loans will
consist principally of its contractual servicing obligations under the related
Agreement (including its obligation to enforce the obligations of the
Sub-Servicers, Lenders or other third parties as more fully described herein
under "The Mortgage Loans--Representations by Lenders; Repurchases" and
"Administration--Sub-Servicing by Lenders," "--Assignment of Mortgage Assets")
and its obligation to make certain cash advances in the event of delinquencies
in payments on or with respect to the Mortgage Loans in the amounts described
herein under "Description of the Securities-Advances." The obligations of a
Master Servicer to make advances may be subject to limitations, to the extent
provided herein and in the related Prospectus Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
Single Family Loans generally will consist of mortgage loans, deeds of
trust or participation or other beneficial interests therein, secured by liens
on one- to four-family residential properties. The Single Family Loans also may
include loans or participations therein secured by mortgages or deeds of trust
on condominium units in condominium buildings together with such condominium
unit's appurtenant interest in the common elements of the condominium building.
Cooperative Loans generally will be secured by security interests in or similar
liens on stock, shares or membership certificates issued by Cooperatives and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in such Cooperatives' buildings. Single Family
Loans and Cooperative Loans may be conventional loans (I.E., loans that are not
insured or guaranteed by any governmental agency), insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Single Family Loans and Cooperative Loans will all have individual
principal balances at origination of not less than $25,000 and not more than
$1,000,000, and original terms to stated maturity of 15 to 40 years or such
other individual principal balances at origination and/or original terms to
stated maturity as are specified in the related Prospectus Supplement.
The Mortgaged Properties relating to Single Family Loans will consist
of detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, and certain other dwelling units. Such
Mortgaged Properties may include vacation and second homes, investment
properties and leasehold interests. In the case of leasehold interests, the term
of the leasehold generally will exceed the scheduled maturity of the Mortgage
Loan by at least five years. Certain Mortgage Loans may be originated or
acquired in connection with employee relocation programs.
MULTIFAMILY LOANS
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Multifamily Loans will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by liens on rental
apartment buildings or projects containing five or more residential units. Such
loans may be conventional loans or FHA-insured loans, as specified in the
related Prospectus Supplement. Multifamily Loans generally will have original
terms to stated maturity of not more than 40 years.
Mortgaged Properties which secure Multifamily Loans may include
high-rise, mid-rise and garden apartments. Certain of the Multifamily Loans may
be secured by apartment buildings owned by Cooperatives. The Cooperative owns
all the apartment units in the building and all common areas. The Cooperative is
owned by tenant-stockholders who, through ownership of stock, shares or
membership certificates in the corporation, receive proprietary leases or
occupancy agreements which confer exclusive rights to occupy specific apartments
or units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its mortgage loan, real property taxes,
maintenance expenses and other capital or ordinary expenses. Those payments are
in addition to any payments of principal and interest the tenant-stockholder
must make on any loans to the tenant-stockholder secured by its shares in the
Cooperative. The Cooperative will be directly responsible for building
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. A Cooperative's ability to meet debt service obligations on
a Multifamily Loan, as well as all other operating expenses, will be dependent
in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial areas
the Cooperative might control. Unanticipated expenditures may in some cases have
to be paid by special assessments on the tenant-stockholders.
CONTRACTS
The Contracts will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Each Contract generally will be fully amortizing and will bear
interest at its APR. Contracts will have individual principal balances at
origination of not less than $10,000 and not more than $1,000,000 and original
terms to stated maturity of 5 to 40 years, or such other individual principal
balances at origination and/or original terms to stated maturity as are
specified in the related Prospectus Supplement.
The "Manufactured Homes" securing the Contracts generally will consist
of manufactured homes within the meaning of 42 United States Code, Section
5402(6), which defines a "manufactured home" as "a structure, transportable in
one or more sections, which in the traveling mode, is eight body feet or more in
width or forty body feet or more in length, or, when erected on site, is three
hundred twenty or more square feet, and which is built on a permanent chassis
and designed to be used as a dwelling with or without a permanent foundation
when connected to the required utilities, and includes the plumbing, heating,
air conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of [this]
paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter."
The related Prospectus Supplement will specify for the Contracts
contained in the related Trust Fund among other things, the date of origination
of the Contracts; the APRs on the Contracts; the Contract Loan-to-Value Ratios;
the minimum and maximum outstanding principal balances as of the Cut-off Date
and the average outstanding principal balance; the outstanding principal
balances of the Contracts included in the related Trust Fund, and the original
maturities of the Contracts and the last maturity date of any Contract.
AGENCY SECURITIES
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GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GNMA is a wholly-owned
corporate instrumentality of the United States with the United States Department
of Housing and Urban Development. Section 306(g) of Title II of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of mortgage loans insured by FHA under the
Housing Act, or Title V of the Housing Act of 1949 ("FHA Loans"), or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or Chapter 37 of Title 38, United States Code ("VA Loans").
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury in an amount which is at
any time sufficient to enable GNMA, with no limitations as to amount, to perform
its obligations under its guarantee.
GNMA CERTIFICATES. Each GNMA Certificate held in a Trust Fund (which
may be issued under either the GNMA I Program or the GNMA II Program) will be a
"fully modified pass-through" mortgaged-backed certificate issued and serviced
by a mortgage banking company or other financial concern ("GNMA Issuer")
approved by GNMA or approved by Fannie Mae as a seller-servicer of FHA Loans
and/or VA Loans. The mortgage loans underlying the GNMA Certificates will
consist of FHA Loans and/or VA Loans. Each such mortgage loan is secured by a
one- to four-family residential property or a manufactured home. GNMA will
approve the issuance of each such GNMA Certificate in accordance with a guaranty
agreement (a "Guaranty Agreement") between GNMA and the GNMA Issuer. Pursuant to
its Guaranty Agreement, a GNMA Issuer will be required to advance its own funds
in order to make timely payments of all amounts due on each such GNMA
Certificate, even if the payments received by the GNMA Issuer on the FHA Loans
or VA Loans underlying each such GNMA Certificate are less than the amounts due
on each such GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 30 years (but may have original maturities of
substantially less than 30 years). Each such GNMA Certificate will be based on
and backed by a pool of FHA Loans or VA Loans secured by one- to four-family
residential properties or manufactured homes and will provide for the payment by
or on behalf of the GNMA Issuer to the registered holder of such GNMA
Certificate of scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loan or VA Loan
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate
as it becomes due, it must promptly notify GNMA and request GNMA to make such
payment. Upon notification and request, GNMA will make such payments directly to
the registered holder of such GNMA Certificate. In the event no payment is made
by a GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make
such payment, the holder of such GNMA Certificate will have recourse only
against GNMA to obtain such payment. The Trustee or its nominee, as registered
holder of the GNMA Certificates held in a Trust Fund, will have the right to
proceed directly against GNMA under the terms of the Guaranty Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA I Certificate must
have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on such GNMA
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I Certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying such GNMA I Certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular GNMA II Certificate may have
per annum interest rates that vary from each other by up to one percentage
point. The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each GNMA Certificate held in
a Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or Buydown Loans. No statistics comparable
to the FHA's prepayment experience on level payment, non-buydown loans are
available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Certificates may be held in book-entry form.
If specified in a related Prospectus Supplement, GNMA Certificates may
be backed by multifamily mortgage loans having the characteristics specified in
such Prospectus Supplement.
The GNMA Certificates included a Trust Fund, and the related
underlying mortgage loans, may have characteristics and terms different from
those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. Fannie Mae is a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act (the "Charter Act"). Fannie
Mae was originally established in 1938 as a United States government agency to
provide supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
Fannie Mae provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders, thereby replenishing their funds for
additional lending. Fannie Mae acquires funds to purchase mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding the total amount of funds
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available for housing. Operating nationwide, Fannie Mae helps to redistribute
mortgage funds from capital-surplus to capital-short areas.
FANNIE MAE CERTIFICATES. Fannie Mae Certificates are Guaranteed
Mortgage Pass-Through Certificates representing fractional undivided interests
in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan must meet
the applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae Certificates held by a Trust Fund
will consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae Certificate are expected to be between either 8 to
15 years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a Fannie Mae Certificate may have annual
interest rates that vary by as much as two percentage points from each other.
The rate of interest payable on a Fannie Mae Certificate is equal to the lowest
interest rate of any mortgage loan in the related pool, less a specified minimum
annual percentage representing servicing compensation and Fannie Mae's guaranty
fee. Under a regular servicing option (pursuant to which the mortgagee or other
servicers assumes the entire risk of foreclosure losses), the annual interest
rates on the mortgage loans underlying a Fannie Mae Certificate will be between
50 basis points and 250 basis points greater than in its annual pass-through
rate and under a special servicing option (pursuant to which Fannie Mae assumes
the entire risk for foreclosure losses), the annual interest rates on the
mortgage loans underlying a Fannie Mae Certificate will generally be between 55
basis points and 255 basis points greater than the annual Fannie Mae Certificate
pass-through rate. If specified in the related Prospectus Supplement, Fannie Mae
Certificates may be backed by adjustable rate mortgages.
Fannie Mae guarantees to each registered holder of a Fannie Mae
Certificate that it will distribute amounts representing such holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by such Fannie Mae Certificate on the
underlying mortgage loans, whether or not received, and such holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not such principal amount is
actually recovered. The obligations of Fannie Mae under its guarantees are
obligations solely of Fannie Mae and are not backed by, nor entitled to, the
full faith and credit of the United States. Although the Secretary of the
Treasury of the United States has discretionary authority to lend Fannie Mae up
to $2.25 billion outstanding at any time, neither the United States nor any
agency thereof is obligated to finance Fannie Mae's operations or to assist
Fannie Mae in any other manner. If Fannie Mae were unable to satisfy its
obligations, distributions to holders of Fannie Mae Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of Fannie Mae Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Fannie Mae Certificates evidencing interests in pools of mortgage
loans formed on or after May 1, 1985 (other than Fannie Mae Certificates backed
by pools containing graduated payment mortgage loans or mortgage loans secured
by multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each Fannie Mae Certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie Mae
Certificate is entered in the books of the Federal Reserve Banks (or registered
on the Fannie Mae Certificate register in the case of fully registered Fannie
Mae Certificates) as of the close of business on the last day of the preceding
month. With respect to Fannie Mae Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
Fannie Mae Certificates, distributions thereon will be made by check.
The Fannie Mae Certificates included in a Trust Fund, and the related
underlying mortgage loans, may have
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characteristics and terms different from those described above. Any such
different characteristics and terms will be described in the related Prospectus
Supplement.
FREDDIE MAC. Freddie Mac is a publicly-held United States
government-sponsored enterprise created pursuant to the Federal Home Loan
Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). Freddie Mac was established primarily for the
purpose of increasing the availability of mortgage credit for the financing of
urgently needed housing. It seeks to provide an enhanced degree of liquidity for
residential mortgage investments primarily by assisting in the development of
secondary markets for conventional mortgages. The principal activity of Freddie
Mac currently consists of the purchase of first lien conventional mortgage loans
or participation interests in such mortgage loans and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily Freddie Mac Certificates. Freddie Mac is confined to purchasing, so
far as practicable, mortgage loans that it deems to be of such quality, type and
class as to meet generally the purchase standards imposed by private
institutional mortgage investors.
FREDDIE MAC CERTIFICATES. Each Freddie Mac Certificate represents an
undivided interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA Loans or VA Loans (a "Freddie Mac Certificate Group").
Freddie Mac Certificates are sold under the terms of a Mortgage Participation
Certificate Agreement. A Freddie Mac Certificate may be issued under either
Freddie Mac's Cash Program or Guarantor Program.
Mortgage loans underlying the Freddie Mac Certificates held by a Trust
Fund will consist of mortgage loans with original terms to maturity of between
10 and 30 years or such other period as provided in the related Prospectus
Supplement. Each such mortgage loan must meet the applicable standards set forth
in the FHLMC Act. A Freddie Mac Certificate group may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and/or participations comprising another Freddie Mac Certificate group. Under
the Guarantor Program, any such Freddie Mac Certificate group may include only
whole loans or participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable Certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans in the Freddie Mac Certificate group represented by such Freddie
Mac Certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac Certificate collection by such holder of all
principal on the underlying mortgage loans, without any offset or deduction, to
the extent of such holder's pro rata share thereof, but does not, except if and
to the extent specified in the Prospectus Supplement for a Series of
Certificates, guarantee the timely payment of scheduled principal. Under Freddie
Mac's Gold PC Program, Freddie Mac guarantees the timely payment of principal
based on the difference between the pool factor, published in the month
preceding the month of distribution and the pool factor published in such month
of distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of
Freddie Mac Certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac Certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each mortgagor, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
Freddie Mac Certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do
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not constitute debts or obligations of the United States or any Federal Home
Loan Bank. The obligations of Freddie Mac under its guarantee are obligations
solely of Freddie Mac and are not backed by, nor entitled to, the full faith and
credit of the United States. If Freddie Mac were unable to satisfy such
obligations, distributions to holders of Freddie Mac Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of Freddie Mac Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of Freddie Mac Certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac Certificateholder's
pro rata share of principal payments on the underlying mortgage loans, interest
at the Freddie Mac pass-through rate and any other sums such as prepayment fees,
within 60 days of the date on which such payments are deemed to have been
received by Freddie Mac.
Under Freddie Mac's cash program, there is no limitation on the amount
by which interest rates on the mortgage loans underlying a Freddie Mac
Certificate may exceed the pass-through rate on the Freddie Mac Certificate.
Under such program, Freddie Mac purchases groups of whole mortgage loans from
sellers at specified percentages of their unpaid principal balances, adjusted
for accrued or prepaid interest, which when applied to the interest rate of the
mortgage loans and participations purchased, results in the yield (expressed as
a percentage) required by Freddie Mac. The required yield, which includes a
minimum servicing fee retained by the servicer, is calculated using the
outstanding principal balance. The range of interest rates on the mortgage loans
and participations in a Freddie Mac Certificate group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a Freddie Mac Certificate group based upon their yield to Freddie Mac rather
than on the interest rate on the underlying mortgage loans. Under Freddie Mac's
Guarantor Program, the pass-through rate on a Freddie Mac Certificate is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of Freddie Mac's management
and guaranty income as agreed upon between the seller and Freddie Mac.
Freddie Mac Certificates duly presented for registration of ownership
on or before the last business day of a month are registered effective as of the
first day of the month. The first remittance to a registered holder of a Freddie
Mac Certificate will be distributed so as to be received normally by the 15th
day of the second month following the month in which the purchaser became a
registered holder of the Freddie Mac Certificates. Thereafter, such remittance
will be distributed monthly to the registered holder so as to be received
normally by the 15th day of each month. The Federal Reserve Bank of New York
maintains book-entry accounts with respect to Freddie Mac Certificates sold by
Freddie Mac on or after January 2, 1985, and makes payments of principal and
interest each month to the registered holders thereof in accordance with such
holders' instructions.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency Securities may consist of
one or more stripped mortgage-backed securities, each as described herein and in
the related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain Freddie Mac, Fannie
Mae, GNMA or other government agency or government-sponsored agency
Certificates. The underlying securities will be held under a trust agreement by
Freddie Mac, Fannie Mae, GNMA or another government agency or
government-sponsored agency, each as trustee, or by another trustee named in the
related Prospectus Supplement. Freddie Mac, Fannie Mae, GNMA or another
government agency or government-sponsored agency generally will guarantee each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security.
OTHER AGENCY SECURITIES. If specified in the related Prospectus
Supplement, a Trust Fund may include other
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mortgage pass-through certificates issued or guaranteed by GNMA, Fannie Mae,
Freddie Mac or other government agencies or government-sponsored agencies. The
characteristics of any such mortgage pass-through certificates will be described
in such related Prospectus Supplement. If so specified, a combination of
different types of Agency Securities may be held in a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private Mortgage-Backed Securities may consist of (a)
mortgage pass-through certificates evidencing a direct or indirect undivided
interest in a pool of Mortgage Loans, or (b) collateralized mortgage obligations
secured by Mortgage Loans. Private Mortgage-Backed Securities will have been
issued pursuant to a pooling and servicing agreement (a "PMBS Agreement"). The
Private Mortgage-Backed Securities in a Trust Fund may include a class or
classes of securities that are callable at the option of another class or
classes of securities. The seller/servicer of the underlying Mortgage Loans will
have entered into the PMBS Agreement with the PMBS Trustee under the PMBS
Agreement. The PMBS Trustee or its agent, or a custodian, will possess the
Mortgage Loans underlying such Private Mortgage-Backed Security. Mortgage Loans
underlying a Private Mortgage-Backed Security will be serviced by the PMBS
Servicer directly or by one or more sub-servicers who may be subject to the
supervision of the PMBS Servicer. The PMBS Servicer will be a Fannie Mae or
Freddie Mac approved servicer and, if FHA Loans underlie the Private
Mortgage-Backed Securities, approved by the Department of Housing and Urban
Development ("HUD") as an FHA mortgagee, or such other servicer as specified in
the related Prospectus Supplement.
Such securities will (i) either (a) have been previously registered under the
Securities Act of 1933, as amended, or (b) will at the time be eligible for sale
under Rule 144(k) under such act; and (ii) will be acquired in bona fide
secondary market transactions not from the issuer or its affiliates. The PMBS
Issuer generally will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the related Prospectus Supplement, the PMBS Issuer may be an
affiliate of the Seller. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust or the assignment by it of the
representations and warranties of another entity from which it acquired the
assets. The PMBS Issuer generally will not have guaranteed any of the assets
conveyed to the related trust or any of the Private Mortgage-Backed Securities
issued under the PMBS Agreement. Additionally, although the Mortgage Loans
underlying the Private Mortgage-Backed Securities may be guaranteed by an agency
or instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
UNDERLYING LOANS. The Mortgage Loans underlying the Private
Mortgage-Backed Securities may consist of fixed rate, level payment, fully
amortizing loans or graduated payment mortgage loans, buydown loans, adjustable
rate mortgage loans, or loans having balloon or other special payment features.
Such Mortgage Loans may be secured by single family property, multifamily
property, Manufactured Homes or by an assignment of the proprietary lease or
occupancy agreement relating to a specific dwelling within a Cooperative and the
related shares issued by such Cooperative. In general, (i) no Mortgage Loan will
have had a Loan-to-Value Ratio at origination in excess of 95%, (ii) each Single
Family Loan secured by a Mortgaged Property having a Loan-to-Value Ratio in
excess of 80% at
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origination will be covered by a primary mortgage insurance policy until the
principal balance is reduced to 80%, (iii) each Mortgage Loan will have had an
original term to stated maturity of not less than 5 years and not more than 40
years, (iv) no Mortgage Loan that was more than 30 days delinquent more than
once in the past 12 months and will not be delinquent as of the Cut-off Date as
to the payment of principal or interest will have been eligible for inclusion in
the assets under the related PMBS Agreement, (v) each Mortgage Loan (other than
a Cooperative Loan) will be required to be covered by a standard hazard
insurance policy (which may be a blanket policy), and (vi) each Mortgage Loan
(other than a Cooperative Loan or a Contract secured by a Manufactured Home)
will be covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Mortgage Loans underlying the
Private Mortgage-Backed Securities or with respect to the Private
Mortgage-Backed Securities themselves.
ADDITIONAL INFORMATION. The related Prospectus Supplement for a Series
for which the Trust Fund includes Private Mortgage-Backed Securities will
specify (i) the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the Mortgage Loans which comprise the underlying assets for
the Private Mortgage-Backed Securities including to the extent available (A) the
payment features of such Mortgage Loans, (B) the approximate aggregate principal
balance, if known, of underlying Mortgage Loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Mortgage Loans, (D) the minimum and maximum stated maturities of
the underlying Mortgage Loans at origination and (E) delinquency experience with
respect to the Mortgage Loans, (iii) the pass-through or certificate rate of the
Private Mortgage-Backed Securities and the method of determination thereof, (iv)
the PMBS Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS
Trustee for such Private Mortgage-Backed Securities, (v) certain characteristics
of credit support, if any, such as subordination, reserve funds, insurance
policies, letters of credit or guarantees relating to the Mortgage Loans
underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (vi) the terms on which the underlying
Mortgage Loans for such Private Mortgage-Backed Securities, or such Private
Mortgage-Backed Securities themselves, may, or are required to, be purchased
prior to their stated maturity or the stated maturity of the Private
Mortgage-Backed Securities and (vii) the terms on which Mortgage Loans or
Private Mortgage-Backed Securities may be substituted for those originally
deposited with the PMBS Trustee or the Trustee.
U.S. GOVERNMENT SECURITIES
If specified in the related Prospectus Supplement, United States
Treasury securities and other securities issued by the U.S. Government, any of
its agencies or other issuers established by federal statute (collectively,
"U.S. Government Securities") may be included in the Trust Assets. Such
securities will be backed by the full faith and credit of the United States or
will represent the obligations of the U.S. Government or such agency or such
other issuer or obligations payable from the proceeds of U.S. Government
Securities, as specified in the related Prospectus Supplement.
FASITS
Assets may be added to the Trust Fund if it has elected to be treated
as a FASIT for federal income tax purposes under the Code, subject to the
provisions of the Code restricting such additional assets to "permitted assets",
as defined in the Code, and so long as the FASIT does not engage in a
"prohibited transaction" under the Code. See "Federal Income Tax
Consequences--Qualification as a FASIT" and "--FASIT Ownership
Certificate--INCOME FROM PROHIBITED TRANSACTIONS". Subject to the foregoing, it
is intended that, in connection with a particular Trust Fund, assets will be
chosen for a FASIT on the basis of similarity of certain characteristics such as
coupon and market price, as provided
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in the related Prospectus Supplement. Assets would be added to a FASIT upon the
occurrence of certain events such as prepayment of existing assets or removal of
assets for credit or other reasons, as provided in the related Prospectus
Supplement. Any such addition or removal would be subject to confirmation from
the applicable rating agency or agencies that such actions would not affect the
ratings then assigned to the related Securities.
SUBSTITUTION OF MORTGAGE ASSETS
If so provided in the related Prospectus Supplement, substitution of
Mortgage Assets will be permitted in the event of breaches of representations
and warranties with respect to any original Mortgage Asset or in the event the
documentation with respect to any Mortgage Asset is determined by the Trustee or
other party identified in the related Prospectus Supplement to be incomplete.
The period during which such substitution will be permitted generally will be
indicated in the related Prospectus Supplement. The related Prospectus
Supplement will describe any other conditions upon which Mortgage Assets may be
substituted for Mortgage Assets initially included in the Trust Fund.
USE OF PROCEEDS
The Seller intends to use the net proceeds to be received from the
sale of the Securities of each Series to repay short-term loans incurred to
finance the purchase of the Trust Assets related to such Securities, to acquire
certain of the Trust Assets to be deposited in the related Trust Fund, and/or to
pay other expenses connected with pooling Trust Assets and issuing Securities.
Any amounts remaining after such payments may be used for general corporate
purposes. The Seller expects to sell Securities in Series from time to time.
THE SELLER
Structured Asset Mortgage Investments Inc. (formerly, Bear Stearns
Mortgage Securities Inc.), the Seller, is a Delaware corporation organized on
October 17, 1991. The Seller is engaged in the business of acquiring Mortgage
Assets and selling interests therein or bonds secured thereby. It is a wholly
owned subsidiary of Bear Stearns Mortgage Capital Corporation, a Delaware
corporation, and an affiliate of Bear, Stearns & Co. Inc. The Seller maintains
its principal office at 245 Park Avenue, New York, New York 10167. Its telephone
number is (212) 272-2000.
The Seller does not have, nor is it expected in the future to have,
any significant assets.
THE MORTGAGE LOANS
The Mortgage Loans will have been purchased by the Seller, either
directly or through affiliates, from Lenders. The Mortgage Loans so acquired by
the Seller will have been originated in accordance with the underwriting
criteria specified below under "Underwriting Standards" or such other
underwriting criteria as is specified in the related Prospectus Supplement.
UNDERWRITING STANDARDS
In general, each Lender will represent and warrant that all Mortgage
Loans originated and/or sold by it to the Seller or one of its affiliates will
have been underwritten in accordance with standards consistent with those
utilized by mortgage lenders or manufactured home lenders generally during the
period of origination. As to any Mortgage Loan insured by the FHA or partially
guaranteed by the VA, the Lender will represent that it has complied with
underwriting
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policies of the FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a Lender to
evaluate the borrower's credit standing and repayment ability, and the value and
adequacy of the Mortgaged Property as collateral. In general, a prospective
borrower applying for a Single Family Loan or a Cooperative Loan or for
financing secured by a Manufactured Home is required to fill out a detailed
application designed to provide to the underwriting officer pertinent credit
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report which summarizes the borrower's credit history with
local merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained from an independent source (typically the
borrower's employer) which verification reports the length of employment with
that organization, the current salary, and whether it is expected that the
borrower will continue such employment in the future. If a prospective borrower
is self-employed, the borrower may be required to submit copies of signed tax
returns. The borrower may also be required to authorize verification of deposits
at financial institutions where the borrower has demand or savings accounts.
Underwriting standards which pertain to the creditworthiness of borrowers
seeking Multifamily Loans will be described in the related Prospectus
Supplement.
In determining the adequacy of the Mortgaged Property as collateral,
an appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. With respect to Single Family
Loans, the appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. With respect to Cooperative Loans, the appraisal is based
on the market value of comparable units. With respect to Contracts, the
appraisal is based on recent sales of comparable Manufactured Homes and, when
deemed applicable, a replacement cost analysis based on the cost of a comparable
Manufactured Home. With respect to a Multifamily Loan, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis, was
used. An appraisal employing the income approach to value analyzes a multifamily
project's cashflow, expenses, capitalization and other operational information
in determining the property's value. The market approach to value focuses its
analysis on the prices paid for the purchase of similar properties in the
multifamily project's area, with adjustments made for variations between these
other properties and the multifamily project being appraised. The cost approach
calls for the appraiser to make an estimate of land value and then determine the
current cost of reproducing the building less any accrued depreciation. In any
case, the value of the property being financed, as indicated by the appraisal,
must be such that it currently supports, and is anticipated to support in the
future, the outstanding loan balance.
In the case of Single Family Loans, Cooperative Loans and Contracts,
once all applicable employment, credit and property information is received, a
determination generally is made as to whether the prospective borrower has
sufficient monthly income available (i) to meet the borrower's monthly
obligations on the proposed mortgage loan (determined on the basis of the
monthly payments due in the year of origination) and other expenses related to
the Mortgaged Property (such as property taxes and hazard insurance) and (ii) to
meet monthly housing expenses and other financial obligations and monthly living
expenses. The underwriting standards applied by Lenders may be varied in
appropriate cases where factors such as low Loan-to-Value Ratios or other
favorable credit factors exist.
A Lender may originate Mortgage Loans under a reduced documentation
program with balances that exceed in size or other respects general agency
criteria. A reduced documentation program is designed to facilitate the loan
approval process and thereby improve the Lender's competitive position among
other loan originators. Under a reduced documentation program, relatively more
emphasis is placed on property underwriting than on credit underwriting and
certain credit underwriting documentation concerning income and employment
verification is waived.
In the case of a Single Family or Multifamily Loan secured by a
leasehold interest in a real property, the title to which is held by a third
party lessor, the Lender will represent and warrant, among other things, that
the remaining
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term of the lease and any sublease is at least five years longer than the
remaining term of the Mortgage Loan.
Certain of the types of Mortgage Loans which may be included in the
Mortgage Pools are more recently developed and may involve additional
uncertainties not present in traditional types of loans. For example, certain of
such Mortgage Loans may provide for escalating or variable payments by the
mortgagor or obligor. These types of Mortgage Loans are underwritten on the
basis of a judgment that mortgagors or obligors will have the ability to make
monthly payments required initially. In some instances, however, a mortgagor's
or obligor's income may not be sufficient to permit continued loan payments as
such payments increase.
RE-UNDERWRITING. The Seller will acquire Mortgage Loans utilizing
re-underwriting criteria it believes are appropriate depending to some extent on
the Seller's or its affiliates' prior experience with the Lender and the
servicer, as well as the Seller's prior experience with a particular type of
loan or with loans relating to mortgaged properties in a particular geographical
region. A standard approach to re-underwriting will be to compare loan file
information and information that is represented to the Seller on a tape with
respect to a percentage of the Mortgage Loans deemed appropriate by the Seller
in the circumstances. No independent investigation of the creditworthiness of
particular obligors will be undertaken by the Seller.
QUALIFICATIONS OF LENDERS
Each Lender will be required to satisfy the qualifications set forth
herein or as otherwise set forth in the related Prospectus Supplement. Each
Lender must be an institution experienced in originating and servicing Mortgage
Loans of the type contained in the related Mortgage Pool in accordance with
accepted practices and prudent guidelines, and must maintain satisfactory
facilities to originate and service those Mortgage Loans. In general, each
Lender must be a seller/servicer approved by either Fannie Mae or Freddie Mac,
and each Lender must be a mortgagee approved by the HUD or an institution the
deposit accounts in which are insured by the Federal Deposit Insurance
Corporation (the "FDIC").
REPRESENTATIONS BY LENDERS; REPURCHASES
Each Lender generally will have made representations and warranties in
respect of the Mortgage Loans sold by such Lender and included in the assets of
the Trust Fund. Such representations and warranties generally include, among
other things: (i) that title insurance (or in the case of Mortgaged Properties
located in areas where such policies are generally not available, an attorney's
certificate of title) in the case of Single Family Loans and Multifamily Loans
and any required hazard insurance policy was in effect on the date of purchase
of the Mortgage Loan from the Lender by or on behalf of the Seller; (ii) that
the Lender had title to each such Mortgage Loan and such Mortgage Loan was
subject to no offsets, defenses or counterclaims; (iii) that each Mortgage Loan
constituted a valid first or other applicable lien on, or a perfected security
interest with respect to, the Mortgaged Property (subject only to permissible
title insurance exceptions, if applicable, and certain other exceptions
described in the Agreement) and that the Mortgaged Property was free from damage
and was in good repair; (iv) that there were no delinquent tax or assessment
liens against the Mortgaged Property, (v) that no required payment on a Mortgage
Loan was more than a specified number of days delinquent; and (vi) that each
Mortgage Loan was made in compliance with, and is enforceable under, all
applicable state and federal laws and regulations in all material respects.
All of the representations and warranties of a Lender in respect of a
Mortgage Loan will have been made as of the date on which such Lender sold the
Mortgage Loan to the Seller or one of its affiliates or as of such other date as
is specified in the related Prospectus Supplement. A substantial period of time
may have elapsed between such date and the date of initial issuance of the
Series of Securities evidencing an interest in, or secured by, such Mortgage
Loan. Since the representations and warranties of a Lender do not address events
that may occur following the sale of a Mortgage Loan by such Lender, its
repurchase obligation described below will not arise if the relevant event that
would
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otherwise have given rise to such an obligation with respect to a Mortgage Loan
occurs after the date of sale of such Mortgage Loan by such Lender to the Seller
or its affiliates. If the Master Servicer is also a Lender with respect to a
particular Series, such representations will be in addition to the
representations and warranties, if any, made by the Master Servicer in its
capacity as a Master Servicer.
In general, the Master Servicer or the Trustee, if the Master Servicer
is the Lender, will be required to promptly notify the relevant Lender of any
breach of any representation or warranty made by it in respect of a Mortgage
Loan which materially and adversely affects the interests of the Securityholders
with respect to such Mortgage Loan. If such Lender cannot cure such breach
generally within 60 days after notice from the Master Servicer or the Trustee,
as the case may be, then such Lender generally will be obligated to repurchase
such Mortgage Loan from the Trust Fund at a price (the "Purchase Price") equal
to the unpaid principal balance thereof as of the date of the repurchase plus
accrued interest thereon to the first day of the month following the month of
repurchase at the Mortgage Rate (less any amount payable as related servicing
compensation if the Lender is the Master Servicer) or such other price as may be
described in the related Prospectus Supplement. This repurchase obligation will
constitute the sole remedy available to holders of Securities or the Trustee for
a breach of representation by a Lender. Certain rights of substitution for
defective Mortgage Loans may be provided with respect to a Series in the related
Prospectus Supplement.
Neither the Seller nor the Master Servicer (unless the Master Servicer
is the Lender) will be obligated to purchase a Mortgage Loan if a Lender
defaults on its obligation to do so, and no assurance can be given that Lenders
will carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent that a breach of a representation and warranty of
a Lender may also constitute a breach of a representation made by the Seller or
the Master Servicer, the Master Servicer may have a repurchase obligation as
described below under "Administration-Assignment of Mortgage Assets."
If specified in the related Prospectus Supplement, the Lender may have
acquired the Mortgage Loans from a third party which made certain
representations and warranties to the Lender as of the time of the sale to the
Lender. In lieu of representations and warranties made by the Lender as of the
time of the sale to the Seller, the Lender may assign the representations and
warranties from the third party to the Seller, which will assign them to the
Trustee on behalf of the Securityholders. In such cases, the third party will be
obligated to purchase a Mortgage Loan upon a breach of such representations and
warranties, and the Lender will not be obligated to purchase a Mortgage Loan if
the third party defaults on its obligation to do so.
The Lender and any third party which conveyed the Mortgage Loans to
the Lender may experience financial difficulties and in some instances may enter
into insolvency proceedings. As a consequence, the Lender or such third party
may be unable to perform its repurchase obligations with respect to the Mortgage
Loans. Any arrangements for the assignment of representations and the repurchase
of Mortgage Loans must be acceptable to the Rating Agency rating the related
Securities.
OPTIONAL PURCHASE OF DEFAULTED LOANS
If specified in the related Prospectus Supplement, the Master Servicer
or another entity identified in such Prospectus Supplement may, at its option,
purchase from the Trust Fund any Mortgage Loan which is delinquent in payment by
91 days or more. Any such purchase shall be at such price as may be described in
the related Prospectus Supplement.
DESCRIPTION OF THE SECURITIES
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The Notes of a Series will be issued pursuant to an indenture (the
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Notes. The
Certificates will also be issued in Series pursuant to separate agreements (each
a "Pooling and Servicing Agreement" or a "Trust Agreement") among the Seller,
one or more Master Servicers, if applicable, and the Trustee. The provisions of
each such Agreement will vary depending upon the nature of the Securities to be
issued thereunder and the nature of the related Trust Fund. A form of Pooling
and Servicing Agreement, a form of a Trust Agreement and a form of Indenture are
exhibits to the Registration Statement of which this Prospectus is a part. The
following summaries describe certain provisions which may appear in each such
Agreement. The Prospectus Supplement for a Series of Securities will provide
additional information regarding each such Agreement relating to such Series.
The summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
applicable Agreement or Agreements for each Series of Securities and the
applicable Prospectus Supplement. The Seller will provide a copy of the
applicable Agreement or Agreements (without exhibits) relating to any Series
without charge upon written request of a Securityholder of such Series addressed
to Structured Asset Mortgage Investments Inc., 245 Park Avenue, New York, New
York 10167; Attention: Mortgage Department.
GENERAL
The Securities of each Series will be issued in fully registered form,
in the denominations specified in the related Prospectus Supplement, will
evidence specified beneficial ownership interests in, or debt secured by the
assets of, the related Trust Fund and will not be entitled to distributions in
respect of the Trust Assets included in any other Trust Fund established by the
Seller. The Securities will not represent obligations of the Seller or any
affiliate of the Seller. The Mortgage Loans generally will not be insured or
guaranteed by any governmental entity or other person unless the Prospectus
Supplement provides that loans are included that have the benefit of FHA
insurance ("FHA Insurance"), VA guarantees ("VA Guarantees"), primary mortgage
insurance, pool insurance or another form of insurance or guarantees. Each Trust
Fund will consist of, to the extent provided in the Agreement, (i) the Mortgage
Assets, as from time to time are subject to the related Agreement (exclusive of
any amounts specified in the related Prospectus Supplement ("Retained
Interest")), (ii) such assets as from time to time are required to be deposited
in the related Protected Account, Securities Account or any other accounts
established pursuant to the Agreement (collectively, the "Accounts"); (iii)
property which secured a Mortgage Loan and which is acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure, (iv) U.S.
Government Securities; and (v) any Primary Insurance Policies, FHA Insurance, VA
Guarantees, other insurance policies or other forms of credit enhancement
required to be maintained pursuant to the Agreement. If so specified in the
related Prospectus Supplement, a Trust Fund may include one or more of the
following: reinvestment income on payments received on the Trust Assets, a
reserve fund, a mortgage pool insurance policy, a special hazard insurance
policy, a bankruptcy bond, one or more letters of credit, a financial guaranty
insurance policy, third party guarantees or similar instruments, U.S. Government
Securities designed to assure payment of the Securities or other agreements. If
provided in the related Agreement, a securities administrator may be obligated
to perform certain duties in connection with the administration of the
Securities. It is not intended to list any class of Securities on any securities
exchange or to quote the Securities in the automated quotation system of a
regulated securities association. However, if such listing or such quotation is
intended in a Series, relevant information will be included in the related
Prospectus Supplement.
Each Series of Securities will be issued in one or more classes. Each
class of Securities of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the assets in the related Trust Fund or will evidence the
obligations of the related Trust Fund to make payments from amounts received on
the such assets in the related Trust Fund. A Series of Securities may include
one or more classes that receive certain preferential treatment with respect to
one or more other classes of Securities of such Series. Certain Series or
classes of Securities may he covered by insurance policies or other forms of
credit enhancement, in each case as described herein and in the related
Prospectus Supplement. Distributions on one or more classes of a Series of
Securities may be made prior to one or more other classes, after the occurrence
of specified events, in accordance with a schedule or formula, on the basis
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of collections from designated portions of the assets in the related Trust Fund
or on a different basis, in each case, as specified in the related Prospectus
Supplement. The timing and amounts of such distributions may vary among classes
or over time as specified in the related Prospectus Supplement. If so provided
in the related Prospectus Supplement, the Securityholder of a class (a "Call
Class") of securities of a Series may have the right to direct the Trustee to
redeem a related Callable Class or Classes (as defined herein). A "Callable
Class" is a class of Securities of a Series that is redeemable, directly or
indirectly, at the direction of the holder of the related Call Class, as
provided in the related Prospectus Supplement. A Call Class and its related
Callable Class or Classes will be issued pursuant to a separate trust agreement.
A Callable Class generally will not be called unless the market value of the
assets in the trust fund for such Callable Class exceeds the outstanding
principal balance of such assets. If so provided in the related Prospectus
Supplement, after the issuance of the Callable Class, there may be a specified
"lock-out period" during which such Securities could not be called. It is
anticipated that Call Classes generally will be offered only on a private basis.
It is anticipated that Call Classes generally will be offered only on a private
basis.
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on the related Securities will be made by the
Trustee on each Distribution Date (I.E., monthly, quarterly, semi-annually or at
such other intervals and on the dates specified in the related Prospectus
Supplement) in the proportions specified in the related Prospectus Supplement.
Distributions will be made to the persons in whose names the Securities are
registered at the close of business on the dates specified in the related
Prospectus Supplement (each, a "Record Date"). Distributions will be made by
check or money order mailed to the persons entitled thereto at the address
appearing in the register maintained for holders of Securities (the "Securities
Register") or, if specified in the related Prospectus Supplement, in the case of
Securities that are of a certain minimum denomination, upon written request by
the Securityholder, by wire transfer or by such other means as are described
therein; provided, however, that the final distribution in retirement of the
Securities will be made only upon presentation and surrender of the Securities
at the office or agency of the Trustee or other person specified in the notice
to Securityholders of such final distribution.
Except with respect to REMIC Residual Securities and FASIT Ownership
Securities, the Securities will be freely transferable and exchangeable at the
Corporate Trust Office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge. Certain
representations will be required in connection with the transfer of REMIC
Residual Securities and FASIT Ownership Securities, as provided in the related
Prospectus Supplement.
DISTRIBUTIONS ON SECURITIES
GENERAL. In general, the method of determining the amount of
distributions on a particular Series of Securities will depend on the type of
credit support, if any, that is used with respect to such Series. See "Credit
Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the Securities of a particular
Series. The Prospectus Supplement for each Series of Securities will describe
the method to be used in determining the amount of distributions on the
Securities of such Series.
Distributions allocable to principal and interest on the Securities
will be made by the Trustee out of, and only to the extent of, funds in the
related Securities Account, including any funds transferred from any Reserve
Account and funds received as a result of credit enhancement or from other
specified sources. As between Securities of different classes and as between
distributions of interest and principal and, if applicable, between
distributions of prepayments of principal and scheduled payments of principal,
distributions made on any Distribution Date will be applied as specified in the
related Prospectus Supplement. Distributions to any class of Securities will be
made pro rata to all Securityholders of that class or as specified in the
related Prospectus Supplement.
AVAILABLE FUNDS. All distributions on the Securities of each Series on
each Distribution Date will be made from
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the Available Funds in accordance with the terms described in the related
Prospectus Supplement and as specified in the Agreement. "Available Funds" for
each Distribution Date will generally equal the amounts on deposit in the
related Securities Account on a date specified in the related Prospectus
Supplement, net of related fees and expenses payable by the related Trust Fund
and other amounts to be held therein for distribution on future Distribution
Dates.
DISTRIBUTIONS OF INTEREST. Interest generally will accrue on the
aggregate Current Principal Amount (defined herein) (or, in the case of
Securities entitled only to distributions allocable to interest, the aggregate
notional principal balance) of each class of Securities entitled to interest
from the date, at the interest rate (the "Interest Rate") and for the periods
specified in the related Prospectus Supplement. To the extent funds are
available therefor, interest accrued during each such specified period on each
class of Securities entitled to interest (other than a class of Securities that
provides for interest that accrues, but is not currently payable, referred to
hereinafter as "Accrual Securities") will be distributable on the Distribution
Dates specified in the related Prospectus Supplement until the aggregate Current
Principal Amount of the Securities of such class has been distributed in full
or, in the case of Securities entitled only to distributions allocable to
interest, until the aggregate notional principal balance of such Securities is
reduced to zero or for the period of time designated in the related Prospectus
Supplement. The original Current Principal Amount of each Security will equal
the aggregate distributions allocable to principal to which such Security is
entitled. Distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated based on the
notional principal balance of such Security or on such other basis as is
specified in the related Prospectus Supplement. The notional principal balance
of a Security will not evidence an interest in or entitlement to distributions
allocable to principal but will be used solely for convenience in expressing the
calculation of interest and for certain other purposes.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Current Principal
Amount of such class of Securities on that Distribution Date. Distributions of
interest on each class of Accrual Securities will commence only after the
occurrence of the events specified in the related Prospectus Supplement. Prior
to such time, the beneficial ownership interest of such class of Accrual
Securities in the Trust Fund, as reflected in the aggregate Current Principal
Amount of such class of Accrual Securities, generally will increase on each
Distribution Date by the amount of interest that accrued on such class of
Accrual Securities during the preceding interest accrual period but that was not
required to be distributed to such class on such Distribution Date. Any such
class of Accrual Securities will thereafter accrue interest on its outstanding
Current Principal Amount as so adjusted.
DISTRIBUTIONS OF PRINCIPAL. The aggregate "Current Principal Amount"
of any class of Securities entitled to distributions of principal generally will
be the aggregate original Current Principal Amount of such class of Securities
specified in the related Prospectus Supplement, reduced by all distributions and
losses reported to the holders of such Securities as allocable to principal,
and, in the case of Accrual Securities, generally will be increased by all
interest accrued but not then distributable on such Accrual Securities. The
related Prospectus Supplement will specify the method by which the amount of
principal to be distributed on the Securities on each Distribution Date will be
calculated and the manner in which such amount will be allocated among the
classes of Securities entitled to distributions of principal.
If so provided in the related Prospectus Supplement, one or more
classes of Senior Securities will be entitled to receive all or a
disproportionate percentage of the payments of principal which are received from
borrowers in advance of their scheduled due dates and are not accompanied by
amounts representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or for
the periods specified in the related Prospectus Supplement. Any such allocation
of Principal Prepayments to such class or classes of Securities will have the
effect of accelerating the amortization of such Senior Securities while
increasing the interests evidenced by the Subordinated Securities in the Trust
Fund. Increasing the interests of the Subordinated Securities relative to that
of the Senior Securities is intended to preserve the availability of the
subordination provided by the
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Subordinated Securities. See "Credit Enhancement-Subordination."
UNSCHEDULED DISTRIBUTIONS. If specified in the related Prospectus
Supplement, the Securities will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the manner
described below and in the related Prospectus Supplement. If applicable, the
Trustee will be required to make such unscheduled distributions on the day and
in the amount specified in the related Prospectus Supplement if, due to
substantial payments of principal (including Principal Prepayments) on the
Mortgage Assets, low rates then available for reinvestment of such payments or
both, the Trustee or the Master Servicer determines, based on the assumptions
specified in the Agreement, that the amount anticipated to be on deposit in the
Securities Account on the next Distribution Date, together with, if applicable,
any amounts available to be withdrawn from any Reserve Account, may be
insufficient to make required distributions on the Securities on such
Distribution Date. The amount of any such unscheduled distribution that is
allocable to principal generally will not exceed the amount that would otherwise
have been required to be distributed as principal on the Securities on the next
Distribution Date. All unscheduled distributions generally will include interest
at the applicable Interest Rate (if any) on the amount of the unscheduled
distribution allocable to principal for the period and to the date specified in
the related Prospectus Supplement.
All distributions allocable to principal in any unscheduled
distribution generally will be made in the same priority and manner as
distributions of principal on the Securities would have been made on the next
Distribution Date, and with respect to Securities of the same class, unscheduled
distributions of principal generally will be made on a pro rata basis. Notice of
any unscheduled distribution will be given by the Trustee prior to the date of
such distribution.
ADVANCES
The Master Servicer or other person designated in the Prospectus
Supplement will be required to advance on or before each Distribution Date (from
its own funds, funds advanced by Sub-Servicers or funds held in any of the
Accounts for future distributions to the holders of such Securities), an amount
equal to the aggregate of payments of principal and interest that were
delinquent on the related Determination Date and were not advanced by any
Sub-Servicer, subject to the Master Servicer's determination that such advances
will be recoverable out of late payments by Mortgagors, Liquidation Proceeds,
Insurance Proceeds or otherwise with respect to the specific Mortgage Loan or,
if required by the applicable Rating Agency, with respect to any of the Mortgage
Loans.
In making advances, the Master Servicer will endeavor to maintain a
regular flow of scheduled interest and principal payments to holders of the
Securities, rather than to guarantee or insure against losses. If advances are
made by the Master Servicer from cash being held for future distribution to
Securityholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Account on
such Distribution Date would be less than the amount required to be available
for distributions to Securityholders on such date. Any Master Servicer funds
advanced will be reimbursable to the Master Servicer out of recoveries on the
specific Mortgage Loans with respect to which such advances were made (E.G.,
late payments made by the related Mortgagor, any related Insurance Proceeds,
Liquidation Proceeds or proceeds of any Mortgage Loan purchased by a Lender
under the circumstances described herein). Advances by the Master Servicer (and
any advances by a Sub-Servicer) also will be reimbursable to the Master Servicer
(or Sub-Servicer) from cash otherwise distributable to Securityholders
(including the holders of Senior Securities) at such time as the Master Servicer
determines that any such advances previously made are not ultimately recoverable
from the proceeds with respect to the specific Mortgage Loan or, if required by
the applicable Rating Agency, at such time as a loss is realized with respect to
a specific Mortgage Loan. The Master Servicer also will be obligated to make
advances, to the extent recoverable out of Insurance Proceeds, Liquidation
Proceeds or otherwise, in respect of certain taxes and insurance premiums not
paid by Mortgagors on a timely basis. Funds so advanced are reimbursable to the
Master Servicer to the extent permitted by the Agreement. If specified in the
related Prospectus Supplement, the obligations of the Master Servicer to make
advances may be supported by a cash advance reserve fund, a surety bond or other
arrangement, in each case as described in such Prospectus Supplement.
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REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a Distribution Date
or at such other time as is specified in the related Prospectus Supplement or
Agreement, the Master Servicer or the Trustee will furnish to each
Securityholder of record of the related Series a statement setting forth, to the
extent applicable or material to such Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal
Prepayments and if so specified in the related Prospectus Supplement,
prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any advance by the Master Servicer;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securityholders on such Distribution Date, and (b)
withdrawn from the Reserve Fund, if any, that is included in the
amounts distributed to the Senior Securityholders;
(v) the outstanding Current Principal Amount or notional
principal balance of such class after giving effect to the
distribution of principal on such Distribution Date;
(vi) the percentage of principal payments on the Mortgage Loans,
if any, which such class will be entitled to receive on the following
Distribution Date;
(vii) the percentage of Principal Prepayments on the Mortgage
Loans, if any, which such class will be entitled to receive on the
following Distribution Date;
(viii) unless the Interest Rate is a fixed rate, the Interest
Rate applicable to the distribution on the Distribution Date;
(ix) the number and aggregate principal balances of Mortgage
Loans in the related Mortgage Pool delinquent (a) one month, (b) two
months or (c) three or more months, and the number and aggregate
principal balances of Mortgage Loans in foreclosure;
(x) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure, and if such
real estate secured a Multifamily Loan, such additional information as
may be specified in the related Prospectus Supplement; and
(xi) if applicable, the amount remaining in any Reserve Account
or the amount remaining of any other credit support, after giving
effect to the distribution on the Distribution Date.
Where applicable, any amount set forth above may be expressed as a
dollar amount per single Security of the relevant class having a denomination or
interest specified in the related Prospectus Supplement or in the report to
Securityholders. The report to Securityholders for any Series of Securities may
include additional or other information of a similar nature to that specified
above.
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In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or the Trustee will mail to each
Securityholder of record at any time during such calendar year a report (a) as
to the aggregate of amounts reported pursuant to (i) and (ii) for such calendar
year and (b) such other customary information as may be deemed necessary or
desirable for Securityholders to prepare their tax returns.
BOOK-ENTRY REGISTRATION
If specified in the related Prospectus Supplement, one or more classes
of Securities of any Series may be issued in book-entry form. Persons acquiring
beneficial ownership interests in the book-entry Securities ("Owners") will hold
their Securities through the Depository Trust Company ("DTC") in the United
States, or Cedel Bank, societe anonyme, ("Cedel") or the Euroclear System
("Euroclear") (in Europe) if they are participants of any of such systems
("Participants"), or indirectly through organizations which are Participants.
The book-entry Securities will be issued in one or more certificates or notes,
as the case may be, that equal the aggregate principal balance of the applicable
class or classes of Securities and will initially be registered in the name of
Cede & Co., the nominee of DTC. Cedel and Euroclear will hold omnibus positions
on behalf of their Participants through customers' securities accounts in
Cedel's and Euroclear's names on the books of their respective depositaries that
in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank N.A. will act as depositary
for Cedel and The Chase Manhattan Bank will act as depositary for Euroclear (in
such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Except as described below, no person acquiring a
book-entry Security will be entitled to receive a physical certificate or note
representing such Security (a "Definitive Security"). Unless and until
Definitive Securities are issued, it is anticipated that the only
"Securityholder" will be Cede & Co., as nominee of DTC. Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Owner's ownership of a book-entry Security will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such book-entry Security will be recorded on the records of DTC (or
of a DTC Participant that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant and on the records of
Cedel or Euroclear, as appropriate).
Owners will receive all distributions allocable to principal and
interest with respect to the book-entry Securities from the Trustee through DTC
and DTC Participants. While the book-entry Securities are outstanding (except
under the circumstances described below), under the rules, regulations and
procedures creating, governing and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among Participants on
whose behalf it acts with respect to the Securities and is required to receive
and transmit distributions allocable to principal and interest with respect to
the Securities. Participants and Financial Intermediaries with whom Owners have
accounts with respect to Securities are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Owners. Accordingly, although Owners will not possess physical
certificates or notes, the Rules provide a mechanism by which Owners will
receive distributions and will be able to transfer their beneficial ownership
interests in the Securities.
Owners will not receive or be entitled to receive Definitive
Securities, except under the limited circumstances described below. Unless and
until Definitive Securities are issued, Owners who are not Participants may
transfer ownership of Securities only through Participants and Financial
Intermediaries by instructing such Participants and Financial Intermediaries to
transfer beneficial ownership interests in the Securities by book-entry transfer
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants or Financial Intermediaries.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Securities will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and
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credited. Similarly, the Participants and Financial Intermediaries will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Owners.
Because of time zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
or Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC is a New York-chartered limited purpose trust company that
performs services for its Participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC Participant in the book-entry
Securities, whether held for its own account or as a nominee for another person.
In general, beneficial ownership of book-entry Securities will be subject to the
Rules as in effect from time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its Participants and facilitates the
clearance and settlement of securities transactions between Cedel Participants
through electronic book-entry changes in accounts of Cedel Participants, thereby
eliminating the need for movement of physical securities. Transactions may be
settled in Cedel in any of 28 currencies, including United States dollars. Cedel
provides to its Participants, among other things, services for safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Cedel interfaces with domestic markets in
several countries. As a professional depository, Cedel is subject to regulation
by the Luxembourg Monetary Institute. Cedel Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. Indirect access to Cedel is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its Participants
and to clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for movement of physical securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear provides
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels,
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Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the book-entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payments to the Owners that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Owners that it
represents.
Under a book-entry format, Owners may experience some delay in their
receipt of payments, since such payments will be forwarded by the Trustee to
Cede & Co. Distributions with respect to Securities held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
DTC Participants that in turn can only act on behalf of Financial
Intermediaries, the ability of an Owner to pledge book-entry Securities to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such book-entry Securities, may be limited due to the lack
of physical certificates or notes for such book-entry Securities. In addition,
issuance of the book-entry Securities in book-entry form may reduce the
liquidity of such Securities in the secondary market since certain potential
investors may be unwilling to purchase Securities for which they cannot obtain
physical certificates or notes.
Monthly and annual reports on the applicable Trust Fund will be
provided to Cede & Co., as nominee of DTC, and may be made available by Cede &
Co. to Owners upon request, in accordance with the Rules, and to the DTC
Participants to whose DTC accounts the book-entry Securities of such Owners are
credited directly or are credited indirectly through Financial Intermediares.
DTC has advised the Trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the book-entry Securities under the Agreement only at the direction
of one or more DTC Participants to whose DTC accounts the book-entry Securities
are credited, to the extent that such actions are taken on behalf of such
Participants whose holdings include such book-entry Securities. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a holder under the Agreement on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to
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the ability of the Relevant Depositary to effect such actions on its behalf
through DTC. DTC may take actions, at the direction of the related Participants,
with respect to some Securities which conflict with actions taken with respect
to other Securities.
Definitive Securities will be issued to Owners only upon the events
specified in the related Agreement. Such events may include the following: (i)
the Seller advises the Trustee in writing that DTC is no longer willing or able
to properly discharge its responsibilities as depository with respect to the
Securities, and the Trustee or the Seller is unable to locate a qualified
successor, (ii) the Seller, at its option, elects to terminate the book-entry
system through DTC, or (iii) after the occurrence of an Event of Default
(defined herein), Securityholders representing not less than 50% of the
aggregate Current Principal Amount of the applicable Securities advise the
Trustee and DTC through Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interest of the Securityholders. Upon the occurrence of any of the events
specified in the related Agreement, DTC will be required to notify all
Participants of the availability through DTC of Definitive Securities. Upon
surrender by DTC of the certificates or notes representing the Securities and
instruction for re-registration, the Trustee will issue the Securities in the
form of Definitive Securities, and thereafter the Trustee will recognize the
holders of such Definitive Securities as Securityholders. Thereafter, payments
of principal of and interest on the Certificates will be made by the Trustee
directly to Securityholders in accordance with the procedures set forth herein
and in the Agreement. The final distribution of any Security (whether Definitive
Securities or Securities registered in the name of Cede & Co.), however, will be
made only upon presentation and surrender of such Securities on the final
Distribution Date at such office or agency as is specified in the notice of
final payment to Securityholders.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
None of the Seller, the Master Servicer or the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry Securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
EXCHANGEABLE SECURITIES
GENERAL
Certain Series will provide for the issuance of one or more classes of
Exchangeable Securities, as set forth in the relevant Prospectus Supplement. In
any such Series, the holders of one or more of the specified classes of
Exchangeable Securities will be entitled, upon notice and payment to the Trustee
of an administrative fee, to exchange all or a portion of such classes for
proportionate interests in one or more of the other specified classes of
Exchangeable Securities. The classes of Exchangeable Securities that are
exchangeable for one another will be referred to as being "related" to one
another, and related classes of Exchangeable Securities will be referred to as
"Combinations". The Combinations for the Exchangeable Securities in a Series, if
any, will be set forth in the Prospectus Supplement for the Series.
In each Series that includes Exchangeable Securities, all of the
classes of Securities that are shown on the cover page of the related Prospectus
Supplement will be issued, and those classes that are to be the basis for the
exchange arrangements will be deposited in a separate trust fund (an
"Exchangeable Security Trust Fund") established pursuant to a trust agreement
between the Seller and a trustee. The Trustee may serve as such trustee. The
Exchangeable Security Trust Fund initially will issue classes of Exchangeable
Securities that are identical in all respects to the classes
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of Securities deposited in such trust fund. At any time after their issuance,
including immediately after such issuance, these classes of Exchangeable
Securities may be exchanged, in whole or in part, for other related classes of
Exchangeable Securities that are part of the same Combination, as specified in
the related Prospectus Supplement. When an exchange is effected, the
Exchangeable Security Trust Fund will cancel the relevant portion or portions of
the class or classes of Exchangeable Securities that are being exchanged and
will issue the corresponding portion or portions of the class or classes of
other related Exchangeable Securities into which such class or classes of
securities are exchangeable. Exchangeable Securities received in an exchange may
subsequently be exchanged for other Exchangeable Securities that are part of the
same Combination. This process may be repeated again and again. Each
Exchangeable Security issued by an Exchangeable Security Trust Fund will
represent a beneficial ownership interest in the class or classes of Securities
deposited in such trust fund.
In general, the descriptions in this Prospectus of classes of
Securities of a Series also apply to the ES Classes of that Series, except where
the context requires otherwise. For example, the ES Classes of a Series are
entitled to receive payments of principal and/or interest, are issued in
book-entry form or as Definitive Securities to Securityholders in prescribed
denominations, may be provided with credit enhancements, and are subject to
yield and prepayment considerations, in the same manner and to the same extent
as are the classes of Securities of such Series. Similarly, the discussions
under "ERISA Considerations" and "Legal Investment" apply to Exchangeable
Securities as well as Securities.
EXCHANGES
The ability of a holder of a class or classes of Exchangeable
Securities to exchange such class or classes for another related class or
classes of Exchangeable Securities within the same Combination will be subject
to three basic constraints, as follows:
o The aggregate principal amount (rounded to whole dollars)
of the Exchangeable Securities received in the exchange, immediately
after the exchange, must equal that of the Exchangeable Securities
surrendered for exchange immediately before the exchange (for this
purpose, the principal amount of any interest only class will always
equal $0).
o The aggregate amount of annual interest (rounded to whole
dollars) (the "Annual Interest Amount") payable with respect to the
Exchangeable Securities received in the exchange must equal that of
the Exchangeable Securities surrendered for exchange.
o Such classes must be exchanged in the applicable exchange
proportions, if any, shown in the related Prospectus Supplement,
which, as described below, are based at all times on the original
principal amounts (or original notional principal amounts, if
applicable) of such classes.
Within any particular Series, one or more types of Combinations may
exist. For example, a class of Exchangeable Securities with an Interest Rate
that varies directly with changes in an index (a "Floating Rate Class"") and a
class of Exchangeable Securities with an Interest Rate that varies inversely
with changes in an index (an "Inverse Floating Rate Class") may be exchangeable
for a class of Exchangeable Securities with a fixed Interest Rate. Under another
Combination, a class of Exchangeable Securities that is a principal only class
and a class of Exchangeable Securities that is an interest only class may be
exchangeable for a class of Exchangeable Securities that pays both principal and
interest. Further, a class of Exchangeable Securities that accretes all of its
interest for a period (such accreted interest being added to the principal of
such class) (an "Accrual Class") and a class of Exchangeable Securities that
receives principal payments from such accretions on the Accrual Class may be
exchangeable for a class of Exchangeable Securities that receives payments of
principal continuously from the first Distribution Date on which it receives
principal until it is retired. Under another Combination, a class of
Exchangeable Securities that is designed to receive principal payments in
accordance with a predetermined schedule derived by assuming two constant
prepayment rates for the underlying Mortgage Loans ( a "Planned Amortization
Class") and a class of Exchangeable Securities that
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receives principal payments on any Distribution Date only if scheduled payments
have been made on the Planned Amortization Class may be exchangeable for a class
of Exchangeable Securities that receives payments of principal continuously from
the first Distribution Date on which it receives principal until it is retired
and that also receives a coupon. The foregoing examples describe only some of
the types of Combinations that are possible.
Set forth below are additional examples that illustrate in simple
mathematical terms how certain possible Combinations might operate. The first
example shows a Combination in which Exchangeable Securities of a principal only
class and Exchangeable Securities of an interest bearing class are exchangeable
for Exchangeable Securities of a class that has the aggregate characteristics of
the two original classes of Exchangeable Securities:
MAXIMUM
CLASS ORIGINAL INTEREST CLASS ORIGINAL INTEREST
PRINCIPAL RATES PRINCIPAL RATE
AMOUNT AMOUNT
ES-1 $20,000,000 10% ES-2 $40,000,000 5%
ES-P* 20,000,000 0%
_____________
* Class ES-P is a principal only class and will receive no interest.
The following example illustrates a Combination of a Floating Rate
Exchangeable Security and an Inverse Floating Rate Exchangeable Security which
are exchangeable for a single class of Exchangeable Securities with a fixed
interest rate:
MAXIMUM
CLASS ORIGINAL INTEREST CLASS ORIGINAL INTEREST
PRINCIPAL RATES PRINCIPAL RATE
AMOUNT AMOUNT
ES-3 $9,333,330 LIBOR+0.75% ES-5 $11,333,330 7%
ES-4 2,000,000 36.16666 -
(LIBOR x
4.666667)
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In the following Combination, a Exchangeable Security that pays both
principal and interest is exchangeable for two Exchangeable Securities, one of
which pays only interest and the other pays only principal:
CLASS ORIGINAL INTEREST CLASS MAXIMUM ORIGINAL INTEREST
PRINCIPAL RATE PRINCIPAL OR RATES
AMOUNT NOTIONAL PRINCIPAL
AMOUNT
ES-5 $20,000,000 10% ES-P* $20,000,000 0%
ES-X** 20,000,000
(notional)*** 10%
__________________
* Class ES-P is a principal only class and will receive no interest.
** Class ES-X is an interest only class and will receive no principal.
*** Notional principal amount of ES-X Class being exchanged equals principal
amount of ES-P Class being exchanged.
In some Series, a Combination may include a number of classes of
Exchangeable Securities that are exchangeable for one another and that will
enable a holder of one of the classes of Exchangeable Securities to exchange it
for another class of Exchangeable Securities with a higher or lower coupon. As
discussed below, any such exchange also will require the issuance of a third
class of Exchangeable Securities that will pay only principal or interest,
respectively. The following table illustrates such a Combination:
CLASS ORIGINAL INTEREST CLASS MAXIMUM ORIGINAL INTEREST
PRINCIPAL RATE PRINCIPAL OR NOTIONAL RATES
AMOUNT PRINCIPAL AMOUNT
ES-6 $20,000,000 7.00% ES-X* $20,000,000 7.00%
(notional)
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ES-7 20,000,000 6.00
ES-8 20,000,000 6.25
ES-9 20,000,000 6.50
ES-10 20,000,000 6.75
ES-11 19,310,344 7.25
ES-12 18,666,666 7.50
ES-13 18,064,516 7.75
ES-14 17,500,000 8.00
ES-P** 20,000,000 0.00
________________
* Class ES-X is an interest only class and will receive no principal.
** Class ES-P is a principal only class and will receive no interest.
The foregoing table shows the maximum amount of each other ES Class
that can be created from the related Class ES-6 Exchangeable Security. Such
amounts could not exist concurrently, as any combination is limited to the
amount of principal and interest distributable on the related Exchangeable
Security to be exchanged. One method of calculating the maximum amount that can
be created in a specific combination is to determine the Annual Interest Amount
applicable to the Exchangeable Security to be exchanged, and divide such
interest amount by the coupon of the desired Exchangeable Security. The
resulting principal amount can in no case be greater than the principal amount
of Exchangeable Securities to be exchanged. For example, using the foregoing
table, if Class ES-12 is desired, the maximum original principal amount of the
Class ES-12 Exchangeable Securities that could be created would be $18,666,666,
an amount arrived at by dividing the Annual Interest Amount of the Class ES-6
Securities ($1,400,000) by the Interest Rate of the Class ES-12 Exchangeable
Securities (7.50%). Since all of the available Annual Interest Amount with
respect to the Class ES-6 Exchangeable Securities would be used to create the
Class ES-12 Exchangeable Securities, principal only Class ES-P Exchangeable
Securities would be created to receive the remainder of the Class ES-6 principal
in the amount of $1,333,334 (calculated by subtracting the Class ES-12
Exchangeable Securities original principal amount from the Class ES-6
Exchangeable Securities original principal amount).
Similarly, if Class ES-9 Exchangeable Securities are desired, dividing
the Annual Interest Amount of the Class ES-6 Exchangeable Securities
($1,400,000) by the Interest Rate of the Class ES-9 Exchangeable Securities
(6.50%) would indicate an original principal amount of $21,538,461. However,
since the Class ES-6 Exchangeable Securities have a principal balance of
$20,000,000, only $20,000,000 of the Class ES-9 Exchangeable Securities could be
created. The Annual Interest Amount applicable to the Class ES-9 Exchangeable
Securities would be $20,000,000 multiplied by 6.50% or $1,300,000. Since the
Annual Interest Amount of the Class ES-6 Exchangeable Securities is $1,400,000,
the interest only Class ES-X Exchangeable Securities would be created to receive
the remaining $100,000 of interest. The notional amount of such securities would
be calculated by dividing the Annual Interest Amount ($100,000) by the Interest
Rate applicable to Class ES-X Exchangeable Securities (7.00%) to determine the
notional amount ($1,428,571).
Under the terms of this Combination, the Class ES-9 Exchangeable
Securities described in the preceding paragraph might also be exchangeable for
the Class ES-14 Exchangeable Securities. If the Annual Interest Amount of the
Class ES-9 Exchangeable Securities ($1,300,000) is divided by the Interest Rate
on the Class ES-14 Exchangeable Securities (8.00%), the maximum original
principal amount of the Class ES-14 Exchangeable Securities that can be created
is $16,250,000. Since all of the available Annual Interest Amount with respect
to the Class ES-9 Exchangeable Securities would be used to create the Class
ES-14 Exchangeable Securities, principal only Class ES-P Exchangeable
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Securities would be created to receive the remainder of the Class ES-9 principal
in the amount of $3,750,000 (calculated by subtracting the Class ES-14
Exchangeable Securities original principal amount from the Class ES-9
Exchangeable Securities original principal amount).
The foregoing examples set forth various combinations of Exchangeable
Securities which differ in interest characteristics (i.e., interest only
classes, principal only classes and classes which have principal amounts and
bear interest). In certain Series, a Securityholder may also be able to exchange
its Exchangeable Securities for other Exchangeable Securities that have
different principal payment characteristics. For example, an exchange of two or
more classes of Exchangeable Securities for a single class of Exchangeable
Securities may result in an Exchangeable Security with the aggregate principal
payment characteristics of the multiple classes of Exchangeable Securities for
which it was exchanged. In addition, in certain Series, Exchangeable Securities
may be exchangeable for other Exchangeable Securities with different credit
characteristics. For example, a class that is senior in priority of payment may
be combined with a subordinated class, to create a new class with the aggregate
credit characteristics of the two classes that were combined.
At any given time, a Securityholder's ability to exchange Exchangeable
Securities for other Exchangeable Securities will be limited by a number of
factors. A Securityholder must, at the time of the proposed exchange, own the
class or classes which are permitted to be exchanged in the proportions
necessary in order to effect the desired exchange. A Securityholder that does
not own such class or classes or the necessary amounts of such class or classes
may not be able to obtain the desired class or classes of Exchangeable
Securities. The Securityholder of a needed class may refuse or be unable to sell
at a reasonable price or at any price, or certain classes may have been
purchased and placed into other financial structures. ERISA or other transfer
restrictions may apply to certain of the Exchangeable Securities in a
combination, but not to others. In addition, principal payments and prepayments
will, over time, diminish the amounts available for exchange.
PROCEDURES AND EXCHANGE PROPORTIONS
A Securityholder proposing to effectuate an exchange must notify the
Trustee or follow other procedures as described in the related Prospectus
Supplement. Such notice must be given in writing or by telefax not later than
five business days before the proposed exchange date (which date, subject to the
Trustee's approval, can be any business day other than the first or last
business day of the month) or as otherwise specified in the related Prospectus
Supplement. The notice must include the outstanding principal (or notional
principal) amount of both the securities to be exchanged and the securities to
be received, and the proposed exchange date. Promptly after the Securityholder
has given the required notice, the Trustee will provide instructions for
delivering the securities and the payment of the administrative fee to the
Trustee by wire transfer. A Securityholder's notice becomes irrevocable on the
second business day before the proposed exchange date or as otherwise specified
in the related Prospectus Supplement.
An administrative fee will be payable to the Trustee in connection
with each exchange as specified in the related Prospectus Supplement. Any
exchanges will be subject to the rules, regulations and procedures applicable to
DTC's book-entry securities, in the case of ES Classes issued in book-entry
form.
Where exchange proportions are shown in the related Prospectus
Supplement for classes of Exchangeable Securities, the Issuer will follow the
convention of basing such proportions on the original, rather than on the
outstanding, principal or notional principal amounts of such classes. If such
classes receive principal payments pro rata with each other, the exchange
proportions also will apply to their outstanding principal amounts. If such
classes do not receive principal payments pro rata with each other, an investor
can calculate current exchange proportions for such classes, based on their
outstanding principal amounts, by (i) multiplying the exchange proportion shown
in the related
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Prospectus Supplement for each such class by its current Class Factor (as
defined below) and (ii) dividing each resulting percentage by the sum of such
percentages. The Trustee will include the Class Factor for each class of
outstanding Exchangeable Securities having a principal amount in the statements
it furnishes to Securityholders in connection with each Distribution Date. The
current Class Factor also will be available to Securityholders upon request from
the Trustee or the Seller as specified in the related Prospectus Supplement. The
"Class Factor" for any month will be a truncated seven-digit decimal which, when
multiplied by the original principal amount of that class, will equal its
remaining principal amount, after giving effect to any payment of (or addition
to) principal to be made on the Distribution Date in the following month. A
Class Factor for each interest only class having a notional principal amount
will be included in the statements the Trustee furnishes to Securityholders in
connection with each Distribution Date and also will be available to
Securityholders upon request from the Trustee or the Seller as specified in the
related Prospectus Supplement. Such a Class Factor will reflect the remaining
notional principal amount of the interest only class in an analogous manner.
The first payment on an Exchangeable Security received in an exchange
transaction will be made on the Distribution Date in the month following the
month of the exchange or as specified in the related Prospectus Supplement. Such
payment will be made to the Securityholder of record as of the applicable record
date.
CREDIT ENHANCEMENT
GENERAL
Credit enhancement may be provided with respect to one or more classes
of a Series of Securities or with respect to the assets in the related Trust
Fund. Credit enhancement may be in the form of (i) the subordination of one or
more classes of the Securities of such Series, (ii) the use of a Pool Insurance
Policy, Special Hazard Insurance Policy, Bankruptcy Bond, FHA Insurance, VA
Guarantees, Reserve Accounts, a letter of credit, a limited financial guaranty
insurance policy, other third party guarantees, interest rate or other swap
agreements, caps, collars or floors, another method of credit enhancement
described in the related Prospectus Supplement, or the use of a cross-support
feature, or (iii) any combination of the foregoing. In general, any credit
enhancement will not provide protection against all risks of loss and generally
will not guarantee repayment of the entire principal balance of the Securities
and interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, holders of one
or more classes of Securities will bear their allocable share of deficiencies.
If a form of credit enhancement applies to several classes of Securities, and if
principal payments equal to the Current Principal Amounts of certain classes
will be distributed prior to such distributions to other classes, the classes
which receive such distributions at a later time are more likely to bear any
losses which exceed the amount covered by credit enhancement. Coverage under any
credit enhancement generally may be canceled or reduced by the Master Servicer
or the Seller if such cancellation or reduction would not adversely affect the
rating or ratings of the related Securities.
SUBORDINATION
If so specified in the related Prospectus Supplement, distributions in
respect of scheduled principal, Principal Prepayments, interest or any
combination thereof that otherwise would have been payable to one or more
classes of Subordinated Securities of a Series will instead be payable to
holders of one or more classes of Senior Securities under the circumstances and
to the extent specified in the related Prospectus Supplement. If specified in
the related Prospectus Supplement, delays in receipt of scheduled payments on
the Mortgage Loans and losses on defaulted Mortgage Loans will be borne first by
the various classes of Subordinated Securities and thereafter by the various
classes of Senior Securities, in each case under the circumstances and subject
to the limitations specified in the related Prospectus
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Supplement. The aggregate distributions in respect of delinquent payments on the
Mortgage Loans over the lives of the Securities or at any time, the aggregate
losses in respect of defaulted Mortgage Loans which must be borne by the
Subordinated Securities by virtue of subordination and the amount of the
distributions otherwise distributable to the Subordinated Securityholders that
will be distributable to Senior Securityholders on any Distribution Date may be
limited as specified in the related Prospectus Supplement. If aggregate
distributions in respect of delinquent payments on the Mortgage Loans or
aggregate losses in respect of such Mortgage Loans were to exceed the total
amounts payable and available for distribution to holders of Subordinated
Securities or, if applicable, were to exceed the specified maximum amount,
holders of Senior Securities would experience losses on such Securities.
In addition to or in lieu of the foregoing, if so specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
payable to holders of Subordinated Securities on any Distribution Date may
instead be deposited into one or more Reserve Accounts established with the
Trustee. If so specified in the related Prospectus Supplement, such deposits may
be made on each Distribution Date, on each Distribution Date for specified
periods or until the balance in the Reserve Account has reached a specified
amount and, following payments from the Reserve Account to holders of Senior
Securities or otherwise, thereafter to the extent necessary to restore the
balance in the Reserve Account to required levels, in each case as specified in
the related Prospectus Supplement. If so specified in the related Prospectus
Supplement, amounts on deposit in the Reserve Account may be released to the
holders of the class of Securities specified in the related Prospectus
Supplement at the times and under the circumstances specified in the related
Prospectus Supplement.
If so specified in the related Prospectus Supplement, the same class
of Securities may be Senior Securities with respect to certain types of payments
or certain types of losses or delinquencies and Subordinated Securities with
respect to other types of payment or types of losses or delinquencies. If
specified in the related Prospectus Supplement, various classes of Senior
Securities and Subordinated Securities may themselves be subordinate in their
right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross support mechanism or
otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to a Mortgage Pool
of Single Family Loans or Cooperative Loans, a separate Pool Insurance Policy
will be obtained for the Mortgage Pool and issued by the insurer (the "Pool
Insurer") named in such related Prospectus Supplement. Each Pool Insurance
Policy will, subject to the limitations described below, cover loss by reason of
default in payment on Single Family Loans or Cooperative Loans in the Mortgage
Pool in an amount specified in such Prospectus Supplement. As more fully
described below, the Master Servicer will present claims thereunder to the Pool
Insurer on behalf of itself, the Trustee and the holders of the Securities. The
Mortgage Pool Insurance Policies, however, are not blanket policies against
loss, since claims thereunder may only be made respecting particular defaulted
Mortgage Loans and only upon satisfaction of certain conditions precedent
described below. A Pool Insurance Policy generally will not cover losses due to
a failure to pay or denial of a claim under a Primary Insurance Policy.
In general, each Pool Insurance Policy will provide that no claims may
be validly presented unless (i) any required Primary Insurance Policy is in
effect for the defaulted Mortgage Loan and a claim thereunder has been
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submitted and settled; (ii) hazard insurance on the related Mortgaged Property
has been kept in force and real estate taxes and other protection and
preservation expenses have been paid; (iii) if there has been physical loss or
damage to the Mortgaged Property, it has been restored to its physical condition
(reasonable wear and tear excepted) at the time of issuance of the policy; and
(iv) the insured has acquired good and merchantable title to the Mortgaged
Property free and clear of liens except certain permitted encumbrances. Upon
satisfaction of these conditions, the Pool Insurer will have the option either
(a) to purchase the Mortgaged Property at a price equal to the principal balance
thereof plus accrued and unpaid interest at the Mortgage Rate to the date of
purchase and certain expenses incurred by the Master Servicer on behalf of the
Trustee and Securityholders, or (b) to pay the amount by which the sum of the
principal balance of the defaulted Mortgage Loan plus accrued and unpaid
interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Insurance Policy. If any Mortgaged
Property securing a defaulted Mortgage Loan is damaged and proceeds, if any,
from the related hazard insurance policy or the applicable Special Hazard
Insurance Policy are insufficient to restore the damaged Mortgaged Property to a
condition sufficient to permit recovery under the Pool Insurance Policy, the
Master Servicer will not be required to expend its own funds to restore the
damaged Mortgaged Property unless it determines that (i) such restoration will
increase the proceeds to Securityholders on liquidation of the Mortgage Loan
after reimbursement of the Master Servicer for its expenses and (ii) such
expenses will be recoverable by it through proceeds of the sale of the Mortgaged
Property or proceeds of the related Pool Insurance Policy or any related Primary
Insurance Policy.
A Pool Insurance Policy generally will not insure (and many Primary
Insurance Policies do not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
originator or persons involved in the origination thereof, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications. If
so specified in the Prospectus supplement, an endorsement to the Pool Insurance
Policy, a bond or other credit support may cover fraud in connection with the
origination of Mortgage Loans. If so specified in the related Prospectus
Supplement, a failure of coverage attributable to an event specified in clause
(i) or (ii) above might result in a breach of the related Lender's
representations described above and, in such event, might give rise to an
obligation on the part of such Lender to purchase the defaulted Mortgage Loan if
the breach cannot be cured by such Lender. No Pool Insurance Policy will cover
(and many Primary Insurance Policies do not cover) a claim in respect of a
defaulted Mortgage Loan occurring when the servicer of such Mortgage Loan, at
the time of default or thereafter, was not approved by the applicable insurer.
The original amount of coverage under each Pool Insurance Policy
generally will be reduced over the life of the related Securities by the
aggregate dollar amount of claims paid less the aggregate of the net dollar
amounts realized by the Pool Insurer upon disposition of all foreclosed
properties covered thereby. The amount of claims paid will include certain
expenses incurred by the Master Servicer as well as accrued interest on
delinquent Mortgage Loans to the date of payment of the claim. Accordingly, if
aggregate net claims paid under any Pool Insurance Policy reach the original
policy limit, coverage under that Pool Insurance Policy will be exhausted and
any further losses will be borne by the Securityholders.
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
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Supplement. Each Special Hazard Insurance Policy will, subject to limitations
described below, protect holders of the related Securities from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located or under a flood
insurance policy if the Mortgaged Property is located in a federally designated
flood area, and (ii) loss caused by reason of the application of the coinsurance
clause contained in hazard insurance policies. See "Administration-Hazard
Insurance." Special Hazard Insurance Policies will not cover losses occasioned
by war, civil insurrection, certain governmental action, errors in design,
faulty workmanship or materials (except under certain circumstances), nuclear
reaction, flood (if the Mortgaged Property is located in a federally designated
flood area), chemical contamination and certain other risks. The amount of
coverage under any Special Hazard Insurance Policy will be specified in the
related Prospectus Supplement. Each Special Hazard Insurance Policy will provide
that no claim may be paid unless hazard and, if applicable, flood insurance on
the property securing the Mortgage Loan has been kept in force and other
protection and preservation expenses have been paid.
Subject to the foregoing limitations, each Special Hazard Insurance
Policy will provide that where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
the Special Hazard Insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
Special Hazard Insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and certain
expenses incurred by the Master Servicer with respect to such property. If the
unpaid principal balance of a Mortgage Loan plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair of the property will further reduce coverage by such amount. So long
as a Pool Insurance Policy remains in effect, the payment by the Special Hazard
Insurer of the cost of repair or of the unpaid principal balance of the related
Mortgage Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to Securityholders, but will affect the relative
amounts of coverage remaining under the related Special Hazard Insurance Policy.
Collection of insurance proceeds under a Pool Insurance Policy is
generally not possible if the underlying property has been damaged and not
restored. A Special Hazard Insurance Policy permits full recovery under a Pool
Insurance Policy relating to the Mortgage Loans backing the Series of Securities
by providing insurance to restore damaged property. Each Agreement will provide
that, if the related Pool Insurance Policy shall have been terminated or been
exhausted through payment of claims, the Master Servicer will be under no
further obligation to maintain such Special Hazard Insurance Policy.
To the extent specified in the related Prospectus Supplement, the
Master Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Securities of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Special Hazard
Insurance Policy. The amount of any Special Hazard Insurance Policy or of the
deposit to the special trust account in lieu thereof relating to such Securities
may be reduced so long as any such reduction will not result in a downgrading of
the rating of such Securities by any such rating agency.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
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If specified in the related Prospectus Supplement, a Bankruptcy Bond
for proceedings under the federal Bankruptcy Code will be issued by an insurer
named in such Prospectus Supplement. Each Bankruptcy Bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Securities of the related Series
in the Trust Fund to provide protection in lieu of or in addition to that
provided by a Bankruptcy Bond. See "Legal Aspects of the Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
To the extent specified in the related Prospectus Supplement, the
Master Servicer may deposit cash, an irrevocable letter of credit or any other
instrument acceptable to each nationally recognized rating agency rating the
Securities of the related Series in a special trust account to provide
protection in lieu of or in addition to that provided by a Bankruptcy Bond. The
amount of any Bankruptcy Bond or of the deposit to the special trust account in
lieu thereof relating to such Securities may be reduced so long as any such
reduction will not result in a downgrading of the rating of such Securities by
any such rating agency.
The terms of any Bankruptcy Bond relating to a pool of Contracts will
be described in the related Prospectus Supplement.
FHA INSURANCE; VA GUARANTEES
Single Family Loans designated in the related Prospectus Supplement as
insured by the FHA will be insured by the FHA as authorized under the United
States Housing Act of 1937, as amended. Such Mortgage Loans will be insured
under various FHA programs including the standard FHA 203(b) program to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. These programs generally limit the principal amount
and interest rates of the mortgage loans insured. Mortgage Loans insured by the
FHA generally require a minimum down payment of approximately 5% of the original
principal amount of the loan. No FHA-insured Mortgage Loan relating to a Series
may have an interest rate or original principal amount exceeding the applicable
FHA limits at the time of origination of such loan.
The insurance premiums for Mortgage Loans insured by the FHA are
collected by lenders approved by HUD or by the Master Servicer or any
Sub-Servicers and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to HUD or upon assignment of the defaulted
Mortgage Loan to HUD. With respect to a defaulted FHA-insured Mortgage Loan, the
Master Servicer or any Sub-Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the Master Servicer or
any Sub-Servicer or HUD, that default was caused by circumstances beyond the
mortgagor's control, the Master Servicer or any Sub-Servicer is expected to make
an effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the mortgagor. Such plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with such payments to be made up on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or beyond the maturity
date. In addition, when a default caused by such circumstances is accompanied by
certain other criteria, HUD may provide relief by making payments to the Master
Servicer or any Sub-Servicer in partial or full satisfaction of amounts due
under the Mortgage Loan (which payments are to be repaid by the mortgagor to
HUD) or by accepting assignment of the loan from the
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Master Servicer or any Sub-Servicer. With certain exceptions, at least three
full monthly installments must be due and unpaid under the Mortgage Loan, and
HUD must have rejected any request for relief from the mortgagor before the
Master Servicer or any Sub-Servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or any Sub-Servicer of each
FHA-insured Single Family Loan will be obligated to purchase any such debenture
issued in satisfaction of such Mortgage Loan upon default for an amount equal to
the principal amount of any such debenture.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or Sub-Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or
Sub-Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or Sub-Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured Single Family Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any obligation to make any payment due under the Mortgage
and, upon assignment, from the date of assignment, to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Mortgage Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's Readjustment
Act of 1944, as amended, permits a veteran (or in certain instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no Mortgage Loan guaranteed by the VA will
have an original principal amount greater than five times the partial VA
guarantee for such Mortgage Loan.
The maximum guarantee that may be issued by the VA under a
VA-guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 3703(a), as
amended. As of April, 1998, the maximum guarantee that may be issued by the VA
under a VA-guaranteed mortgage loan of more than $144,000 is the lesser of 25%
of the original principal amount of the mortgage loan and $50,750. The liability
on the guarantee is reduced or increased pro rata with any reduction or increase
in the amount of indebtedness, but in no event will the amount payable on the
guarantee exceed the amount of the original guarantee. The VA may, at its option
and without regard to the guarantee, make full payment to a mortgage holder of
unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA-guaranteed Single Family Loan, the
Master Servicer or Sub-Servicer is, absent exceptional circumstances, authorized
to announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Single Family Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the loan, interest accrued
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on the unpaid balance of the loan to the appropriate date of computation and
limited expenses of the mortgagee, but in each case only to the extent that such
amounts have not been recovered through liquidation of the Mortgaged Property.
The amount payable under the guarantee may in no event exceed the amount of the
original guarantee.
FHA INSURANCE ON MULTIFAMILY LOANS
There are two primary FHA insurance programs that are available for
Multifamily Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure mortgage loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of such mortgage loans made under Sections 221(d)(3)
and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of such
a mortgage loan may be up to 40 years and the ratio of loan amount to property
replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, a dollar amount per apartment unit established from time to time by
HUD or, at the discretion of the Secretary of HUD, 25% of the value of the
property. In general the loan term may not exceed 35 years and a loan to value
ratio of no more than 85% is required for the purchase of a project and 70% for
the refinancing of a project.
FHA insurance is generally payable in cash or, at the option of the
mortgagee, in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of interest
from the date of the default.
RESERVE AND OTHER ACCOUNTS
If specified in the related Prospectus Supplement, cash, U.S. Treasury
or comparable securities, instruments evidencing ownership of principal or
interest payments thereon, demand notes, certificates of deposit or a
combination thereof in the aggregate amount specified in the related Prospectus
Supplement will be deposited by the Master Servicer or Seller on the date
specified in the related Prospectus Supplement with the Trustee or in one or
more Reserve Accounts established with the Trustee. Such cash and the principal
and interest payments on such other instruments will be used to pay, or to
enhance the likelihood of timely payment of, principal of, and interest on, or,
if so specified in the related Prospectus Supplement, to provide additional
protection against losses in respect of, the assets of the related Trust Fund,
to pay the expenses of the Trust Fund or for such other purposes specified in
the related Prospectus Supplement. Whether or not the Master Servicer or Seller
has any obligation to make such a deposit, certain amounts to which the
Subordinated Securityholders, if any, will otherwise be entitled may instead be
deposited into a Reserve Account from time to time and in the amounts as
specified in the related Prospectus Supplement. Any cash in the Reserve Account
and the proceeds of any other instrument upon maturity will be invested, to the
extent acceptable to the applicable Rating Agency, in obligations of the United
States and certain agencies thereof, certificates of deposit, certain commercial
paper, time deposits and bankers acceptances sold by eligible commercial banks,
certain repurchase agreements of United States government securities with
eligible commercial banks and certain other instruments acceptable to the
applicable Rating Agency ("Permitted Investments"). Instruments held by the
Trustee and/or deposited in the Reserve Account generally will name the Trustee,
in its capacity as trustee for the holders of the Securities, as beneficiary and
generally will be issued by an entity acceptable to the applicable Rating
Agency. Additional information with respect to such instruments will be set
forth in the related Prospectus Supplement.
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Any amounts so deposited and payments on instruments so deposited will
be available for distribution to the holders of Securities for the purposes, in
the manner and at the times specified in the related Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust Fund may
include in lieu of some or all of the foregoing or in addition thereto letters
of credit, financial guaranty insurance policies, third party guarantees, U.S.
Government Securities and other arrangements for providing for or maintaining
timely payments or providing additional protection against losses on the assets
included in such Trust Fund, paying administrative expenses, or accomplishing
such other purpose as may be described in the related Prospectus Supplement. The
Trust Fund may include a guaranteed investment contract or reinvestment
agreement pursuant to which funds held in one or more accounts will be invested
at a specified rate. If any class of Securities has a floating interest rate, or
if any of the Mortgage Assets has a floating interest rate, the Trust Fund may
include an interest rate swap contract, an interest rate cap agreement or
similar contract providing limited protection against interest rate risks.
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust Fund may be evidenced
by separate classes of the related Series of Securities. In such case, credit
support may be provided by a cross-support feature which requires that
distributions be made with respect to Securities evidencing a beneficial
ownership interest in other asset groups within the same Trust Fund. The
Prospectus Supplement for a Series which includes a cross-support feature will
describe the manner and conditions for applying such cross-support feature.
If specified in the related Prospectus Supplement, the coverage
provided by one or more forms of credit support may apply concurrently to two or
more separate Trust Fund. If applicable, the related Prospectus Supplement will
identify the Trust Fund to which such credit support relates and the manner of
determining the amount of the coverage provided hereby and of the application of
such coverage to the identified Trust Fund.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity of the Securities will be affected by the
amount and timing of principal payments on or in respect of the Mortgage Assets
included in the related Trust Funds, the allocation of available funds to
various Classes of Securities, the Interest Rate for various Classes of
Securities and the purchase price paid for the Securities.
The original terms to maturity of the Mortgage Loans in a given
Mortgage Pool will vary depending upon the type of Mortgage Loans included
therein. Each Prospectus Supplement will contain information with respect to the
type and maturities of the Mortgage Loans in the related Mortgage Pool. Single
Family Loans, Cooperative Loans and Contracts generally may be prepaid without
penalty in full or in part at any time. Multifamily Loans may prohibit
prepayment for a specified period after origination, may prohibit partial
prepayments entirely, and may require the payment of a prepayment penalty upon
prepayment in full or in part.
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Conventional Single Family Loans, Cooperative Loans and Contracts
generally will contain due-on-sale provisions permitting the mortgagee or holder
of the Contract to accelerate the maturity of the Mortgage Loan or Contract upon
sale or certain transfers by the mortgagor or obligor of the underlying
Mortgaged Property. As described in the related Prospectus Supplement,
conventional Multifamily Loans may contain due-on-sale provisions,
due-on-encumbrance provisions, or both. Mortgage Loans insured by the FHA, and
Single Family Loans and Contracts partially guaranteed by the VA, are assumable
with the consent of the FHA and the VA, respectively. Thus, the rate of
prepayments on such Mortgage Loans may be lower than that of conventional
Mortgage Loans bearing comparable interest rates. The Master Servicer generally
will enforce any due-on-sale or due-on-encumbrance clause, to the extent it has
knowledge of the conveyance or further encumbrance or the proposed conveyance or
proposed further encumbrance of the Mortgaged Property and reasonably believes
that it is entitled to do so under applicable law; provided, however, that the
Master Servicer will not take any enforcement action that would impair or
threaten to impair any recovery under any related insurance policy. See
"Administration-Collection Procedures" and "Legal Aspects of the Mortgage Loans"
for a description of certain provisions of each Agreement and certain legal
developments that may affect the prepayment experience on the Mortgage Loans.
When a full prepayment is made on a Single Family Loan or Cooperative
Loan, the Mortgagor is charged interest on the principal amount of the Mortgage
Loan so prepaid only for the number of days in the month actually elapsed up to
the date of the prepayment rather than for a full month. Similarly, upon
liquidation of a Mortgage Loan, interest accrues on the principal amount of the
Mortgage Loan only for the number of days in the month actually elapsed up to
the date of liquidation rather than for a full month. The effect of prepayments
in full and liquidations generally will be to reduce the amount of interest
passed through in the following month to holders of Securities because interest
on the principal amount of any Mortgage Loan so prepaid will be paid only to the
date of prepayment or liquidation. In connection with certain Series, as
described in the related Prospectus Supplement, the Master Servicer or a Lender
will be required to use some or all of its servicing compensation to pay
compensating interest to cover such shortfalls. Interest shortfalls also could
result from the application of the Solders' and Sailors' Civil Relief Act of
1940, as amended, as described under "Legal Aspects of the Mortgage
Loans-Soldiers' and Sailors' Civil Relief Act" herein. Partial prepayments in a
given month may be applied to the outstanding principal balances of the Mortgage
Loans so prepaid on the first day of the month of receipt or the month following
receipt. In the latter case, partial prepayments will not reduce the amount of
interest passed through in such month. Prepayment penalties collected with
respect to Multifamily Loans will be distributed to the holders of Securities,
or to other persons entitled thereto, as described in the related Prospectus
Supplement.
Under certain circumstances, the Master Servicer, the holders of the
residual interests in a REMIC or a FASIT or another person specified in the
related Prospectus Supplement may have the option to purchase the assets of a
Trust Fund, thereby effecting earlier retirement of the related Series of
Securities. See "Administration-Termination; Optional Termination." The yield to
investors in a Callable Class will depend on whether and, if so, when a
redemption of such Securities occurs.
The rate of prepayments with respect to conventional mortgage loans
has fluctuated significantly in recent years. In general, if prevailing rates
fall significantly below the Mortgage Rates borne by the Mortgage Loans, such
Mortgage Loans are likely to be subject to higher prepayment rates than if
prevailing interest rates remain at or above such Mortgage Rates. Conversely, if
prevailing interest rates rise appreciably above the Mortgage Rates borne by the
Mortgage Loans, such Mortgage Loans are likely to experience a lower prepayment
rate than if prevailing rates remain at or below such Mortgage Rates. However,
there can be no assurance that such will be the case.
Prepayments are influenced by a variety of economic, geographical,
social, tax, legal and additional factors. The rate of prepayment on Single
Family Loans, Cooperative Loans and Contracts may be affected by changes in a
mortgagor's housing needs, job transfers, unemployment, a borrower's net equity
in the mortgage properties, the
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enforcement of due-on-sale clauses and other servicing decisions. Adjustable
rate mortgage loans, bi-weekly mortgage loans, graduated payment mortgage loans,
growing equity mortgage loans, reverse mortgage loans, buy-down mortgage loans
and mortgage loans with other characteristics may experience a rate of principal
prepayments which is different from that of fixed rate, monthly pay, fully
amortizing mortgage loans. The rate of prepayment on Multifamily Loans may be
affected by other factors, including Mortgage Loan terms (E.G., the existence of
lockout periods, due-on-sale and due-on-encumbrance clauses and prepayment
penalties), relative economic conditions in the area where the Mortgaged
Properties are located, the quality of management of the Mortgaged Properties
and the relative tax benefits associated with the ownership of income-producing
real property.
The timing of payments on the Mortgage Assets may significantly affect
an investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Assets, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the
Securities will not be offset by a subsequent like reduction (or increase) in
the rate of principal prepayments.
The effective yield to Securityholders generally will be slightly
lower than the yield otherwise produced by the applicable Pass-Through Rate and
purchase price, because while interest generally will accrue on each Mortgage
Loan from the first day of the month, the distribution of such interest will not
be made earlier than a specified date in the month following the month of
accrual.
In the case of any Securities purchased at a discount, a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield. In the case of any Securities purchased at a
premium, a faster than anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield. A discount or premium
would be determined in relation to the price at which a Security will yield its
Interest Rate, after giving effect to any payment delay.
Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Securities. The relative contribution of the
various factors affecting prepayment may also vary from time to time. There can
be no assurance as to the rate of payment of principal of the Mortgage Assets at
any time or over the lives of the Securities.
The Prospectus Supplement relating to a Series of Securities
will discuss in greater detail the effect of the rate and timing of principal
payments (including prepayments) on the yield, weighted average lives and
maturities of such
Securities (including, but not limited to, any Exchangeable Securities in such
Series).
ADMINISTRATION
Set forth below is a summary of the material provisions of each
Agreement which are not described elsewhere in this Prospectus. Where particular
provisions or terms used in the Agreements are referred to, such provisions or
terms are as specified in the Agreements. Concurrently with the assignment of
the Trust Assets to the related Trust Fund, the Trustee will execute and deliver
the Securities.
ASSIGNMENT OF MORTGAGE ASSETS
ASSIGNMENT OF THE MORTGAGE LOANS. At the time of issuance of the
Securities of a Series, the Seller will cause the Mortgage Loans comprising the
Trust Fund to be sold and assigned to the Trustee, together with all principal
and interest received by or on behalf of the Seller on or with respect to such
Mortgage Loans after the Cut-off Date, other
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than principal and interest due on or before the Cut-off Date and other than any
Retained Interest specified in the related Prospectus Supplement. If Notes are
issued in a Series, such assets will be pledged to the Trustee pursuant to the
terms of the Indenture. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the related
Agreement.
Such schedule will include information as to the outstanding principal balance
of each Mortgage Loan after application of payments due on the Cut-off Date, as
well as information regarding the Mortgage Rate or APR, the current scheduled
monthly payment of principal and interest, the maturity of the loan, the
Loan-to-Value Ratio at origination and certain other information.
In addition, the Seller generally will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) as to
each Mortgage Loan, among other things, (i)_ the mortgage note or Contract
endorsed without recourse in blank or to the order of the Trustee, (ii) in the
case of Single Family Loans or Multifamily Loans, the mortgage, deed of trust or
similar instrument (a "Mortgage") with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office, in which
case the Seller will deliver or cause to be delivered a copy of such Mortgage
together with a certificate that the original of such Mortgage was or will be
delivered to such recording office), (iii) an assignment of the Mortgage or
Contract to the Trustee, which assignment will be in recordable form in the case
of a Mortgage assignment, and (iv)_ such other security documents as may be
specified in the related Prospectus Supplement. In the case of Single Family
Loans or Multifamily Loans, the Seller or Master Servicer generally will
promptly cause the assignments of the related Mortgage Loans to be recorded in
the appropriate public office for real property records, except in the
discretion of the Seller in states in which, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in such loans against the claim of any subsequent transferee
or any successor to or creditor of the Seller or the originator of such loans.
In the case of Contracts, the Seller or Master Servicer generally will promptly
make or cause to be made an appropriate filing of a UCC-1 financing statement in
the appropriate states to give notice of the Trustee's ownership of the
Contracts.
With respect to any Mortgage Loans which are Cooperative Loans, the
Seller will cause to be delivered to the Trustee (or to the custodian
hereinafter referred to), the related original cooperative note endorsed without
recourse in blank or to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Seller will cause to be filed in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will review
such Mortgage Loan documents within the time period specified in the related
Prospectus Supplement after receipt thereof, and the Trustee will hold such
documents in trust for the benefit of the Securityholders. In general, if any
such document is found to be missing or defective in any material respect, the
Trustee (or such custodian) will be required to notify the Master Servicer and
the Seller or in certain circumstances the related Lender, or the Master
Servicer will notify the related Lender. If the Lender or an entity which sold
the Mortgage Loan to the Lender cannot cure the omission or defect within 60
days after receipt of such notice (or such other period as is specified in the
related Prospectus Supplement), the Lender or such entity generally will be
obligated to purchase the related Mortgage Loan from the Trustee at the Purchase
Price. There can be no assurance that a Lender or such entity will fulfill this
purchase obligation. Although the Master Servicer may be obligated to enforce
such obligation to the extent described above under "The Mortgage
Loans-Representations by Lenders; Repurchases," neither the Master Servicer nor
the Seller will be obligated to purchase such Mortgage Loan if the Lender or
such entity defaults on its purchase obligation, unless such breach also
constitutes a breach of the representations or warranties of the Master Servicer
or the Seller, as the case may be. This purchase obligation generally will
constitute the sole remedy available to the Securityholders or the Trustee for
omission of, or a material defect in, a constituent document. Certain rights of
substitution for defective Mortgage Loans may be provided with respect to a
Series in the related Prospectus Supplement.
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The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Mortgage Loans as agent of the Trustee.
ASSIGNMENT OF AGENCY SECURITIES. The Seller will cause Agency
Securities to be registered in the name of the Trustee or its nominee. Each
Agency Security will be identified in a schedule appearing as an exhibit to the
Agreement, which will specify as to each Agency Security the original principal
amount and outstanding principal balance as of the Cut-off Date, the annual
pass-through rate (if any) and the maturity date.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES. The Seller will
cause Private Mortgage-Backed Securities to be registered in the name of the
Trustee on behalf of the Trust Fund. The Trustee (or the custodian) will have
possession of any certificated Private Mortgage-Backed Securities. The Trustee
generally will not be in possession of or be assignee of record of any
underlying assets for a Private Mortgage-Backed Security. See "The Trust
Fund-Private Mortgage-Backed Securities" herein. Each Private Mortgage-Backed
Security will be identified in a schedule appearing as an exhibit to the related
Agreement which will specify the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date for each Private Mortgage-Backed Security conveyed to the
Trustee.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO ACCOUNTS
In general, each Master Servicer and Sub-Servicer servicing the
Mortgage Loans will be required to establish and maintain for one or more Series
of Securities a separate account or accounts for the collection of payments on
the related Mortgage Loans (the "Protected Account"), which must be either (i)
maintained with a depository institution the debt obligations of which (or in
the case of a depository institution that is the principal subsidiary of a
holding company, the obligations of such holding company) are rated in one of
the two highest rating categories by each Rating Agency rating the Series of
Securities, (ii) an account or accounts the deposits in which are fully insured
by the FDIC, (iii) an account or accounts the deposits in which are insured by
the FDIC (to the limits established by the FDIC), and the uninsured deposits in
which are invested in Permitted Investments held in the name of the Trustee, or
(iv) an account or accounts otherwise acceptable to each Rating Agency. A
Protected Account may be maintained as an interest bearing account or the funds
held therein may be invested pending each succeeding Distribution Date in
Permitted Investments. The related Master Servicer or Sub-Servicer or its
designee or another person specified in the Prospectus supplement will be
entitled to receive any such interest or other income earned on funds in the
Protected Account as additional compensation and will be obligated to deposit or
deliver for deposit in the Protected Account the amount of any loss immediately
as realized. The Protected Account may be maintained with the Master Servicer or
Sub-Servicer or with a depository institution that is an affiliate of the Master
Servicer or Sub-Servicer, provided it meets the standards set forth above.
Each Master Servicer and Sub-Servicer generally will be required to
deposit or cause to be deposited in the Protected Account for each Trust Fund on
a daily basis the following payments and collections received or advances made
by or on behalf of it subsequent to the Cut-off Date (other than payments due on
or before the Cut-off Date and exclusive of any amounts representing Retained
Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, prepayment
penalties, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, net of
applicable servicing compensation;
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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 Securityholders by
foreclosure or deed in lieu of foreclosure;
(iv) all proceeds of any Mortgage Loan or property in respect thereof
purchased as described under "The Mortgage Loans-Representations by Lenders;
Repurchases" or "-Assignment of Mortgage Assets" above;
(v) all payments required to be deposited in the Protected Account
with respect to any deductible clause in any blanket insurance policy described
under "-Hazard Insurance" below;
(vi) any amount required to be deposited by the Master Servicer or
Sub-Servicer in connection with losses realized on investments for the benefit
of the Master Servicer or Sub-Servicer of funds held in any Accounts; and
(vii) all other amounts required to be deposited in the Protected
Account pursuant to the Agreement.
If acceptable to each Rating Agency rating the Series of Securities, a
Protected Account maintained by a Master Servicer or Sub-Servicer may commingle
funds from the Mortgage Loans deposited in the Trust Fund with similar funds
relating to other mortgage loans which are serviced or owned by the Master
Servicer or Sub-Servicer. The Agreement may require that certain payments
related to the Mortgage Assets be transferred from a Protected Account
maintained by a Master Servicer or Sub-Servicer into another account maintained
under conditions acceptable to each Rating Agency.
The Trustee will be required to establish in its name as Trustee for
one or more Series of Securities a trust account or another account acceptable
to each Rating Agency (the "Securities Account"). The Securities Account may be
maintained as an interest bearing account or the funds held therein may be
invested pending each succeeding Distribution Date in Permitted Investments. If
there is more than one Master Servicer for the rated Series of Securities, there
may be a separate Securities Account or a separate subaccount in a single
Securities Account for funds received from each Master Servicer. The related
Master Servicer or its designee or another person specified in the related
Prospectus Supplement may be entitled to receive any interest or other income
earned on funds in the Securities Account or subaccount of the Securities
Account as additional compensation and, if so entitled, will be obligated to
deposit or deliver for deposit in the Securities Account or subaccount the
amount of any loss immediately as realized. The Trustee will be required to
deposit into the Securities Account on the business day received all funds
received from the Master Servicer for deposit into the Securities Account and
any other amounts required to be deposited into the Securities Account pursuant
to the Agreement. In addition to other purposes specified in the Agreement, the
Trustee will be required to make withdrawals from the Securities Account to make
distributions to Securityholders. If the Series includes one Trust Fund which
contains a beneficial ownership interest in another Trust Fund, funds from the
Trust Assets may be withdrawn from the Securities Account included in the latter
Trust Fund and deposited into another Account included in the former Trust Fund
prior to transmittal to Securityholders with a beneficial ownership interest in
the former Trust Fund. If specified in the related Prospectus Supplement, the
Protected Account and the Securities Account may be combined into a single
Securities Account. With respect to a Series backed by Agency Securities
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and/or Private Mortgage-Backed Securities there would only be one or more
Securities Accounts.
SUB-SERVICING BY LENDERS
Each Lender with respect to a Mortgage Loan or any other servicing
entity may act as the Master Servicer or the Sub-Servicer for such Mortgage Loan
pursuant to an agreement (each, a "Sub-Servicing Agreement"), which will not
contain any terms inconsistent with the related Agreement. While in general each
Sub-Servicing Agreement will be a contract solely between the Master Servicer
and the Sub-Servicer, the Agreement pursuant to which a Series of Securities is
issued will provide that, if for any reason the Master Servicer for such Series
of Securities is no longer the Master Servicer of the related Mortgage Loans,
the Trustee or any successor Master Servicer must recognize the Sub-Servicer's
rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate
its servicing obligations to third-party servicers. Such Sub-Servicer will
remain obligated, or will be released from its obligations, under the related
Sub-Servicing Agreement, as provided in the related Prospectus Supplement. Each
Sub-Servicer will be required to perform the customary functions of a servicer
of mortgage loans. Such functions generally include collecting payments from
mortgagors or obligors and remitting such collections to the Master Servicer;
maintaining hazard insurance policies as described herein and in the related
Prospectus Supplement, and filing and settling claims thereunder, subject in
certain cases to the right of the Master Servicer to approve in advance any such
settlement; maintaining escrow or impound accounts of mortgagors or obligors for
payment of taxes, insurance and other items required to be paid by the mortgagor
or obligor pursuant to the related Mortgage Loan; processing assumptions or
substitutions, although the Master Servicer is generally required to exercise
due-on-sale clauses to the extent such exercise is permitted by law and would
not adversely affect insurance coverage; attempting to cure delinquencies;
supervising foreclosures; inspecting and managing Mortgaged Properties under
certain circumstances; maintaining accounting records relating to the Mortgage
Loans; and, to the extent specified in the related Prospectus Supplement,
maintaining additional insurance policies or credit support instruments and
filing and settling claims thereunder. A Sub-Servicer will also be obligated to
make advances in respect of delinquent installments of principal and interest on
Mortgage Loans, as described more fully above under "-Payments on Mortgage
Loans; Deposits to Accounts," and in respect of certain taxes and insurance
premiums not paid on a timely basis by mortgagors or obligors.
As compensation for its servicing duties, each Sub-Servicer will be
entitled to a monthly servicing fee (to the extent the scheduled payment on the
related Mortgage Loan has been collected) in the amount set forth in the related
Prospectus Supplement. Each Sub-Servicer will generally be entitled to collect
and retain, as part of its servicing compensation, any prepayment or late
charges provided in the mortgage note or related instruments. Each Sub-Servicer
will be reimbursed by the Master Servicer for certain expenditures which it
makes, generally to the same extent the Master Servicer would be reimbursed
under the Agreement. The Master Servicer may purchase the servicing of Mortgage
Loans if the Sub-Servicer elects to release the servicing of such Mortgage Loans
to the Master Servicer. See "-Servicing and Other Compensation and Payment of
Expenses."
Each Sub-Servicer may be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Sub-Servicer in its servicing
capacity. Each Sub-Servicer will be required to maintain a fidelity bond and an
errors and omissions policy with respect to its officers, employees and other
persons acting on its behalf or on behalf of the Master Servicer.
Each Sub-Servicer will be required to service each Mortgage Loan
pursuant to the terms of the Sub-Servicing Agreement for the entire term of such
Mortgage Loan, unless the Sub-Servicing Agreement is earlier terminated by the
Master Servicer or unless servicing is released to the Master Servicer. The
Master Servicer generally may terminate
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a Sub-Servicing Agreement without cause, upon written notice to the
Sub-Servicer.
The Master Servicer may agree with a Sub-Servicer to amend a
Sub-Servicing Agreement or, upon termination of the Sub-Servicing Agreement, the
Master Servicer may act as servicer of the related Mortgage Loans or enter into
new Sub-Servicing Agreements with other sub-servicers. If the Master Servicer
acts as servicer, it will not assume liability for the representations and
warranties of the Sub-Servicer which it replaces. Each Sub-Servicer must be a
Lender or meet the standards for becoming a Lender or have such servicing
experience as to be otherwise satisfactory to the Master Servicer and the
Seller. The Master Servicer will make reasonable efforts to have the new
Sub-Servicer assume liability for the representations and warranties of the
terminated Sub-Servicer, but no assurance can be given that such an assumption
will occur. In the event of such an assumption, the Master Servicer may in the
exercise of its business judgment release the terminated Sub-Servicer from
liability in respect of such representations and warranties. Any amendments to a
Sub-Servicing Agreement or new Sub-Servicing Agreements may contain provisions
different from those which are in effect in the original Sub-Servicing
Agreement. However, each Agreement will provide that any such amendment or new
agreement may not be inconsistent with or violate such Agreement.
COLLECTION PROCEDURES
The Master Servicer, directly or through one or more Sub-Servicers,
will make reasonable efforts to collect all payments called for under the
Mortgage Loans and will, consistent with each Agreement and any Pool Insurance
Policy, Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard
Insurance Policy, Bankruptcy Bond or alternative arrangements, follow such
collection procedures as are customary with respect to mortgage loans that are
comparable to the Mortgage Loans. Consistent with the above, the Master Servicer
may, in its discretion, (i) waive any assumption fee, late payment or other
charge in connection with a Mortgage Loan and (ii) to the extent not
inconsistent with the coverage of such Mortgage Loan by a Pool Insurance Policy,
Primary Insurance Policy, FHA Insurance, VA Guaranty, Special Hazard Insurance
Policy, Bankruptcy Bond or alternative arrangements, if applicable, arrange with
a Mortgagor a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment or such other
period as is specified in the Agreement. Both the Sub-Servicer and the Master
Servicer remain obligated to make advances during any period of such an
arrangement.
In any case in which property securing a conventional Mortgage Loan
has been, or is about to be, conveyed by the mortgagor or obligor, the Master
Servicer generally will, to the extent it has knowledge of such conveyance or
proposed conveyance, exercise or cause to be exercised its rights to accelerate
the maturity of such Mortgage Loan under any due-on-sale clause applicable
thereto, but only if the exercise of such rights is permitted by applicable law
and will not impair or threaten to impair any recovery under any related Primary
Insurance Policy. If these conditions are not met or if such Mortgage Loan is
insured by the FHA or partially guaranteed by the VA, the Master Servicer will
enter into or cause to be entered into an assumption and modification agreement
with the person to whom such property has been or is about to be conveyed,
pursuant to which such person becomes liable for repayment of the Mortgage Loan
and, to the extent permitted by applicable law, the mortgagor remains liable
thereon; provided, however, that the Master Servicer will not enter into such an
agreement if it would jeopardize the tax status of the Trust Fund. Any fee
collected by or on behalf of the Master Servicer for entering into an assumption
agreement will be retained by or on behalf of the Master Servicer as additional
servicing compensation. In the case of Multifamily Loans, the Master Servicer
generally will agree to exercise any right it may have to accelerate the
maturity of a Multifamily Loan to the extent it has knowledge of any further
encumbrance of the related Mortgaged Property effected in violation of any
due-on-encumbrance clause applicable thereto. See "Legal Aspects of the Mortgage
Loans--Due-on-Sale Clauses." In connection with any such assumption, the terms
of the related Mortgage Loan may not be changed.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of
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the board of directors of the relevant Cooperative before purchasing the shares
and acquiring rights under the related proprietary lease or occupancy agreement.
See "Legal Aspects of the Mortgage Loans." This approval is usually based on the
purchaser's income and net worth and numerous other factors. The necessity of
acquiring such approval could limit the number of potential purchasers for those
shares and otherwise limit the Trust Fund's ability to sell and realize the
value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section
216(b)(2)) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Code Section 216(b)(1) is allowed a deduction
for amounts paid or accrued within his taxable year to the corporation
representing his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Code Section 216(a) to the
corporation under Code Sections 163 and 164. In order for a corporation to
qualify under Code Section 216(b)(1) for its taxable year in which such items
are allowable as a deduction to the corporation, such Section requires, among
other things, that at least 80% of the gross income of the corporation be
derived from its tenant-stockholders (as defined in Code Section 216(b)(2)). By
virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Code Section 216(a) with respect to those years. In view of the significance of
the tax benefits accorded tenant-stockholders of a corporation that qualifies
under Code Section 216(b)(1), the likelihood that such a failure would be
permitted to continue over a period of years appears remote.
HAZARD INSURANCE
The Master Servicer will require the mortgagor or obligor on each
Single Family Loan, Multifamily Loan or Contract to maintain a hazard insurance
policy providing for no less than the coverage of the standard form of fire
insurance policy with extended coverage customary for the type of Mortgaged
Property in the state in which such Mortgaged Property is located. Such coverage
will be in an amount not less than the replacement value of the improvements or
Manufactured Home securing such Mortgage Loan or the principal balance owing on
such Mortgage Loan, whichever is less. All amounts collected by the Master
Servicer under any hazard policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor or
obligor in accordance with the Master Servicer's normal servicing procedures)
will be deposited in the related Protected Account. In the event that the Master
Servicer maintains a blanket policy insuring against hazard losses on all the
Mortgage Loans comprising part of a Trust Fund, it will conclusively be deemed
to have satisfied its obligation relating to the maintenance of hazard
insurance. Such blanket policy may contain a deductible clause, in which case
the Master Servicer will be required to deposit from its own funds into the
related Protected Account the amounts which would have been deposited therein
but for such clause. Any additional insurance coverage for Mortgaged Properties
in a Mortgage Pool of Multifamily Loans will be specified in the related
Prospectus Supplement.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements or Manufactured
Home securing a Mortgage Loan by fire, lightning, explosion, smoke, windstorm
and hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Although the policies relating to the
Mortgage Loans may have been underwritten by different insurers under different
state laws in accordance with different applicable forms and therefore may not
contain identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive. If the Mortgaged Property
securing a Mortgage Loan is located
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in a federally designated special flood area at the time of origination, the
Master Servicer will require the mortgagor or obligor to obtain and maintain
flood insurance.
The hazard insurance policies covering properties securing the
Mortgage Loans typically contain a clause which in effect requires the insured
at all times to carry insurance of a specified percentage (generally 80% to 90%)
of the full replacement value of the insured property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, then the insurer's liability in the event of partial loss
will not exceed the larger of (i) the actual cash value (generally defined as
replacement cost at the time and place of loss, less physical depreciation) of
the improvements damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance the Master Servicer may cause to be
maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, and since improved real estate
generally has appreciated in value over time in the past, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property. If specified in the
related Prospectus Supplement, a special hazard insurance policy or an
alternative form of credit enhancement will be obtained to insure against
certain of the uninsured risks described above. See "Credit Enhancement-Special
Hazard Insurance Policies."
The Master Servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
PRIMARY INSURANCE POLICIES. The Master Servicer will be required to
maintain or cause each Sub-Servicer to maintain, as the case may be, in full
force and effect, to the extent specified in the related Prospectus Supplement,
a Primary Insurance Policy with regard to each Single Family Loan for which such
coverage is required. The Master Servicer will be required not to cancel or
refuse to renew any such Primary Insurance Policy in effect at the time of the
initial issuance of a Series of Securities that is required to be kept in force
under the applicable Agreement unless the replacement Primary Insurance Policy
for such canceled or nonrenewed policy is maintained with an insurer whose
claims-paying ability is sufficient to maintain the current rating of the
classes of Securities of such Series that have been rated.
Although the terms and conditions of primary mortgage insurance vary,
the amount of a claim for benefits under a Primary Insurance Policy covering a
Mortgage Loan generally will consist of the insured percentage of the unpaid
principal amount of the covered Mortgage Loan and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to the Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore the Mortgaged Property and which have not been applied to the payment of
the Mortgage Loan, (iii) amounts expended but not approved by the issuer of the
related Primary Insurance Policy (the "Primary Insurer"), (iv) claim payments
previously made by the Primary Insurer and (v) unpaid premiums.
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Primary Insurance Policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary Insurance Policies will not
insure against, and exclude from coverage, a loss sustained by reason of a
default arising from or involving certain matters, including (i) fraud or
negligence in origination or servicing of the Mortgage Loans, including
misrepresentation by the originator, borrower or other persons involved in the
origination of the Mortgage Loan; (ii)_ failure to construct the Mortgaged
Property subject to the Mortgage Loan in accordance with specified plans; (iii)
physical damage to the Mortgaged Property; and (d) the related Master Servicer
not being approved as a servicer by the Primary Insurer.
RECOVERIES UNDER A PRIMARY INSURANCE POLICY. As conditions precedent
to the filing of or payment of a claim under a Primary Insurance Policy covering
a Mortgage Loan, the insured generally will be required to (i) advance or
discharge (a) all hazard insurance policy premiums and (b) as necessary and
approved in advance by the Primary Insurer, (1) real estate property taxes, (2)
all expenses required to maintain the related Mortgaged Property in at least as
good a condition as existed at the effective date of such Primary Insurance
Policy, ordinary wear and tear excepted, (3) Mortgaged Property sales expenses,
(4) any outstanding liens (as defined in such Primary Insurance Policy) on the
Mortgaged Property and (5) foreclosure costs, including court costs and
reasonable attorneys' fees; (ii) in the event of any physical loss or damage to
the Mortgaged Property, have restored and repaired the Mortgaged Property to at
least as good a condition as existed at the effective date of such Primary
Insurance Policy, ordinary wear and tear excepted; and (iii) tender to the
Primary Insurer good and merchantable title to and possession of the Mortgaged
Property.
In those cases in which a Single Family Loan is serviced by a
Sub-Servicer, the Sub-Servicer, on behalf of itself, the Trustee and
Securityholders, will present claims to the Primary Insurer, and all collections
thereunder will be deposited in the Protected Account maintained by the
Sub-Servicer. In all other cases, the Master Servicer, on behalf of itself, the
Trustee and the Securityholders, will present claims to the Primary Insurer
under each Primary Insurance Policy, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Mortgage Loans. As set forth above, all collections by or on behalf of
the Master Servicer under any Primary Insurance Policy and, when the Mortgaged
Property has not been restored, the hazard insurance policy, are to be deposited
in the Protected Account, subject to withdrawal as heretofore described.
If the Mortgaged Property securing a defaulted Mortgage Loan is
damaged and proceeds, if any, from the related hazard insurance policy are
insufficient to restore the damaged Mortgaged Property to a condition sufficient
to permit recovery under the related Primary Insurance Policy, if any, the
Master Servicer is not required to expend its own funds to restore the damaged
Mortgaged Property unless it determines (i)_ that such restoration will
increase the proceeds to Securityholders on liquidation of the Mortgage Loan
after reimbursement of the Master Servicer for its expenses and (ii)_ that
such expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
If recovery on a defaulted Mortgage Loan under any related Primary
Insurance Policy is not available for the reasons set forth in the preceding
paragraph, or if the defaulted Mortgage Loan is not covered by a Primary
Insurance Policy, the Master Servicer will be obligated to follow or cause to be
followed such normal practices and procedures as it deems necessary or advisable
to realize upon the defaulted Mortgage Loan. If the proceeds of any liquidation
of the Mortgaged Property securing the defaulted Mortgage Loan are less than the
principal balance of such Mortgage Loan plus interest accrued thereon that is
payable to Securityholders, the Trust Fund will realize a loss in the amount of
such difference plus the aggregate of expenses incurred by the Master Servicer
in connection with such proceedings and which are reimbursable under the
Agreement.
If the Master Servicer or its designee recovers Insurance Proceeds
which, when added to any related Liquidation Proceeds and after deduction of
certain expenses reimbursable to the Master Servicer, exceed the principal
balance of such Mortgage Loan plus interest accrued thereon that is payable to
Securityholders, the Master Servicer will
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be entitled to withdraw or retain from the Protected Account amounts
representing its normal servicing compensation with respect to such Mortgage
Loan. In the event that the Master Servicer has expended its own funds to
restore the damaged Mortgaged Property and such funds have not been reimbursed
under the related hazard insurance policy, it will be entitled to withdraw from
the Protected Account out of related Liquidation Proceeds or Insurance Proceeds
an amount equal to such expenses incurred by it, in which event the Trust Fund
may realize a loss up to the amount so charged. See "Credit Enhancement."
RECOVERIES UNDER FHA INSURANCE AND VA GUARANTEES. The Master Servicer,
on behalf of itself, the Trustee and the Securityholders, will present claims
under any FHA Insurance or VA Guarantees with respect to the Mortgage Loans. See
"Credit Enhancement--FHA Insurance; VA Guarantees."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
A Master Servicer's primary servicing compensation with respect to a
Series of Securities will come from the monthly payment to it, out of each
interest payment on a Mortgage Loan, of an amount equal to the percentage per
annum described in the related Prospectus Supplement of the outstanding
principal balance thereof or from such other source as is specified in the
related Prospectus Supplement. If the Master Servicer's primary compensation is
a percentage of the outstanding principal balance of each Mortgage Loan, such
amounts will decrease as the Mortgage Loans amortize. In addition to primary
compensation, the Master Servicer or the Sub-Servicers generally will be
entitled to retain all assumption fees and late payment charges, to the extent
collected from Mortgagors, and any prepayment penalties and, to the extent
provided in the related Prospectus Supplement, any interest or other income
which may be earned on funds held in any Accounts. Sub-Servicers generally will
receive a portion of the Master Servicer's primary compensation as its
sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, to the extent
specified in the related Agreement, the Master Servicer may pay from its
servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment in
certain cases of premiums for insurance policies, guarantees, sureties or other
forms of credit enhancement, payment of the fees and disbursements of the
Trustee and independent accountants, payment of expenses incurred in connection
with distributions and reports to Securityholders, and payment of certain other
expenses. The Master Servicer will be entitled to reimbursement of expenses
incurred in enforcing the obligations of Sub-Servicers and Lenders under certain
limited circumstances. In addition, as indicated in the preceding section, the
Master Servicer will be entitled to reimbursement for certain expenses incurred
by it in connection with any defaulted Mortgage Loan as to which it has
determined that all recoverable Liquidation Proceeds and Insurance Proceeds have
been received.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Audit Program for
Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac or a
program certified by such firm to be comparable, the servicing by or on behalf
of the Master Servicer of mortgage loans, agency securities or private
mortgage-backed securities, under pooling and servicing agreements substantially
similar to each other (including the related Agreement) was conducted in
compliance with such agreements except for any significant exceptions or errors
in records that, in the opinion of the firm, the Uniform single Audit Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or such comparable program requires it to report. In rendering its statement
such firm may rely, as to matters relating to the direct servicing of mortgage
loans, agency securities or private mortgage-backed securities by
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Sub-Servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Audit Program for Mortgage
Bankers, the Audit Program for Mortgages serviced for Freddie Mac or such
comparable program (rendered within one year of such statement) of firms of
independent public accountants with
respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by an
officer of each Master Servicer to the effect that such Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of
officers of each Master Servicer may be obtained by Securityholders of the
related Series without charge upon written request to the Master Servicer at the
address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SELLER
One or more Master Servicers under each Agreement will be named in the
related Prospectus Supplement. Each entity serving as Master Servicer may have
normal business relationships with the Seller or the Seller's affiliates.
The Agreement will provide that a Master Servicer may not resign from
its obligations and duties under the Agreement except upon a determination that
its duties thereunder are no longer permissible under applicable law or as
otherwise specified in the related Prospectus Supplement. No such resignation
will become effective until the Trustee or a successor servicer has assumed the
Master Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither the Master Servicer,
in certain instances, the Seller nor any director, officer, employee, or agent
of the Master Servicer or the Seller will be under any liability to the Trustee,
the related Trust Fund or Securityholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Agreement, or for
errors in judgment; provided, however, that neither the Master Servicer, the
Seller nor any such person will be protected against any breach of warranties or
representations made in the Agreement or any liability which would otherwise be
imposed by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. Each Agreement will further provide that the
Master Servicer, in certain instances, the Seller and any director, officer,
employee or agent of the Master Servicer or the Seller will be entitled to
indemnification by the related Trust Fund and will be held harmless against any
loss, liability or expense incurred in connection with any legal action relating
to the Agreement or the Securities, other than any loss, liability or expense
related to any specific Mortgage Loan or Mortgage Loans (except any such loss,
liability or expense otherwise reimbursable pursuant to the Agreement) and any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, each
Agreement will provide that neither the Master Servicer nor, in certain
instances, the Seller will be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. The Master Servicer or the Seller may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Agreement and the rights and duties of the parties thereto
and the interests of the Securityholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Trust Fund and the Master Servicer or the
Seller, as the case may be, will be entitled to be reimbursed therefor out of
funds otherwise distributable to Securityholders.
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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, Fannie Mae or Freddie Mac and further
provided that such merger, consolidation or succession does not adversely affect
the then current rating or ratings of the class or classes of Securities of such
Series that have been rated.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT; MASTER SERVICING
AGREEMENT, "Events of Default" under a Pooling and Servicing Agreement, a Trust
Agreement or a Master Servicing Agreement generally will include (i) any failure
by the Master Servicer to cause to be deposited in the Securities Account any
amount so required to be deposited pursuant to the Agreement, and such failure
continues unremedied for two business days or such other time period as is
specified in the Agreement; (ii)_ any failure by the Master Servicer duly
to observe or perform in any material respect any of its other covenants or
agreements in the Agreement which continues unremedied for 60 days or such other
time period as is specified in the Agreement after the giving of written notice
of such failure to the Master Servicer by the Trustee, or to the Master Servicer
and the Trustee by the holders of Securities of any class evidencing not less
than 25% of the aggregate principal amount or interests ("Percentage Interests")
evidenced by such class; and (iii)_ certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings and certain actions by or on behalf of the Master Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
If specified in the related Prospectus Supplement, the Pooling and
Servicing Agreement, the Trust Agreement or Master Servicing Agreement will
permit the Trustee to sell the assets of the Trust Fund in the event that
payments in respect thereto are insufficient to make payments required in the
Agreement. The assets of the Trust Fund will be sold only under the
circumstances and in the manner specified in the related Prospectus Supplement.
In general, so long as an Event of Default under an Agreement remains
unremedied, the Trustee may, and at the direction of holders of Securities
evidencing Percentage Interests aggregating not less than 25% of the principal
of the related Trust Fund and under such circumstances as may be specified in
such Agreement, the Trustee shall, terminate all of the rights and obligations
of the Master Servicer under the Agreement relating to such Trust Fund and in
and to the Mortgage Loans, whereupon the Trustee generally will succeed to all
of the responsibilities, duties and liabilities of the Master Servicer under the
Agreement, including, if specified in the related Prospectus Supplement, the
obligation to make advances, and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a Mortgage Loan servicing institution with a net worth of at least
$10,000,000 to act as successor to the Master Servicer under the Agreement.
Pending such appointment, the Trustee is obligated to act in such capacity. The
Trustee and any such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation payable to the
Master Servicer under the Agreement.
In general, no Securityholder, solely by virtue of such holder's
status as a Securityholder, will have any right under any Agreement to institute
any proceeding with respect to such Agreement, unless such holder previously has
given to the Trustee written notice of default and unless the holders of
Securities of any class of such Series evidencing not less than 25% of the
aggregate Percentage Interest constituting such class have made written request
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
INDENTURE. "Events of Default" under the Indenture for each Series of
Notes will include: In general, (i) a default
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for 30 days or more in the payment of any principal of or interest on any Note
of such Series; (ii) failure to perform any other covenant of the Trust Fund in
the Indenture which continues for a period of 60 days or such other time period
as is specified in the Indenture after notice thereof is given in accordance
with the procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Trust Fund in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith with respect to or affecting such Series having been incorrect in a
material respect as of the time made, and such breach is not cured within 60
days after notice thereof is given in accordance with the procedures described
in the related Prospectus Supplement; (iv) certain events of bankruptcy,
insolvency, receivership or liquidation of the Seller or the Trust Fund; or (v)
any other Event of Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series may declare the principal amount (or, if the Notes of that
Series are entitled to payment of principal only, such portion of the principal
amount as may be specified in the related Prospectus Supplement) of all the
Notes of such Series to be due and payable immediately. Such declaration may,
under certain circumstances, be rescinded and annulled by the Securityholders of
a majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for 30 days or more, unless
(a) the Securityholders of 100% of the then aggregate outstanding amount of the
Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of Securityholders of 66-2/3% of the then aggregate
outstanding amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for 30 days or more in the payment
of principal of or interest on the Notes of a Series, the Indenture provides
that the Trustee will have a prior lien on the proceeds of any such liquidation
for unpaid fees and expenses. As a result, upon the occurrence of such an Event
of Default, the amount available for distribution to the Securityholders of
Notes may be less than would otherwise be the case. However, the Trustee may not
institute a proceeding for the enforcement of its lien except in connection with
a proceeding for the enforcement of the lien of the Indenture for the benefit of
the Securityholders of Notes after the occurrence of such an Event of Default.
In the event the principal of the Notes of a Series is declared due
and payable, as described above, the Securityholder of any such Notes issued at
a discount from par may be entitled to receive no more than an amount equal to
the unpaid principal amount thereof less the amount of such discount which is
unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Securityholders of Notes of such Series, unless such
Securityholders have offered to the Trustee security or indemnity satisfactory
to it against the costs,
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expenses and liabilities which might be incurred by it in complying with such
request or direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Securities will be set
forth in the related Prospectus Supplement. The entity serving as Trustee may
have normal banking relationships with the Seller and its affiliates. In
addition, for the purpose of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust Fund relating to a Series of
Securities. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the applicable Agreement
will be conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who will exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents will have any or all of the rights, powers, duties and obligations of the
Trustee conferred on them by such appointment; provided that the Trustee will
continue to be responsible for its duties and obligations under the Agreement.
In the event a Series includes both Notes and Certificates, a separate Trustee
identified in the related Prospectus Supplement will serve as Trustee for the
Certificates and for the Notes.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any assets or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Agreement. Upon receipt of the various certificates,
statements, reports or other instruments required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the
Securityholders or the Master Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that the Trustee will not
be personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the
Securityholders following an Event of Default. The Trustee is not required to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the Agreement, or in the exercise of any
of its rights or powers, if it has reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
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RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Seller, resign at any
time, in which event the Seller will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within the period specified in the Agreement after the
giving of such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for appointment of a successor Trustee. The
Trustee may also be removed at any time (i) if the Trustee ceases to be eligible
to continue as such under the Agreement, (ii) if the Trustee becomes insolvent
or (iii) by the Securityholders evidencing over 50% of the aggregate voting
rights of the Securities in the Trust Fund upon written notice to the Trustee
and to the Seller. Any resignation or removal of the Trustee and appointment of
a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
AMENDMENT
In general, each Agreement may be amended by the parties thereto,
without the consent of any of the Securityholders, (i) to cure any ambiguity;
(ii) to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the Agreement which
are not inconsistent with the provisions thereof, provided that such action will
not adversely affect in any material respect the interests of any
Securityholder. In addition, to the extent provided in the related Agreement, an
Agreement may be amended without the consent of any of the Securityholders, to
change the manner in which the Securities Account, the Protected Account or any
other Accounts are maintained, provided that any such change does not adversely
affect the then current rating on the class or classes of Securities of such
Series that have been rated. In addition, if a REMIC election is made with
respect to a Trust Fund, the related Agreement may be amended to modify,
eliminate or add to any of its provisions to such extent as may be necessary to
maintain the qualification of the related Trust Fund as a REMIC, provided that
the Trustee has received an opinion of counsel to the effect that such action is
necessary or helpful to maintain such qualification. In general, each Agreement
may also be amended by the parties thereto with consent of holders of Securities
of such Series evidencing not less than 51% of the aggregate Percentage
Interests of each class affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Agreement or of modifying in any manner the rights of the holders of the
related Securities; provided, however, that no such amendment may (i)_ reduce in
any manner the amount of or delay the timing of, payments received on Trust
Assets which are required to be distributed on any Security without the consent
of the holder of such Security, or (ii) reduce the aforesaid percentage of
Securities of any class of holders which are required to consent to any such
amendment without the consent of the holders of all Securities of such class
covered by such Agreement then outstanding. If a REMIC election is made with
respect to a Trust Fund, the Trustee will not be entitled to consent to an
amendment to the related Agreement without having first received an opinion of
counsel to the effect that such amendment will not cause such Trust Fund to fail
to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
The obligations created by each Agreement for a Series of Securities
generally will terminate upon the payment to the related Securityholders of all
amounts held in any Accounts or by the Master Servicer and required to be paid
to them pursuant to such Agreement following the later of (i) the final payment
or other liquidation of the last of the Trust Assets subject thereto or the
disposition of all property acquired upon foreclosure or deed in lieu of
foreclosure of any Mortgage Assets remaining in the Trust Fund and (ii) the
purchase by the Seller, the Master Servicer or other entity specified in the
related Prospectus Supplement including, if REMIC or FASIT treatment has been
elected, by the holder of the residual interest in the REMIC or FASIT (see
"Federal Income Tax Consequences" below), from the related Trust Fund of all of
the remaining Trust Assets and all property acquired in respect of Mortgage
Assets remaining in the Trust
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Fund.
Any such purchase of Trust Assets and property acquired in respect of
Mortgage Assets evidenced by a Series of Securities will be made at the option
of the Seller or other entity identified in the related Prospectus Supplement,
at a price, and in accordance with the procedures, specified in the related
Prospectus Supplement. Such purchase price may not in all cases equal the entire
unpaid principal and accrued unpaid interest on the Securities that are
outstanding at the time of the optional termination due to the fact that any
component of the purchase price based on existing REO property (i.e. real
property acquired following foreclosure and as to which a realized loss has not
yet been taken) will be equal to the fair market value of such property and not
necessarily the previously outstanding principal balance of the related loan.
There may not be sufficient proceeds to pay off the then current balance of and
accrued unpaid interest on Securities of such Series outstanding. The exercise
of such right will effect early retirement of the Securities, but the right of
the Seller or such other entity to so purchase will generally be subject to the
principal balance of the related Trust Assets being less than the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Trust Assets at the Cut-off Date for the Series. The foregoing is
subject to the provision that if a REMIC or FASIT election is made with respect
to a Trust Fund, any repurchase pursuant to clause (ii) above will be made only
in connection with a "qualified liquidation" of the REMIC or the FASIT within
the meaning of Section 860F(g)(4) of the Code.
LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of material legal matters relating to the Mortgage Loans. Because such
legal aspects are governed primarily by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete or to reflect
the laws of any particular state, or to encompass the laws of all states in
which the security for the Mortgage Loans is situated.
GENERAL
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. The Single Family Loans and
Multifamily Loans will be secured by mortgages, deeds of trust, security deeds
or deeds to secure debt, depending upon the prevailing practice in the state in
which the property subject to the loan is located. Deeds of trust are used
almost exclusively in California instead of mortgages. A mortgage creates a lien
upon the real property encumbered by the mortgage, which lien is generally not
prior to the lien for real estate taxes and assessments. Priority between
mortgages depends on their terms and generally on the order of recording with a
state or county office. There are two parties to a mortgage, the mortgagor, who
is the borrower and owner of the mortgaged property, and the mortgagee, who is
the lender. The mortgagor delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
formally has three parties, the borrower-property owner called the trustor
(similar to a mortgagor), a lender (similar to a mortgagee) called the
beneficiary, and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. A security deed and a deed to secure debt are special types of deeds
which indicate on their face that they are granted to secure an underlying debt.
By executing a security deed or deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until such time as the underlying debt is repaid. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary. The priority of the lien of the mortgage in a Single Family Loan or
Multifamily Loan will be specified in the related Prospectus Supplement.
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CONDOMINIUMS. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the other individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
COOPERATIVES. Certain of the Mortgage Loans may be Cooperative Loans.
The Cooperative (i)_ owns all the real property that comprises the project,
including the land and the apartment building comprised of separate dwelling
units and common areas or (ii)_ leases the land generally by a long-term
ground lease and owns the apartment building. The Cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
property and/or underlying land, as is generally the case, the Cooperative, as
project mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the Cooperative in connection with
the construction or purchase of the Cooperative's apartment building. The
interest of the occupants under proprietary leases or occupancy agreements to
which the Cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the Cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the blanket mortgage on a Cooperative may provide financing in the
form of a mortgage that does not fully amortize with a significant portion of
principal being due in one lump sum at final maturity. The inability of the
Cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of a Trust Fund including Cooperative Loans,
the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock, shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-stockholder's
pro rata share of the Cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a Cooperative and accompanying rights is financed through
a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and typically
a financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
CONTRACTS. Each Contract evidences both (a) the obligation of the
obligor to repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such loan. The
Contracts generally are "chattel paper" as defined in the UCC in effect in the
states in which the Manufactured Homes initially were registered. Pursuant to
the UCC, the rules governing the sale of chattel paper are similar to those
governing the perfection of a security interest in chattel paper. Under the
Agreement, the Seller generally will transfer or cause the
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transfer of physical possession of the Contracts to the Trustee or its
custodian. In addition the Seller will make or cause to be made an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes
personal property and is subject to the motor vehicle registration laws of the
state or other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. The Master Servicer generally
will be required to effect such notation or delivery of the required documents
and fees, and to obtain possession of the certificate of title, as appropriate
under the laws of the state in which any Manufactured Home is registered. If the
Master Servicer fails, due to clerical errors or otherwise, to effect such
notation or delivery, or files the security interest under the wrong law (for
example, under a motor vehicle title statute rather than under the UCC, in a few
states), the Trustee may not have a first priority security interest in the
Manufactured Home securing a Contract.
As manufactured homes have become larger and often have been attached
to their sites without any apparent intention to move them, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a Manufactured Home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor does not violate this agreement, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or the filing of a
UCC financing statement will be effective to maintain the priority of the
security interest in the Manufactured Home. If, however, a Manufactured Home is
permanently attached to its site, other parties could obtain an interest in the
Manufactured Home which is prior to the security interest originally retained by
the Seller and transferred to the Seller.
The Seller will assign or cause to be assigned a security interest in
the Manufactured Homes to the Trustee, on behalf of the Securityholders. In
general, neither the Seller, the Master Servicer nor the Trustee will amend the
certificates of title to identify the Trustee, on behalf of the Securityholders,
as the new secured party and, accordingly, the Seller or the Lender will
continue to be named as the secured party on the certificates of title relating
to the Manufactured Homes. In most states, such assignment is an effective
conveyance of such security interest without amendment of any lien noted on the
related certificate of title and the new secured party succeeds to the Seller's
rights as the secured party. However, in some states there exists a risk that,
in the absence of an amendment to the certificate of title, such assignment of
the security interest might not be held effective against creditors of the
Seller or Lender.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against
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the rights of subsequent purchasers of a Manufactured Home or subsequent lenders
who take a security interest in the Manufactured Home. If there are any
Manufactured Homes as to which the security interest assigned to the Seller and
the Trustee is not perfected, such security interest would be subordinate to,
among others, subsequent purchasers for value of Manufactured Homes and holders
of perfected security interests. There also exists a risk in not identifying the
Trustee, on behalf of the Securityholders as the new secured party on the
certificate of title that, through fraud or negligence, the security interest of
the Trustee could be released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Seller will obtain the representation of the Lender that it has no knowledge of
any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Securityholders in the event such a lien
arises.
FORECLOSURE/REPOSSESSION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. Foreclosure of a deed of
trust is generally accomplished by a non-judicial sale under a specific
provision in the deed of trust which authorizes the trustee to sell the property
at public auction upon any default by the borrower under the terms of the note
or deed of trust. In some states, such as California, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person who
has recorded a request for a copy of any notice of default and notice of sale.
In addition the trustee must provide notice in some states to any other person
having an interest of record in the real property, including any junior
lienholders. Before such non-judicial sale takes place, typically a notice of
sale must be posted in a public place and, in most states, including California,
published during a specific period of time in one or more newspapers. In
addition, these notice provisions require that a copy of the notice of sale be
posted on the property and sent to parties having an interest of record in the
property. In California, the entire process from recording a notice of default
to recording a non-judicial sale usually takes four to five months.
In some states, including California, the borrower-trustor has the
right to reinstate the loan at any time following default until shortly before
the trustee's sale. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a reinstatement period, cure
the default by paying the entire amount in
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arrears plus the costs and expenses incurred in enforcing the obligation.
Certain state laws control the amount of foreclosure expenses and costs,
including attorney's fees, which may be recoverable by a lender.
Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the property. In general, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a statutorily prescribed
reinstatement period, cure a monetary default by paying the entire amount in
arrears plus other designated costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the
mortgage is not reinstated, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus the foreclosing lender often purchases the property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
the lender will assume the burden of ownership, including obtaining hazard
insurance and making such repairs at its own expense as are necessary to render
the property suitable for sale. The lender will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Courts have imposed general equitable principles upon foreclosure,
which are generally designed to mitigate the legal consequences to the borrower
of the borrower's defaults under the loan documents. Some courts have been faced
with the issue of whether federal or state constitutional provisions reflecting
due process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
COOPERATIVE LOANS. The Cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the Cooperative's Certificate of
Incorporation and Bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the Cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the Cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
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The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws and existing shareholders
and tenants are entitled to remain in the building pursuant to such laws.
CONTRACTS. The Master Servicer on behalf of the Trustee, to the extent
required by the related Agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (I.E., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, generally varying from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
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unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the Manufactured Home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS. In certain states, after
sale pursuant to a deed of trust or foreclosure of a mortgage, the borrower and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. In certain other states, including
California, this right of redemption applies only to sales following judicial
foreclosure, and not to sales pursuant to a non-judicial power of sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption would defeat the title
of any purchaser from the lender subsequent to foreclosure or sale under a deed
of trust. Consequently, the practical effect of the redemption right is to force
the lender to retain the property and pay the expenses of ownership until the
redemption period has run.
CONTRACTS. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states, including California, have adopted statutory
prohibitions restricting the right of the beneficiary or mortgagee to obtain a
deficiency judgment against borrowers financing the purchase of their residence
or following sale under a deed of trust or certain other foreclosure
proceedings. A deficiency judgment is a personal judgment against the borrower
equal in most cases to the difference between the amount due to the lender and
the fair market value of the real property sold at the foreclosure sale. As a
result of these prohibitions, it is anticipated that in many instances the
Master Servicer will not seek deficiency judgments against defaulting
mortgagors. Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment for any deficiency following possession and resale
of a Manufactured Home. However, some states impose prohibitions or limitations
on deficiency judgments in such cases.
Some state statutes may require the beneficiary or mortgagee to
exhaust the security afforded under a deed of trust or mortgage by foreclosure
in an attempt to satisfy the full debt before bringing a personal action against
the borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
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In some states, exceptions to the anti-deficiency statutes are
provided for in certain instances where the value of the lender's security has
been impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any such proceedings under the federal Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Mortgage Loans underlying a Series of Securities and
possible reductions in the aggregate amount of such payments. Some states also
have homestead exemption laws which would protect a principal residence from a
liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state laws
impose specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade
Commission (the "FTC Rule") has the effect of subjecting a seller (and certain
related creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Lender had or should have had knowledge of such claim or
defense, the Master Servicer will have the right to require the Lender to
repurchase the Contract because of a breach of its representation and warranty
that no claims or defenses exist which would affect the obligor's obligation to
make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
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DUE-ON-SALE CLAUSES
Each conventional Mortgage Loan generally will contain a due-on-sale
clause which will generally provide that if the mortgagor or obligor sells,
transfers or conveys the Mortgaged Property, the loan or contract may be
accelerated by the mortgagor or secured party. The Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St Germain Act"), subject to certain
exceptions, preempts state constitutional, statutory and case law prohibiting
the enforcement of due-on-sale clauses. As to loans secured by an owner-occupied
residence (which would include a Manufactured Home), the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Act may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Mortgaged Property to
an uncreditworthy person, which could increase the likelihood of default or may
result in a Mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Mortgage Loan.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after
a certain period of time following origination of Single Family Loans,
Cooperative Loans or Contracts with respect to prepayments on loans secured by
liens encumbering owner-occupied residential properties. Since many of the
Mortgaged Properties will be owner-occupied, it is anticipated that prepayment
charges may not be imposed with respect to many of the Single Family Loans,
Cooperative Loans and Contracts. The absence of such a restraint on prepayment,
particularly with respect to fixed rate Single Family Loans, Cooperative Loans
or Contracts having higher Mortgage Rates or APR's, may increase the likelihood
of refinancing or other early retirement of such loans or contracts. Legal
restrictions, if any, on prepayment of Multifamily Loans will be described in
the related Prospectus Supplement.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title
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V. In any state in which application of Title V was expressly rejected or a
provision limiting discount points or other charges has been adopted, no
Contract which imposes finance charges or provides for discount points or
charges in
excess of permitted levels will be included in any Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"), a borrower who enters military
service after the origination of such borrower's mortgage loan (including a
borrower who is a member of the National Guard or is in reserve status at the
time of the origination of the mortgage loan and is later called to active duty)
may not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of the Master
Servicer to collect full amounts of interest on certain of the Mortgage Loans.
In general, any shortfall in interest collections resulting from the application
of the Relief Act could result in losses to the holders of the Securities. In
addition, the Relief Act imposes limitations which would impair the ability of
the Master Servicer to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that such a Mortgage
Loan goes into default, there may be delays and losses occasioned by the
inability to realize upon the Mortgaged Property in a timely fashion.
PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted
alleging personal injury or property damage from the existence of certain
chemical substances which may be present in building materials. For example,
formaldehyde and asbestos have been and in some cases are incorporated into many
building materials utilized in manufactured and other housing. As a consequence,
lawsuits may arise from time to time asserting claims against manufacturers or
builders of the housing, suppliers of component parts, and related persons in
the distribution process. Plaintiffs have won such judgments in certain such
lawsuits.
Under the FTC Rule described above, the holder of any Contract secured
by a Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. In general, the successful assertion of such claim
constitutes a breach of a representation or warranty of the Lender, and the
Securityholders would suffer a loss only to the extent that (i) the Lender
breached its obligation to repurchase the Contract in the event an obligor is
successful in asserting such a claim, and (ii) the Lender, the Seller or the
Trustee were unsuccessful in asserting any claim of contribution or subrogation
on behalf of the Securityholders against the manufacturer or other persons who
were directly liable to the plaintiff for the damages. Typical products
liability insurance policies held by manufacturers and component suppliers of
manufactured homes may not cover liabilities arising from formaldehyde and
certain other chemicals in manufactured housing, with the result that recoveries
from such manufacturers, suppliers or other persons may be limited to their
corporate assets without the benefit of insurance.
To the extent described in the related Prospectus Supplement, the
Mortgage Loans may include installment sales contracts entered into with the
builders of the homes located on the Mortgaged Properties. The Mortgagors in
some instances may have claims and defenses against the builders which could be
asserted against the Trust Fund.
ENVIRONMENTAL CONSIDERATIONS
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Environmental conditions may diminish the value of the Mortgage Assets
and give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, petroleum
substances (including heating oil and gasoline), radon and other materials which
may affect the property securing the Mortgage Assets. For example, under the
Federal Comprehensive Environmental Response Compensation and Liability Act, as
amended, and possibly under state law in certain states, a secured party which
takes a deed in lieu of foreclosure or purchases a mortgaged property at a
foreclosure sale may become liable in certain circumstances for the costs of a
remedial action ("Cleanup Costs") if hazardous wastes or hazardous substances
have been released or disposed of on the property. Such Cleanup Costs may be
substantial. It is possible that such costs could become a liability of the
Trust Fund and reduce the amounts otherwise distributable to the Securityholders
if a Mortgaged Property securing a Mortgage Loan became the property of the
Trust Fund in certain circumstances and if such Cleanup Costs were incurred.
Moreover, certain states by statute impose a priority lien for any Cleanup Costs
incurred by such state on the property that is the subject of such Cleanup Costs
(a "Superlien"). In such states, even prior recorded liens are subordinated to
such Superliens. In these states, the security interest of the Trustee in a
property that is subject to such a Superlien could be adversely affected.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
This section sets forth (i) the federal income tax opinions of Stroock
& Stroock & Lavan LLP, special counsel to the Seller ("Federal Tax Counsel"),
described below regarding the federal income tax status of the entity issuing
the Secuirites and the federal income tax characterization of such Securities,
and (ii) a summary, based on the advice of Federal Tax Counsel, of the material
federal income tax consequences of the purchase, ownership and disposition of
Securities. The summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended
(the "Code"), but much of the discussion is applicable to other investors as
well. Because tax consequences may vary based on the status or tax attributes
and the individual circumstances or special treatment under the income tax laws
of the owner of a Security, prospective investors are urged to consult their own
tax advisers concerning the federal, state, local and any other tax consequences
to them of the purchase, ownership and disposition of Securities. For purposes
of this tax discussion (except with respect to information reporting, or where
the context indicates otherwise), any reference to the "holder" means the
beneficial owner of a Security.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences with respect to a Series of
Securities to holders will vary depending on whether: (i) an election is made to
treat the Trust Fund (or certain assets of the Trust Fund) relating to a
particular Series of Securities as a real estate mortgage investment conduit
("REMIC") under the Code; (ii) an election is made to treat the Trust Fund (or
certain assets of the Trust Fund) as a financial asset securitization investment
trust ("FASIT") under the Code; (iii) for federal income tax purposes the Trust
Fund is classified as a grantor trust; (iv) for federal income tax purposes the
Trust Fund is classified as a partnership or is disregarded as an entity
separate from its owner; (v) the Securities represent an ownership interest for
federal income tax purposes in some or all of the assets included in the
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Trust Fund for a Series and/or (vi) the Securities of a Series are classified as
indebtedness for federal income tax purposes. The Prospectus Supplement for each
Series of Securities will specify how the Securities will be treated for federal
income tax purposes and will discuss whether a REMIC or FASIT election, if any,
will be made with respect to such Series.
REMIC AND FASIT ELECTIONS
Under the Code, an election may be made with respect to each Trust
Fund related to a Series of Securities to treat such Trust Fund or certain
assets of such Trust Fund as a REMIC or a FASIT. The Prospectus Supplement for
each Series of Securities will indicate whether a REMIC or a FASIT election will
be made with respect to the related Trust Fund. To the extent provided in the
Prospectus Supplement for a Series, holders may also have the benefit of a
Reserve Account and of certain agreements (each, a "Yield Supplement Agreement")
under which payment will be made from the Reserve Account or under the Yield
Supplement Agreement in the event that interest accrued on the Mortgage Loans at
their Mortgage Rates is insufficient to pay interest on the Securities of such
Series (a "Basis Risk Shortfall").
REMIC SECURITIES
GENERAL. The term "REMIC Securities" denotes Securities (or the
interests composing Securities) of a Series with respect to which a REMIC
election will be made. If a REMIC election with respect to a Trust Fund is to be
made, the Prospectus Supplement will designate the Securities of such Series or
the interests composing such Securities as "regular interests" ("REMIC Regular
Securities"), which where the context so requires includes a reference to each
interest composing a Security where such interest has been designated as a
regular interest, in lieu of such Securities, in the REMIC (within the meaning
of Section 860G(a)(l) of the Code) or as the REMIC Residual Certificates in the
REMIC (within the meaning of Section 860G(a)(2) of the Code). With respect to
each Series of REMIC Securities, the Trustee will agree in the Agreement to
elect to treat the related Trust Fund or certain assets of such Trust Fund as a
REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Upon the issuance of each Series of REMIC Securities, Federal Tax
Counsel will deliver its opinion that, with respect to each Series of REMIC
Securities for which a REMIC election is to be made, under then existing law,
and assuming a proper and timely REMIC election and ongoing compliance with the
provisions of the Agreement and applicable provisions of the Code and applicable
Treasury regulations, the related Trust Fund or certain assets of such Trust
Fund will be a REMIC and the REMIC Securities will be considered to evidence
ownership of "regular interests" or "residual interests" within the meaning of
the REMIC provisions of the Code.
ALLOCATION OF PURCHASE PRICE. To the extent provided in the Prospectus
Supplement for a Series, holders of REMIC Regular Securities who are entitled to
payments from the Reserve Account in the event of a Basis Risk Shortfall will be
required to allocate their purchase price between their beneficial ownership
interests in the related REMIC regular interests and Yield Supplement
Agreements, and will be required to report their income realized with respect to
each, calculated taking into account such allocation. In general, such
allocation would be based on the respective fair market values of the REMIC
regular interests and the related Yield Supplement Agreements on the date of
purchase of the related REMIC Regular Security. However, a portion of the
purchase price of a REMIC Regular Security should be allocated to accrued but
unpaid interest. No representation is or will be made as to the fair market
value of the Yield Supplement Agreements or the relative values of the REMIC
regular interests and the Yield Supplement Agreements, upon initial issuance of
the related REMIC Regular Securities or at any time thereafter. Holders of REMIC
Regular Securities are advised to consult their own tax advisors concerning the
determination of such fair market values. Under the applicable Agreement,
holders of applicable REMIC Regular Securities will agree that, for federal
income tax purposes, they will be treated as owners of the respective regular
interests and of the corresponding Yield Supplement Agreement.
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STATUS OF REMIC SECURITIES. REMIC Securities will be "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets, but not to the extent that the
REMIC's assets consist of Yield Supplement Agreements. However, if at least 95
percent of the REMIC's assets are qualifying assets, then 100 percent of the
REMIC Securities will be qualifying assets. Similarly, income on the REMIC
Securities will be treated as "interest on obligations secured by mortgages on
real property" within the meaning of Section 856(c)(3)(B) of the Code, subject
to the limitations of the preceding two sentences. In addition to the Mortgage
Assets, the REMIC's assets will include payments on the Mortgage Assets held
pending distribution to holders of REMIC Securities, amounts in Reserve Accounts
(if any), other credit enhancements (if any), and possibly buydown funds
("Buydown Funds"). The Prospectus Supplement will indicate whether the Mortgage
Assets will be qualifying assets under the foregoing sections of the Code. The
regulations under Sections 860A through 860G of the Code (the "REMIC
Regulations") treat credit enhancements as part of the mortgages or pool of
mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on the Mortgage Assets and held pending
distribution to holders of REMIC Securities ("cash flow investments") will be
treated as qualifying assets. Treasury regulations do not address whether
amounts in a Reserve Account or Buydown Funds would also constitute qualifying
assets. The Prospectus Supplement for each Series will indicate (if applicable)
that it has Buydown Funds. The REMIC Securities will not be "residential loans"
for purposes of the residential loan requirement of Section 593(g)(4)(B) of the
Code.
TIERED REMIC STRUCTURES
For certain Series of Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
Series of Securities, Federal Tax Counsel will deliver its opinion that,
assuming compliance with all provisions of the related Agreement and applicable
provisions of the Code and applicable Treasury regulations and rulings, the
Tiered REMICs will each qualify under then existing law as a REMIC and the REMIC
Securities issued by the Tiered REMICs, respectively, will be considered to
evidence ownership of "regular interests" or "residual interests" in the related
REMIC within the meaning of the REMIC provisions of the Code.
Solely for purposes of determining whether the REMIC Securities will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code,
and assets described in Section 7701(a)(19)(C) of the Code, and whether the
income on such Securities is interest described in Section 856(c)(3)(B) of the
Code, the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR SECURITIES
CURRENT INCOME ON REMIC REGULAR SECURITIES-GENERAL. Except as
otherwise indicated herein, the REMIC Regular Securities will be treated for
federal income tax purposes (but not necessarily for accounting or other
purposes) as debt instruments that are issued by the REMIC on the date of
issuance of the REMIC Regular Securities and not as beneficial interests in the
REMIC or the REMIC's assets. Holders of REMIC Regular Securities who would
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Securities under an accrual method.
Payments of interest on REMIC Regular Securities may be based on a
fixed rate, a variable rate as permitted
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by the REMIC Regulations, or may consist of a specified portion of the interest
payments on qualified mortgages where such portion does not vary during the
period the REMIC Regular Security is outstanding. The definition of a variable
rate for purposes of the REMIC Regulations is based on the definition of a
qualified floating rate for purposes of the rules governing original issue
discount set forth in Sections 1271 through 1275 of the Code and the regulations
thereunder (the "OID Regulations") with certain modifications and permissible
variations. See "--Current Income on REMIC Regular Securities--Original Issue
Discount" and "--Variable Rate REMIC Regular Securities" below, for a discussion
of the definition of a qualified floating rate for purposes of the OID
Regulations. In contrast to the OID Regulations, for purposes of the REMIC
Regulations, a qualified floating rate does not include any multiple of a
qualified floating rate (also excluding multiples of qualified floating rates
that themselves would constitute qualified floating rates under the OID
Regulations), and the characterization of a variable rate that is subject to a
cap, floor or similar restriction as a qualified floating rate for purposes of
the REMIC Regulations will not depend upon the OID Regulations relating to caps,
floors, and similar restrictions. See "--Current Income on REMIC Regular
Securities--Original Issue Discount" and "--Variable Rate REMIC Regular
Securities" below for discussion of the OID Regulations relating to caps, floors
and similar restrictions. A qualified floating rate, as defined above for
purposes of the REMIC Regulations (a "REMIC qualified floating rate"), qualifies
as a variable rate for purposes of the REMIC Regulations if such REMIC qualified
floating rate is set at a "current rate" as defined in the OID Regulations. In
addition, a rate equal to the highest, lowest or an average of two or more REMIC
qualified floating rates qualifies as a variable rate for REMIC purposes. A
REMIC Regular Security may also have a variable rate based on a weighted average
of the interest rates on some or all of the qualified mortgages held by the
REMIC where each qualified mortgage taken into account has a fixed rate or a
variable rate that is permissible under the REMIC Regulations. Further, a REMIC
Regular Security may have a rate that is the product of a REMIC qualified
floating rate or a weighted average rate and a fixed multiplier, is a constant
number of basis points more or less than a REMIC qualified floating rate or a
weighted average rate, or is the product, plus or minus a constant number of
basis points, of a REMIC qualified floating rate or a weighted average rate and
a fixed multiplier. An otherwise permissible variable rate for a REMIC Regular
Security, described above, will not lose its character as such because it is
subject to a floor or a cap, including a "funds available cap" as that term is
defined in the REMIC Regulations. Lastly, a REMIC Regular Security will be
considered as having a permissible variable rate if it has a fixed or otherwise
permissible variable rate during one or more payment or accrual periods and
different fixed or otherwise permissible variable rates during other payment or
accrual periods.
ORIGINAL ISSUE DISCOUNT. REMIC Regular Securities of certain Series
may be issued with "original issue discount" within the meaning of Section
1273(a) of the Code. Holders of REMIC Regular Securities issued with original
issue discount generally must include original issue discount in gross income
for federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Security be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Securities.
Each Trust Fund will report original issue discount, if any, to the
holders of REMIC Regular Securities based on the OID Regulations. OID
Regulations concerning contingent payment debt instruments do not apply to the
REMIC Regular Securities.
The OID Regulations provide that, in the case of debt instruments such
as REMIC Regular Securities, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "Prepayment Assumption"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular Securities
will be the rate used in pricing the initial
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offering of the securities. The Prospectus Supplement for each Series of REMIC
Regular Securities will specify the Prepayment Assumption, but no representation
is made that the REMIC Regular Securities will, in fact, prepay at a rate
based on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Security will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "--Payment Lag REMIC Regular
Securities; Initial Period Considerations," and "--Qualified Stated Interest,"
and in the case of certain Variable Rate REMIC Regular Securities (as defined
below) and accrual Securities, the stated redemption price at maturity of a
REMIC Regular Security is its principal amount. The issue price of a REMIC
Regular Security is the initial offering price to the public (excluding bond
houses and brokers) at which a substantial amount of the class of REMIC Regular
Securities is sold. The issue price will be reduced if any portion of such price
is allocable to a related Yield Supplement Agreement. Notwithstanding the
general definition of original issue discount, such discount will be considered
to be zero for any REMIC Regular Security on which such discount is less than
0.25% of its stated redemption price at maturity multiplied by its weighted
average life. The weighted average life of a REMIC Regular Security apparently
is computed for purposes of this DE MINIMIS rule as the sum, for all
distributions included in the stated redemption price at maturity of the REMIC
Regular Security, of the amounts determined by multiplying (i) the number of
complete years (rounding down for partial years) from the Closing Date to the
date on which each such distribution is expected to be made, determined under
the Prepayment Assumption, by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the REMIC Regular
Security's stated redemption price at maturity. The OID Regulations provide that
holders will include any DE MINIMIS original issue discount ratably as payments
of stated principal are made on the REMIC Regular Securities.
The holder of a REMIC Regular Security issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Security. In the case of an original holder of a REMIC
Regular Security, the daily portions of original issue discount are determined
first by calculating the portion of the original issue discount that accrued
during each period (an "accrual period") that begins on the day following a
Distribution Date (or in the case of the first such period, begins on the
Closing Date) and ends on the next succeeding Distribution Date. The original
issue discount accruing during each accrual period is then allocated ratably to
each day during such period to determine the daily portion of original issue
discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Security, if any, in future periods and (B) the distributions
made on the REMIC Regular Security during the accrual period that are included
in such REMIC Regular Security's stated redemption price at maturity, over (ii)
the adjusted issue price of such REMIC Regular Security at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence will be calculated (i) assuming that the REMIC Regular
Securities will be prepaid in future periods at a rate computed in accordance
with the Prepayment Assumption and (ii) using a discount rate equal to the
original yield to maturity of the REMIC Regular Securities. For these purposes,
the original yield to maturity of the REMIC Regular Securities will be
calculated based on their issue price and assuming that the REMIC Regular
Securities will be prepaid in accordance with the Prepayment Assumption. The
adjusted issue price of a REMIC Regular Security at the beginning of any accrual
period will equal the issue price of such REMIC Regular Security, increased by
the portion of the original issue discount that has accrued during prior accrual
periods, and reduced by the amount of any distributions made on such REMIC
Regular Security in prior accrual periods that were included in such REMIC
Regular Security's stated redemption price at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
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accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Security in future accrual
periods. Such a holder may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
holder is entitled. However, Treasury regulations do not address this issue.
A subsequent holder that purchases a REMIC Regular Security issued
with original issue discount at a cost that is less than its remaining stated
redemption price at maturity will also generally be required to include in gross
income, for each day on which it holds such REMIC Regular Security, the daily
portions of original issue discount with respect to the REMIC Regular Security,
calculated as described above. However, if (i) the excess of the remaining
stated redemption price at maturity over such cost is less than (ii) the
aggregate amount of such daily portions for all days after the date of purchase
until final retirement of such REMIC Regular Security, then such daily portions
will be reduced proportionately in determining the income of such holder.
QUALIFIED STATED INTEREST. Interest payable on a REMIC Regular
Security which qualifies as "qualified stated interest" for purposes of the OID
Regulations will not be includable in the stated redemption price at maturity of
the REMIC Regular Security. Accordingly, if the interest on a REMIC Regular
Security does not constitute "qualified stated interest," the REMIC Regular
Security will have original issue discount. Interest payments will not qualify
as qualified stated interest unless the interest payments are "unconditionally
payable." The OID Regulations state that interest is unconditionally payable if
reasonable legal remedies exist to compel timely payment, or the debt instrument
otherwise provides terms and conditions that make the likelihood of late payment
(other than a late payment that occurs within a reasonable grace period) or
nonpayment of interest a remote contingency, as defined in the OID Regulations.
Treasury regulations do not address whether the terms and conditions of the
Mortgage Assets underlying the REMIC Regular Securities or the terms and
conditions of the REMIC Regular Securities are considered when determining
whether the likelihood of late payment or nonpayment of interest is a remote
contingency. Any terms or conditions that do not reflect arm's length dealing or
that the holder does not intend to enforce are not considered.
PREMIUM. A purchaser of a REMIC Regular Security that purchases such
REMIC Regular Security at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Security at a premium, and may, under Section 171 of the Code, elect to amortize
such premium under a constant yield method over the life of the REMIC Regular
Security. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Security for this purpose. Except as
provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Security.
PAYMENT LAG REMIC REGULAR SECURITIES; INITIAL PERIOD CONSIDERATIONS.
Certain REMIC Regular Securities will provide for distributions of interest
based on a period that is the same length as the interval between Distribution
Dates but ends prior to each Distribution Date. Any interest that accrues prior
to the Closing Date may be treated under the OID Regulations either (i) as part
of the issue price and the stated redemption price at maturity of the REMIC
Regular Securities or (ii) as not included in the issue price or the stated
redemption price. The OID Regulations provide a special application of the DE
MINIMIS rule for debt instruments with long first accrual periods where the
interest payable for the first period is at a rate which is effectively less
than that which applies in all other periods. In such cases, for the sole
purpose of determining whether original issue discount is DE MINIMIS, the OID
Regulations provide that the stated redemption price is equal to the
instrument's issue price plus the greater of the amount of foregone interest or
the excess (if any) of the instrument's stated principal amount over its issue
price.
VARIABLE RATE REMIC REGULAR SECURITIES. Under the OID Regulations,
REMIC Regular Securities paying interest at a variable rate (a "Variable Rate
REMIC Regular Security") are subject to special rules. A Variable Rate REMIC
Regular Security will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total
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noncontingent principal payments due under the Variable Rate REMIC Regular
Security by more than a specified DE MINIMIS amount; (ii) it provides for stated
interest, paid or compounded at least annually, at (a) one or more qualified
floating rates, (b) a single fixed rate and one or more qualified floating
rates, (c) a single objective rate or (d) a single fixed rate and a single
objective rate that is a qualified inverse floating rate; and (iii) it does not
provide for any principal payments that are contingent, as defined in the OID
Regulations, except as provided in (i), above. Because the OID Regulations
relating to contingent payment debt instruments do not apply to REMIC regular
interests, principal payments on the REMIC Regular Securities should not be
considered contingent for this purpose.
A "qualified floating rate" is any variable rate where variations in
the value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Security is denominated. A multiple of a qualified
floating rate will generally not itself constitute a qualified floating rate for
purposes of the OID Regulations. However, a variable rate equal to (i) the
product of a qualified floating rate and a fixed multiple that is greater than
0.65 but not more than 1.35 or (ii) the product of a qualified floating rate and
a fixed multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate REMIC Regular Security
will be treated as a single qualified floating rate (a "Presumed Single
Qualified Floating Rate"). Two or more qualified floating rates with values
within 25 basis points of each other as determined on the Variable Rate REMIC
Regular Security's issue date will be conclusively presumed to be a Presumed
Single Qualified Floating Rate. Notwithstanding the foregoing, a variable rate
that would otherwise constitute a qualified floating rate, but which is subject
to one or more restrictions such as a cap or floor, will not be a qualified
floating rate for purposes of the OID Regulations unless the restriction is
fixed throughout the term of the Variable Rate REMIC Regular Security or the
restriction is not reasonably expected as of the issue date to significantly
affect the yield of the Variable Rate REMIC Regular Security.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. An interest rate on a
REMIC Regular Security that is the weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC should constitute an
objective rate. Despite the foregoing, a variable rate of interest on a Variable
Rate REMIC Regular Security will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Variable Rate REMIC Regular Security's term will be either significantly
less than or significantly greater than the average value of the rate during the
final half of the Variable Rate REMIC Regular Security's term. Further, an
objective rate does not include a rate that is based on information that is
within the control of the issuer (or a party related to the issuer) or that is
unique to the circumstances of the issuer (or a party related to the issuer). An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Regulations also provide that if a
Variable Rate REMIC Regular Security provides for stated interest at a fixed
rate for an initial period of less than one year followed by a variable rate
that is either a qualified floating rate or an objective rate and if the
variable rate on the Variable Rate REMIC Regular Security's issue date is
intended to approximate the fixed rate, then the fixed rate and the variable
rate together will constitute either a single qualified floating rate or
objective rate, as the case may be (a "Presumed Single Variable Rate"). If the
value of the variable rate and the initial fixed rate are within 25 basis points
of each other as determined on the Variable Rate REMIC Regular Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate REMIC Regular Securities that qualify as a "variable
rate debt instrument" under the OID Regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a Presumed
Single
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Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate REMIC Regular Security"), original issue discount is
computed as described above in "--Current Income on REMIC Regular
Securities--Original Issue Discount" based on the following: (i) stated interest
on the Single Variable Rate REMIC Regular Security which is unconditionally
payable in cash or property (other than debt instruments of the issuer) at least
annually will constitute qualified stated interest; (ii) by assuming that the
variable rate on the Single Variable Rate REMIC Security is a fixed rate equal
to: (a) in the case of a Single Variable Rate REMIC Regular Security with a
qualified floating rate or a qualified inverse floating rate, the value, as of
the issue date, of the qualified floating rate or the qualified inverse floating
rate or (b) in the case of a Single Variable Rate REMIC Regular Security with an
objective rate (other than a qualified inverse floating rate), a fixed rate
which reflects the reasonably expected yield for such Single Variable Rate REMIC
Regular Security; and (iii) the qualified stated interest allocable to an
accrual period is increased (or decreased) if the interest actually paid during
an accrual period exceeds (or is less than) the interest assumed to be paid
under the assumed fixed rate described in (ii), above.
In general, any Variable Rate REMIC Regular Security other than a
Single Variable Rate REMIC Regular Security(a "Multiple Variable Rate REMIC
Regular Security") that qualifies as a "variable rate debt instrument" will be
converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Security. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Security be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Security with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Multiple Variable
Rate REMIC Regular Security's issue date. Any objective rate (other than a
qualified inverse floating rate) provided for under the terms of the Multiple
Variable Rate REMIC Regular Security is converted into a fixed rate that
reflects the yield that is reasonably expected for the Multiple Variable Rate
REMIC Regular Security. (A Multiple Variable Rate REMIC Regular Security may not
bear more than one objective rate.) In the case of a Multiple Variable Rate
REMIC Regular Security that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate REMIC Regular Security provides for
a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate REMIC
Regular Security as of the Multiple Variable Rate REMIC Regular Security's issue
date is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for either the qualified floating rate
or qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Multiple Variable Rate REMIC Regular Security is then
converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate REMIC Regular Security is converted
into an "equivalent" fixed rate debt instrument pursuant to the foregoing rules,
the amounts of original issue discount and qualified stated interest, if any,
are determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described above in "--Current Income on REMIC Regular
Securities--Original Issue Discount." A holder of the Multiple Variable Rate
REMIC Regular Security will account for such original issue discount and
qualified stated interest as if the holder held the "equivalent" fixed rate debt
instrument. In each accrual period, appropriate adjustments will be made to the
amount of qualified stated interest or original issue discount assumed to have
been accrued or paid with respect to the "equivalent" fixed rate debt instrument
in the event that such amounts differ from the actual amount of interest accrued
or paid on the Multiple Variable Rate REMIC Regular Security during the accrual
period.
If a Variable Rate REMIC Regular Security does not qualify as a
"variable rate debt instrument" under the OID
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Regulations, then the Variable Rate REMIC Regular Security would be treated as a
contingent payment debt obligation. The manner in which a Variable Rate REMIC
Regular Security would be taxed if such REMIC Regular Security were treated as a
contingent payment debt obligation is not governed by the OID Regulations
relating to contingent payment debt obligations which do not apply to REMIC
regular interests and Treasury regulations do not otherwise address this point.
INTEREST-ONLY REMIC REGULAR SECURITIES. The Trust Fund intends to
report income from interest-only REMIC Regular Securities to the Internal
Revenue Service and to holders of interest-only REMIC Regular Securities based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Securities will be treated as having original
issue discount.
MARKET DISCOUNT. A holder that acquires a REMIC Regular Security at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the holder of a REMIC Regular Security will be required to allocate
that principal distribution first to the portion of the market discount on such
REMIC Regular Security that has accrued but has not previously been includable
in income, and will recognize ordinary income to that extent. In general terms,
unless Treasury regulations when issued provide otherwise, market discount on a
REMIC Regular Security may be treated, at the election of the holder of the
REMIC Regular Security, as accruing either (i) under a constant yield method,
taking into account the Prepayment Assumption, or (ii) in proportion to accruals
of original issue discount (or, if there is no original issue discount, in
proportion to stated interest at the Interest Rate).
In addition, a holder may be required to defer deductions for a
portion of the holder's interest expense on any debt incurred or continued to
purchase or carry a REMIC Regular Security purchased with market discount. The
deferred portion of any interest deduction would not exceed the portion of the
market discount on the REMIC Regular Security that accrues during the taxable
year in which such interest would otherwise be deductible and, in general, would
be deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Security. The
Code requires that information necessary to compute accruals of market discount
be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Securities.
Notwithstanding the above rules, market discount on a REMIC Regular
Security will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular Security
multiplied by its weighted average remaining life. Weighted average remaining
life presumably is calculated in a manner similar to weighted average life
(described above under "--Current Income on REMIC Regular Securities--Original
Issue Discount"), taking into account distributions (including prepayments)
prior to the date of acquisition of such REMIC Regular Security by the
subsequent purchaser. If market discount on a REMIC Regular Security is treated
as zero under this rule, the actual amount of such discount must be allocated to
the remaining principal distributions on such REMIC Regular Security in
proportion to the amounts of such principal distributions, and when each such
distribution is made, gain equal to the discount, if any, allocated to the
distribution will be recognized.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD RULES. The OID
Regulations provide that the holder of a debt instrument issued after April 4,
1994 may elect to include in gross income all interest that accrues on such debt
instrument using the constant yield method. For purposes of this election,
interest includes stated interest, original issue discount, and market discount,
as adjusted to account for any premium. Holders of REMIC Regular Securities
should consult their own tax advisors regarding the availability or advisability
of such an election.
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SINGLE-CLASS REMICS. In the case of "single-class REMICs," certain
expenses of the REMIC will be allocated to the holders of the REMIC Regular
Securities. The deductibility of such expenses may be subject to certain
limitations. See "--Deductibility of Trust Fund Expenses" below.
SALES OF REMIC REGULAR SECURITIES. If a REMIC Regular Security is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Security. A holder's adjusted basis in a REMIC Regular Security generally equals
the cost of the REMIC Regular Security to the holder, increased by income
reported by the holder with respect to the REMIC Regular Security and reduced
(but not below zero) by distributions on the REMIC Regular Security received by
the holder and by amortized premium. Except as indicated in the next two
paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Security is held as a capital asset.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includable in the seller's income with respect to the REMIC Regular Security had
income accrued thereon at a rate equal to 110% of "the applicable federal rate"
(generally, an average of current yields on Treasury securities), determined as
of the date of purchase of the REMIC Regular Security, over (ii) the amount
actually includable in the seller's income. In addition, gain recognized on the
sale of a REMIC Regular Security by a seller who purchased the REMIC Regular
Security at a market discount would be taxable as ordinary income in an amount
not exceeding the portion of such discount that accrued during the period the
REMIC Regular Security was held by such seller, reduced by any market discount
includable in income under the rules described above under "--Current Income on
REMIC Regular Securities--Market Discount."
REMIC Regular Securities will be "evidences of indebtedness" within
the meaning of Section 582(c)(1) of the Code, so that gain or loss recognized
from a sale of a REMIC Regular Security by a bank or other financial institution
to which such section applies would be ordinary income or loss.
TERMINATION. The REMIC will terminate, if not earlier, shortly
following the REMIC's receipt of the final payment in respect of the underlying
qualified mortgages. The last distribution on a REMIC Regular Security should be
treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a holder of a REMIC Regular Security of a Series will have a
separate contractual right to payments under a Yield Supplement Agreement, and
the tax treatment of such payments, if any, will be addressed in the related
Prospectus Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a holder of a REMIC Residual Certificate must be
treated as ordinary income or loss as the case may be. Income from residual
interests is "portfolio income" which cannot
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be offset by "passive activity losses" in the hands of individuals or other
persons subject to the passive loss rules. The Code also provides that all
residual interests must be issued on the REMIC's startup day and designated as
such. For this purpose, "startup day" means the day on which the REMIC issues
all of its regular and residual interests, and under the REMIC Regulations may,
in the case of a REMIC to which property is contributed over a period of up to
ten consecutive days, be any day designated by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the
amounts taken into account by holders of REMIC Residual Certificates, is
determined in the same manner as in the case of an individual, with certain
exceptions. The accrual method of accounting must be used and the taxable year
of the REMIC must be the calendar year. The basis of property contributed to the
REMIC in exchange for regular or residual interests is its fair market value
immediately after the transfer. The REMIC Regulations determine the fair market
value of the contributed property by deeming it equal to the aggregate issue
prices of all regular and residual interests in the REMIC.
A REMIC Regular Security will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Assets held by the REMIC must be included
in the income of the REMIC as it accrues, rather than being included in income
only upon sale of the Mortgage Assets or as principal on the Mortgage Assets is
paid. The REMIC is not entitled to any personal exemptions or to deductions for
taxes paid to foreign countries and U.S. possessions, charitable contributions
or net operating losses, or to certain other deductions to which individuals are
generally entitled. Income or loss in connection with a "prohibited transaction"
is disregarded. See "--Prohibited Transactions."
As previously discussed, the timing of recognition of negative
original issue discount, if any, on a REMIC Regular Security is uncertain. As a
result, the timing of recognition of the related REMIC taxable income is also
uncertain. The related REMIC taxable income may be recognized when the adjusted
issue price of such REMIC Regular Security would exceed the maximum amount of
future payments with respect to such REMIC Regular Security. However, Treasury
regulations do not address this issue.
A REMIC Residual Certificate has a tax basis in its holder's hands
that is distinct from the REMIC's basis in its assets. The tax basis of a REMIC
Residual Certificate in its holder's hands will be its cost (I.E., the purchase
price of the REMIC Residual Certificate), and will be reduced (but not below
zero) by the holder's share of cash distributions and losses and increased by
its share of taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC
Residual Certificate in any quarter may not exceed the holder's basis in its
REMIC Residual Certificate. Any excess losses may be carried forward
indefinitely to future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce its share of the
REMIC's taxable income.
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MISMATCHING OF INCOME AND DEDUCTIONS. The taxable income recognized by
the holder of a REMIC Residual Certificate in any taxable year will be affected
by, among other factors, the relationship between the timing of recognition of
interest and discount income (or deductions for amortization of premium) with
respect to qualified mortgages, on the one hand, and the timing of deductions
for interest (including original issue discount) on the REMIC Regular
Securities, on the other. In the case of multiple classes of REMIC Regular
Securities issued at different yields, and having different weighted average
lives, taxable income recognized by the holders of REMIC Residual Certificates
may be greater than cash flow in earlier years of the REMIC (with a
corresponding taxable loss or less taxable income than cash flow in later
years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Securities, will increase over time as the shorter term, lower yielding
classes of REMIC Regular Securities are paid, whereas interest income from the
Mortgage Assets may not increase over time as a percentage of the outstanding
principal amount of the Mortgage Assets.
In the case of Tiered REMICs, the OID Regulations provide that the
regular interests in the REMIC which directly owns the Mortgage Assets (the
"Lower Tier REMIC") will be treated as a single debt instrument for purposes of
the original issue discount provisions. Therefore, the Trust Fund will calculate
the taxable income of Tiered REMICs by treating the Lower Tier REMIC regular
interests as a single debt instrument.
EXCESS INCLUSIONS. Any "excess inclusions" with respect to a REMIC
Residual Certificate will be subject to certain special rules. The excess
inclusions with respect to a REMIC Residual Certificate are equal to the excess,
if any, of its share of REMIC taxable income for the quarterly period over the
sum of the daily accruals for such quarterly period. The daily accrual for any
day on which the REMIC Residual Certificate is held is determined by allocating
to each day in a quarter its allocable share of the product of (A) 120% of the
long-term applicable federal rate (for quarterly compounding) that would have
applied to the REMIC Residual Certificates (if they were debt instruments) on
the closing date under Section 1274(d)(1) and (B) of the Code the adjusted issue
price of such REMIC Residual Certificates at the beginning of a quarterly
period. For this purpose, the adjusted issue price of such REMIC Residual
Certificate at the beginning of a quarterly period is the issue price of such
Securities plus the amount of the daily accruals of REMIC taxable income for all
prior quarters, decreased by any distributions made with respect to such
Securities prior to the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be
offset by other deductions, including net operating loss carryforwards, on a
holder's return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular taxable
income computed without regard to the rule that taxable income cannot be less
than the amount of excess inclusions, (ii) the alternative minimum taxable
income of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions. While
these provisions are generally effective for tax years beginning after December
31, 1986, a taxpayer may elect to have these provisions apply only with respect
to tax years beginning after August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization
subject to the tax on unrelated business income imposed by Section 511 of the
Code, the excess inclusions will be treated as unrelated business taxable income
of such holder for purposes of Section 511 of the Code. In addition, the Code
provides that under Treasury regulations, if a real estate investment trust
("REIT") owns a REMIC Residual Certificate, to the extent excess inclusions of
the REIT exceed its real estate investment trust taxable income (excluding net
capital gains), the excess inclusions would be allocated among the shareholders
of the REIT in proportion to the dividends received by the shareholders from the
REIT. Excess
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inclusions derived by regulated investment companies ("RICs"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
PROHIBITED TRANSACTIONS. A REMIC is subject to tax at a rate of 100
percent on any net income it derives from "prohibited transactions." In general,
"prohibited transaction" means the disposition of a qualified mortgage other
than pursuant to specified exceptions, the receipt of income as compensation for
services, the receipt of income from a source other than a qualified mortgage or
certain other permitted investments, or gain from the disposition of an asset
representing a temporary investment of payments on the qualified mortgages
pending distribution on the REMIC Securities. In addition, a tax is imposed on a
REMIC equal to 100 percent of the value of certain property contributed to the
REMIC after its "startup day." No REMIC in which interests are offered hereunder
will accept contributions that would cause it to be subject to such tax. This
provision will not affect a REMIC's ability in accordance with the Agreement to
accept substitute Mortgage Assets or to sell defective Mortgage Assets.
A REMIC is subject to a tax (deductible from its income) on any "net
income from foreclosure property" (determined in accordance with Section
857(b)(4)(B) of the Code as if the REMIC were a REIT).
The related Prospectus Supplement will indicate whether any tax
described in the two preceding paragraphs that may be imposed on a Trust Fund
initially would be borne by the REMIC Residual Certificates in the related REMIC
rather than by the REMIC Regular Securities.
DEALERS' ABILITY TO MARK TO MARKET REMIC RESIDUAL CERTIFICATES.
Treasury regulations provide that all REMIC Residual Certificates acquired on or
after January 4, 1995 are not securities and cannot be marked to market pursuant
to Section 475 of the Code.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
TAX ON DISPOSITION OF REMIC RESIDUAL CERTIFICATES. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Section 582(c) of the Code, the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although the tax treatment with respect to a REMIC Residual Certificate
that has unrecovered basis after all funds of the Trust Fund have been
distributed is not addressed in Treasury regulations, under general tax
principles, the holder would be entitled to claim a loss in the amount of the
unrecovered basis.
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The Code provides that, except as provided in Treasury regulations
(which have not yet been issued), if a holder sells a REMIC Residual Certificate
and acquires the same or other REMIC Residual Certificates, residual interests
in another REMIC, or any similar interests in a "taxable mortgage pool" (as
defined in Section 7701(i) of the Code) during the period beginning six months
before, and ending six months after, the date of such sale, such sale will be
subject to the "wash sale" rules of Section 1091 of the Code. In that event, any
loss realized by the seller on the sale generally will not be currently
deductible.
A tax is imposed on the transfer of any residual interest in a REMIC
to a "disqualified organization." The tax is imposed on the transferor, or,
where the transfer is made through an agent of the disqualified organization, on
the agent. "Disqualified organizations" include for this purpose the United
States, any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions for periods after such transfer with respect to the interest
transferred multiplied by the highest corporate rate of tax. The transferor (or
agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
TREATMENT OF PAYMENTS TO A TRANSFEREE IN CONSIDERATION OF TRANSFER OF
A REMIC RESIDUAL CERTIFICATE. The preamble to the REMIC Regulations indicates
that the Internal Revenue Service is considering the appropriate federal income
tax consequences of any considertaion paid to a transferee on a transfer of an
interest in a REMIC Residual Certificate and has requested comments on this
issue from tax practitioners. A transferee of such an interest should consult
its own tax advisors.
RESTRICTIONS ON TRANSFER; HOLDING BY PASS-THROUGH ENTITIES. An entity
or segregated pool of assets cannot qualify as a REMIC absent reasonable
arrangements designed to ensure that (1) residual interests in such entity or
segregated pool are not held by disqualified organizations and (2) information
necessary to calculate the tax due on transfers to disqualified organizations
(I.E., a computation of the present value of the excess inclusions) is made
available by the REMIC. The governing instruments of a Trust Fund will contain
provisions designed to ensure the foregoing, and any transferee of a REMIC
Residual Certificate must execute and deliver an affidavit stating that neither
the transferee nor any person for whose account such transferee is acquiring the
REMIC Residual Certificate is a disqualified organization. In addition, as to
the requirement that reasonable arrangements be made to ensure that disqualified
organizations do not hold a residual interest in the REMIC, the REMIC
Regulations require that notice of the prohibition be provided either through a
legend on the certificate that evidences ownership, or through a conspicuous
statement in the prospectus or other offering document used to offer the
residual interest for sale. As to the requirement that sufficient information be
made available to calculate the tax on transfers to disqualified organizations
(or the tax, discussed below, on pass-through entities, interests in which are
held by disqualified organizations), the REMIC Regulations further require that
such information also be provided to the Internal Revenue Service.
A tax is imposed on "pass-through entities" holding residual interests
where a disqualified organization is a record holder of an interest in the
pass-through entity. "Pass-through entity" is defined for this purpose to
include RICs, REITs, common trust funds, partnerships, trusts, estates and
subchapter T cooperatives. Except as provided in
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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 number of partners will
be treated as disqualified organizations for purposes of the tax imposed on
pass-through entities if such partnerships hold residual interests in a REMIC.
In addition, 70 percent of an electing large partnership's miscellaneous
itemized deductions will be disallowed, including deductions for servicing and
guaranty fees and any expenses of the REMIC, although the remaining deductions
will not be subject to the 2 percent floor applicable to individual partners.
See "--Deductibility of Trust Fund Expenses" below.
The REMIC Regulations provide that a transfer of a "noneconomic
residual interest" will be disregarded for all federal income tax purposes
unless impeding the assessment or collection of tax was not a significant
purpose of the transfer. A residual interest will be treated as a "noneconomic
residual interest" unless, at the time of the transfer (1) the present value of
the expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate, and (2)
the transferor reasonably expects that for each anticipated excess inclusion,
the transferee will receive distributions from the REMIC, at or after the time
at which taxes on such excess inclusion accrue, sufficient to pay the taxes
thereon. A significant purpose to impede the assessment or collection of tax
exists if the transferor, at the time of the transfer, either knew or should
have known (had "improper knowledge") that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
transferor will be presumed not to have improper knowledge if (i) the transferor
conducts, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
came due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future, and (ii) the
transferee represents to the transferor that (A) the transferee understands that
it might incur tax liabilities in excess of any cash received with respect to
the residual interest and (B) the transferee intends to pay the taxes associated
with owning the residual interest as they come due. Any transferee of a REMIC
Residual Certificate must execute and deliver to the transferor an affidavit
containing the representations described in (ii) above. A different formulation
of this rule applies to transfers of REMIC Residual Certificates by or to
foreign transferees. See "--Foreign Investors in REMIC Securities" below.
DEDUCTIBILITY OF TRUST FUND EXPENSES
A holder of REMIC Securities that is an individual, estate or trust
will be subject to the limitation with respect to certain itemized deductions
described in Section 67 of the Code, to the extent that such deductions, in the
aggregate, do not exceed two percent of the holder's adjusted gross income, and
such holder may not be able to deduct such fees and expenses to any extent in
computing such holder's alternative minimum tax liability. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the Master
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Servicer of the Mortgage Assets. These deductions will be allocated entirely to
the holders of the REMIC Residual Certificates in the case of REMIC Trust Funds
with multiple classes of REMIC Regular Securities that do not pay their
principal amounts ratably. As a result, the REMIC will report additional taxable
income to holders of REMIC Residual Certificates in an amount equal to their
allocable share of such deductions, and individuals, estates, or trusts holding
an interest in such REMIC Residual Certificates may have taxable income in
excess of the cash received. In the case of a "single-class REMIC," the expenses
will be allocated, under Treasury regulations, among the holders of the REMIC
Regular Securities and the REMIC Residual Certificates on a daily basis in
proportion to the relative amounts of income accruing to each holder on that
day. In the case of a holder of a REMIC Regular Security who is an individual or
a "pass-through interest holder" (including certain pass-through entities, but
not including REITs), the deductibility of such expenses will be subject to the
limitations described above. The reduction or disallowance of these deductions
may have a significant impact on the yield of REMIC Regular Securities to such a
holder. In general terms, a single-class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the
single-class REMIC rules.
FOREIGN INVESTORS IN REMIC SECURITIES
REMIC REGULAR SECURITIES. Except as discussed below, a holder of a
REMIC Regular Security who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Security, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Security under penalties of perjury, certifying that the
holder of the REMIC Regular Security is not a United States person and providing
the name and address of the holder, (ii) the holder is not a "10-percent
shareholder" within the meaning of Section 871(h)(3)(B) of the Code, which could
be interpreted to apply to a holder of a REMIC Regular Security who holds a
direct or indirect 10 percent interest in the REMIC Residual Certificates, (iii)
the holder is not a "controlled foreign corporation" (as defined in the Code)
related to the REMIC or related to a 10 percent holder of a residual interest in
the REMIC, and (iv) the holder is not engaged in a United States trade or
business, or otherwise subject to federal income tax as a result of any direct
or indirect connection to the United States other than through its ownership of
a REMIC Regular Security. For these purposes, the term "United States person"
means (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate whose income
is includable in gross income for United States federal income taxation
regardless of its source, and (iv) a trust for which one or more United States
fiduciaries have the authority to control all substantial decisions and for
which a court of the United States can exercise primary supervision over the
trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (iv) above, unless the trust elects to have its United
States status determined under the criteria set forth in (iv) above for tax
years ending after August 20, 1996. Recently issued Treasury regulations (the
"Final Withholding Regulations"), which are generally effective with respect to
payments made after December 31, 1999, consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payor. All holders
should consult their tax advisers regarding the application of the Final
Withholding Regulations.
REMIC RESIDUAL CERTIFICATES. The Conference Report to the Tax Reform
Act of 1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the
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United States is subject to a 30% withholding tax. The withholding tax on
interest does not apply, however, to "portfolio interest" (if certain
certifications as to beneficial ownership are made, as discussed above under
"--Foreign Investors in REMIC Securities--REMIC Regular Securities") or to the
extent a tax treaty reduces or eliminates the tax. Treasury regulations provide
that amounts paid with respect to residual interests qualify as portfolio
interest only if interest on the qualified mortgages held by the REMIC qualifies
as portfolio interest. Generally, interest on the Mortgage Assets held by a
Trust Fund will not qualify as portfolio interest, although interest on the
Private Mortgage-Backed Securities, other pass-through certificates, or REMIC
regular interests held by a Trust Fund may qualify. In any case, a holder of a
REMIC Residual Certificate will not be entitled to the portfolio interest
exception from the 30% withholding tax (or to any treaty exemption or rate
reduction) for that portion of a payment that constitutes excess inclusions.
Generally, the withholding tax will be imposed when REMIC gross income is paid
or distributed to the holder of a residual interest or there is a disposition of
the residual interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Mortgage Assets from 50 percent of the Prepayment Assumption to 200
percent of the Prepayment Assumption. A transfer by a foreign transferor to a
domestic transferee will likewise be disregarded under the REMIC Regulations if
the transfer would have the effect of allowing the foreign transferor to avoid
the tax on accrued excess inclusions.
BACKUP WITHHOLDING ON REMIC SECURITIES
Distributions made on the REMIC Securities and proceeds from the sale
of REMIC Securities to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Securities complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Securities
would be refunded by the Internal Revenue Service or allowable as a credit
against the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust Fund (Form 1066 and
Schedules Q thereto) must be filed as if the Trust Fund were a partnership for
federal income tax purposes. Information on Schedule Q must be provided to
holders of REMIC Residual Certificates with respect to every calendar quarter.
Each holder of a REMIC Residual Certificate will be required to treat items on
its federal income tax returns consistently with their treatment on the Trust
Fund's information returns unless the holder either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from an incorrect schedule received from the Trust Fund. The Trust Fund also
will be subject to the procedural and administrative rules of the Code
applicable to partnerships, including the determination of any adjustments to,
among other things, items of REMIC taxable income by the Internal Revenue
Service. Holders of REMIC Residual Certificates will have certain rights and
obligations with respect to any administrative or judicial proceedings involving
the Internal Revenue Service. Under the Code and Regulations, a REMIC generally
is required to designate a tax matters person. Generally, subject to various
limitations, the tax matters person has authority to act on behalf of the REMIC
and the holders of the REMIC Residual Certificates in connection with
administrative
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determinations and judicial review respecting returns of taxable income of the
REMIC. Treasury regulations exempt from certain of these procedural rules REMICs
having no more than one residual interest holder.
The Prospectus Supplement will indicate whether the Trustee, its
designee or some other party will act as the tax matters person for each REMIC.
Each holder of a REMIC Residual Certificate, by the acceptance of its interest
in the REMIC Residual Certificate, agrees that the Trustee or its designee will
act as the holder's fiduciary in the performance of any duties required of the
holder in the event that the holder is the tax matters person.
FASIT SECURITIES
If a FASIT election with respect to a Trust Fund is to be made, the
Prospectus Supplement will designate the Securities of such Series or the
interests composing such Securities as "regular interests" ("FASIT Regular
Securities") which, where the context so requires, includes a reference to each
interest composing a Security where such interest has been designated as a
regular interest, in lieu of such Securities, in the FASIT (within the meaning
of Section 860L(b)(1)(A) of the Code) or an "ownership interest" ("FASIT
Ownership Certificate") in the FASIT (within the meaning of Section 860L(b)(2)
of the Code). Each class of FASIT Regular Securities which are "high-yield
interests" within the meaning of Section 860L(b)(1)(B) of the Code ("High-Yield
Interests") will be identified as such in the Prospectus Supplement. The term
"FASIT Securities" denotes Securities (or the interests composing Securities) of
a Series with respect to which a FASIT election will be made.
With respect to each Series of FASIT Securities, the Trustee will
agree in the Agreement to elect to treat the related Trust Fund or certain
assets of such Trust Fund as a FASIT. Qualification as a FASIT requires ongoing
compliance with certain conditions which are generally described below. Upon the
issuance of each Series of FASIT Securities, Federal Tax Counsel will deliver
its opinion that, with respect to each Series of FASIT Securities for which a
FASIT election is to be made, under then existing law, and assuming a proper and
timely FASIT election and ongoing compliance with the provisions of the
Agreement and applicable provisions of the Code and applicable Treasury
regulations, if any, the related Trust Fund or certain assets of such Trust Fund
will be a FASIT and the FASIT Securities will be considered to evidence
ownership of "regular interests" or an "ownership interest" within the meaning
of the FASIT provisions of the Code.
QUALIFICATION AS A FASIT
The following is a general description of the requirements under the
applicable provisions of Sections 860H through 860L of the Code for the Trust
Fund or certain assets of each Trust Fund to qualify as a FASIT. Treasury
regulations have not yet been proposed or issued with respect to FASITs. A FASIT
must fulfill an assets test, which requires that substantially all the assets of
the FASIT, as of the close of the third calendar month beginning after the
Startup Day and at all times thereafter, must consist of cash or cash
equivalents, certain permitted debt instruments (other than debt instruments
issued by the holder of the FASIT Ownership Certificate or a related party) and
hedges (including contracts to acquire hedges), foreclosure property and regular
interests in another FASIT or in a REMIC. By analogy to the REMIC provisions, it
appears that the "substantially all" requirements should be met if at all times
the aggregate adjusted basis of the nonqualified assets is less than one percent
of the aggregate adjusted basis of all the FASIT's assets. The FASIT Ownership
Certificate and "High-Yield Interests" (described below) may be held only by
certain fully taxable, domestic corporations ("eligible corporations" described
below). The Agreement for each Trust Fund will provide that no legal or
beneficial interests in the FASIT Ownership Certificate or in any Class of FASIT
Regular Securities which the Seller determines to be a High-Yield Interest may
be transferred or registered unless certain conditions, designed to prevent
violation of this requirement, are met.
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For purposes of the assets test, permitted debt instruments must bear
interest, if any, at a fixed or qualified variable rate. Permitted hedges
include interest rate or foreign currency notional principal contracts, letters
of credit, insurance, guarantees of payment default and similar instruments as
provided in regulations, and which are reasonably required to guarantee or hedge
against the FASIT's risks associated with being the obligor on interests issued
by the FASIT. Foreclosure property is real property acquired by the FASIT in
connection with the default or imminent default of a qualified mortgage,
provided the Seller had no knowledge or reason to know as of the date such asset
was acquired by the FASIT that such a default had occurred or would occur.
Foreclosure property may generally not be held beyond the close of the third
taxable year after the taxable year in which the FASIT acquired such property,
with one extension available from the Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a
FASIT also must meet the following requirements. All of the interests in a FASIT
must be: (i) one or more classes of FASIT regular interests or (ii) a single
FASIT ownership interest. A FASIT regular interest is an interest that is issued
on or after the Startup Day with fixed terms, is designated as a FASIT regular
interest, and (i) unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), (ii) provides that interest payments
(or other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or on a qualified variable rate that would be permitted
under the REMIC Regulations, (iii) has a stated maturity of generally not longer
than 30 years, (iv) has an issue price not greater than 125% of its stated
principal amount, and (v) has a yield to maturity not greater than 5 percentage
points higher that the related applicable federal rate (as defined in Section
1274(d) of the Code). A FASIT regular interest that is described in the
preceding sentence except that it fails to meet one or more of requirements (i),
(ii) (iv) or (v) is a "High-Yield Interest." In order for a FASIT to issue a
High-Yield Interest that fails requirement (ii), such High-Yield Interest must
consist of a specified, nonvarying portion of the interest payments on the
permitted assets (as provided in the REMIC rules). A FASIT ownership interest is
an interest in a FASIT other than a regular interest that is issued on the
Startup Day, is designated a FASIT ownership interest and is held by an
"eligible corporation". An "eligible corporation" is a taxable C corporation
which is not a RIC, REIT, REMIC or cooperative and, therefore, would not include
tax-exempt entities (including pension funds).
If an entity fails to comply with one or more of the ongoing
requirements of the Code for status as a FASIT during any taxable year, the
entity or applicable portion thereof will not be treated as a FASIT thereafter.
In this event, any entity that holds Mortgage Assets and is the obligor with
respect to debt obligations with two or more maturities may be treated as a
separate taxable mortgage pool (I.E, as an association taxable as a corporation;
see "--Tax Characterization of the Trust as a Partnership--Taxable Mortgage
Pools."), and the FASIT Regular Securities may be treated as equity interests
therein. The legislative history of the FASIT provisions indicates, however,
that an entity can continue to be a FASIT if loss of its status was inadvertent,
it takes prompt steps to requalify and other requirements that may be provided
in Treasury regulations are met. Loss of FASIT status results in retirement of
all FASIT regular interests and their reissuance. If the resulting interests
would be treated as equity under general tax principles, cancellation of debt
income may result.
TIERED FASIT STRUCTURES
For certain Series of Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as FASITs
("Tiered FASITs") for federal income tax purposes. Upon the issuance of any such
Series of Securities, Federal Tax Counsel will deliver its opinion that,
assuming compliance with all provisions of the related Agreement and applicable
provisions of the Code and applicable Treasury regulations and rulings, the
Tiered FASITs will each qualify under then existing law as a FASIT and the FASIT
Securities issued by the Tiered FASITs, respectively, will be considered to
evidence ownership of "regular interests" or "ownership interests" in the
related
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FASIT within the meaning of the FASIT provisions of the Code.
Solely for purposes of determining whether the FASIT Regular
Securities will be "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code, and assets described in Section 7701(a)(19)(C) of the
Code, and whether the income on such Securities is interest described in Section
856(c)(3)(B) of the Code, the Tiered FASITs will be treated as one FASIT.
FASIT REGULAR SECURITIES
CURRENT INCOME ON FASIT REGULAR SECURITIES-GENERAL. Except as
otherwise indicated herein, the FASIT Regular Securities will be treated for
federal income tax purposes (but not necessarily for accounting or other
purposes) as debt instruments that are issued by the FASIT on the date of
issuance of the FASIT Regular Securities and not as beneficial interests in the
FASIT or the FASIT's assets. Holders of FASIT Regular Securities who would
otherwise report income under a cash method of accounting will be required to
report income with respect to FASIT Regular Securities under an accrual method.
As FASIT Regular Securities will be treated as debt instruments, they
are subject to the same original issue discount, premium and market discount
provisions that apply to REMIC regular interests and which are described above
in "--REMIC Regular Securities--Current Income on REMIC Regular
Securities--Original Issue Discount," "--Premium" and "--Market Discount,"
except that those FASIT Regular Securities which are High-Yield Interests are
subject to additional provisions set forth below.
HIGH-YIELD INTERESTS. The taxable income of the holder of any
High-Yield Interest for any tax year will in no event be less than the sum of
that holder's taxable income determined solely with respect to that interest
(including gains and losses from sales and exchanges of those interests) and the
"excess inclusions," if any, as defined under the REMIC rules relating to REMIC
Residual Certificates for such tax year (see "REMIC Residual
Certificates--Excess Inclusions"). Therefore, holders of High-Yield Interests
may not use net operating losses to offset any FASIT income derived from the
High-Yield Interest. This rule is coordinated with the rule that limits a
taxpayer's ability to offset REMIC excess inclusion income against net operating
losses. Any net operating loss carryover is computed by disregarding any income
from the disallowed loss. For purposes of the alternative minimum tax, the
taxable income of the holder of any High-Yield Interest is determined without
regard to the above rules with respect to net operating losses. However, the
alternative minimum taxable income of the holder of any High-Yield Interest may
not be less than the holder's taxable income from the FASIT. In addition, the
alternative tax net operating loss deduction is computed without regard to any
increase in taxable income to the holder referred to above. For purposes of
these rules, all members of an affiliated group filing a consolidated return
will be treated as one taxpayer.
A transfer of a High-Yield Interest to a "disqualified holder" is not
recognized for income tax purposes. A "disqualified holder" is any holder other
than a FASIT or an "eligible corporation" (described above). The transferor will
continue to be taxed on the income from the High-Yield Interest, and the
disqualified holder will not include in its income earnings (other than gain)
from the High-Yield Interest, unless the transferee provides the transferor with
an affidavit that the transferee is not a disqualified holder or the Internal
Revenue Service determines that the High-Yield Interest is no longer held by a
disqualified holder and a corporate tax has been paid on the income from the
High-Yield Interest while it was held by a disqualified holder. Under this rule,
no High-Yield Interests will be treated as issued where the FASIT directly
issues these interests to a disqualified holder other than certain securities
dealers.
An excise tax computed at the highest corporate income tax rate is
imposed on a securities dealer (in addition
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to other taxes) if it ceases to be a dealer in securities or subsequently holds
the High-Yield Interest for investment. A securities dealer will not be treated
as having changed his intent for holding High-Yield Interests to investment for
the first 31 days after it acquires the interests unless the holding is a part
of a plan to avoid the restriction on the holding
of High-Yield Interests by disqualified holders.
Where a pass-through entity, other than a FASIT, issues either debt or
equity interests that are supported (i.e., secured by FASIT regular interests
and those interests bear a yield to maturity greater than that held on the FASIT
regular interests or the applicable federal rate plus 5 percentage points), then
an excise tax is imposed on the pass-through entity at a rate equal to the
highest corporate income tax rate on the income of any holder of that instrument
attributable to the FASIT regular interests, unless the pass-through entity did
not issue the debt or equity with the principal purpose of avoiding the rule
that High-Yield Interests not be owned by disqualified holders.
SALE OF FASIT REGULAR SECURITIES. If a FASIT Regular Security is sold,
the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the FASIT Regular
Security. A holder's adjusted basis in a FASIT Regular Security generally equals
the cost of the FASIT Regular Security to the holder, increased by income
reported by the holder with respect to the FASIT Regular Security and reduced
(but not below zero) by distributions on the FASIT Regular Security received by
the holder and by amortized premium. Any such gain or loss generally will be
capital gain or loss, provided the FASIT Regular Security is held as a capital
asset.
FASIT Regular Securities will be "evidences of indebtedness" within
the meaning of Section 582(c)(1) of the Code, so that gain or loss recognized
from a sale of a FASIT Regular Security by a bank or other financial institution
to which such section applies would be ordinary income or loss.
TERMINATION. The FASIT will terminate, if not earlier, shortly
following the FASIT's receipt of the final payment in respect of the underlying
qualified mortgages. The last distribution on a FASIT Regular Security should be
treated as a payment in full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a holder of a FASIT Regular Security of a Series will have a
separate contractual right to payments under a Yield Supplement Agreement (which
may require an allocation of the purchase price between the FASIT Regular
Securities and the Yield Supplement Agreements) and the tax treatment of such
payments, if any, will be addressed in the related Prospectus Supplement.
FASIT OWNERSHIP CERTIFICATE
GENERALLY. All assets, liabilities and items of income, gain,
deduction loss and credit of a FASIT are treated as assets, liabilities and
items of income, gain, deduction, loss and credit of the holder of the FASIT
Ownership Certificate (the "FASIT Owner") in determining the FASIT Owner's
taxable income. The FASIT Owner does not take into account any item of income,
gain or deduction allocable to prohibited transactions as discussed below and
must treat tax-exempt interest accrued by the FASIT as ordinary income. The
FASIT Owner must use the constant yield method, applied under an accrual method
of accounting, in determining all interest, original issue discount, market
discount and premium deductions with respect to debt instruments held by the
FASIT. Like the holder of a High-Yield Interest, the FASIT Owner is not allowed
to offset any net taxable income derived from its FASIT Ownership Certificate
(including gains and losses from sales and exchanges of such Security) with
losses, including net operating losses. See above discussion under "--FASIT
Regular Securities--Income on FASIT Regular Securities--High-Yield Interests."
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NET INCOME FROM PROHIBITED TRANSACTIONS. The FASIT Owner is required
to pay a tax equal to 100 percent of the net income derived from prohibited
transactions. Prohibited transactions include (i) the receipt of income from an
asset that is not a permitted asset; (ii) the disposition of a permitted asset,
other than a permitted disposition as described below; (iii) the receipt of
income derived from any loan originated by the FASIT; and (iv) compensation for
services (other than any fee for a waiver, amendment or consent with respect to
permitted assets, other than foreclosure property). A permitted disposition of a
permitted asset includes a disposition pursuant to the complete liquidation of
any class of regular interests, even if the FASIT itself is not liquidated.
Further, a disposition of a permitted debt instrument is not a prohibited
transaction if the disposition is (i) incident to the foreclosure, default or
imminent default of the instrument; (ii) pursuant to the bankruptcy or
insolvency of the FASIT; (iii) pursuant to a qualified liquidation; (iv)
required to prevent default on a FASIT regular interest where the threatened
default is attributable to a default on one or more debt instruments held by the
FASIT; (v) to facilitate a clean-up call or (vi) to substitute one permitted
debt instrument for another or to reduce overcollateralization of the FASIT by
distributing a debt instrument contributed by the holder of the ownership
interest to such holder (but only if a principal purpose of acquiring the debt
instrument which is disposed of was not the recognition of gain (or the
reduction of loss) as a result of an increase in the market value of the debt
instrument after its acquisition by the FASIT.
TAX ON DISPOSITION OF FASIT OWNERSHIP CERTIFICATE. The sale of a FASIT
Ownership Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the holder's adjusted
basis in the FASIT Ownership Certificate.
If the seller of a FASIT Ownership Certificate held the FASIT
Ownership Certificate as a capital asset, the gain or loss generally will be
capital gain or loss. However, under Section 582(c) of the Code, the sale of a
FASIT Ownership Certificate by certain banks and other financial institutions
will be considered a sale of property other than a capital asset, resulting in
ordinary income or loss. The tax treatment with respect to a FASIT Ownership
Certificate that has unrecovered basis after all funds of the Trust Fund have
been distributed has not been addressed in Treasury regulations, but the holder
presumably would be entitled to claim a loss in the amount of the unrecovered
basis.
The Code provides that, except as provided in Treasury regulations
(which have not been issued), if a holder sells a FASIT Ownership Certificate
and acquires the same or other FASIT Ownership Certificates in another FASIT or
any similar interests in a "taxable mortgage pool" (see "--Tax Characterization
of the Trust as a Partnership--Taxable Mortgage Pools" below) during the period
beginning six months before, and ending six months after, the date of such sale,
such sale will be subject to the "wash sales" rules of Section 1091 of the Code.
In that event, any loss realized by the seller on the sale generally will not be
currently deductible.
STATUS OF FASIT SECURITIES. The FASIT Regular Securities (but not
FASIT Ownership Certificates) will be "real estate assets" for purposes of
Section 856(c)(4)(A) of the Code and assets described in Section 7701(a)(19)(C)
of the Code (assets qualifying under one or both of those sections, applying
each section separately, "qualifying assets") to the extent that the FASIT's
assets are qualifying assets, but not to the extent that the FASIT's assets
consist of Yield Supplement Agreements. However, if at least 95 percent of the
FASIT's assets are qualifying assets, then 100 percent of the FASIT Securities
will be qualifying assets. Similarly, income on the FASIT Securities will be
treated as "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code, subject to the
limitations of the preceding two sentences. In addition to Mortgage Assets, the
Fasit's assets will include payments on the Mortgage Assets held pending
distribution to holders of FASIT Securities, amounts in Reserve Accounts (if
any), other credit enhancements (if any), and possibly buydown funds ("Buydown
Funds"). The related Prospectus Supplement will indicate whether the Mortgage
Assets will be qualifying assets under the foregoing sections of the Code. The
REMIC regulations treat credit enhancements as part of the mortgage or pool of
mortgages to which they
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relate and, therefore, by analogy to the REMIC Regulations, credit enhancements
generally should be qualifying assets. Similarly, by analogy to the REMIC
Regulations, amounts paid on the Mortgage Assets and held pending distribution
to holders of FASIT Securities ("cash flow investments") should be treated as
qualifying assets. Whether amounts in a Reserve Account or Buydown Funds would
also constitute qualifying assets has not been addressed in Treasury
regulations. The Prospectus Supplement for each Series will indicate (if
applicable) that it has Buydown Funds. The FASIT Securities will not be
"residential loans" for purposes of the residential loan requirement of Section
593(g)(4)(B) of the Code.
FOREIGN INVESTORS IN FASIT SECURITIES. FASIT Regular Securities are
subject to the same United States income tax and withholding tax rules as those
that apply to a REMIC Regular Security as described in "Foreign Investors in
REMIC Securities" and "Backup Withholding on REMIC Securities" herein.
FASIT Ownership Certificates and FASIT Regular Securities which are
High-Yield Interests may not be sold or transferred to holders who are not U.S.
persons, and such securities will be subject to transfer restrictions as
described in the Agreement for the Series.
GRANTOR TRUSTS
The discussion under this heading applies only to a Series of
Securities with respect to which neither a REMIC nor a FASIT election is made
("Non-Electing Securities") and which are issued by a grantor trust.
TAX STATUS OF THE TRUST FUND. Upon the issuance of each Series of
Non-Electing Securities, Federal Tax Counsel will deliver its opinion that,
under then current law, assuming compliance with the Agreement, the related
Trust Fund will be classified for federal income tax purposes as a grantor trust
and not as an association taxable as a corporation or a taxable mortgage pool
(see"--Tax Characterization of the Trust as a Partnership-- Taxable Mortgage
Pools"). Accordingly, each holder of a Non-Electing Security will be treated for
federal income tax purposes as the owner of an undivided interest in the
Mortgage Assets included in the Trust Fund. As further described below, each
holder of a Non-Electing Security therefore must report on its federal income
tax return the gross income from the portion of the Mortgage Assets that is
allocable to such Non-Electing Security and may deduct the portion of the
expenses incurred by the Trust Fund that is allocable to such Non-Electing
Security, at the same time and to the same extent as such items would be
reported by such holder if it had purchased and held directly such interest in
the Mortgage Assets and received directly its share of the payments on the
Mortgage Assets and incurred directly its share of expenses incurred by the
Trust Fund when those amounts are received or incurred by the Trust Fund.
A holder of a Non-Electing Security that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of such holder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the "applicable amount" ($100,000
(or $50,000 in the case of a separate return by a married individual), adjusted
for changes in the cost of living subsequent to 1990) will be reduced by the
lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. A holder of a Non-Electing Security
that is not a corporation cannot deduct such expenses for purposes of the
alternative minimum tax (if applicable). Such deductions will include servicing,
guarantee and administrative fees paid to the servicer of the Mortgage Assets.
As a result, individuals, estates, or trusts holding Non-Electing Securities may
have taxable income in excess of the cash received.
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STATUS OF THE NON-ELECTING SECURITIES. The Non-Electing Securities
generally will be "real estate assets" for purposes of Section 856(c)(4)(A) of
the Code and "loans... secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code, and interest income on the
Non-Electing Securities generally will be "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. However, the Non-Electing Securities may not be qualifying assets under
the foregoing sections of the Code to the extent that the Trust Fund's assets
include Buydown Funds, amounts in a Reserve Account, or payments on mortgages
held pending distribution to holders. The Non-Electing Securities should not be
"residential loans made by the taxpayer" for purposes of the residential loan
requirement of Section 593(g)(4)(B) of the Code.
TAXATION OF NON-ELECTING SECURITIES UNDER STRIPPED BOND RULES. The
federal income tax treatment of the Non-Electing Securities will depend on
whether they are subject to the rules of section 1286 of the Code (the "stripped
bond rules"). The Non-Electing Securities will be subject to those rules if
stripped interest-only Securities are issued. In addition, whether or not
stripped interest-only Securities are issued, the Internal Revenue Service may
contend that the stripped bond rules apply on the ground that the Master
Servicer's servicing fee, or other amounts, if any, paid to (or retained by) the
Master Servicer or its affiliates, as specified in the applicable Prospectus
Supplement, represent greater than an arm's length consideration for servicing
the Mortgage Assets. In Revenue Ruling 91-46, the Internal Revenue Service
concluded that retained interest in excess of reasonable compensation for
servicing is treated as a "stripped coupon" under the rules of Section 1286 of
the Code.
If interest retained for the Master Servicer's servicing fee or other
interest is treated as a "stripped coupon," the Non-Electing Securities will
either be subject to the original issue discount rules or the market discount
rules. A holder of a Non-Electing Securities will account for any discount on
the Non-Electing Security (other than an interest treated as a "stripped
coupon") as market discount rather than original issue discount if either (i)
the amount of original issue discount with respect to the Non-Electing Security
was treated as zero under the original issue discount DE MINIMIS rule when the
Non-Electing Security was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from the Mortgage Assets. If neither of the above exceptions
applies, the original issue discount rules will apply to the Non-Electing
Securities. See "--REMIC Regular Securities--Current Income on REMIC Regular
Securities--Original Issue Discount and --Market Discount" above.
If the original issue discount rules apply, the holder of a
Non-Electing Security (whether a cash or accrual method taxpayer) will be
required to report interest income from the Non-Electing Security in each
taxable year equal to the income that accrues on the Non-Electing Security in
that year calculated under a constant yield method based on the yield of the
Non-Electing Security (or, possibly, the yield of each Mortgage Loan underlying
such Non-Electing Security) to such holder. Such yield would be computed at the
rate that, if used in discounting the holder's share of the payments on the
Mortgage Assets, would cause the present value of those payments to equal the
price at which the holder purchased the Non-Electing Security. The Taxpayer
Relief Act of 1997 amended the original issue discount provisions to provide
that for "any pool of debt instruments, the yield on which may be affected by
reason of prepayments," original issue discount shall be accrued based on a
prepayment assumption determined in a manner prescribed by forthcoming
regulations. This might require the use of the pricing prepayment assumption
instead of the prepayment assumptions used in the underlying transactions. The
Prospectus Supplement for each Series of Non-Electing Securities will describe
the prepayment assumption that will be used for this purpose, but no
representation is made that the Mortgage Assets will prepay at that rate or at
any other rate.
In the case of a Non-Electing Security acquired at a price equal to
the principal amount of the Mortgage Assets allocable to the Non-Electing
Security, the use of a reasonable prepayment assumption generally would not have
any significant effect on the yield used in calculating accruals of interest
income. In the case, however, of a Non-Electing Security acquired at a discount
or premium (that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate
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or decelerate the reporting of interest income, respectively.
If a Mortgage Loan is prepaid in full, the holder of a Non-Electing
Security acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Mortgage Loan that is allocable to the Non-Electing
Security and the portion of the adjusted basis of the Non-Electing Security (see
"Sales of Non-Electing Securities" below) that is allocable to the Mortgage
Loan.
Non-Electing Securities of certain Series ("Variable Rate Non-Electing
Securities") may provide for an Interest Rate based on the weighted average of
the interest rates of the Mortgage Assets held by the Trust Fund, which interest
rates may be fixed or variable. In the case of a Variable Rate Non-Electing
Security that is subject to the original issue discount rules, the daily
portions of original issue discount generally will be calculated in the same
manner as discussed above except the principles discussed in "--REMIC Regular
Securities--Current Income on REMIC Regular Securities--Original Issue
Discount--Variable Rate REMIC Regular Securities" will be applied.
TAXATION OF NON-ELECTING SECURITIES IF STRIPPED BOND RULES DO NOT
APPLY. If the stripped bond rules do not apply to a Non-Electing Security, then
the holder will be required to include in income its share of the interest
payments on the Mortgage Assets in accordance with its tax accounting method. In
addition, if the holder purchased the Non-Electing Security at a discount or
premium, the holder will be required to account for such discount or premium in
the manner described below, as if it had purchased the Mortgage Assets directly.
The treatment of any discount will depend on whether the discount with respect
to the Mortgage Assets is original issue discount as defined in the Code and, in
the case of discount other than original issue discount, whether such other
discount exceeds a DE MINIMIS amount. In the case of original issue discount,
the holder (whether a cash or accrual method taxpayer) will be required to
report as additional interest income in each month the portion of such discount
that accrues in that month, calculated based on a constant yield method. In
general it is not anticipated that the amount of original issue discount to be
accrued in each month, if any, will be significant relative to the interest paid
currently on the Mortgage Assets. However, original issue discount could arise
with respect to a Mortgage Loan ("ARM") that provides for interest at a rate
equal to the sum of an index of market interest rates and a fixed number. The
original issue discount for ARMs generally will be determined under the
principals discussed in "--REMIC Regular Securities--Current Income on REMIC
Regular Securities--Original Issue Discount" and "--Variable Rate REMIC Regular
Securities."
If discount on the Mortgage Assets other than original issue discount
exceeds a DE MINIMIS amount (described below), the holder will also generally be
required to include in income in each month the amount of such discount accrued
through such month and not previously included in income, but limited, with
respect to the portion of such discount allocable to any Mortgage Loan, to the
amount of principal on such Mortgage Loan received by the Trust Fund in that
month. Because the Mortgage Assets will provide for monthly principal payments,
such discount may be required to be included in income at a rate that is not
significantly slower (and, under certain circumstances, faster) than the rate at
which such discount accrues (and therefore at a rate not significantly slower
than the rate at which such discount would be included in income if it were
original issue discount). The holder may elect to accrue such discount under a
constant yield method based on the yield of the Non-Electing Security to such
holder. In the absence of such an election, it may be necessary to accrue such
discount under a more rapid straight-line method. Under the DE MINIMIS rule,
market discount with respect to a Non-Electing Security will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Mortgage Assets allocable to the Non-Electing Security and (ii) the weighted
average life (determined using complete years) of the Mortgage Assets remaining
at the time of purchase of the Non-Electing Security. See "--REMIC Regular
Securities--Current Income on REMIC Regular Securities--Market Discount."
If a holder purchases a Non-Electing Security at a premium, such
holder may elect under Section 171 of the Code to amortize, as an offset to
interest income, the portion of such premium that is allocable to a Mortgage
Loan under
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a constant yield method based on the yield of the Mortgage Loan to such holder,
provided that such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before that date should be
allocated among the principal payments on the Mortgage Loan and allowed as an
ordinary deduction as principal payments are made or, perhaps, upon termination.
Treasury regulations do not address whether the foregoing adjustments
for discount or premium would be made based on the scheduled payments on the
Mortgage Assets or taking account of a reasonable prepayment assumption.
If a Mortgage Loan is prepaid in full, the holder of a Non-Electing
Security acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to the Non-Electing Security and the
portion of the adjusted basis of the Non-Electing Security (see "Sales of
Non-Electing Securities" below) that is allocable to the Mortgage Loan.
SALES OF NON-ELECTING SECURITIES. A holder that sells a Non-Electing
Security will recognize gain or loss equal to the difference between the amount
realized in the sale and its adjusted basis in the Non-Electing Security. In
general, such adjusted basis will equal the holder's cost for the Non-Electing
Security, increased by the amount of any income previously reported with respect
to the Non-Electing Security and decreased by the amount of any losses
previously reported with respect to the Non-Electing Security and the amount of
any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-Electing Security were
held as capital assets, except that, for a Non-Electing Security to which the
stripped bond rules do not apply and that was acquired with more than a DE
MINIMIS amount of discount other than original issue discount (see "Taxation of
Non-Electing Securities if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the
Non-Electing Security and that was not previously included in income.
FOREIGN INVESTORS. A holder of a Non-Electing Security who is not a
"United States person" (as defined below) and is not subject to federal income
tax as a result of any direct or indirect connection to the United States other
than its ownership of a Non-Electing Security will not be subject to United
States income or withholding tax in respect of payments of interest or original
issue discount on a Non-Electing Security to the extent attributable to Mortgage
Assets that were originated after July 18, 1984, provided that the holder
complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-Electing
Security under penalties of perjury, certifying that such holder is not a United
States person and providing the name and address of such holder). Recently
issued Treasury regulations (the "Final Withholding Regulations"), which are
generally effective with respect to payments made after December 31, 1999,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide certain presumptions regarding the status of holders when payments
to the holders cannot be reliably associated with appropriate documentation
provided to the payor. All holders should consult their tax advisers regarding
the application of the Final Withholding Regulations. Interest or original issue
discount on a Non-Electing Security attributable to Mortgage Assets that were
originated prior to July 19, 1984 will be subject to a 30% withholding tax
(unless such tax is reduced or eliminated by an applicable tax treaty). For
these purposes, the term "United States person" means a citizen or a resident of
the United States, a corporation, partnership or other entity created or
organized in, or under the laws of, the United States or any political
subdivision thereof, an estate the income of which is subject to United States
federal income taxation regardless of its source, and a trust for which one or
more United States fiduciaries have the authority to control all substantial
decisions and for which a court of the United States can exercise primary
supervision over the trust's administration. For years beginning before January
1, 1997, the term "United States person" shall include a trust whose income is
includible in gross income for United States federal income taxation regardless
of source, in lieu of trusts just described, unless the trust elects to have its
United States status determined under the criteria described in the previous
sentence for tax years ending after August 20, 1996.
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TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
If a Trust Fund is intended to be a partnership for federal income tax
purposes the applicable Agreement will provide that the nature of the income of
the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Securities will
be structured as a private placement under an IRS safe harbor, so that the Trust
Fund will not be characterized as a publicly traded partnership taxable as a
corporation, and that no action will be taken that is inconsistent with the
treatment of the Trust Fund as a partnership (such as election to treat the
Trust Fund as a corporation for federal income tax purposes). If, however, the
Trust Fund has a single owner for federal income tax purposes, it will be
treated as a division of its owner and as such will be disregarded as an entity
separate from its owner for federal income tax purposes, assuming no election
will be made to treat the Trust Fund as a corporation for federal income tax
purposes.
TAXABLE MORTGAGE POOLS. Certain entities classified as "taxable
mortgage pools" are subject to corporate level tax on their net income. A
"taxable mortgage pool" is generally defined as an entity that meets the
following requirements: (i)_ the entity is not a REMIC or a FASIT, (ii)
substantially all of the assets of the entity are debt obligations, and more
than 50 percent of such debt obligations consists of real estate mortgages (or
interests therein), (iii) the entity is the obligor under debt obligations with
two or more maturities, and (iv) payments on the debt obligations on which the
entity is the obligor bear a relationship to the payments on the debt
obligations which the entity holds as assets. With respect to requirement (iii),
the Code authorizes the IRS to provide by regulations that equity interests may
be treated as debt for purposes of determining whether there are two or more
maturities. If the Trust Fund were treated as a taxable mortgage pool, it would
be ineligible to file consolidated returns with any other corporation and could
be liable for corporate tax. Treasury regulations do not provide for the
recharacterization of equity as debt for purposes of determining whether an
entity has issued debt with two maturities, except in the case of transactions
structured to avoid the taxable mortgage pool rules. Federal Tax Counsel will
deliver its opinion for a Trust Fund which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
that the Trust Fund will not be a taxable mortgage pool. This opinion will be
based on the assumption that the terms of the related Agreement and related
documents will be complied with, and on Federal Tax Counsel's conclusion that
either the number of classes of debt obligations issued be the Trust Fund, or
the nature of the assets held by the Trust Fund will exempt the Trust Fund from
treatment as a taxable mortgage pool.
TAX CONSEQUENCES TO HOLDERS OF DEBT SECURITIES ISSUED BY A PARTNERSHIP
GENERAL. Certain Non-Electing Securities ("Debt Securities") may be
issued with the intention to treat them, for federal income tax purposes, either
as (i) nonrecourse debt of the Seller secured by the related Mortgage Assets, in
which case the related Trust Fund will constitute only a security device which
constitutes a collateral arrangement for the issuance of secured debt and not an
entity for federal income tax purposes or (ii) debt of a partnership, in which
case the related Trust Fund will constitute a partnership for federal income tax
purposes, and Federal Tax Counsel will deliver its opinion that, for federal
income tax purposes, assuming compliance with all the provisions of the related
Indenture, (i) Debt Securities will be characterized as debt issued by, and not
equity in, the related Trust Fund and (ii) the related Trust Fund will not be
characterized as an association (or publicly traded partnership within the
meaning of Code Section 7704) taxable as a corporation or as a taxable mortgage
pool. Since different criteria are used to determine the non-tax accounting
treatment of the issuance of Debt Securities, however, the Seller expects to
treat such transactions, for financial accounting purposes, as a transfer of an
ownership interest in the related Mortgage Assets to the related Trust Fund and
not as the issuance of debt obligations. In this regard, it should be noted that
the IRS has issued a notice stating that, upon examination, it will scrutinize
instruments treated as debt for federal income tax purposes but as equity for
regulatory, rating agency or financial accounting purposes to determine if their
purported status as debt for federal
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income tax purposes is appropriate. Assuming, as Federal Tax Counsel advises,
that Debt Securities will be treated as indebtedness for federal income tax
purposes, holders of Debt Securities, using their method of tax accounting, will
follow the federal income tax treatment hereinafter described.
ORIGINAL ISSUE DISCOUNT. If interest payments on the Debt Securities
may, in the event of certain shortfalls, be deferred for periods exceeding one
year, it is likely that the Debt Securities will be treated as having been
issued with "original issue discount" within the meaning of Section 1273(a) of
the Code. As a result, interest payments may not be considered "qualified stated
interest" payments.
In general, a holder of a Debt Security having original issue discount
must include original issue discount in ordinary income as it accrues in advance
of receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a Debt
Security will be computed generally as described under "--REMIC Regular
Securities--Current Income on REMIC Regular Securities--Original Issue Discount"
and "--Variable Rate Regular Securities." The Seller intends to report any
information required with respect to the Debt Securities based on the OID
Regulations.
MARKET DISCOUNT. A purchaser of a Debt Security may be subject to the
market discount rules of Code Sections 1276 through 1278. In general, "market
discount" is the amount by which the stated redemption price at maturity (or, in
the case of a Debt Security issued with original issue discount, the adjusted
issue price) of the Debt Security exceeds the purchaser's basis in a Debt
Security. The holder of a Debt Security that has market discount generally will
be required to include accrued market discount in ordinary income to the extent
payments includible in the stated redemption price at maturity of such Debt
Security are received. The amount of market discount on a Debt Security will be
computed generally as described under "--REMIC Regular Securities--Current
Income on REMIC Regular Securities--Market Discount."
PREMIUM. A Debt Security purchased at a cost greater than its
currently outstanding stated redemption price at maturity is considered to be
purchased at a premium. A holder of a Debt Security which holds a Debt Security
as a "capital asset" within the meaning of Section 1221 of the Code may elect
under Section 171 of the Code to amortize the premium under the constant
interest method. That election will apply to all premium obligations that the
holder of a Debt Security acquires on or after the first day of the taxable year
for which the election is made, unless the IRS permits the revocation of the
election. In addition, it appears that the same rules that apply to the accrual
of market discount on installment obligations are intended to apply in
amortizing premium on installment obligations such as the Debt Securities. The
treatment of premium incurred upon the purchase of a Debt Security will be
determined generally as described above under "--REMIC Regular
Securities--Premium."
SALE OR EXCHANGE OF DEBT SECURITIES. If a holder of a Debt Security
sells or exchanges a Debt Security, the holder of a Debt Security will recognize
gain or loss equal to the difference, if any, between the amount received and
the holder of a Debt Security's adjusted basis in the Debt Security. The
adjusted basis in the Debt Security generally will equal its initial cost,
increased by any original issue discount or market discount previously included
in the seller's gross income with respect to the Debt Security and reduced by
the payments previously received on the Debt Security, other than payments of
qualified stated interest, and by any amortized premium.
In general, except as described above with respect to market discount,
and except for certain financial institutions subject to Code Section 582(c),
any gain or loss on the sale or exchange of a Debt Security recognized by an
investor who holds the Debt Security as a capital asset (within the meaning of
Code Section 1221), will be capital gain or loss and will be long-term or
short-term depending on whether the Debt Security has been held for more than
one year. For corporate taxpayers, there is no preferential rate afforded to
long-term capital gains. For individual
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taxpayers, net capital gains are subject to varying tax rates depending upon the
holding period of the Debt Securities.
BACKUP WITHHOLDING. Holders of Debt Securities will be subject to
backup withholding rules identical to those applicable to REMIC Regular
Securities. See "--REMIC Regular Securities--Backup Withholding on REMIC
Securities."
TAX TREATMENT OF FOREIGN INVESTORS. Holders of Debt Securities who are
foreign investors will be subject to taxation in the same manner as foreign
holders of REMIC Regular Securities. See"--REMIC Regular Securities--Foreign
Investors in REMIC Securities."
TAX CONSEQUENCES TO HOLDERS OF NOTES ISSUED BY A PARTNERSHIP
The Trust Fund will agree, and the holders of Notes will agree by
their purchase of Notes, to treat the Notes as debt for federal income tax
purposes. If the related Prospectus Supplement indicates that one or more
Classes of Notes are to be treated as debt for federal income tax purposes,
Federal Tax Counsel will advise the Seller that the Notes will be classified as
debt for federal income tax purposes. If, contrary to the opinion of Federal Tax
Counsel, the IRS successfully asserted that one or more of the Notes did not
represent debt for federal income tax purposes, the Notes might be treated as
equity interests in the Trust Fund. If so treated, the Trust Fund would likely
be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
foreign investors generally would be subject to U.S. federal income tax and
federal income tax return filing and withholding requirements, income to certain
tax-exempt entities would be "unrelated business taxable income," and individual
holders might be subject to certain limitations on their ability to deduct their
share of the Trust Fund's expenses.
With respect to those Securities issued as Notes, no regulations,
published rulings or judicial decisions exist that discuss the characterization
for federal income tax purposes of instruments with terms substantially the same
as the Notes. However, if the related Prospectus Supplement indicates that one
or more Classes of Notes are to be treated as debt for federal income tax
purposes, Federal Tax Counsel will deliver its opinion that, for federal income
tax purposes, assuming compliance with all the provisions of the related
Indenture, (i) such Notes will be characterized as debt issued by, and not
equity in, the related Trust Fund and (ii) the related Trust Fund will not be
characterized as an association (or publicly traded partnership within the
meaning of Section 7704 of the Code) taxable as a corporation or as a taxable
mortgage pool. Assuming, as Federal Tax Counsel advises, that Notes are treated
as indebtedness for federal income tax purposes, holders of Notes, using their
method of tax accounting, will follow the same federal income tax treatment as
Debt Securities, as described above under "--Tax Consequences for Holders of
Debt Securities Issued by a Partnership."
For federal income tax purposes, (i) Notes held by a thrift
institution taxed as a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) interest on Notes held by
a real estate investment trust will not be treated as "interest on obligations
secured by mortgages on real property or on interests in real property "within
the meaning of Code Section 856(c)(3)(B); (iii) Notes held by a real estate
investment trust will not constitute "real estate assets" or "Government
securities" within the meaning of Section 856(c)(4)(A) of the Code; and (v)
Notes held by a regulated investment company will not constitute "Government
securities" within the meaning of Section 851(b)(3)(A)(i) of the Code.
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TAX CONSEQUENCES TO HOLDERS OF CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. In the case of a Trust
Fund intended to qualify as a partnership for federal income tax purposes, the
Trust Fund and the Seller will agree, and the holders of Certificates will agree
by their purchase of Certificates, to treat the Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust Fund, the partners of the partnership being the
holders of Certificates, and the Notes, if any, being debt of the partnership,
or if there is a single holder of Certificates for federal income tax purposes,
to disregard the Trust Fund as an entity separate from the holder of
Certificates.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Generally, provided
such Certificates are issued at or close to face value, any such
characterization would not result in materially adverse tax consequences to
holders of Certificates as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership. The following discussion also assumes that all payments on the
Certificates are denominated in U.S. dollars, none of the Certificates have
interest rates which would qualify as contingent interest under the OID
regulations, and that a Series of Securities includes a single Class of
Certificates. If these conditions are not satisfied with respect to any given
Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each holder of Certificates will be
required to separately take into account such holder's allocated share of
income, gains, losses, deductions and credits of the Trust Fund. The Trust
Fund's income will consist primarily of interest and finance charges earned on
the Mortgage Assets (including appropriate adjustments for market discount, OID
and bond premium) and any gain upon collection or disposition of Mortgage
Assets. The Trust Fund's deductions will consist primarily of interest and OID
accruing with respect to the Notes, servicing and other fees, and losses or
deductions upon collection or disposition of Mortgage Assets.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Agreement). The Agreement will provide, in general, that the holders
of Certificates will be allocated taxable income of the Trust Fund for each
month equal to the sum of (i) the interest that accrues on the Certificates in
accordance with their terms for such month, including interest accruing at the
Interest Rate for such month and interest on amounts previously due on the
Certificates but not yet distributed; (ii) any Trust Fund income attributable to
discount on the Mortgage Assets that corresponds to any excess of the principal
amount of the Certificates over their initial issue price; (iii) prepayment
premium payable to the holders of Certificates for such month; and (iv) any
other amounts of income payable to the holders of Certificates for such month.
Such allocation will be reduced by any amortization by the Trust Fund of premium
on the Mortgage Assets that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Seller. Based on the economic arrangement of
the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to holders of Certificates. Moreover, even under the foregoing method of
allocation, holders of Certificates may be allocated income equal to the entire
Interest Rate plus the other items described above even though the Trust Fund
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis and holders of Certificates may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all holders of Certificates
but holders may be purchasing Certificates at different times and
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at different prices, such holders may be required to report on their tax returns
taxable income that is greater or less than
the amount reported to them by the Trust Fund.
If Notes are also issued, all of the taxable income allocated to a
holder of Certificates that is a pension, profit sharing or employee benefit
plan or other tax-exempt entity (including an individual retirement account)
will constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund
(including fees to the Master Servicer but not interest expense) would be
miscellaneous itemized deductions. Such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to holders of Certificates on an aggregate basis. If the IRS
were to require that such calculations be made separately for each Mortgage
Loan, the Trust Fund might be required to incur additional expense but it is
believed that there would not be a material adverse effect on such holders.
DISCOUNT AND PREMIUM. It is believed that the Mortgage Assets will not
have been issued with OID and, therefore, the Trust Fund should not have
original issue discount income. However, the purchase price paid by the Trust
Fund for the Mortgage Assets may be greater or less than the remaining principal
balance of the Mortgage Assets at the time of purchase. If so, the Mortgage Loan
will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Mortgage Loan by Mortgage Loan
basis.)
If the Trust Fund acquires the Mortgage Assets at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Assets or to offset any
such premium against interest income on the Mortgage Assets. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to holders of Certificates.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates issued by a partnership in an amount equal
to the difference between the amount realized and the seller's tax basis in the
Certificates sold. The tax basis of a holder in a Certificate will generally
equal the holder's cost increased by the holder's share of Trust Fund income
(includible in income) and decreased by any distributions received with respect
to such Certificate. In addition, both the tax basis in the Certificates and the
amount realized on a sale of a Certificate would include the holder's share of
the Notes and other liabilities of the Trust Fund. A holder acquiring
Certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in such Certificates, and, upon sale or other disposition of
some of the Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
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Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Mortgage Assets would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust Fund does not expect to have any
other assets that would give rise to such special reporting requirements. Thus,
to avoid those special reporting requirements, the Trust Fund will elect to
include market discount in income as it accrues.
If a holder of Certificates is required to recognize an aggregate
amount of income (not including income attributable to disallowed itemized
deductions described above) over the life of the Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN SELLERS AND TRANSFEREES. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the holders of
Certificates in proportion to the principal amount of Certificates owned by them
as of the close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The legislative history relating to these provisions directs Treasury
to establish a convention for such allocations, but no Treasury regulations have
been issued or proposed. Accordingly, the use of such a monthly convention may
not be permitted. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the holders of Certificates. The
Trust Fund's method of allocation between transferors and transferees may be
revised to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a holder sells its
Certificates at a profit (loss), the purchasing holder will have a higher
(lower) basis in the Certificates than the selling holder had. The tax basis of
the Trust Fund's assets will not be adjusted to reflect that higher (or lower)
basis unless the Trust Fund were to file an election under Section 754 of the
Code. In order to avoid the administrative complexities that would be involved
in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust Fund currently does not intend to
make such election. As a result, holders of Certificates might be allocated a
greater or lesser amount of Trust Fund income than would be appropriate based on
their own purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each holder's allocable share of items of Trust Fund
income and expense to holders and the IRS on Schedule K-1. The Trust Fund will
provide the Schedule K-1 information to nominees that fail to provide the Trust
Fund with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as
a nominee at any time during a calendar year is required to furnish the Trust
Fund with a statement containing certain information on the nominee, the
beneficial owners and the Certificates so held. Such information includes (i)
the name, address and taxpayer identification number
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of the nominee and (ii) as to each beneficial owner (x) the name, address and
identification number of such person, (y) whether such person is a United States
person, a tax-exempt entity or a foreign government, an international
organization, or any wholly owned agency or instrumentality of either of the
foregoing, and (z) certain information on Certificates that were held, bought or
sold on behalf of such person throughout the year. In addition, brokers and
financial institutions that hold Certificates through a nominee are required to
furnish directly to the Trust Fund information as to themselves and their
ownership of Certificates. A clearing agency registered under Section 17A of the
Exchange Act is not required to furnish any such information statement to the
Trust Fund. The information referred to above for any calendar year must be
furnished to the Trust Fund on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust Fund with the
information described above may be subject to penalties.
The Seller will be designated as the tax matters partner in the
related Agreement and, as such, will be responsible for representing the holders
of Certificates in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the holders of Certificates,
and, under certain circumstances, a holder of Certificates may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of returns of a holder of Certificates
and adjustments of items not related to the income and losses of the Trust Fund.
TAX CONSEQUENCES TO FOREIGN HOLDERS OF CERTIFICATES. There is no clear
authority addressing the issue of whether the Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to foreign investors. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold pursuant to Section 1446 of the
Code on the portion of its taxable income that is allocable to holders of
Certificates that are foreign investors, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for foreign holders that
are taxable as corporations and 39.6% for all other foreign holders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Trust Fund to change its withholding procedures.
Each holder of Certificates that is a foreign investor might be
required to file a U.S. individual or corporate income tax return (including, in
the case of a corporation, the branch profits tax) on its share of the Trust
Fund's income. A foreign holder generally would be entitled to file with the IRS
a claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a holder of
Certificates who is a foreign investor generally will be considered guaranteed
payments to the extent such payments are determined without regard to the income
of the Trust Fund. If these interest payments are properly characterized as
guaranteed payments, then the interest probably will not be considered
"portfolio interest." As a result, holders of Certificates will be subject to
United States federal income tax and withholding tax at a rate of 30%, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
investor would only be entitled to claim a refund for that portion of the taxes,
if any, in excess of the taxes that should be withheld with respect to the
guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the holder of Certificates fails to
comply with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code and, if necessary, adequately
demonstrates such status.
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TAXATION OF CLASSES OF EXCHANGEABLE SECURITIES
GENERAL
The arrangement pursuant to which the ES Classes of a Series are
created, sold and administered (an "ES Pool") will be classified as a grantor
trust under subpart E, part I of subchapter J of the Code. The interests in the
classes of Securities that have been exchanged for ES Classes will be the assets
of the ES Pool and the ES Classes represent beneficial ownership of these
interests in the classes of Securities.
TAX STATUS
The ES Classes should be considered to represent "real estate assets"
within the meaning of Code Section 856(c)(4)(A) and assets described in Section
7701(a)(19)(C) of the Code. Original issue discount and interest accruing on ES
Classes should be considered to represent "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. ES Classes will be "qualified mortgages" under Section 860G(a) (3) of the
Code for a REMIC.
TAX ACCOUNTING FOR EXCHANGEABLE SECURITIES
An ES Class represents beneficial ownership of an interest in one or
more classes of Securities on deposit in an Exchangeable Security Trust Fund, as
specified in the applicable Prospectus Supplement. If it represents an interest
in more than one class of Securities, a purchaser must allocate its basis in the
ES Class among the interests in the classes of Securities in accordance with
their relative fair market values as of the time of acquisition. Similarly, on
the sale of such an ES Class, the holder must allocate the amount received on
the sale among the interests in the classes of Securities in accordance with
their relative fair market values as of the time of sale.
The holder of an ES Class must account separately for each interest in
a class of Securities (there may be only one such interest). Where the interest
represents a pro rata portion of a class of Securities, the holder of the ES
Class should account for such interest as described under "--Current Income on
REMIC Regular Securities" above. Where the interest represents beneficial
ownership of a disproportionate part of the principal and interest payments on a
class of Securities (a "Strip"), the holder is treated as owning, pursuant to
Section 1286 of the Code, "stripped bonds" to the extent of its share of
principal payments and "stripped coupons" to the extent of its share of interest
payments on such class of Securities. The Seller intends to treat each Strip as
a single debt instrument for purposes of information reporting. The Internal
Revenue Service, however, could take a different position. For example, the
Internal Revenue Service could contend that a Strip should be treated as a pro
rata part of the class of Securities to the extent that the Strip represents a
pro rata portion thereof, and "stripped bonds" or "stripped coupons" with
respect to the remainder. An investor should consult its tax advisor regarding
this matter.
A holder of an ES Class should calculate original issue discount with
respect to each Strip and include it in ordinary income as it accrues, which may
be prior to the receipt of cash attributable to such income, in accordance with
a constant interest method that takes into account the compounding of interest.
See "--Current Income on REMIC Regular Securities--Original Issue Discount"
above. The holder should determine its yield to maturity based on its purchase
price allocated to the Strip and on a schedule of payments projected using a
prepayment assumption, and then make periodic adjustments to take into account
actual prepayment experience. With respect to a particular holder,
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Treasury regulations do not address whether the prepayment assumption used to
calculate original issue discount would be determined at the time of purchase of
the Strip or would be the original prepayment assumption with respect to the
related class of Securities. Further, if the related class of Securities is
subject to redemption as described in the applicable Prospectus Supplement,
Treasury regulations do not address the extent to which such prepayment
assumption should take into account the possibility of the retirement of the
Strip concurrently with the redemption of such class of Securities. An investor
should consult its tax advisor regarding these matters. For purposes of
information reporting relating to original issue discount, the original yield to
maturity of the Strip, determined as of the date of issuance of the Series, will
be calculated based on the original prepayment assumption.
If original issue discount accruing with respect to a Strip, computed
as described above, is negative for any period, the holder is entitled to offset
such amount only against future positive original issue discount accruing from
such Strip, and income is reported in all cases in this manner. Although not
entirely free from doubt, such a holder may be entitled to deduct a loss to the
extent that its remaining basis would exceed the maximum amount of future
payments to which the holder is entitled with respect to such Strip, assuming no
further prepayments of the Mortgages (or, perhaps, assuming prepayments at a
rate equal to the prepayment assumption). Although the issue is not free from
doubt, all or a portion of such loss may be treated as a capital loss if the
Strip is a capital asset in the hands of the holder.
A holder realizes gain or loss on the sale of a Strip in an amount
equal to the difference between the amount realized and its adjusted basis in
such Strip. The holder's adjusted basis generally is equal to the holder's
allocated cost of the Strip, increased by income previously included, and
reduced (but not below zero) by distributions previously received. Except as
described below, any gain or loss on such sale is capital gain or loss if the
holder has held its interest as a capital asset and is long-term if the interest
has been held for the long-term capital gain holding period (more than one
year). Such gain or loss will be ordinary income or loss (i) for a bank or
thrift institution or (ii) to the extent income recognized by the holder is less
than the income that would have been recognized if the yield on such interest
were 110% of the applicable federal rate under Section 1274(d) of the Code.
If a holder exchanges a single ES Class (an "Exchanged ES Class") for
several ES Classes (each, a "Received ES Class") and then sells one of the
Received ES Classes, the sale will subject the investor to the coupon stripping
rules of Section 1286 of the Code. The holder must allocate its basis in the
Exchanged ES Class between the part of such class underlying the Received ES
Class that was sold and the part of the Exchanged ES Class underlying the
Received ES Classes that was retained, in proportion to their relative fair
market values as of the date of such sale. The holder is treated as purchasing
the interest retained for the amount of basis allocated to such interest. The
holder must calculate original issue discount with respect to the retained
interest as described above.
Although the matter is not free from doubt, a holder that acquires in
one transaction a combination of ES Classes that may be exchanged for a single
ES Class that is identical to a class of Securities that is on deposit in the
related Exchangeable Security Trust Fund should be treated as owning the
relevant class of Securities. EXCHANGES OF EXCHANGEABLE SECURITIES
An exchange of an interest in one or more ES Classes for an interest
in one or more other related ES Classes that are part of the same Combination,
or vice versa, will not be a taxable exchange. After the exchange, the holder is
treated as continuing to own the interests in the class or classes of
Exchangeable Securities that it owned immediately prior to the exchange.
TAX TREATMENT OF FOREIGN INVESTORS
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A holder of an ES Class is subject to taxation in the same manner as
foreign holders of REMIC Regular Securities. See "--REMIC Regular
Securities--Investors in REMIC Securities."
BACKUP WITHHOLDING
A holder of an ES Class is subject to backup withholding rules to
those applicable to REMIC Regular Securities. See "--REMIC Regular
Securities--Backup Withholding on REMIC Securities."
REPORTING AND ADMINISTRATIVE MATTERS
Reports will be made to the Internal Revenue Service and to holders of
record of ES Classes that are not excepted from the reporting requirements.
CALLABLE CLASSES
Any amount received in redemption of a class of Securities that is a
Callable Class will be treated under the original issue discount rules and
market discount rules as a distribution with respect to such class of Securities
in the same manner as REMIC Regular Securities. See "--REMIC Regular
Securities--Original Issue Discount" and "--Market Discount."."
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Federal Income Tax Consequences," potential investors should consider the state
and local income tax consequences of the acquisition, ownership, and disposition
of the Securities. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
GENERAL. A fiduciary of a pension, profit-sharing, retirement or other
employee benefit plan subject to Title I of ERISA, should consider the fiduciary
standards under ERISA in the context of the plan's particular circumstances
before authorizing an investment of a portion of such plan's assets in the
Securities. Accordingly, pursuant to Section 404 of ERISA, such fiduciary should
consider among other factors (i) whether the investment is for the exclusive
benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the applicable diversification requirements; (iii) whether
the investment is in accordance with the documents and instruments governing the
plan; and (iv) whether the investment is prudent, considering the nature of the
investment. Fiduciaries of plans also should consider ERISA's prohibition on
improper delegation of control over, or responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code (each, a "Plan"), are prohibited from
engaging in a broad range of transactions involving Plan assets and persons
having certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406
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of ERISA and excise taxes are imposed upon such persons by Section 4975 of the
Code. The Seller, Bear, Stearns & Co. Inc., each Master Servicer or other
servicer, any Pool Insurer, any Special Hazard Insurer, the Trustee, and certain
of their affiliates might be considered "parties in interest" or "disqualified
persons" with respect to a Plan. If so, the acquisition, holding or disposition
of Securities by or on behalf of such Plan could be considered to give rise to a
"prohibited transaction" within the meaning of ERISA and the Code unless an
exemption is available. Furthermore, if an investing Plan's assets were deemed
to include the Mortgage Loans and not merely an interest in the Securities,
transactions occurring in the management of Mortgage Loans might constitute
prohibited transactions and the fiduciary investment standards of ERISA could
apply to the assets of the Trust Fund, unless an administrative exemption
applies.
ERISA CONSIDERATIONS RELATING TO CERTIFICATES. In DOL Regulation
ss.2510.3-101 (the "Plan Asset Regulations"), the U.S. Department of Labor has
defined what constitutes Plan assets for purposes of ERISA and Section 4975 of
the Code. The Regulation provides that if a Plan makes an investment in an
"equity interest" in an entity, the assets of the entity will be considered the
assets of such Plan unless certain exceptions apply. The Seller can give no
assurance that the Securities will qualify for any of the exceptions under the
Regulation. As a result, the Mortgage Loans may be considered the assets of any
Plan which acquires Securities, unless some administrative exemption is
available.
The U.S. Department of Labor has issued an administrative exemption,
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1"), which, under certain
conditions, exempts from the application of the prohibited transaction rules of
ERISA and the excise tax provisions of Section 4975 of the Code transactions
involving a Plan in connection with the operation of a "mortgage pool" and the
purchase, sale and holding of "mortgage pool pass-through certificates." A
"mortgage pool" is defined as an investment pool, consisting solely of interest
bearing obligations secured by first or second mortgages or deeds of trust on
single-family residential property, property acquired in foreclosure and
undistributed cash. A "mortgage pool pass-through certificate" is defined as a
certificate which represents a beneficial undivided interest in a mortgage pool
which entitles the holder to pass-through payments of principal and interest
from the Mortgage Loans.
For the exemption to apply, PTCE 83-1 requires that (i) the Seller and
the Trustee maintain a system of insurance or other protection for the Mortgage
Loans and the property securing such Mortgage Loans, and for indemnifying
holders of Certificates against reductions in pass-through payments due to
defaults in loan payments or property damage in an amount at least equal to the
greater of 1% of the aggregate principal balance of the Mortgage Loans, or 1% of
the principal balance of the largest covered pooled Mortgage Loan; (ii) the
Trustee may not be an affiliate of the Seller; and (iii) the payments made to
and retained by the Seller in connection with the Trust Fund, together with all
funds inuring to its benefit for administering the Trust Fund, represent no more
than "adequate consideration" for selling the Mortgage Loans, plus reasonable
compensation for services provided to the Trust Fund.
In addition, PTCE 83-1 exempts the initial sale of Certificates to a
Plan with respect to which the Seller, the Special Hazard Insurer, the Pool
Insurer, the Master Servicer, or other servicer, or the Trustee is a party in
interest if the Plan does not pay more than fair market value for such
Certificate and the rights and interests evidenced by such Certificate are not
subordinated to the rights and interests evidenced by other Certificates of the
same pool. PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the Mortgage
Pool, provided that any payments made to the Master Servicer in connection with
the servicing of the Trust Fund are made in accordance with a binding agreement,
copies of which must be made available to prospective investors.
In the case of any Plan with respect to which the Seller, the Master
Servicer, the Special Hazard Insurer, the Pool Insurer, or the Trustee is a
fiduciary, PTCE 83-1 will only apply if, in addition to the other requirements:
(i) the initial sale, exchange or transfer of Certificates is expressly approved
by an independent fiduciary who has authority
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to manage and control those plan assets being invested in Certificates; (ii) the
Plan pays no more for the Certificates than would be paid in an arm's length
transaction; (iii) no investment management, advisory or underwriting fee, sale
commission, or similar compensation is paid to the Seller with regard to the
sale, exchange or transfer of Certificates to the Plan; (iv) the total value of
the Certificates purchased by such Plan does not exceed 25% of the amount
issued; and (v) at least 50% of the aggregate amount of Certificates is acquired
by persons independent of the Seller, the Trustee, the Master Servicer, and the
Special Hazard Insurer or Pool Insurer.
Before purchasing Certificates, a fiduciary of a Plan should confirm
that the Trust Fund is a "mortgage pool," that the Certificates constitute
"mortgage pool pass-through certificates," and that the conditions set forth in
PTCE 83-1 would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in PTCE 83-1, the Plan
fiduciary should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary also should consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates on
behalf of a Plan.
In addition to PTCE 83-1, the U.S. Department of Labor has issued an
individual exemption, Prohibited Transaction Exemption 90-30 ("PTE 90-30"), to
Bear, Stearns & Co. Inc., which is applicable to Certificates which meet its
requirements whenever Bear, Stearns & Co. Inc. or its affiliate is the sole
underwriter, manager or co-manager of an underwriting syndicate, or is the
selling or placement agent. PTE 90-30 generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that certain conditions set forth in PTE 90-30 are
satisfied. The exempted transactions include certain transactions relating to
the servicing and operation of investment trusts holding assets of the following
general categories: single and multifamily residential or commercial mortgages,
motor vehicle receivables, consumer or commercial receivables and guaranteed
government mortgage pool certificates and the purchase, sale and holding of
mortgage-backed or asset-backed pass-through certificates representing
beneficial ownership interests in the assets of such investment trusts.
PTE 90-30 sets forth seven general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Certificates
to be eligible for exemptive relief thereunder. First, the acquisition of
Certificates by certain Plans must be on terms that are at least as favorable to
the Plan as they would be in an arm's length transaction with an unrelated
party. Second, the rights and interests evidenced by the Certificates must not
be subordinated to the rights and interests evidenced by other certificates of
the same trust. Third, the Certificates at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by Standard
& Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.,
Moody's Investors Services, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA,
Inc. ("Nationally Recognized Rating Agencies"). Fourth, the Trustee cannot be an
affiliate of any member of the "Restricted Group" which consists of any
underwriter as defined in PTE 90-30, the Seller, the Master Servicer, each
servicer, the Pool Insurer, the Special Hazard Insurer and any obligor with
respect to obligations or receivables constituting more than 5% of the aggregate
unamortized principal balance of the obligations or receivables as of the date
of initial issuance of the Certificates. Fifth, the sum of all payments made to
and retained by such underwriters must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made to
and retained by the Seller pursuant to the assignment of the obligations or
receivables to the related Trust Fund must represent not more than the fair
market value of such obligations; and the sum of all payments made to and
retained by the Master Servicer and any servicer must represent not more than
reasonable compensation for such person's services under the Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, (i) the investment pool consists only of assets of the type enumerated in
the exemption and which have been included in other investment pools; (ii)
certificates evidencing interests in such other investment pools have been rated
in one of the three highest generic rating categories by one of the Nationally
Recognized Rating Agencies for at least one year prior to a Plan's acquisition
of certificates; and (iii) certificates evidencing interests in such other
investment pools have been purchased by investors other than Plans for at least
one year prior to a Plan's acquisition of certificates. Finally, the investing
Plan must be an accredited investor as defined in Rule 501(a)(1) of Regulation D
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of the Commission under the Securities Act of 1933, as amended. The Seller
assumes that only Plans which are accredited investors under the federal
securities laws will be permitted to purchase the Certificates.
If the general conditions of PTE 90-30 are satisfied, such exemption
may provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of the
Certificates by Plans. However, no exemption is provided from the restrictions
of ERISA for the acquisition or holding of a Certificate on behalf of an
"Excluded Plan" by any person who is a fiduciary with respect to the assets of
such Excluded Plan. For purposes of the Certificates, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group. In addition, each Plan's
investment in each class of Certificates cannot exceed 25% of the outstanding
Certificates in the class, and after the Plan's acquisition of the Certificates,
no more than 25% of the assets over which the fiduciary has investment authority
are invested in Certificates of a trust containing assets which are sold or
serviced by the same entity. Finally, in the case of initial issuance (but not
secondary market transactions), at least 50% of each class of Certificates, and
at least 50% of the aggregate interests in the trust, must be acquired by
persons independent of the Restricted Group.
On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Exemption which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendment generally allows a portion of the mortgages or
receivables ("Loans") supporting payments to holders of Certificates and having
a principal amount equal to no more than 25% of the total principal amount of
the Certificates to be transferred to the Trust within a 90-day or three-month
period following the Closing Date ("DOL Pre-Funding Period"), instead of
requiring that all such Loans be either identified or transferred on or before
the Closing Date. The relief is effective for transactions occurring on or after
May 23, 1997, provided that the following conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Certificates being offered ("Pre-Funding
Limit") must not exceed twenty-five percent (25%).
(2) All Loans transferred after the Closing Date ("Additional Loans")
must meet the same terms and conditions for eligibility as the original Loans
used to create the Trust, which terms and conditions have been approved by the
Rating Agency.
(3) The transfer of such Additional Loans to the Trust during the DOL
Pre-Funding Period must not result in the Certificates receiving a lower credit
rating from the Rating Agency upon termination of the DOL Pre-Funding Period
than the rating that was obtained at the time of the initial issuance of the
Certificates by the Trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "average interest rate") for all of the
Loans in the Trust Fund at the end of the DOL Pre-Funding Period must not be
more than 100 basis points lower than the average interest rate for the Loans
which were transferred to the Trust on the Closing Date.
(5) Either: (i) the characteristics of the Additional Loans must be
monitored by an insurer or other credit support provider which is independent of
the Seller; or (ii) an independent accountant retained by the Seller must
provide the Seller with a letter (with copies provided to the Rating Agency, the
Underwriter and the Trustee) stating whether or not the characteristics of the
Additional Loans conform to the characteristics described in the Prospectus,
Prospectus Supplement, Private Placement Memorandum ("Offering Documents")
and/or the Agreement. In preparing such letter, the independent accountant must
use the same type of procedures as were applicable to the Loans which
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were transferred as of the Closing Date.
(6) The DOL Pre-Funding Period must end no later than three months or
90 days after the Closing Date or earlier, in certain circumstances, if the
amount on deposit in the Pre-Funding Account is reduced below the minimum level
specified in the Agreement or an event of default occurs under the Agreement.
(7) Amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested only in
investments which are permitted by the Rating Agency and (i) are direct
obligations of, or obligations fully guaranteed as to timely payment of
principal and interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith and credit
of the United States); or (ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by the Rating Agency
("Acceptable Investments").
(8) The Offering Documents must describe: (i) any Pre-Funding Account
and/or Capitalized Interest Account used in connection with a Pre-Funding
Account; (ii) the duration of the DOL Pre-Funding Period; (iii) the percentage
and/or dollar amount of the Pre-Funding Limit for the Trust Fund; and (iv) that
the amounts remaining in the Pre-Funding Account at the end of the DOL
Pre-Funding Period will be remitted to holders of Certificates (each a as
repayments of principal.
(9) The Agreement must describe the Acceptable Investments for the
Pre-Funding Account and Capitalized Interest Account and, if not disclosed in
the Offering Documents, the terms and conditions for eligibility of the
Additional Loans.
Before purchasing a Certificate in reliance on any of these exemptions
or any other exemption, a fiduciary of a Plan should itself confirm that
requirements set forth in such exemption would be satisfied.
One or more exemptions may be available, with respect to certain
prohibited transactions to which neither PTCE 83-1 nor PTE_ 90-30 is
applicable, depending in part upon the type of Plan fiduciary making the
decision to acquire Certificates and the circumstances under which such decision
is made, including, but not limited to PTCE_ 90-1 (regarding investments by
insurance company pooled separate accounts), PTCE 91-38 (regarding investments
by bank collective investments funds), PTCE 84-14 (regarding transactions
effected by "qualified professional asset managers"), PTCE 95-60 (regarding
investments by insurance company general accounts) and PTCE 96-23 (regarding
transactions effected by "in-house asset managers") (collectively, the "Investor
Based Exemptions"). However, even if the conditions specified in either of these
exemptions are met, the scope of the relief provided by these exemptions might
or might not cover all acts which might be construed as prohibited transactions.
Each Prospectus Supplement will contain information concerning
considerations relating to ERISA and the Code that are applicable to the related
Certificates.
ERISA CONSIDERATIONS RELATING TO THE NOTES. Under the Plan Asset
Regulations, the assets of the Trust Fund would be treated as plan assets of a
Plan for the purposes of ERISA and the Code only if the Plan acquires an "Equity
Interest" in the Trust Fund and none of the exceptions contained in the Plan
Asset Regulations is applicable. An equity interest is defined under the Plan
Asset Regulations as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. Assuming that a Series of Notes is treated as indebtedness without
substantial equity features for purposes of the Plan Asset Regulations, then
such Series of Notes will be eligible for purchase by Plans. However, without
regard to whether a Series of Notes is treated as an
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"equity interest" for such purposes, the acquisition or holding of Notes by or
on behalf of a Plan could be considered to give rise to a prohibited transaction
if the Trust Fund or any of its affiliates is or becomes a party in interest or
disqualified person with respect to such Plan, or in the event that a Note is
purchased in the secondary market and such purchase constitutes a sale or
exchange between a Plan and a party in interest or disqualified person with
respect to such Plan. There can be no assurance that the Trust Fund or any of
its affiliates will not be or become a party in interest or a disqualified
person with respect to a Plan that acquires Notes. However, one or more of the
Investor Based Exemptions described above may apply to any potential prohibited
transactions arising as a consequence of the acquisition, holding and transfer
of the Notes.
With respect to those classes of Exchangeable Securities which were
eligible for exemptive relief under PTE 90-30 when purchased, PTE 90-30 would
also cover the acquisition or disposition of such Exchangeable Securities when
the Securityholder exercises its exchange rights. Similarly, with respect to
classes of Securities which were eligible for exemptive relief under PTE 90-30
and were issued as a Callable Class, the exercise of the Call would be covered
under PTE 90-30. However, with respect to classes of Exchangeable Securities and
Callable Classes which were not eligible for exemptive relief under PTE 90-30
when purchased, the exchange, purchase or sale of such securities pursuant to
the exercise of exchange rights or call rights may give rise to prohibited
transactions if a Plan and a party-in-interest with respect to such Plan are
involved in the transaction. However, one or more Investor Based Exemptions
discussed above may be applicable to these transactions.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
A governmental plan as defined in Section (32) of ERISA is not subject
to ERISA, or Code Section 4975. However, such governmental plan may be subject
to federal, state and local law, which is, to a material extent, similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of such
investment under applicable fiduciary or other investment standards, and the
need for the availability of any exemptive relief under any Similar Law.
FASIT REGULAR CERTIFICATES WHICH ARE HIGH-YIELD INTERESTS OR FASIT
OWNERSHIP CERTIFICATES ARE NOT ELIGIBLE TO BE ACQUIRED BY A PURCHASER WHICH IS
ACQUIRING SUCH FASIT CERTIFICATES DIRECTLY OR INDIRECTLY FOR, ON BEHALF OF OR
WITH THE ASSETS OF, A PLAN OR A GOVERNMENTAL PLAN.
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LEGAL INVESTMENT
SMMEA
The Prospectus Supplement for each Series of Securities will specify
which, if any, of the classes of Securities offered thereby will constitute
"mortgage related securities" for purposes of SMMEA. Any Securities which
constitute mortgage related securities, absent state legislation described
below, will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that under
applicable law obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality thereof constitute legal
investments for such entities. Under SMMEA, if a state enacted legislation prior
to October 4, 1991 specifically limiting the legal investment authority of any
such entities with respect to "mortgage related securities," the Securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Certain states adopted legislation which limits the
ability of insurance companies domiciled in these states to purchase
mortgage-related securities, such as the Securities.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with Securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in Securities, and
national banks may purchase Securities for their own account without regard to
the limitations generally applicable to investment securities set forth in 12
U.S.C. ss. 24 (Seventh), subject in each case to such regulations as the
applicable federal regulatory authority may prescribe. In this connection,
federal credit unions should review the National Credit Union Administration
("NCUA") Letter to Credit Unions No. 96, as modified by Letter to Credit Unions
No. 108, which included guidelines to assist federal credit unions in making
investment decisions for mortgage related securities, and the NCUA's regulation
"Investment and Deposit Activities" (12 C.F.R. Part 703), (whether or not the
class of Securities under consideration for purchase constitutes a "mortgage
related security").
FFIEC POLICY STATEMENT
The Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency and the Office of
Thrift Supervision have adopted the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on Securities Activities (the "Policy
Statement"). Although the National Credit Union Administration has not yet
adopted the Policy Statement, it has adopted other regulations affecting
mortgage-backed securities and is expected to consider adoption of the Policy
Statement. The Policy Statement, among other things, places responsibility on a
depository institution to develop and monitor appropriate policies and
strategies regarding the investment, sale and trading of securities and
restricts an institution's ability to engage in certain types of transactions.
The Policy Statement and any applicable modifications or supplements
thereto should be reviewed prior to the purchase of any Securities by a
depository institution. The summary of the Policy Statement contained herein
does not purport to be complete and should not be relied upon for purposes of
making any regulatory determinations. In addition, any regulator may adopt
modifications or supplements to the Policy Statement or additional restrictions
on the purchase of mortgage-backed or other securities. Investors are urged to
consult their own legal advisors prior to making any determinations with respect
to the Policy Statement or other regulatory requirements.
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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.
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.
- 129 -
<PAGE>
Securities and other products, whether carried on or off balance sheet
(such as CMO swaps but excluding servicing assets), having characteristics
similar to those of high-risk mortgage securities, will be subject to the same
supervisory treatment as high-risk mortgage securities. Long-maturity holdings
of zero coupon, stripped and deep discount OID products which are
disproportionately large in relation to the total investment portfolio or total
capital of a depository institution are considered an imprudent investment
practice. Long-maturity generally means a remaining maturity exceeding 10 years.
GENERALLY
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities, to purchase
Securities representing more than a specified percentage of the investor's
assets, or to purchase certain types of Securities, such as residual interests
or stripped mortgage-backed securities. Investors should consult their own legal
advisors in determining whether and to what extent the Securities constitute
legal investments for such investors and comply with any other applicable
requirements.
METHOD OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus
Supplements will be offered in Series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Bear, Stearns & Co. Inc. ("Bear,
Stearns"), an affiliate of the Seller, acting as underwriter with other
underwriters, if any, named therein. In such event, the related Prospectus
Supplement may also specify that the underwriters will not be obligated to pay
for any Securities agreed to be purchased by purchasers pursuant to purchase
agreements acceptable to the Seller. In connection with the sale of the
Securities, underwriters may receive compensation from the Seller or from
purchasers of the Securities in the form of discounts, concessions or
commissions. The related Prospectus Supplement will describe any such
compensation paid by the Seller.
Alternatively, the related Prospectus Supplement may specify that the
Securities will be distributed by Bear, Stearns acting as agent or in some cases
as principal with respect to Securities that it has previously purchased or
agreed to purchase. If Bear, Stearns acts as agent in the sale of Securities,
Bear, Stearns will receive a selling commission with respect to each Series of
Securities, depending on market conditions, expressed as a percentage of the
aggregate principal balance of the Securities sold hereunder as of the Cut-off
Date. The exact percentage for each Series of Securities will be disclosed in
the related Prospectus Supplement. To the extent that Bear, Stearns elects to
purchase Securities as principal, Bear, Stearns may realize losses or profits
based upon the difference between its purchase price and the sales price. The
related Prospectus Supplement with respect to any Series offered other than
through underwriters will contain information regarding the nature of such
offering and any agreements to be entered into between the Seller and purchasers
of Securities of such Series.
The Seller will indemnify Bear, Stearns and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Bear, Stearns and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Bear, Stearns and the Seller may
engage in various securities and financing
- 130 -
<PAGE>
transactions, including repurchase agreements to provide interim financing of
the Seller's Mortgage Loans pending the sale of such Mortgage Loans or interests
therein, including the Securities.
This Prospectus and the related Prospectus Supplement may be used by
Bear Stearns in connection with offers and sales related to market-making
transactions in the Securities. Bear Stearns may act as principal or agent in
such transactions. Such sales will be made at prices related to prevailing
market prices at the time of sale or otherwise.
The Seller anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Securityholders should consult
with their legal advisors in this regard prior to any such reoffer or sale.
LEGAL MATTERS
The legality of the Securities of each Series, including certain
federal income tax consequences with respect thereto, will be passed upon for
the Seller by Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York
10038, or by Thacher 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
Securities and no Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Securities of each Series
offered hereby and by the related Prospectus Supplement that they shall have
been rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies specified in the related
Prospectus Supplement.
Ratings on mortgage-backed securities address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage loans
or other assets. These ratings address the structural, legal and issuer-related
aspects associated with such Securities, the nature of the underlying mortgage
loans or other assets and the credit quality of the guarantor, if any. Ratings
on mortgage-backed securities do not represent any assessment of the likelihood
of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
Securityholders might suffer a lower than anticipated yield, and, in addition,
holders of stripped Securities under certain scenarios might fail to recoup
their underlying investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or
- 131 -
<PAGE>
withdrawal at any time by the assigning rating organization. Each security
rating should be evaluated independently of any other security rating.
GLOSSARY
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
TERM PAGE
Accounts................................................................41, 129
Accrual Class................................................................50
Accrual Securities...........................................................42
Agency Securities.............................................................1
Annual Interest Amount.......................................................50
APR...........................................................................7
ARM.........................................................................111
Available Funds..............................................................42
Bankruptcy Bond..............................................................15
Basis Risk Shortfall.........................................................89
Bear, Stearns...............................................................130
Buydown Funds...............................................................109
Buydown Loans.................................................................6
Call Class...................................................................12
Call Securities...............................................................1
Callable Class...............................................................12
Callable Securities...........................................................1
Capitalized Interest Account.................................................10
Cedel........................................................................45
Certificates..................................................................4
Charter Act..................................................................31
Class Factor.................................................................54
Cleanup Costs................................................................87
CMO...........................................................................8
Code.........................................................................17
Collateral Value.............................................................26
Combinations.................................................................49
Commission....................................................................2
Contracts.....................................................................1
Cooperatives..................................................................5
- 132 -
<PAGE>
Current Principal Amount.....................................................43
Cut-off Date.................................................................12
Debt Securities.............................................................114
Definitive Security..........................................................46
Detailed Description.........................................................24
Distribution Date.............................................................2
DTC..........................................................................45
Equity Interest.............................................................126
ERISA........................................................................20
ES Class.....................................................................12
Euroclear....................................................................45
Euroclear Operator...........................................................47
European Depositaries........................................................46
Events of Default............................................................74
Exchangeable Security........................................................12
Exchangeable Security Trust Fund.............................................49
Exchanged ES Class..........................................................121
Fannie Mae....................................................................1
Fannie Mae Certificates.......................................................7
FASIT.........................................................................2
FASIT Owner.............................................................18, 108
FASIT Regular Securities....................................................104
FASIT Securities............................................................104
FDIC.........................................................................38
Federal Tax Counsel..........................................................88
FHA...........................................................................5
FHA Insurance................................................................40
FHA Loans....................................................................29
FHLMC Act....................................................................32
Floating Rate Class..........................................................50
Freddie Mac...................................................................1
Freddie Mac Certificate Group................................................32
Freddie Mac Certificates......................................................7
FTC Rule.....................................................................85
Garn-St Germain Act..........................................................85
GNMA..........................................................................1
GNMA Certificates.............................................................7
GNMA Issuer..................................................................29
Guaranty Agreement...........................................................29
High-Yield Interests.........................................................18
Housing Act..................................................................29
HUD..........................................................................34
Indenture....................................................................40
- 133 -
<PAGE>
Insurance Proceeds...........................................................66
Insured Expenses.............................................................66
Interest Rate................................................................13
Inverse Floating Rate Class..................................................50
Investor Based Exemptions...................................................126
Lender........................................................................1
Liquidation Expenses.........................................................66
Liquidation Proceeds.........................................................66
Loan-to-Value Ratio..........................................................26
Lower Tier REMIC.............................................................98
Manufactured Homes...........................................................28
Manufacturer's Invoice Price.................................................26
Master Servicer...............................................................1
Master Servicing Agreement...................................................27
Mortgage Assets...............................................................1
Mortgage Loans................................................................4
Mortgage Pool.................................................................4
Mortgage Rate.................................................................6
Mortgaged Properties.........................................................25
Multifamily Loans.............................................................1
Multiple Variable Rate REMIC Regular Security................................95
Nationally Recognized Rating Agencies.......................................124
NCUA........................................................................128
Non-Electing Securities.....................................................109
Notes.........................................................................1
OID Regulations..............................................................90
Owners.......................................................................45
Participants.................................................................45
Percentage Interests.........................................................74
Permitted Investments........................................................61
Plan........................................................................123
Plan Asset Regulations......................................................123
Planned Amortization Class...................................................50
PMBS Agreement...............................................................34
PMBS Issuer...................................................................9
PMBS Servicer.................................................................9
PMBS Trustee..................................................................9
Policy Statement............................................................128
Pool Insurance Policy........................................................14
Pool Insurer.................................................................56
Pooling and Servicing Agreement...........................................4, 40
Pre-Funded Amount............................................................10
Pre-Funding Account..........................................................10
- 134 -
<PAGE>
Pre-Funding Period...........................................................10
Prepayment Assumption........................................................91
Presumed Single Qualified Floating Rate......................................94
Presumed Single Variable Rate................................................94
Primary Insurance Policy.....................................................25
Primary Insurer..............................................................71
Principal Prepayments........................................................43
Private Mortgage-Backed Securities............................................1
Protected Account............................................................65
PTCE 83-1...................................................................123
PTE 90-30...................................................................124
Purchase Price...............................................................39
Rating Agency................................................................15
Received ES Class...........................................................121
Record Date..................................................................41
Refinance Loan...............................................................26
REIT.........................................................................99
Relevant Depositary..........................................................46
Relief Act...................................................................86
REMIC.........................................................................2
REMIC Regular Securities.....................................................17
REMIC Regulations........................................................89, 90
REMIC Securities.............................................................89
Reserve Account...............................................................2
Restricted Group............................................................124
Retained Interest............................................................41
RICs.........................................................................99
Securities....................................................................1
Securities Account...........................................................66
Securities Register..........................................................41
Securityholders...............................................................1
Seller........................................................................1
Senior Securities............................................................11
Series........................................................................1
Single Family Loans...........................................................1
Single Variable Rate REMIC Regular Security..................................94
SMMEA........................................................................16
Special Hazard Insurance Policy..............................................15
Special Hazard Insurer.......................................................57
Strip.......................................................................120
Sub-Servicer.................................................................16
Sub-Servicing Agreement......................................................67
Subordinated Securities......................................................11
- 135 -
<PAGE>
Superlien....................................................................88
Terms and Conditions.........................................................47
Tiered FASITs...............................................................106
Tiered REMICs................................................................90
Title V......................................................................86
Trust Agreement...............................................................4
Trust Assets..................................................................1
Trust Fund...................................................................11
Trustee......................................................................40
U.S. Government Securities....................................................1
United States person........................................................102
VA............................................................................5
Variable Rate REMIC Regular Security.........................................93
Yield Supplement Agreement...................................................89
- 136 -
<PAGE>
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INVESTORS SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. THE SELLER, THE ISSUER OR THE
UNDERWRITER HAVE NOT AUTHORIZED ANYONE TO PROVIDE INVESTORS WITH DIFFERENT
INFORMATION. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE CERTIFICATES OFFERED HEREBY
NOR AN OFFER OF SUCH CERTIFICATES TO ANY PERSON IN ANY
STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY
OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE. UNTIL 90 DAYS AFTER THE DATE OF THIS
PROSPECTUS SUPPLEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE
CERTIFICATES OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
Summary of Terms.....................................S-4
Risk Factors .......................................S-11
Description of the Certificates.....................S-11
Description of the Pooled Certificates..............S-16
Yield and Prepayment Considerations.................S-18
The Pooling Agreement...............................S-25
Federal Income Tax Considerations...................S-28
ERISA Considerations................................S-29
Legal Investment....................................S-31
Restrictions on Purchase and Transfer of the Residual
Certificates....................................S-31
Method of Distribution..............................S-31
Legal Matters.......................................S-31
Rating..............................................S-32
Index of Principal Definitions......................S-33
Annex 1
Pooled Certificate Information ...................A-1
Annex 2
Collateral Information ..........................A-2
PROSPECTUS
Prospectus Supplement..................................2
Available Information..................................2
Incorporation of Certain Documents By Reference........3
Reports to Securityholders.............................3
Summary of Terms.......................................4
Risk Factors..........................................18
The Trust Fund........................................21
Use of Proceeds.......................................31
The Seller............................................32
The Mortgage Loans....................................32
Description of the Securities.........................35
Exchangeable Securities...............................42
Credit Enhancement....................................47
Yield and Prepayment Considerations...................53
Administration........................................55
Legal Aspects of the Mortgage Loans...................67
Federal Income Tax Consequences.......................76
State Tax Consequences...............................106
ERISA Considerations.................................106
Legal Investment.....................................111
Method of Distribution...............................113
Legal Matters........................................113
Financial Information................................113
Rating...............................................114
Glossary.............................................115
================================================================================
$82,751,959
(APPROXIMATE)
STRUCTURED ASSET
MORTGAGE INVESTMENTS INC.
MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 1999-5
------------------
PROSPECTUS SUPPLEMENT
------------------
BEAR, STEARNS & CO. INC.
DECEMBER 28, 1999
================================================================================
