The depositor has filed a registration statement (including a base prospectus) with the SEC for the offering
to which this term sheet supplement relates. Before you invest, you should read the base prospectus in that
registration statement and other documents the depositor has filed with the SEC for more complete information
about the issuing entity and this offering. You may obtain these documents free of charge by visiting EDGAR
on the SEC Web site at www.sec.gov. Alternatively, the issuing entity, any underwriter or any dealer
participating in the offering will arrange to send you the base prospectus if you request it by calling
toll-free 1-866-803-9204. Please click here http:// www.bearstearns.com/prospectus/sami or visit the following
website: http:// www.bearstearns.com/prospectus/sami for a copy of the base prospectus applicable to this
offering.
This term sheet supplement is not required to contain all information that is required to be included in the
base prospectus.
The information in this term sheet supplement is preliminary and is subject to completion or change.
The information in this term sheet supplement, if conveyed prior to the time of your commitment to purchase,
supersedes information contained in any prior similar term sheet supplement relating to these securities.
This term sheet supplement is not an offer to sell or a solicitation of an offer to buy these securities in
any state where such offer, solicitation or sale is not permitted.
The securities referred to in this term sheet supplement are being offered when, as and if issued. Our
obligation to sell securities to you is conditioned on the securities having the characteristics described in
this term sheet supplement. If that condition is not satisfied, we will notify you, and neither the issuing
entity nor the underwriter will have any obligation to you to deliver all or any portion of the securities
which you have committed to purchase, and there will be no liability between us as a consequence of the
non-delivery.
TERM SHEET SUPPLEMENT
Bear Stearns Mortgage Funding Trust 2006-AR5
Issuing Entity
EMC Mortgage Corporation
Servicer and Sponsor
Structured Asset Mortgage Investments II Inc.
Depositor
Bear Stearns Mortgage Funding Trust 2006-AR5
Mortgage Pass-Through Certificates, Series 2006-AR5
The certificates are obligations only of the trust. Neither the certificates nor the mortgage loans are
insured or guaranteed by any person, except as described herein. 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 term sheet supplement or the prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
The Attorney General of the state of New York has not passed on or endorsed the merits of this offering. Any
representation to the contrary is unlawful.
For use with securitizations involving Bear Stearns Option ARM loans and 5 Yr. Secure Option ARM loans, each
with negative amortization features, consisting of certain classes of Class A, Class M and Class B
certificates with multiple loan groups and with an overcolleralization structure. Certain classes of
certificates may be grantor trust certificates or have the benefit of a certificate insurance policy, each as
further described herein.
Bear, Stearns & Co. Inc.
Underwriter
Dated as of December 6, 2006
For use with the base prospectus dated October 23, 2006
Important notice about information presented in this term sheet supplement
and the accompanying prospectus
You should rely only on the information contained in this document. We have not authorized anyone to provide
you with different information.
We provide information to you about the offered certificates in two separate documents that progressively
provide more detail:
o the accompanying prospectus, which provides general information, some of which may not apply to this
series of certificates; and
o this term sheet supplement, which describes the specific terms of your certificates.
Annex I is incorporated into and comprises a part of this term sheet supplement as if fully set forth herein.
The description of your certificates in this term sheet supplement is intended to enhance the related
description in the prospectus and you should rely on the information in this term sheet supplement and the
related term sheet as providing additional detail not available in the prospectus.
The Depositor's principal offices are located at 383 Madison Avenue, New York, New York10179 and its
telephone number is (212) 272-2000.
NOTWITHSTANDING ANY OTHER EXPRESS OR IMPLIED AGREEMENT TO THE CONTRARY, THE SPONSOR, THE SERVICER, THE
TRUSTEE, EACH RECIPIENT OF THE RELATED TERM SHEET SUPPLEMENT AND, BY ITS ACCEPTANCE THEREOF, EACH HOLDER OF A
CERTIFICATE, AGREES AND ACKNOWLEDGES THAT EACH PARTY HERETO HAS AGREED THAT EACH OF THEM AND THEIR EMPLOYEES,
REPRESENTATIVES AND OTHER AGENTS MAY DISCLOSE, IMMEDIATELY UPON COMMENCEMENT OF DISCUSSIONS, TO ANY AND ALL
PERSONS THE TAX TREATMENT AND TAX STRUCTURE OF THE CERTIFICATES AND THE REMICS, THE TRANSACTIONS DESCRIBED
HEREIN AND ALL MATERIALS OF ANY KIND (INCLUDING OPINIONS OR OTHER TAX ANALYSES) THAT ARE PROVIDED TO ANY OF
THEM RELATING TO SUCH TAX TREATMENT AND TAX STRUCTURE.
TRANSACTION STRUCTURE
RISK FACTORS
You are encouraged to carefully consider the following risk factors in connection with the purchase of
the offered certificates:
Your Yield on the Certificates Will be Subject to any Negative Amortization on the Related Mortgage
Loans.
All of the mortgage loans in the trust fund are negative amortization loans. Generally, after the
initial fixed rate period following origination (as set forth in the related mortgage note), the interest
rates on the negative amortization loans included in the trust will typically adjust either monthly or
semi-annually, as applicable, but their monthly payments and amortization schedules adjust annually. In
addition, in most circumstances, the amount by which a monthly payment may be adjusted on an annual payment
adjustment date may be limited and may not be sufficient to amortize fully the unpaid principal balance of a
mortgage loan over its remaining term to maturity. The initial interest rates on most of the mortgage loans
are lower than the sum of the indices applicable at origination and the related margins. During a period of
rising interest rates, as well as prior to the annual adjustment to the monthly payment made by the
mortgagor, the amount of interest accruing on the principal balance of these mortgage loans may exceed the
amount of the minimum monthly payment. As a result, a portion of the accrued interest on negatively
amortizing loans may become deferred interest which will be added to their principal balances and will also
bear interest at the applicable interest rates. The amount of any deferred interest accrued on a mortgage
loan during a due period will reduce the amount of interest available to be distributed on the related
certificates on the related distribution date.
If the interest rates on the mortgage loans decrease prior to an adjustment in the monthly payment, a
larger portion of the monthly payment will be applied to the unpaid principal balance of the mortgage loan,
which may cause the related classes of certificates to amortize more quickly. Conversely, if the interest
rates on the mortgage loans increase prior to an adjustment in the monthly payment, a smaller portion of the
monthly payment will be applied to the unpaid principal balance of the mortgage loan, which may cause the
related classes of certificates to amortize more slowly.
With respect to the Bear Option ARM loans, on the fifth payment adjustment date of a mortgage loan and
every fifth payment adjustment date thereafter and the last payment adjustment date prior to the mortgage
loan's maturity, the monthly payment due on that mortgage loan will be reset without regard to the related
periodic payment cap or, if the unpaid principal balance equals or exceeds a percentage of 110% or 115% (as
applicable) of the original principal balance due to deferred interest, the monthly payment due on that
mortgage loan will be reset without regard to the related periodic payment cap, in each case in order to
provide for the outstanding balance of the mortgage loan to be paid in full at its maturity by the payment of
equal monthly installments. With respect to the 5 Yr. Bear Secure Option ARM loans, the initial minimum
monthly payment is calculated on the basis of the original loan amount and an interest rate below the
original interest rate of generally up to 3%. On the fifth payment adjustment date or if the unpaid
principal balance equals or exceeds a percentage of 110% or 115% (as applicable) of the original principal
balance due to deferred interest, the monthly payment due on that mortgage loan will be reset without regard
to the related periodic payment cap, to an interest only payment in an amount equal to the full amount of
accrued interest on the mortgage loan calculated based on the outstanding principal balance of the mortgage
loan and the interest rate then in effect. These adjustment features are likely to substantially increase
the monthly payment due from borrowers and are likely to affect the rate at which principal on these mortgage
loans is paid and may create a greater risk of default if the borrowers are unable to pay the monthly
payments on the related increased principal balances. It is expected that if a borrower paid only the
minimum monthly payment due under the mortgage loan, such mortgage loan would reach the applicable negative
amortization percentage within approximately four years of origination.
The amount of deferred interest, if any, with respect to the mortgage loans for a given month will
reduce the amount of interest collected on these mortgage loans and available to be distributed as a
distribution of interest to the related classes of certificates. The resulting reduction in interest
collections on the mortgage loans will be offset, in part or in whole, by applying all payments of principal
received on the mortgage loans in the related loan group to interest distributions on the related classes of
certificates. For any distribution date, the net deferred interest on the mortgage loans will be allocated
to each class of certificates as set forth in the Term Sheet. The amount of the reduction of accrued
interest distributable to each class of certificates attributable to net deferred interest will be added to
the current principal amount of that class. Only the amount by which the payments of principal received on
the mortgage loans exceed the amount of deferred interest on the mortgage loans will be distributed as
principal to the related classes of certificates. The increase in the class certificate balance of any class
of certificates and the slower reduction in the class certificate balances due to the use of all principal
collected on the mortgage loans to offset the deferred interest will have the effect of increasing the
weighted average lives of the certificates and increasing your exposure to realized losses on the related
mortgage loans. We cannot predict the extent to which mortgagors will prepay their mortgage loans and
therefore cannot predict the extent of the effect of the allocation of net deferred interest on your
certificates.
In addition, as the principal balance of a mortgage loan subject to negative amortization will
increase by the amount of deferred interest allocated to such loan, the increasing principal balance of a
negative amortization loan may approach or exceed the value of the related mortgaged property, thus
increasing the likelihood of defaults as well as the amount of any loss experienced with respect to any such
negative amortization that is required to be liquidated. Furthermore, each mortgage loan provides for the
payment of any remaining unamortized principal balance thereto (due to the addition of deferred interest, if
any, to the principal balance of the mortgage loan) in a single payment at the maturity of such mortgage
loan. Because the related mortgagors may be required to make a larger single payment upon maturity, it is
possible that the default risk associated with mortgage loans subject to negative amortization is greater
than associated with fully amortizing mortgage loans.
Some of the Mortgage Loans Have a Limited Performance History.
The 5 Yr. Bear Secure Option ARM loans included in loan group II are a new product in the mortgage
marketplace. The performance of these mortgage loans may be significantly different than mortgage loans that
fully amortize or have other negative amortization features that are more common to the mortgage
marketplace. In particular, the depositor is not aware of any performance history for mortgage loans of this
type, including with respect to losses, delinquencies or prepayments. If the performance of these mortgage
loans is substantially worse or different than assumed by an investor, there may be delays in payment and
increased losses on the mortgage loans. Such delays and losses on the mortgage loans could affect the rate
and timing of payments on the certificates.
The Offered Certificates Will Have Limited Liquidity, So You May Be Unable to Sell Your Securities or
May Be Forced to Sell Them at a Discount from Their Fair Market Value.
The underwriter intends to make a secondary market in the offered certificates, however the
underwriter will not be obligated to do so. There can be no assurance that a secondary market for the offered
certificates will develop or, if it does develop, that it will provide holders of the offered certificates
with liquidity of investment or that it will continue for the life of the offered certificates. As a result,
any resale prices that may be available for any offered certificate in any market that may develop may be at
a discount from the initial offering price or the fair market value thereof. The offered certificates will
not be listed on any securities exchange.
Credit Enhancement Is Limited; The Failure of Credit Enhancement to Cover Losses on the Trust Fund
Assets May Result in Losses Allocated to the Offered Certificates.
The subordination of the subordinate certificates to the senior certificates as described herein is
intended to enhance the likelihood that holders of the senior certificates and, to a more limited extent, the
holders of the related offered subordinate certificates, will receive regular payments of interest and
principal and to provide the holders of the senior certificates and, to a more limited extent, the holders of
the offered subordinate certificates with a higher payment priority, with protection against losses realized
when the remaining unpaid principal balance on a related mortgage loan exceeds the amount of proceeds
recovered upon the liquidation of that mortgage loan. In general, this loss protection is accomplished by
allocating the principal portion of any realized losses, to the extent not covered by excess spread or any
overcollateralization, among the related certificates, beginning with the subordinate certificates with the
lowest payment priority, until the current principal amount of that subordinate class has been reduced to
zero. The principal portion of realized losses are then allocated to the next most junior class of
subordinate certificates, until the current principal amount of each class of subordinate certificates is
reduced to zero. If no subordinate certificates remain outstanding, the principal portion of realized losses
on a mortgage loan will be allocated to the related senior certificates in the order of priority as described
in the Term Sheet until the current principal amount thereof has been reduced to zero. Accordingly, if the
aggregate current principal amount of the non-offered subordinate certificates were to be reduced to zero,
delinquencies and defaults on the mortgage loans would reduce the amount of funds available for monthly
distributions to the holders of the offered subordinate certificates and, if the aggregate current principal
amount of the offered subordinate certificates were to be reduced to zero, delinquencies and defaults on the
mortgage loans would reduce the amount of funds available for monthly distributions to the holders of the
senior certificates.
Certain classes of certificates may be insured by a certificate insurance policy issued by a
certificate insurer. Only the insured certificates will be entitled to any benefits of the related policy.
In the absence of payment under the certificate insurance policy, the holders of the related class of
certificates will directly bear the credit risks associate with their certificates.
The ratings of the offered certificates by the rating agencies may be lowered following the initial
issuance thereof as a result of losses on the mortgage loans in the related loan group in excess of the
levels contemplated by the rating agencies at the time of their initial rating analysis. None of the
depositor, the sponsor, the trustee nor any of their respective affiliates will have any obligation to
replace or supplement any credit enhancement, or to take any other action to maintain the ratings of the
offered certificates. See "Description of Credit Enhancement-Reduction or Substitution of Credit
Enhancement" in the prospectus.
Developments in Specified Regions Could Have a Disproportionate Effect on the Mortgage Loans due to
Geographical Concentrations of Mortgaged Properties.
Some of the mortgage loans may be concentrated in certain geographical regions. Property in those
regions 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 a specific region with a significant concentration of properties underlying the
mortgage loans (which may or may not affect real property values) may affect the ability of
borrowers to repay their loans on time;
o declines in a region's residential real estate market may reduce the values of properties located in
that region, which would result in an increase in the loan-to-value ratios; and
o any increase in the market value of properties located in a particular region 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.
Any risks associated with mortgage loan concentration may affect the yield to maturity of the offered
certificates to the extent losses caused by these risks are not covered by subordination provided by the
subordinate certificates.
A Transfer of Servicing May Result in an Increased Risk of Delinquency and Loss on the Mortgage Loans.
It is expected that the primary servicing for a portion of the mortgage loans will be transferred to
the servicer within one month of the closing date; however, the servicer will be obligated to service the
mortgage loans as of the closing date. Any servicing transfer will involve notifying mortgagors to remit
payments to a new servicer, transferring physical possession of loan files and records to the new servicer
and entering loan and mortgagor data on the management information systems of the new servicer. Accordingly,
such transfers could result in misdirected notices, misapplied payments, data input problems and other
problems. In addition, investors should note that when the servicing of mortgage loans is transferred, there
is generally an increase in delinquencies associated with such transfer. Such increase in delinquencies and
problems incurred with the transfer to the new servicer may result in losses, which, to the extent they are
not absorbed by credit enhancement, will cause losses or shortfalls to be incurred by the holders of the
offered certificates. In addition, any higher default rate resulting from such transfer may result in an
acceleration of prepayments on those mortgage loans.
The Underwriting Standards of Some of the Mortgage Loans Do Not Conform to the Standards of Fannie Mae
or Freddie Mac and May Increase the Risk of Payment Application Errors.
Some of the mortgage loans were underwritten generally in accordance with underwriting standards which
are primarily intended to provide for single family "non-conforming" mortgage loans. A "non-conforming"
mortgage loan means a mortgage loan which is ineligible for purchase by Fannie Mae or Freddie Mac due to
either credit characteristics of the related mortgagor or documentation standards in connection with the
underwriting of the related mortgage loan that do not meet the Fannie Mae or Freddie Mac underwriting
guidelines for "A" credit mortgagors. These credit characteristics include mortgagors whose creditworthiness
and repayment ability do not satisfy such Fannie Mae or Freddie Mac underwriting guidelines and mortgagors
who may have a record of credit write-offs, outstanding judgments, prior bankruptcies and other credit items
that do not satisfy such Fannie Mae or Freddie Mac underwriting guidelines. These documentation standards may
include mortgagors who provide limited or no documentation in connection with the underwriting of the related
mortgage loan. Accordingly, mortgage loans underwritten under the originator's non-conforming credit
underwriting standards are likely to experience rates of delinquency, foreclosure and loss that are higher,
and may be substantially higher, than mortgage loans originated in accordance with the Fannie Mae or Freddie
Mac underwriting guidelines. Any resulting losses, to the extent not covered by credit enhancement, may
affect the yield to maturity of the related offered certificates.
Book-Entry Securities May Delay Receipt of Payment and Reports.
If the trust fund issues certificates in book-entry form, certificateholders may experience delays in
receipt of 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 certificates in book-entry form may reduce the
liquidity of certificates so issued in the secondary trading market since some investors may be unwilling to
purchase certificates for which they cannot receive physical certificates.
The Yield to Maturity on the Offered Certificates Will Depend on a Variety of Factors.
The yield to maturity on the offered certificates will depend, in general, on:
o the applicable purchase price; and
o the rate and timing of principal payments (including prepayments, collections upon defaults,
liquidations and repurchases and the allocation of deferred interest) on the related mortgage
loans and the allocation thereof to reduce or increase the current principal amount of the
offered certificates, as well as other factors.
The yield to investors on the offered certificates will be adversely affected by any allocation
thereto of interest shortfalls on the mortgage loans.
In general, if the offered certificates are purchased at a premium and principal distributions occur
at a rate faster than anticipated at the time of purchase, the investor's actual yield to maturity will be
lower than that assumed at the time of purchase. Conversely, if the offered certificates are purchased at a
discount and principal distributions occur at a rate slower than that anticipated at the time of purchase,
the investor's actual yield to maturity will be lower than that originally assumed.
The rate and timing of distributions allocable to principal on the offered certificates will depend,
in general, on the rate and timing of principal payments (including prepayments, collections upon defaults,
liquidations and repurchases and the allocation of deferred interest) on the mortgage loans and the
allocation thereof to pay principal on these certificates as provided herein. As is the case with mortgage
pass-through certificates generally, the offered certificates are subject to substantial inherent cash-flow
uncertainties because the mortgage loans may be prepaid at any time. However, with respect to some of the
mortgage loans, a prepayment within one to four years of its origination may subject the related mortgagor to
a prepayment charge, which may act as a deterrent to prepayment of the mortgage loan during the applicable
period. However, under certain circumstances, the prepayment charge may be waived by the servicer. There can
be no assurance that any prepayment charges will have any effect on the prepayment performance of the
mortgage loans. See "Description of the Mortgage Loans" herein.
The sponsor may, from time to time, implement programs designed to encourage refinancing. These
programs may include, without limitation, modifications of existing loans, general or targeted solicitations,
the offering of pre-approved applications, reduced origination fees or closing costs or other financial
incentives. Targeted solicitations may be based on a variety of factors, including the credit of the borrower
or the location of the mortgaged property. In addition, the sponsor may encourage assumptions of mortgage
loans, including defaulted mortgage loans, under which creditworthy borrowers assume the outstanding
indebtedness of the mortgage loans which may be removed from the related mortgage pool. As a result of these
programs, with respect to the mortgage pool underlying any trust, the rate of principal prepayments of the
mortgage loans in the mortgage pool may be higher than would otherwise be the case and in some cases, the
average credit or collateral quality of the mortgage loans remaining in the mortgage pool may decline.
Generally, when prevailing interest rates are increasing, prepayment rates on mortgage loans tend to
decrease. A decrease in the prepayment rates on the mortgage loans will result in a reduced rate of return of
principal to investors in the offered certificates at a time when reinvestment at higher prevailing rates
would be desirable.
Conversely, when prevailing interest rates are declining, prepayment rates on mortgage loans tend to
increase. An increase in the prepayment rates on the mortgage loans will result in a greater rate of return
of principal to investors in the offered certificates at time when reinvestment at comparable yields may not
be possible.
During at least the first three years after the Closing Date, the entire amount of payments of
principal with respect to the mortgage loans will be allocated to the senior certificates, as described
herein, unless the current principal amount of the senior certificates has been reduced to zero. This will
accelerate the amortization of the senior certificates in each certificate group as a whole while, in the
absence of losses in respect of the mortgage loans, increasing the percentage interest in the principal
balance of the mortgage loans the subordinate certificates evidence.
For further information regarding the effect of principal prepayments on the weighted average lives of
the offered certificates, see "Yield and Prepayment Considerations" herein, including the tables entitled
"Percent of Initial Principal Amount Outstanding" in this term sheet supplement.
The Subordinate Certificates Have a Greater Risk of Loss than the Senior Certificates.
When certain classes of certificates provide credit enhancement for other classes of certificates it
is sometimes referred to as "subordination." For purposes of this term sheet supplement, subordination with
respect to the offered certificates or "subordinated classes" generally means:
o with respect to the Class A certificates in a loan group: the Class M certificates and Class B
certificates in such loan group and any overcollateralization in such loan group;
o with respect to the Class M certificates in a loan group: each class, if any, of Class M certificates
in such loan group with a higher numerical designation and the Class B certificates and any
overcollateralization in such loan group;
o with respect to the Class B certificates in a loan group: each class, if any, of Class B certificates
in such loan group with a higher numerical designation and any overcollateralization in such
loan group.
Credit enhancement for the senior certificates will be provided, first, by the right of the holders of
the senior certificates to receive certain payments of interest and principal prior to the related
subordinated classes and, second, by the allocation of realized losses to the related subordinated classes
before allocation to the related senior certificates. This form of credit enhancement uses collections on the
mortgage loans otherwise payable to the holders of the related subordinate classes to pay amounts due on the
more senior classes. Such collections are the sole source of funds from which such credit enhancement is
provided. Realized losses in excess of any available excess spread and any current overcollateralization in a
loan group are allocated to the related subordinate certificates, beginning with the Class B certificates
with the highest numerical designation, until the principal amount of that class has been reduced to zero.
Accordingly, if the aggregate certificate principal balance of a subordinated class were to be reduced to
zero, delinquencies and defaults on the mortgage loans would reduce the amount of funds available for monthly
distributions to holders of the remaining subordinated class or classes of certificates and, if the aggregate
certificate principal balance of all the subordinated classes were to be reduced to zero, delinquencies and
defaults on the mortgage loans in the related loan group would reduce the amount of funds available for
monthly distributions to holders of the related senior certificates. Realized losses on the senior
certificates in each loan group will be further allocated among such certificates as set forth in the Term
Sheet. You should fully consider the risks of investing in a subordinate certificate, including the risk
that you may not fully recover your initial investment as a result of realized losses.
The weighted average lives of, and the yields to maturity on, the Class M certificates and Class B
certificates will be progressively more sensitive sequentially, starting with the Class B certificates with
the highest numerical designation and then the Class M certificates with the highest numerical designation,
to the rate and timing of mortgagor defaults and the severity of ensuing losses on the related mortgage
loans. If the actual rate and severity of losses on the related mortgage loans is higher than those assumed
by an investor in such certificates, the actual yield to maturity of such certificates may be lower than the
yield anticipated by such holder based on such assumption. The timing of losses on the mortgage loans will
also affect an investor's actual yield to maturity, even if the rate of defaults and severity of losses over
the life of the mortgage loans are consistent with an investor's expectations. In general, the earlier a loss
occurs, the greater the effect on an investor's yield to maturity. Realized losses on the related mortgage
loans, to the extent they exceed the amount of overcollateralization following distributions of principal on
the related distribution date, will reduce the current principal amounts of the related Class M certificates
and Class B certificates sequentially, starting with the Class B certificates with the highest numerical
order and then the Class M certificates with the highest numerical order. As a result of such reductions,
less interest will accrue on such class of subordinate certificates than would otherwise be the case. Once a
realized loss is allocated to a subordinate certificate, no interest will be distributable with respect to
such written down amount. However, the amount of any realized losses allocated to the related subordinate
certificates may be reimbursed to the holders of the subordinate certificates according to the priorities set
forth under "Description of the Certificates-Distributions on the Certificates" herein.
Unless the current principal amounts of the related senior certificates have been reduced to zero, the
related subordinate certificates will not be entitled to any principal distributions until the distribution
date set forth in the Term Sheet or during any period in which delinquencies or losses on the mortgage loans
exceed certain levels. As a result, the weighted average life of the related subordinate certificates will be
longer than would otherwise be the case if distributions of principal were allocated among all of the
certificates at the same time. As a result of the longer weighted average lives of the related subordinate
certificates, the holders of such certificates have a greater risk of suffering a loss on their investments.
Furthermore, because such certificates might not receive any principal if certain delinquency levels occur,
it is possible for such certificates to receive no principal distributions even if no losses have occurred on
the mortgage pool.
In addition, the multiple class structure of the subordinate certificates causes the yield of such
classes to be particularly sensitive to changes in the rates of prepayment of the mortgage loans. Because
distributions of principal will be made to the holders of such certificates according to the priorities
described herein, the yield to maturity on such classes of certificates will be sensitive to the rates of
prepayment on the mortgage loans experienced both before and after the commencement of principal
distributions on such classes. The yield to maturity on such classes of certificates will also be extremely
sensitive to losses due to defaults on the related mortgage loans and the timing thereof, to the extent such
losses are not covered by overcollateralization, excess spread, or a class of subordinate certificates with a
lower payment priority. Furthermore, the timing of receipt of principal and interest by the subordinate
certificates may be adversely affected by losses even if such classes of certificates do not ultimately bear
such loss.
Excess Spread May be Inadequate to Cover Losses and/or to Build Overcollateralization.
The mortgage loans in each loan group are expected to generate more interest than is needed to pay
interest on the related offered certificates because we expect the weighted average net interest rate on the
related mortgage loans to be higher than the weighted average pass-through rate on the related certificates.
If the mortgage loans generate more interest than is needed to pay interest on the related offered
certificates, any non-offered certificates entitled to interest payments and trust fund expenses, such
"excess spread" will be used to make additional principal payments on the offered certificates and any
non-offered certificates entitled to principal payments, which will reduce the total principal balance of
such certificates below the aggregate principal balance of the mortgage loans, thereby creating
"overcollateralization." Overcollateralization is intended to provide limited protection to certificateholders
by absorbing the certificate's share of losses from liquidated mortgage loans. However, we cannot assure you
that enough excess spread will be generated on the mortgage loans to establish or maintain the required level
of overcollateralization. On the Closing Date the required level is of overcollateralization is expected to
be met with respect to both loan groups. If the protection afforded by overcollateralization is
insufficient, then an investor could experience a loss on your investment.
The excess spread available on any distribution date will be affected by the actual amount of interest
received, advanced or recovered in respect of the mortgage loans during the preceding month. Such amount may
be influenced by changes in the weighted average of the mortgage rates resulting from prepayments, defaults
and liquidations of the mortgage loans.
The overcollateralization provisions, whenever overcollateralization is at a level below the required
level, are intended to result in an accelerated rate of principal distributions to holders of the classes of
offered certificates then entitled to distributions of principal. An earlier return of principal to the
holders of the offered certificates as a result of the overcollateralization provisions will influence the
yield on the offered certificates in a manner similar to the manner in which principal prepayments on the
mortgage loans will influence the yield on the related offered certificates.
The Net Rate Cap May Reduce the Yields on the Offered Certificates.
The pass-through rates on the offered certificates are each subject to a net rate cap equal to the
weighted average of the net mortgage rates on the related mortgage loans (as adjusted for the applicable
portion of the premium rate with respect to any insured certificates, if applicable) as described in the Term
Sheet. If on any distribution date the pass-through rate for a class of offered certificates is limited to
the related net rate cap, the holders of the applicable certificates will receive a smaller amount of
interest than they would have received on that distribution date had the pass-through rate for that class not
been calculated based on the related net rate cap. The holders of those certificates will not be entitled to
recover any resulting shortfall in interest on that distribution date or on any other distribution date
except to the extent of excess cashflow available for that purpose or to the extent of available amounts
received from the cap contracts (if applicable). If mortgage loans with relatively higher mortgage rates
prepay or default, the net rate cap would result in lower interest than otherwise would be the case.
The Offered Certificates May Not Always Receive Interest Based on One-Month LIBOR or One-Year MTA Plus
the Related Margin.
The offered certificates may not always receive interest at a rate equal to One-Month LIBOR or
One-Year MTA, as applicable, plus the related margin. The pass-through rates on the offered certificates are
each subject to a net rate cap equal to the weighted average of the net mortgage rates on the related
mortgage loans (as adjusted for the applicable portion of the premium rate with respect to any insured
certificates), as further described herein. If the net rate cap on a class of certificates is less than the
lesser of (a) One-Month LIBOR or One-Year MTA, as applicable, plus the related margin and (b) the fixed rate
set forth in the Term Sheet (if any), the interest rate on the related certificates will be reduced to the
net rate cap. Thus, the yield to investors in such certificates will be sensitive both to fluctuations in the
level of One-Month LIBOR and One-Year MTA and to the adverse effects of the application of the net rate cap.
The prepayment or default of mortgage loans with relatively higher net mortgage rates, particularly during a
period of increased One-Month LIBOR or One-Year MTA rates, may result in the net rate cap being lower than
otherwise would be the case. If on any distribution date the application of the net rate cap results in an
interest payment lower than One-Month LIBOR or One-Year MTA plus the related margin on the applicable class
of certificates during the related interest accrual period, the value of such class of certificates may be
temporarily or permanently reduced.
The Securities Are Not Suitable Investments for All Investors.
The certificates are complex investments that are not appropriate for all investors. The interaction
of the factors described above is difficult to analyze and may change from time to time while the
certificates are outstanding. It is impossible to predict with any certainty the amount or timing of
distributions on the certificates or the likely return on an investment in any such securities. As a result,
only sophisticated investors with the resources to analyze the potential risks and rewards of an investment
in the certificates should consider such an investment.
Statutory and Judicial Limitations on Foreclosure Procedures May Delay Recovery in Respect of the
Mortgaged Property and, in Some Instances, Limit the Amount that May Be Recovered by the Foreclosing Lender,
Resulting in Losses on the Mortgage Loans That Might be Allocated to the Offered Certificates.
Foreclosure procedures may vary from state to state. Two primary methods of foreclosing a mortgage
instrument are judicial foreclosure, involving court proceedings, and non-judicial foreclosure pursuant to a
power of sale granted in the mortgage instrument. A foreclosure action is subject to most of the delays and
expenses of other lawsuits if defenses are raised or counterclaims are asserted. Delays may also result from
difficulties in locating necessary defendants. Non-judicial foreclosures may be subject to delays resulting
from state laws mandating the recording of notice of default and notice of sale and, in some states, notice
to any party having an interest of record in the real property, including junior lienholders. Some states
have adopted "anti-deficiency" statutes that limit the ability of a lender to collect the full amount owed on
a loan if the property sells at foreclosure for less than the full amount owed. In addition, United States
courts have traditionally imposed general equitable principles to limit the remedies available to lenders in
foreclosure actions that are perceived by the court as harsh or unfair. The effect of these statutes and
judicial principles may be to delay and/or reduce distributions in respect of the offered certificates.
The Value of the Mortgage Loans May Be Affected By, Among Other Things, a Decline in Real Estate
Values, Which May Result in Losses on the Offered Certificates.
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 so that the outstanding balances of the mortgage
loans, and any secondary financing on the mortgaged properties, in the 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 some areas
of the United States, real estate values have risen at a greater rate in recent years than in the past. In
particular, mortgage loans with high principal balances or high loan-to-value ratios will be affected by any
decline in real estate values. Real estate values in any area of the country may be affected by several
factors, including population trends, mortgage interest rates, and the economic well-being of that area. Any
decrease in the value of the mortgage loans may result in the allocation of losses which are not covered by
credit enhancement to the offered certificates.
The Ratings on the Offered Certificates are Not a Recommendation to Buy, Sell or Hold the Offered
Certificates and are Subject to Withdrawal at any Time, Which May Affect the Liquidity or the Market Value of
the Offered Certificates.
It is expected that as a condition to the issuance of the offered certificates that each class of
offered certificates will have the ratings in the categories set forth in the term sheet. A security rating
is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any
time. No person is obligated to maintain the rating on any offered certificate, and, accordingly, there can
be no assurance that the ratings assigned to any offered certificate on the date on which the offered
certificates are initially issued will not be lowered or withdrawn by a rating agency at any time thereafter.
In the event any rating is revised or withdrawn, the liquidity or the market value of the related offered
certificates may be adversely affected.
The Mortgage Loans May Have Limited Recourse to the Related Borrower, Which May Result in Losses with
Respect to These Mortgage Loans.
Some or all of the mortgage loans included in the trust fund will be non-recourse loans or loans for
which recourse may be restricted or unenforceable. As to those mortgage loans, recourse in the event of
mortgagor default will be limited to the specific real property and other assets, if any, that were pledged
to secure the mortgage loan. However, even with respect to those mortgage loans that provide for recourse
against the mortgagor and its assets generally, there can be no assurance that enforcement of the recourse
provisions will be practicable, or that the other assets of the mortgagor will be sufficient to permit a
recovery in respect of a defaulted mortgage loan in excess of the liquidation value of the related mortgaged
property. Any risks associated with mortgage loans with no or limited recourse may affect the yield to
maturity of the offered certificates to the extent losses caused by these risks which are not covered by
credit enhancement are allocated to the offered certificates.
The Mortgage Loans May Have Environmental Risks, Which May Result in Increased Losses with Respect to
These Mortgage Loans.
To the extent that the servicer or the trustee (in its capacity as successor servicer) for a mortgage
loan acquires title to any related mortgaged property on behalf of the trust, which is contaminated with or
affected by hazardous wastes or hazardous substances, these mortgage loans may incur additional losses. To
the extent these environmental risks result in losses on the mortgage loans, the yield to maturity of the
offered certificates, to the extent not covered by credit enhancement, may be affected.
Violation of Various Federal, State and Local Laws May Result in Losses on the Mortgage Loans.
Applicable state and local laws generally regulate interest rates and other charges, require specific
disclosure, and require licensing of the originator. In addition, other state and local laws, public policy
and general principles of equity relating to the protection of consumers, unfair and deceptive practices and
debt collection practices may apply to the origination, servicing and collection of the mortgage loans. The
mortgage loans are also subject to various federal laws.
Depending on the provisions of the applicable law and the specific facts and circumstances involved,
violations of these federal or state laws, policies and principles may limit the ability of the trust to
collect all or part of the principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the trust to damages and administrative
enforcement. See "Legal Aspects of Mortgage Loans" in the prospectus.
Under the anti-predatory lending laws of some states, the borrower is required to meet a net tangible
benefits test in connection with the origination of the related mortgage loan. This test may be highly
subjective and open to interpretation. As a result, a court may determine that a mortgage loan does not meet
the test even if the originator reasonably believed that the test was satisfied at the time of origination.
Any determination by a court that the mortgage loan does not meet the test will result in a violation of the
state anti-predatory lending law, in which case the sponsor will be required to purchase that mortgage loan
from the trust.
On the Closing Date, the sponsor will represent that each mortgage loan at the time it was made
complied in all material respects with all applicable laws and regulations, including, without limitation,
usury, equal credit opportunity, disclosure and recording laws and all predatory lending laws; and each
mortgage loan has been serviced in all material respects in accordance with all applicable laws and
regulations, including, without limitation, usury, equal credit opportunity, disclosure and recording laws
and all predatory lending laws and the terms of the related mortgage note, the mortgage and other loan
documents. In the event of a breach of this representation, the sponsor will be obligated to cure the breach
or repurchase or replace the affected mortgage loan in the manner described in the prospectus.
The Return on the Offered Certificates Could be Reduced by Shortfalls Due to The Application of the
Servicemembers' Civil Relief Act and Similar State Laws.
The Servicemembers' Civil Relief Act or the Relief Act and similar state or local laws provide relief
to mortgagors who enter active military service and to mortgagors in reserve status who are called to active
military service after the origination of their mortgage loans. The military operations by the United States
in Iraq and Afghanistan has caused an increase in the number of citizens in active military duty, including
those citizens previously in reserve status. Under the Relief Act the interest rate applicable to a mortgage
loan for which the related mortgagor is called to active military service will be reduced from the percentage
stated in the related mortgage note to 6.00%. This interest rate reduction and any reduction provided under
similar state or local laws will result in an interest shortfall because the servicer will not be able to
collect the amount of interest which otherwise would be payable with respect to such mortgage loan if the
Relief Act or similar state law was not applicable thereto. This shortfall will not be paid by the mortgagor
on future due dates or advanced by the servicer and, therefore, will reduce the amount available to pay
interest to the certificateholders on subsequent distribution dates. We do not know how many mortgage loans
in the mortgage pool have been or may be affected by the application of the Relief Act or similar state law.
In addition, the Relief Act imposes limitations that would impair the ability of the servicer to foreclose on
an affected single family loan during the mortgagor's period of active duty status, and, under some
circumstances, during an additional three month period thereafter. Thus, in the event that the Relief Act or
similar legislation or regulations applies to any mortgage loan which goes into default, there may be delays
in payment and losses on the certificates in connection therewith. Any other interest shortfalls, deferrals
or forgiveness of payments on the mortgage loans resulting from similar legislation or regulations may result
in delays in payments or losses to holders of the offered certificates. The certificate insurance policy
will not cover any interest shortfalls on the insured certificates as a result of the application of the
Relief Act or similar state laws.
DESCRIPTION OF THE MORTGAGE LOANS
General
The related Term Sheet will include information with respect to the mortgage loans expected to be
included in the pool of mortgage loans in the trust fund. Prior to the Closing Date, mortgage loans may be
removed from the mortgage pool and other mortgage loans may be substituted for the removed mortgage loans.
The depositor believes that the information set forth in the Term Sheet will be representative of the
characteristics of the mortgage pool as it will be constituted at the Closing Date, although certain
characteristics of the mortgage loans in the mortgage pool may vary.
The mortgage pool will generally consist of first lien, adjustable-rate negative amortization mortgage
loans secured by one- to four-family residences and individual condominium units. The mortgage pool will be
divided into two loan groups. One loan group will include mortgage loans originated under the Bear Option
ARM program and the second loan group will include mortgage loans originated under the 5 Yr. Bear Secure
Option ARM program, each as described below.
The mortgage loans will be selected for inclusion in the mortgage pool based on rating agency
criteria, compliance with representations and warranties, and conformity to criteria relating to the
characterization of securities for tax, ERISA, SMMEA, Form S-3 eligibility and other legal purposes.
The mortgage loans are being serviced as described below under "The Servicer-EMC". The mortgage loans
were originated generally in accordance with the guidelines described under "Mortgage Loan
Origination-Underwriting Guidelines".
All of the mortgage loans have scheduled monthly payments due on the Due Date. Each mortgage loan will
contain a customary "due-on-sale" clause.
Bear Option ARM Loans
The mortgage rates for the Bear Option ARM loans are fixed for the one or three month period following
their origination and then adjust monthly. After the initial fixed-rate period, the interest rate borne by
each Bear Option ARM mortgage loan will be adjusted monthly based on One-Year MTA, referred to in this term
sheet supplement as an Index as described below, computed in accordance with the related note, plus (or
minus) the related gross margin and generally subject to rounding. The Bear Option ARM mortgage loans
generally contain a maximum lifetime mortgage rate and a minimum lifetime mortgage rate.
Each month, the mortgagor will be required to pay a minimum monthly payment as provided in the related
mortgage note. The minimum monthly payment will adjust annually on a date specified in the related mortgage
note, subject to the conditions that (i) the amount of the monthly payment (with the exception of each fifth
payment adjustment date or the final payment adjustment date) will not increase or decrease by an amount that
is more than 7.50% of the monthly payment prior to the adjustment, (ii) as of the fifth payment adjustment
date and on the same day every fifth year thereafter and on the last payment adjustment date, the monthly
payment will be recast without regard to the limitation in clause (i) above and (iii) if the unpaid principal
balance exceeds a percentage (either 110% or 115%, depending on the maximum negative amortization for that
mortgage loan) of the original principal balance due to deferred interest, the monthly payment will be recast
without regard to the limitation in clause (i) to amortize fully the then unpaid principal balance over its
remaining term to maturity.
In addition to the minimum monthly payment option, under the Bear Option ARM program, the mortgagor is
offered three additional payment options to the extent they result in a larger payment than the minimum
monthly payment. The payment options include: (i) the Interest Only Payment, where the mortgagor would pay
the full amount of accrued interest on the mortgage loan at the current interest rate and the principal
balance would not be decreased by any amount, (ii) the Fully Amortized Payment, where the mortgagor would
make payments in an amount that would pay interest and amortize fully the then unpaid principal balance over
its remaining term to maturity in substantially equal payments (assuming the interest rate was not adjusted
prior to maturity) and (iii) the 15 Year Amortized Payment, where the mortgagor would make payments in an
amount that would pay interest and amortize fully the then unpaid principal balance over a remaining term of
fifteen (15) years in substantially equal payments (assuming the interest rate was not adjusted prior to
maturity). If a payment option would not result in an amount greater than the minimum payment due, the
payment option will not be available to a mortgagor.
5 Yr. Bear Secure Option ARM Loans
The mortgage rates for the 5 Yr. Bear Secure Option ARM loans are fixed for the five year period
following the origination of the mortgage loan and thereafter adjust every six (6) months. After the initial
fixed-rate period, the interest rate borne by each mortgage loan will be adjusted semi-annually based on
Six-Month LIBOR or annually based on One-Year LIBOR, referred to in this term sheet supplement as an Index as
described below, computed in accordance with the related note, plus (or minus) the related gross margin and
generally subject to rounding and to certain other limitations. The 5 Yr. Bear Secure Option ARM loans will
generally contain a maximum mortgage rate cap for the first adjustment date, a periodic interval cap of 1%
and a maximum lifetime mortgage rate.
During the initial five year fixed period, the mortgagor will be required to pay a minimum monthly
payment calculated on the basis of the original loan amount and a note rate below the original note rate of
generally up to 3%. The minimum monthly payment will adjust at the earlier of (i) the end of the initial
five year fixed period or (ii) the date upon which the unpaid principal balance equals or exceeds a
percentage (either 110% or 115%, depending on the maximum negative amortization for that mortgage loan) of
the original principal balance of the mortgage loan due to deferred interest. Upon adjustment, the required
monthly payment will be an interest only payment in an amount equal to the full amount of accrued interest of
the mortgage loan calculated based on the outstanding principal balance of the mortgage loan and the interest
rate then in effect. The required monthly payment may change once every six months based on the semi-annual
adjustment of interest or once every twelve months based on the annual adjustment of interest. This
interest-only period will expire at the end of the tenth anniversary of the loan, at which time the monthly
payment will be adjusted to pay interest and amortize fully the then unpaid principal balance over its
remaining term to maturity (assuming the interest rate was not adjusted prior to maturity). In addition to
the minimum monthly payment option, under the 5 Yr. Bear Secure Option ARM program, during the initial five
year fixed period, the mortgagor is offered three additional payment options to the extent they result in a
larger payment than the minimum monthly payment. The payment options include the Interest Only Payment, the
Fully Amortized Payment and the 15 Year Amortized Payment, as offered pursuant to the Bear Option ARM
program. As with the Bear Option ARM program, if a payment option would not result in an amount greater than
the minimum payment due, the payment option will not be available to a mortgagor.
Billing and Payment Procedures
The mortgage loans require monthly payments to be made no later than either the 1st or 15th day of
each month, with a grace period as specified in the related mortgage note. Each month, the Servicer sends
monthly invoices to borrowers which provide the payment options available to each borrower. Borrowers may
elect for monthly payments to be deducted automatically from deposit accounts and may make payments by
various means, including online transfers, phone payment although an additional fee may be charged for these
payment methods.
Prepayment Charges on the Mortgage Loans
Some of the mortgage loans provide for payment by the mortgagor of a prepayment charge in connection
with some prepayments. The amount of the prepayment charge is as provided in the related mortgage note, and
the prepayment charge will generally apply if, in any twelve-month period during the first year, first three
years or other period as provided in the related mortgage note from the date of origination of the mortgage
loan, the mortgagor prepays an aggregate amount exceeding 20% of the original principal balance of the
mortgage loan or another amount permitted by applicable law. The amount of the prepayment charge will, for
the majority of the mortgage loans, be equal to 6 months' advance interest calculated on the basis of the
mortgage rate in effect at the time of the prepayment on the amount prepaid in excess of 20% of the original
principal balance of the mortgage loan, but it may be a lesser or greater amount as provided in the related
mortgage note. A prepayment charge may not apply with respect to a sale of the related mortgaged property,
and in some circumstances, such as illegality, may be unenforceable.
Generally, the Servicer shall not waive any prepayment charge unless: (i) the enforceability thereof
shall have been limited by bankruptcy, insolvency, moratorium, receivership and other similar laws relating
to creditors' rights generally, (ii) the enforcement thereof is illegal, or any local, state or federal
agency has threatened legal action if the prepayment penalty is enforced, (iii) the mortgage debt has been
accelerated in connection with a foreclosure or other involuntary payment or (iv) such waiver is standard and
customary in servicing similar mortgage loans and relates to a default or a reasonably foreseeable default
and would, in the reasonable judgment of the Servicer, maximize recovery of total proceeds taking into
account the value of such prepayment charge and the related mortgage loan. Accordingly, there can be no
assurance that the prepayment charges will have any effect on the prepayment performance of the mortgage
loans.
Certain prepayment charges are classified as "hard" prepayment charges, meaning that the mortgagor has
to cover the prepayment charge regardless of the reason for prepayment, while others are classified as
"soft," meaning that the mortgagor has to cover the prepayment charge unless the mortgagor has conveyed the
related mortgaged property to a third-party. The sponsor does not have information with respect to the
percentage of each type of prepayment charge included in the pool of mortgage loans.
Negative Amortization
All of the mortgage loans have a negative amortization feature, under which accrued interest may be
deferred and added to the principal balance of the mortgage loan. Negative amortization results from the
fact that while the interest rate on a negative amortization loan adjusts either monthly or semi-annually, as
applicable, the amount of the monthly payment adjusts only on an annual basis. In addition, the monthly
payment may not fully amortize the principal balance of the loan on an annual adjustment date if a payment
cap applies.
In any given month, the mortgage loan may be subject to:
(1) reduced amortization if the monthly payment is sufficient to pay current accrued interest at the
mortgage rate but is not sufficient to reduce principal in accordance with a fully amortizing
schedule;
(2) negative amortization, if current accrued interest is greater than the monthly payment, which would
result in the accrued interest not currently paid being treated as Deferred Interest; or
(3) accelerated amortization if the monthly payment is greater than the amount necessary to pay current
interest and to reduce principal in accordance with a fully amortizing schedule.
Deferred Interest may result in a final lump sum payment at maturity significantly greater than the
monthly payment that would otherwise be payable.
The total amount of Deferred Interest that may be added is limited by a provision in the mortgage note
to the effect that the principal amount of the mortgage loan may not exceed a percentage or periodic cap,
times the principal amount of the loan at origination.
Indices on the Mortgage Loans
One-Year MTA. The interest rate on the Bear Option ARM loans will adjust monthly based on One-Year
MTA. One-Year MTA will be a per annum rate equal to the twelve-month moving average monthly yield on United
States Treasury Securities adjusted to a constant maturity of one year as published by the Federal Reserve
Board in the Federal Reserve Statistical Release "Selected Interest Rates (H.15)," determined by averaging
the monthly yields for the most recently available twelve months. The index figure used for each interest
rate adjustment date will be the most recent index figure available as of fifteen days before that date.
The following levels of One-Year MTA do not purport to be representative of future levels of One-Year
MTA. No assurance can be given as to the level of One-Year MTA on any adjustment date or during the life of
any mortgage loan with an Index of One-Year MTA.
One-Year MTA
Date 2001 2002 2003 2004 2005 2006
January 1 5.999% 3.260% 1.935% 1.234% 2.022% 3.751%
February 1 5.871 3.056 1.858 1.229 2.171 3.888
March 1 5.711 2.912 1.747 1.225 2.347 4.011
April 1 5.530 2.786 1.646 1.238 2.504 4.143
May 1 5.318 2.668 1.548 1.288 2.633 4.282
June 1 5.102 2.553 1.449 1.381 2.737 4.432
July 1 4.897 2.414 1.379 1.463 2.865 4.563
August 1 4.671 2.272 1.342 1.522 3.019 4.664
September 1 4.395 2.180 1.302 1.595 3.163 4.758
October 1 4.088 2.123 1.268 1.677 3.326 4.827
November 1 3.763 2.066 1.256 1.773 3.478 4.883
December 1 3.481 2.002 1.244 1.887 3.618
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Six-Month LIBOR. The interest rate on a majority of the 5 Yr Secured Option ARM mortgage loans will
adjust semiannually based on Six-Month LIBOR. Six-Month LIBOR will be a per annum rate equal to the average
of interbank offered rates for six-month U.S. dollar-denominated deposits in the London market based on
quotations of major banks as published in The Wall Street Journal and are most recently available as of the
time specified in the related mortgage note.
The following does not purport to be representative of future levels of Six-Month LIBOR. No assurance
can be given as to the level of Six-Month LIBOR on any adjustment date or during the life of any mortgage
loan with an Index of Six-Month LIBOR.
Six-Month LIBOR
Date 2001 2002 2003 2004 2005 2006
January 1................ 6.20% 2.03% 1.38% 1.22% 2.78% 4.71%
February 1............... 5.26 2.08 1.35 1.21 2.97 4.82
March 1.................. 4.91 2.04 1.34 1.17 3.19 5.26
April 1.................. 4.71 2.36 1.23 1.16 3.39 5.14
May 1.................... 4.30 2.12 1.29 1.38 3.41 5.22
June 1................... 3.98 2.08 1.21 1.60 3.54 5.39
July 1................... 3.91 1.95 1.12 1.89 3.73 5.59
August 1................. 3.69 1.87 1.21 1.99 3.95 5.51
September 1.............. 3.45 1.80 1.20 1.98 4.00 5.42
October 1................ 2.52 1.71 1.14 2.20 4.27 5.38
November 1............... 2.15 1.60 1.23 2.32 4.47
December 1............... 2.03 1.47 1.27 2.63 4.63
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One-Year LIBOR. The interest rate on certain of the 5 Yr Secured Option ARM mortgage loans will
adjust annually based on One-Year LIBOR. One-Year LIBOR will be a per annum rate equal to the average of
interbank offered rates for one-year U.S. dollar-denominated deposits in the London market based on
quotations of major banks as published in The Wall Street Journal and are most recently available as of the
time specified in the related mortgage note.
STATIC POOL INFORMATION
The depositor will provide static pool information, material to this offering, with respect to the
experience of the sponsor in securitizing asset pools of a type similar to the Bear Option ARM loans at
http://www.bearstearns.com/transactions/sami_ii/bsmf2006-ar5/index.html.
Information provided through the internet address above will not be deemed to be a part of this term
sheet supplement, the Term Sheet or the registration statement for the securities offered hereby if it
relates to any prior securities pool or vintage data related to periods before January 1, 2006, or with
respect to the mortgage pool (if applicable) for any period before January 1, 2006.
The 5 Yr. Bear Secure Option ARM mortgage loans are a new product in the mortgage marketplace. The
performance of these mortgage loans may be significantly different than mortgage loans that fully amortize or
have other negative amortization features that are more common to the mortgage marketplace. In particular,
the depositor is not aware of any performance history for these mortgage loans.
THE ISSUING ENTITY
Bear Stearns Mortgage Funding Trust 2006-AR5 is a common law trust formed under the laws of the State
of New York pursuant to the Agreement. The Agreement constitutes the "governing instrument" under the laws of
the State of New York. After its formation, Bear Stearns Mortgage Funding Trust 2006-AR5 will not engage in
any activity other than (i) acquiring and holding the mortgage loans and the other assets of the trust and
proceeds therefrom, (ii) issuing the certificates, (iii) making payments on the certificates and (iv)
engaging in other activities that are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith. The foregoing restrictions are contained in the Agreement. For a
description of other provisions relating to amending the Pooling and Servicing Agreement, please see "The
Agreements- Amendment of Agreement" in the prospectus.
The assets of Bear Stearns Mortgage Funding Trust 2006-AR5 will consist of the mortgage loans and
certain related assets.
Bear Stearns Mortgage Funding Trust 2006-AR5's fiscal year end is December 31.
THE DEPOSITOR
Structured Asset Mortgage Investments Inc. II, referred to herein as the Depositor, was formed in the
state of Delaware in June 2003, and is a wholly-owned subsidiary of The Bear Stearns Companies Inc. The
Depositor was organized for the sole purpose of serving as a private secondary mortgage market conduit. The
Depositor does not have, nor is it expected in the future to have, any significant assets.
The Depositor has been serving as a private secondary mortgage market conduit for residential mortgage
loans since 2003. As of June 30, 2006, the Depositor has been involved in the issuance of securities backed
by residential mortgage loans of approximately $115,594,490,169. In conjunction with the Sponsor's
acquisition of the mortgage loans, the Depositor will execute a mortgage loan purchase agreement through
which the loans will be transferred to itself. These loans are subsequently deposited in a common law or
statutory trust, described herein, which will then issue the Certificates.
After issuance and registration of the securities contemplated in this term sheet supplement, the Term
Sheet and any supplement hereto, the Depositor will have no duties or responsibilities with respect to the
pool assets or the securities.
The Depositor's principal executive offices are located at 383 Madison Avenue, New York, New York10179. Its telephone number is (212) 272-2000.
THE SPONSOR
The sponsor, EMC Mortgage Corporation, referred to herein as EMC or the Sponsor, was incorporated in
the State of Delaware on September 26, 1990, as a wholly owned subsidiary corporation of The Bear Stearns
Companies Inc., and is an affiliate of the Depositor and the Underwriter. The Sponsor was established as a
mortgage banking company to facilitate the purchase and servicing of whole loan portfolios containing various
levels of quality from "investment quality" to varying degrees of "non-investment quality" up to and
including real estate owned assets ("REO"). The Sponsor commenced operation in Texas on October 9, 1990.
The Sponsor maintains its principal office at 2780 Lake Vista Drive, Lewisville, Texas75067. Its
telephone number is (214) 626-3800.
Since its inception in 1990, the sponsor has purchased over $100 billion in residential whole loans
and servicing rights, which include the purchase of newly originated alternative A, jumbo (prime) and
sub-prime loans. Loans are purchased on a bulk and flow basis. The Sponsor is one of the United States'
largest purchasers of scratch and dent and sub-performing residential mortgages and REO from various
institutions, including banks, mortgage companies, thrifts and the U.S. government. Loans are generally
purchased with the ultimate strategy of securitization into an array of Bear Stearns' securitizations based
upon product type and credit parameters, including those where the loan has become re-performing or
cash-flowing.
Performing loans include first lien fixed rate and ARMs, as well as closed end fixed rate second liens
and lines of credit ("HELOCs"). Performing loans acquired by the Sponsor are subject to varying levels of
due diligence prior to purchase. Portfolios may be reviewed for credit, data integrity, appraisal valuation,
documentation, as well as compliance with certain laws. Performing loans purchased will have been originated
pursuant to the sponsor's underwriting guidelines or the originator's underwriting guidelines that are
acceptable to the Sponsor.
Subsequent to purchase by the Sponsor, performing loans are pooled together by product type and credit
parameters and structured into RMBS, with the assistance of Bear Stearns' Financial Analytics and Structured
Transactions group, for distribution into the primary market.
The Sponsor has been securitizing residential mortgage loans since 1999. The following table
describes size, composition and growth of the Sponsor's total portfolio of assets it has securitized as of
the dates indicated.
December 31, 2003December 31, 2004December 31, 2005June 30, 2006
Total Portfolio of Total Portfolio of Total Portfolio of Total Portfolio of
Loan Type Number Loans Number Loans Number Loans Number Loans
Alt-A ARM 12,268 $ 3,779,319,393.84 44,821 $ 11,002,497,283.49 73,638 $19,087,119,981.75 45,516 $ 12,690,441,830.33
Alt-A Fixed 15,907 $ 3,638,653,583.24 15,344 $ 4,005,790,504.28 17,294 $ 3,781,150,218.13 9,735 $ 2,365,141,449.49
HELOC - $ - - $ - 9,309 $ 509,391,438.93 4,360 $ 310,097,521.06
Prime ARM 16,279 $ 7,179,048,567.39 30,311 $ 11,852,710,960.78 27,384 $13,280,407,388.92 4,203 $ 2,168,057,808.87
Prime Fixed 2,388 $ 1,087,197,396.83 1,035 $ 509,991,605.86 3,526 $ 1,307,685,538.44 1,803 $ 484,927,212.35
Prime Short Duration ARM 7,089 $ 2,054,140,083.91 23,326 $ 7,033,626,375.35 38,819 $14,096,175,420.37 39,946 $ 15,102,521,877.81
Reperforming 2,800 $ 247,101,330.36 2,802 $ 311,862,677.46 2,877 $ 271,051,465.95 1,084 $ 115,127,847.83
Seconds - $ - 14,842 $ 659,832,093.32 114,899 $ 5,609,656,263.12 68,788 $ 3,755,330,847.76
SubPrime 29,303 $ 2,898,565,285.44 98,426 $ 13,051,338,552.19 101,156 $16,546,152,274.44 34,396 $ 6,069,878,975.92
Totals 86,034 $20,884,025,641.01 230,907 $ 48,427,650,052.73 388,902 $74,488,789,990.05 209,831 $ 43,061,525,370.96
---------------------------------------------------------------------------------------------------------------
With respect to some of the securitizations organized by the sponsor, a "step-down" trigger has
occurred with respect to the loss and delinquency experience of the mortgage loans included in those
securitizations, resulting in a sequential payment of principal to the related offered certificates, from the
certificates with the highest credit rating to the one with the lowest rating. In addition, with respect to
one securitization organized by the Sponsor, a servicing trigger required by the related financial guaranty
insurer has occurred; however, the insurer has granted extensions enabling the normal servicing activities to
continue.
The Sponsor has received a civil investigative demand (CID), from the Federal Trade Commission (FTC),
seeking documents and data relating to the Sponsor's business and servicing practices. The CID was issued
pursuant to a December 8, 2005 resolution of the FTC authorizing non-public investigations of various unnamed
subprime lenders, loan servicers and loan brokers to determine whether there have been violations of certain
consumer protections laws. The Sponsor is cooperating with the FTC's inquiry.
THE SERVICER
General
EMC Mortgage Corporation or EMC, will act as the Servicer of the mortgage loans pursuant to a Pooling
and Servicing Agreement, referred to herein as the Agreement. Among other things, the Agreement will require
that the Servicer accurately and fully report its borrower credit files to credit repositories in a timely
manner.
The information set forth in the following paragraphs with respect to the Servicer has been provided
by the Servicer. None of the Depositor, the Underwriter, the Trustee or any of their respective affiliates
(other than the Servicer) have made or will make any representation as to the accuracy or completeness of
such information.
The Servicer
EMC
For a description of EMC, please see "-The Sponsor" in this term sheet supplement. EMC will service
the mortgage loans in accordance with the description of the applicable servicing procedures contained in
this section in the term sheet supplement. EMC has been servicing residential mortgage loans since 1990.
From year end 2004 to year end 2005 EMC's servicing portfolio grew by 113%.
The principal business of EMC since inception has been specializing in the acquisition,
securitization, servicing and disposition of mortgage loans. EMC's servicing portfolio consists primarily of
two categories:
o "performing loans," or performing investment quality loans serviced for EMC's own account or the
account of Fannie Mae, Freddie Mac, private mortgage conduits and various institutional
investors; and
o "non-performing loans," or non-investment grade, sub-performing loans, non-performing loans and REO
properties serviced for EMC's own account and for the account of investors in securitized
performing and non-performing collateral transactions.
EMC will service the mortgage loans in accordance with the description of the applicable servicing
procedures contained in this section of the term sheet supplement. EMC has been servicing residential
mortgage loans since 1990. EMC will service the mortgage loans in accordance with the description of the
applicable servicing procedures contained in this section of the term sheet supplement. EMC has been
servicing residential mortgage loans since 1990. As of June 30, 2006, EMC was acting as servicer for
approximately 250 series of residential mortgage-backed securities and other mortgage loans with an
outstanding principal balance of approximately $64.6 billion. From year end 2004 to June 30, 2006, the loan
count of EMC's servicing portfolio grew by approximately 95.9%, and the unpaid principal balance of EMC's
servicing portfolio grew by approximately 132.5%.
There have been no appreciable changes to EMC's servicing procedures outside of the normal changes
warranted by regulatory and product type changes in the portfolio.
The following table describes size, composition and growth of EMC's total residential mortgage loan
servicing portfolio as of the dates indicated.
As of December 31, 2003 As of December 31, 2004
----------------------------------------------------------------------------------------------------------------------
Loan Type No. of Dollar Amount Percent Percent No. of Dollar Amount Percent Percent
by No.
by No. of by Dollar of by Dollar
Loans Loans Amount Loans Loans Amount
-----------------------------------------------------------------------------------------------------
Alta-A Arm... 2,439 $ 653,967,868.93 1.40% 4.75% 19,498 $4,427,820,707.76 7.96% 15.94%
Alta-A Fixed. 19,396 $3,651,416,056.79 11.14% 26.51% 25,539 $4,578,725,473.28 10.43% 16.48%
Prime Arm.... 7,978 $ 868,798,347.46 4.58% 6.31% 8,311 $1,045,610,015.30 3.39% 3.76%
Prime Fixed.. 16,377 $1,601,411,491.35 9.40% 11.63% 14,560 $1,573,271,574.42 5.95% 5.66%
Seconds...... 25,290 $ 690,059,168.80 14.52% 5.01% 39,486 $1,381,961,155.08 16.13% 4.98%
Subprime..... 76,166 $5,058,932,125.93 43.73% 36.73% 114,436 $13,706,363,249.78 46.74% 49.34%
Other........ 26,523 $1,249,014,372.71 15.23% 9.07% 23,010 $1,063,682,459.11 9.40% 3.83%
-----------------------------------------------------------------------------------------------------
Total........ 174,169 $13,773,599,431.97100.00% 100.00% 244,840 $27,777,434,634.73 100.00% 100.00%
---------------------------------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 2005 As of June 30, 2006
----------------------------------------------------------------------------------------------------------------------
Loan Type No. of Dollar Amount Percent Percent No. of Dollar Amount Percent Percent
by No.
by No. of by Dollar of by Dollar
Loans Loans Amount Loans Loans Amount
-----------------------------------------------------------------------------------------------------
Alta-A Arm... 57,510 $13,625,934,321.62 12.69% 23.00% 45,369 $11,945,448,033.57 9.46% 18.50%
Alta-A Fixed. 17,680 $3,569,563,859.33 3.90% 6.03% 26,199 $5,240,887,578.52 5.46% 8.11%
Prime Arm.... 7,428 $1,010,068,678.92 1.64% 1.71% 7,050 $ 935,151,471.50 1.47% 1.45%
Prime Fixed.. 15,975 $2,140,487,565.90 3.52% 3.61% 15,683 $2,139,403,359.36 3.27% 3.31%
Seconds...... 155,510 $7,164,515,426.20 34.31% 12.10% 179,330 $8,547,703,139.94 37.38% 13.24%
Subprime..... 142,890 $20,373,550,690.52 31.53% 34.40% 139,890 $20,361,085,084.49 29.16% 31.53%
Other........ 56,216 $11,347,144,055.57 12.40% 19.16% 66,235 $15,414,138,024.47 13.81% 23.87%
-----------------------------------------------------------------------------------------------------
Total........ 453,209 $59,231,264,598.06100.00% 100.00% 479,756 $64,583,816,691.85 100.00% 100.00%
---------------------------------------------------------------------------------------------------------------
MORTGAGE LOAN ORIGINATION
General
A portion of the Bear Option ARM mortgage loans included in loan group I were originated or acquired
by the Sponsor from various sellers and were originated generally in accordance with the underwriting
guidelines established by the Sponsor as set forth below. The remainder of the Bear Option ARM loans
included in loan group I were originated by Bear Stearns Residential Mortgage Corporation, or BSRM, an
affiliate of the Sponsor, the Depositor and the Underwriter. A portion of the Bear Option ARM mortgage loans
included in loan group II were originated or acquired by the Sponsor from various sellers and were originated
generally in accordance with the underwriting guidelines established by the Sponsor as set forth below. The
remainder of the Bear Option ARM loans included in loan group II were originated by Bear Stearns Residential
Mortgage Corporation, or BSRM, an affiliate of the Sponsor, the Depositor and the Underwriter.
Underwriting Guidelines
EMC Underwriting Guidelines
The following is a description of the underwriting policies customarily employed by EMC with respect
to the residential mortgage loans that EMC originated during the period of origination of the mortgage
loans. EMC has represented to the depositor that the mortgage loans were originated generally in accordance
with such policies.
The mortgage loans originated by EMC, or EMC mortgage loans, are "conventional non-conforming mortgage
loans" (i.e., loans that are not insured by the Federal Housing Authority, or FHA, or partially guaranteed by
the Veterans Administration or which do not qualify for sale to Fannie Mae or Freddie Mac) and are secured by
first liens on one-to four-family residential properties. These loans typically differ from those
underwritten to the guidelines established by Fannie Mae and Freddie Mac primarily with respect to the
original principal balances, loan-to-value ratios, borrower income, required documentation, interest rates,
borrower occupancy of the mortgaged property, property types and/or mortgage loans with loan-to-value ratios
over 80% that do not have primary mortgage insurance. The EMC mortgage loans have either been originated or
purchased by an originator and were generally underwritten in accordance with the standards described
herein. Exceptions to the underwriting guidelines are permitted when the seller's performance supports such
action and the variance request is approved by credit management.
Such underwriting standards are applied to evaluate the prospective borrower's credit standing and
repayment ability and the value and adequacy of the mortgaged property as collateral. These standards are
applied in accordance with the applicable federal and state laws and regulations. Exceptions to the
underwriting standards are permitted where compensating factors are present and are managed through a formal
exception process.
Generally, each mortgagor will have been required to complete an application designed to provide to
the lender pertinent credit information concerning the mortgagor. The mortgagor will have given information
with respect to its assets, liabilities, income (except as described below), credit history, employment
history and personal information, and will have furnished the lender with authorization to obtain a credit
report which summarizes the mortgagor's credit history. In the case of investment properties and two- to
four-unit dwellings, income derived from the mortgaged property may have been considered for underwriting
purposes, in addition to the income of the mortgagor from other sources. With respect to second homes or
vacation properties, no income derived from the property will have been considered for underwriting purposes.
With respect to purchase money or rate/term refinance loans secured by single family residences the
following loan-to-value ratios and original principal balances are allowed: loan-to-value ratios at
origination of up to 97% for EMC mortgage loans with original principal balances of up to $375,000 if the
loan is secured by the borrower's primary residence, up to 95% for EMC mortgage loans secured by one-to-four
family, primary residences and single family second homes with original principal balances of up to $650,000,
up to 90% for EMC mortgage loans secured by one-to-four family, primary residences, single family second
homes with original principal balances of up to $1,000,000 and up to 70% for mortgage loans secured by
one-to-four, primary residences and single family second homes with original principal balances of up to
$2,000,000, or super jumbos. For cash out refinance loans, the maximum loan-to-value ratio generally is 95%
and the maximum "cash out" amount permitted is based in part on the original amount of the related EMC
mortgage loan.
With respect to mortgage loans secured by investment properties, loan-to-value ratios at origination
of up to 90% for mortgage loans with original principal balances up to $500,000 are permitted. Mortgage loans
secured by investment properties may have higher original principal balances if they have lower loan-to-value
ratios at origination. For cash out refinance loans, the maximum loan-to-value ratio generally is 90% and the
maximum "cash out" amount permitted is based in part on the original amount of the related mortgage loan.
All other EMC mortgage loans included in the mortgage pool with a loan-to-value ratio at origination
exceeding 80%, have primary mortgage insurance policies insuring a portion of the balance of the EMC Loan at
least equal to the product of the original principal balance of the mortgage loan and a fraction, the
numerator of which is the excess of the original principal balance of such mortgage loan over 75% of the
lesser of the appraised value and the selling price of the related mortgaged property and the denominator of
which is the original principal balance of the related mortgage loan, plus accrued interest thereon and
related foreclosure expenses is generally required. No such primary mortgage insurance policy will be
required with respect to any such EMC Loan after the date on which the related loan-to-value ratio decreases
to 80% or less or, based upon new appraisal, the principal balance of such mortgage loan represents 80% or
less of the new appraised value. All of the insurers that have issued primary mortgage insurance policies
with respect to the EMC mortgage loans meet Fannie Mae's or Freddie Mac's standard or are acceptable to the
Rating Agencies.
In determining whether a prospective borrower has sufficient monthly income available (i) to meet the
borrower's monthly obligation on their proposed mortgage loan and (ii) to meet the monthly housing expenses
and other financial obligations on the proposed mortgage loan, each lender generally considers, when required
by the applicable documentation program, the ratio of such amounts to the proposed borrower's acceptable
stable monthly gross income. Such ratios vary depending on a number of underwriting criteria, including
loan-to-value ratios, and are determined on a loan-by-loan basis.
Each lender also examines a prospective borrower's credit report. Generally, each credit report
provides a credit score for the borrower. Credit scores generally range from 350 to 840 and are available
from three major credit bureaus: Experian (formerly TRW Information Systems and Services), Equifax and Trans
Union. If three credit scores are obtained, the originator applies the middle score of the primary wage
earner. If a primary wage earner cannot be determined because of the documentation type, the lowest middle
score of all borrowers is used. Credit scores are empirically derived from historical credit bureau data and
represent a numerical weighing of a borrower's credit characteristics over a two-year period. A credit score
is generated through the statistical analysis of a number of credit-related characteristics or variables.
Common characteristics include the number of credit lines (trade lines), payment history, past delinquencies,
severity of delinquencies, current levels of indebtedness, types of credit and length of credit history.
Attributes are the specific values of each characteristic. A scorecard (the model) is created with weights or
points assigned to each attribute. An individual loan applicant's credit score is derived by summing together
the attribute weights for that applicant.
The mortgage loans have been underwritten under one of the following documentation programs:
full/alternative documentation ("Full/Alt Doc"), stated income/verified asset documentation ("SIVA"), no
ratio documentation ("No Ratio"), and stated income/stated assets ("SISA") documentation.
Under a stated income/verified asset documentation program, more emphasis is placed on the value and
adequacy of the mortgaged property as collateral, credit history and other assets of the borrower than on a
verified income of the borrower. Although the income is not verified, the originators obtain a telephonic
verification of the borrower's employment without reference to income. Borrower's assets are verified.
Under the no ratio documentation program the borrower's income is not stated and no ratios are
calculated. Although the income is not stated nor verified, lenders obtain a telephonic verification of the
borrower's employment without reference to income. Borrower's assets are verified.
Under the stated income/stated asset documentation program, the borrower's income and assets are
stated but not verified. The underwriting of such mortgage loans may be based entirely on the adequacy of the
mortgaged property as collateral and on the credit history of the borrower.
Under the no income/no asset documentation program, the borrower's income and assets are neither
stated nor verified. The underwriting of such mortgage loans may be based entirely on the adequacy of the
mortgaged property as collateral and on the credit history of the borrower
Each mortgaged property relating to an EMC mortgage loan has been appraised by a qualified independent
appraiser who is approved by each lender. All appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice adopted by the Appraisal Standard Board of the Appraisal Foundation. Each
appraisal must meet the requirements of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac require, among
other things, that the appraiser, or its agent on its behalf, personally inspect the property inside and out,
verify whether the property was in good condition and verify that construction, if new, had been
substantially completed. The appraisal generally will have been based on prices obtained on recent sales of
comparable properties, determined in accordance with Fannie Mae and Freddie Mac guidelines. In certain cases
an analysis based on income generated from the property or a replacement cost analysis based on the current
cost of constructing or purchasing a similar property may be used.
BSRM
The following is a description of BSRM and the underwriting policies customarily employed by BSRM with
respect to the residential mortgage loans that BSRM originated during the period of origination of the
mortgage loans. BSRM has represented to the depositor that the mortgage loans were originated generally in
accordance with such policies.
BSRM is a Delaware corporation and a wholly-owned subsidiary of The Bear Stearns Companies, Inc., a
publicly traded financial services firm (under "BSC" on the NYSE), with an executive and administrative
office located in Scottsdale, Arizona. BSRM is a full-service residential mortgage banking company that is
licensed to originate loans throughout the United States. BSRM originates single-family (1-4 unit)
residential mortgage loans for both prime and sub-prime credit borrowers and offers a full range of loan
products from 30 yr fixed rate to hybrid and short-term adjustable rate mortgages.
BSRM has been in the residential mortgage banking business since March 2005. For the first five
months ending May 31, 2006, BSRM has originated approximately $1.3 billion in mortgage loans, all of which
are secured by one- to four-family residential real estate properties.
The following table describes the size and composition of BSRM's total residential mortgage loan
production since it's inception through May, 2006.
--------------------- ------------------------- ----------------------- ---------------------- ------------------------ -------------- -------------------------------
Loan Type 2nd Qtr. 2005 3rd Qtr. 2005 4th Qtr. 2005 1st Qtr. 2006 Apr-May 2006 Total
--------------------- ------------------------- ----------------------- ---------------------- ------------------------ -------------- -------------------------------
Loan Amount Units Loan Amount Units Loan Amount Units Loan Amount Units Loan Amount Units Loan Amount Units
--------------------- --------------- --------- --------------- ------- -------------- ------- --------------- -------- -------------- -------- -------------- -------
Alt-A ARM $38,345,211 142 $89,814,104 322 $173,110,864 586 $256,139,998 826 $189,521,195 624 $746,931,373 2,500
--------------- --------- --------------- ------- -------------- ------- --------------- -------- -------------- -------- -------------- -------
MTA Option ARM $0 0 $3,512,827 7 $83,586,961 224 $149,955,670 409 $147,389,081 397 $384,444,539 1,037
--------------- --------- --------------- ------- -------------- ------- --------------- -------- -------------- -------- -------------- -------
5 Yr. Option ARM $0 0 $0 0 $0 0 $ 4,367,514 14 $253,217,629 772 $257,585,143 786
--------------- --------- --------------- ------- -------------- ------- --------------- -------- -------------- -------- -------------- -------
Alt-A Fixed $9,970,639 44 $45,157,203 165 $65,596,814 239 $ 57,511,280 254 $ 24,213,642 101 $202,449,578 803
--------------- --------- --------------- ------- -------------- ------- --------------- -------- -------------- -------- -------------- -------
Alt-A Second Lien $5,769,960 106 $16,208,131 276 $48,277,170 472 $ 74,542,985 1,052 $105,170,955 1,445 $249,969,201 3,351
--------------- --------- --------------- ------- -------------- ------- --------------- -------- -------------- -------- -------------- -------
Sub-Prime $2,027,417 10 $2,977,950 21 $47,311,725 434 $ 44,504,754 254 $ 17,158,346 103 $113,980,192 822
--------------------- --------------- --------- --------------- ------- -------------- ------- --------------- -------- -------------- -------- -------------- -------
TOTAL $56,113,227 302 $157,670,215 791 $417,883,534 1,955 $587,022,201 2,809 $736,670,848 3,442 $1,955,360,025 9,299
--------------------- --------------- --------- --------------- ------- -------------- ------- --------------- -------- -------------- -------- -------------- -------
BSRM Underwriting Guidelines
The BSRM Alt-A Underwriting Guidelines are intended to ensure that (i) the loan terms relate to the
borrower's willingness and ability to repay and (ii) the value and marketability of the property are
acceptable. Both the Bear Option ARM loans originated by BSRM and the 5 Yr. Bear Secure Option ARM loans are
originated pursuant to the BSRM Alt-A Underwriting Guidelines.
The BSRM Alt-A Underwriting Guidelines are less stringent than the standards generally acceptable to
Fannie Mae and Freddie Mac with regard to: (i) documentation parameters and (ii) debt to income ratios. The
BSRM Underwriting Guidelines establish the maximum permitted loan-to-value ratio and maximum loan amount for
each loan type based upon prior payment history, credit score, occupancy type and other risk factors. The
maximum loan amount allowable for the Alt A program is $3,000,000.
All of the Alt-A mortgage loans originated by BSRM are based on loan application packages submitted
through the wholesale or correspondent channel. Based on the documentation type each loan application package
has an application completed by the prospective borrower that includes information with respect to the
applicant's assets, liabilities, income, credit and employment history, as well as certain other personal
information. During the underwriting process, BSRM calculates and verifies the loan applicant's sources of
income (except documentation types, which do not require such information to be stated or independently
verified), reviews the credit history of the applicant, calculates the debt-to-income ratio to determine the
applicant's ability to repay the loan, and reviews the mortgaged property for compliance with the BSRM
Underwriting Guidelines. The mortgage loan file also contains a credit report on each applicant from an
approved credit reporting company. Credit history is measured on credit depth, number of obligations,
delinquency patterns and demonstrated intent to repay debts, which can be used to underwrite any file.
The maximum allowable loan-to-value ratio varies based upon the income documentation, property type,
creditworthiness, debt service-to-income ratio of the applicant and the overall risks associated with the
loan decision. BSRM may provide secondary financing to a borrower contemporaneously with the origination of
a mortgage loan, subject to a maximum combined loan-to-value ratio of 100%. BSRM's Underwriting Guidelines do
not prohibit or otherwise restrict a borrower from obtaining secondary financing from lenders other than
BSRM, whether at origination of the mortgage loan or thereafter.
Exceptions to the BSRM Underwriting Guidelines are considered with reasonable compensating factors on
a case-by-case basis and at the sole discretion of senior management. When exception loans are reviewed, all
loan elements are examined as a whole to determine the level of risk associated with approving the loan
including appraisal, credit report, employment, compensating factors and borrower's willingness and ability
to repay the loan. Compensating factors may include, but are not limited to, validated or sourced/seasoned
liquid reserves in excess of the program requirements, borrower's demonstrated ability to accumulate savings
or devote a greater portion of income to housing expense and borrowers' potential for increased earnings
based on education, job training, etc. Loan characteristics such as refinance transactions where borrowers
are reducing mortgage payments and lowering debt ratios may become compensating factors as well.
Borrower Profile
A prospective borrower must generally demonstrate that the ratio of the borrower's monthly housing
expenses (including principal and interest on the proposed mortgage loan and, as applicable, the related
monthly portion of property taxes, hazard insurance and mortgage insurance) to the borrower's monthly gross
income and the ratio of total monthly debt to the monthly gross income (the "debt-to-income" ratios) are
within BSRM acceptable limits. If the prospective borrower has applied for a negative amortization loan with
an initial fixed rate period of less than five years (the Bear Option ARM loan), the mortgage payment
component of the monthly housing expense calculation is based upon the fully-indexed rate using the principal
and interest payment. If the negative amortization loan allows for an initial fixed rate period of five
years or more (the 5 Yr Bear Secure Option ARM loan), the mortgage payment component of the monthly housing
expense calculation is based on the initial Note Rate using the interest-only payment. The maximum
acceptable debt-to-income ratio, which is determined on a loan-by-loan basis, varies depending on a number of
underwriting criteria, including the loan-to-value ratio, loan purpose, loan amount and credit history of the
borrower. Under general underwriting guidelines, BSRM permits a debt-to-income ratio based on the borrower's
total monthly debt of up to 50%. In addition to meeting the debt-to-income ratio guidelines, each
prospective borrower is required to have sufficient cash resources to pay the down payment and cover closing
costs and the monthly cash reserve requirements specified for the loan program being approved.
Documentation Types
The BSRM mortgage loans were originated in accordance with guidelines established by BSRM with one of
the following documentation types: "Full Documentation"; "Limited Documentation"; "Lite Documentation";
"Stated Income/Verified Assets"; "No Ratio/Verified Assets"; "Stated Income/Stated Assets"; "No Income/NoAssets (NINA)"; "No Doc"; and "No Doc with Assets". The nature of the information that a borrower is
required to disclose and whether the information is verified depends, in part, on the documentation type used
in the origination process.
Full Documentation: The Full Documentation type is based upon current year to date income
documentation as well as the previous two year's income documentation (i.e., tax returns and/or W-2 forms)
and either one recent pay-stub with current year income on pay stub or two recent pay-stubs within 30 days of
closing if year to date income is not provided on pay-stub) or bank statements for the previous 24 months.
Self-employed borrowers must be self-employed in the same business or have received 1099 income in the same
job for the past two years. Borrowers self-employed for less than two years (but at least one year) are
considered on a case-by-case basis subject to a two-year history of previous successful employment in the
same occupation or related field. Assets must be documented and independently verified by means of a written
verification of deposit (VOD) with two (2) months' average balance; most recent bank statements, stocks or
securities statements covering a two-(2) month period. The borrower must demonstrate that they have
sufficient reserves (sourced and seasoned) of greater than or equal to three months principal, interest,
taxes and insurance. A verbal verification of employment is also completed within 10 days of funding the loan.
Limited Documentation: The Limited Documentation type is based on the recent twelve (12) months of
consecutive bank statements. Self-employed borrowers must be self-employed in the same business or have
received 1099 income in the same job for the past two years. Assets must be documented and independently
verified by means of a written verification of deposit (VOD) with two (2) months' average balance; most
recent bank statements, stocks or securities statements covering a two-(2) month period. The borrower must
demonstrate that they have sufficient reserves (sourced and seasoned) of greater than or equal to three
months principal, interest, taxes and insurance. A verbal verification of employment is also completed
within 10 days of funding the loan.
Lite Documentation: The Lite Documentation type is based on the recent six (6) months of consecutive
bank statements. Self-employed borrowers must be self-employed in the same business or have received 1099
income in the same job for the past two years. Assets must be documented and independently verified by means
of a written verification of deposit (VOD) with two (2) months' average balance; most recent bank statements,
stocks or securities statements covering a two-(2) month period. The borrower must demonstrate that they have
sufficient reserves (sourced and seasoned) of greater than or equal to three months principal, interest,
taxes and insurance. A verbal verification of employment is also completed within 10 days of funding the
loan.
Stated Income: The Stated Income documentation type requires the applicant's employment and income
sources covering the past two (2) year period to be stated on the application. Self-employed borrowers must
be self-employed in the same business or have received 1099 income in the same job for the past two years.
The applicant's income as stated must be reasonable for the related occupation, borrowers' credit profile and
stated asset, in the loan underwriter's discretion. However, the applicant's income as stated on the
application is not independently verified. Assets must be documented and independently verified by means of a
written verification of deposit (VOD) with two (2) months' average balance; most recent bank statements,
stocks or securities statements covering a two-(2) month period. The borrower must demonstrate that they have
sufficient reserves (sourced and seasoned) of greater than or equal to three months principal, interest,
taxes and insurance. A verbal verification of employment is also completed within 10 days of funding the
loan.
No Ratio: The No Ratio documentation type requires the applicant's employment sources covering the
past two (2) year period to be stated on the application. Self-employed borrowers must be self-employed in
the same business or have received 1099 income in the same job for the past two years. The applicant's
employment is independently verified through a verbal verification of employment, however the income is not
stated on the application. Assets must be documented and independently verified by means of a written
verification of deposit (VOD) with two (2) months' average balance; most recent bank statements, stocks or
securities statements covering a two-(2) month period. The borrower must demonstrate that they have
sufficient reserves (sourced and seasoned) of greater than or equal to three months principal, interest,
taxes and insurance.
Stated Income/Stated Assets: The Stated Income/Stated Assets documentation type requires the
applicant's employment and income sources covering the past two (2) year period to be stated on the
application. Self-employed borrowers must be self-employed in the same business or have received 1099 income
in the same job for the past two years. The applicant's income as stated must be reasonable for the related
occupation, borrowers' credit profile and stated asset, in the loan underwriter's discretion. However, the
applicant's income as stated on the application is not independently verified. Assets as stated on the
application are not independently verified. The borrower must demonstrate that they have sufficient reserves
(sourced and seasoned) of greater than or equal to three months principal, interest, taxes and insurance. A
verbal verification of employment is also completed within 10 days of funding the loan.
No Income/No Assets (NINA): The NINA documentation type requires the applicant's employment sources
covering the past two (2) year period to be stated on the application. Self-employed borrowers must be
self-employed in the same business or have received 1099 income in the same job for the past two years. The
applicant's employment is independently verified through a verbal verification of employment; however the
income and the assets are not stated on the application. Borrower's ability to repay the loan is based upon
past credit history and FICO score.
No Doc: The No Doc documentation type does not require the applicant's income, employment sources or
assets to be stated on the application. Borrower's ability to repay the loan is based upon past credit
history and FICO score.
No Doc with Assets: The No Doc with Assets documentation type does not require the applicant's
income, employment sources to be stated on the application. Assets must be documented and independently
verified by means of a written verification of deposit (VOD) with two (2) months' average balance; most
recent bank statements, stocks or securities statements covering a two-(2) month period. The borrower must
demonstrate that they have sufficient reserves (sourced and seasoned) of greater than or equal to three
months principal, interest, taxes and insurance. Borrower's ability to repay the loan is based upon past
credit history; FICO score and verified assets.
Credit Profile
The mortgage loan file also contains a credit report on each applicant from an approved credit
reporting company. Credit history is measured on credit depth, number of obligations, delinquency patterns
and demonstrated intent to repay reports, which can be used to underwrite any file. A tri-merged credit
report is required for all loan submissions. The report must be from the three nationally recognized credit
repositories and show all credit trades regardless of negative or positive status.
The credit profile review must encompass the last twenty-four months. If the borrower has lived in his
or her current residence for less than twelve months, credit must be searched using both the current and
former address(es). In assessing a prospective borrower's creditworthiness, BSRM may use FICO Credit Scores.
"FICO Credit Scores" are statistical credit scores designed to assess a borrower's creditworthiness and
likelihood to default on a consumer obligation over a two-year period based on a borrower's credit history.
FICO Credit Scores were not developed to predict the likelihood of default on mortgage loans and,
accordingly, may not be indicative of the ability of a borrower to repay its mortgage loan. FICO Credit
Scores range from approximately 250 to approximately 900, with higher scores indicating an individual with a
more favorable credit history compared to an individual with a lower score. Underwriters arrive at each
borrower's credit score by selecting the middle score of three credit scores or the lower of two scores, when
only two scores are reported. The representative score for the loan is determined by the score of the
primary wage-earner or the lowest-scoring borrower in the case in which the income is not verified or
documented. The minimum representative score for each loan underwritten to BSRM's Alt-A underwriting
guidelines is 620.
Property Requirements
The BSRM Underwriting Guidelines are applied in accordance with a procedure that complies with
applicable federal and state laws and regulations and requires (i) an appraisal of the mortgaged property
that conforms to the Uniform Standards of Professional Appraisal Practice and are generally on forms similar
to those acceptable to Fannie Mae and Freddie Mac and (ii) a review of such appraisal, which review is
conducted by a BSRM underwriter.
Properties that secure BSRM mortgage loans have a valuation appraisal performed by a qualified and
licensed appraiser. All appraisers providing services must comply with the respective state and federal laws.
An appraisal must not be more than 120 days old at the Closing Date or a re-certification of value is
required. The original appraiser must perform re-certification. As an alternative, a field review with
comparable properties that sold in the last three months and support the value is also acceptable, in lieu of
the re-certification of value. After 180 days, a new appraisal is required regardless of whether an existing
or new construction property. All combined loan amounts greater than $650,000 and less than or equal to
$1,000,000 require two original appraisals. The second appraisal must be from a BSRM nationally approved
appraiser. The value used to determine the LTV/CLTV will be the lesser of the two values. BSRM combined
loans amounts greater that $1,500,000 in the state of California will require two appraisals; the second
appraisal must be from a BSRM nationally approved appraiser. The value used to determine the LTV/CLTV will
be the lesser of the two values.
Each appraisal is reviewed by a representative of BSRM, who has the right to request a second
appraisal, additional information or explanations, lower the approved loan amount, reduce the maximum
allowable loan-to-value ratio or deny the loan based on the appraisal.
BSRM requires that all of its BSRM mortgage loans have title insurance. BSRM also requires that fire
and extended coverage casualty insurance be maintained on the mortgaged property in an amount at least equal
to the lesser of the principal balance of the related mortgage loan or the replacement cost of the mortgaged
property. BSRM also requires that all mortgage loans where the appraisal has determined that the property
lies in certain zones have flood insurance. Manufactured homes and mobile homes are ineligible property types
under the BSRM Underwriting Guidelines.
DESCRIPTION OF THE CERTIFICATES
The trust will issue the certificates pursuant to the Agreement. The Certificates consist of the
classes of Certificates reflected in the Term Sheet, which we refer to collectively as the offered
certificates, and one or more classes of Class R, Class R-X, Class XP and such other non-offered certificates
identified in the Term Sheet, which are not offered publicly. The offered certificates may include classes
of certificates which are only entitled to interest payments and are referred to herein as Interest-Only
Certificates. The various classes of Class A Certificates and the Interest-Only Certificates are also
referred to as the senior certificates; and the various classes of Class M Certificates and Class B
Certificates are referred to herein as the Class M Certificates or Class B Certificates, respectively, or,
collectively, the subordinate certificates. The Class A, Class M and certain classes of the Class B
Certificates offered by the Term Sheet are collectively referred to herein as the offered certificates.
Certain classes of grantor trust certificates may be issued and included as offered certificates as described
in the Term Sheet and under "Description of the Certificates-The Grantor Trust and Grantor Trust
Certificates." Certain classes of certificates, the insured certificates, may have the benefit of a
certificate insurance policy issued by a certificate insurer as described in the Term Sheet and under
"Description of the Certificates-The Insured Certificates and the Certificate Insurance Policy."
Holders of the Class R Certificates will be entitled to receive any residual cash flow from the
mortgage pool, which is not expected to be significant. A holder of a Class R Certificate will not have a
right to alter the structure of the transaction. The initial owner of the Class R Certificates is expected
to be Bear, Stearns Securities Corp.
General
The certificates issued by Bear Stearns Mortgage Funding Trust 2006-AR5 will consist of the offered
certificates and the non-offered certificates. If issued, the grantor trust certificates will also be offered
certificates. Only the offered certificates are offered by the Term Sheet.
The certificates will evidence in the aggregate the entire beneficial ownership interest in the Trust
or the grantor trust, as applicable. The Trust will generally consist of (i) the mortgage loans; (ii) such
assets as from time to time are identified as deposited in respect of the mortgage loans in the Custodial
Account (as defined in the prospectus) established for the collection of payments on the mortgage loans
serviced by the Servicer and in the Distribution Account (each as defined below) and belonging to the Trust;
(iii) property acquired by foreclosure of such mortgage loans or by deed in lieu of foreclosure; (iv) any
standard hazard insurance policies; (v) such other assets as described in the Agreement; (vi) the certificate
insurance policy, if any, for the benefit of the related class of certificates and (vii) all proceeds of the
foregoing. The grantor trust certificates will represent the entire interest in the grantor trust. The
assets of the grantor trust will consist of the underlying grantor trust certificates and the related swap
agreements.
The offered certificates (other than the Residual Certificates) will be issued, maintained and
transferred on the book-entry records of DTC, Clearstream Banking, société anonyme and the Euroclear System
and each of their participants in the minimum denominations set forth in the Term Sheet. The Residual
Certificates will be offered in registered, certificated form, in a single certificate of $100. The Residual
Certificates (together with any Book-entry Certificates re-issued as definitive certificates) will be
transferable and exchangeable at the offices of the Trustee. See Annex I hereto and "Description of the
Securities-Form of Securities" and "-Global Securities" in the prospectus.
Each class of Book-Entry Certificates will initially be represented by one or more Global Securities
registered in the name of a nominee of DTC. The Depositor has been informed by DTC that DTC's nominee will be
Cede & Co. Beneficial interests will be held by investors through the book-entry facilities of DTC in the
minimum denominations set forth in the Term Sheet. See Annex I to hereto and "Description of the
Securities-Form of Securities" and "-Global Securities" in the prospectus.
No person acquiring an interest in any class of the Book-Entry Certificates will be entitled to
receive a certificate representing such person's interest, except as set forth below under "-DefinitiveCertificates". Unless and until definitive certificates are issued under the limited circumstances described
herein, all references to actions by certificateholders with respect to the Book-Entry Certificates shall
refer to actions taken by DTC upon instructions from its participants and all references herein to
distributions, notices, reports and statements to certificateholders with respect to the Book-Entry
Certificates shall refer to distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Book-Entry Certificates, for distribution to Certificate Owners in accordance with
DTC procedures. See "-Book-Entry Registration" and "-Definitive Certificates" herein.
All distributions to holders of the offered certificates, other than the final distribution on any
class of offered certificates, will be made on each distribution date by or on behalf of the Trustee to the
persons in whose names the offered certificates are registered at the close of business on the related Record
Date. Distributions will be made either (a) by check mailed to the address of each certificateholder as it
appears in the certificate register or (b) upon written request to the Trustee at least five business days
prior to the relevant Record Date by any holder of offered certificate, by wire transfer in immediately
available funds to the account of the certificateholders specified in the request. The final distribution on
any class of offered certificates will be made in like manner, but only upon presentment and surrender of the
class at the corporate trust office of the Trustee or any other location specified in the notice to
certificateholders of the final distribution.
The Grantor Trust and Grantor Trust Certificates
Certain classes of certificates may be deposited into a grantor trust together with the right to
certain payments to be made by a swap counterparty identified in the Term Sheet pursuant to one or more swap
agreements, as applicable. These certificates, the underlying grantor trust certificates, will be
non-offered certificates. The grantor trust will issue certificates, the grantor trust certificates, which
will be offered certificates and will correspond to the related underlying grantor trust certificates.
Distributions of interest and/or principal on the grantor trust certificates will primarily be made (i)
through payments received on the related underlying grantor trust certificates from amounts received in
connection with the related mortgage loans (after payments of any fees and expenses of the grantor trust) and
(ii) from payments that may be made pursuant to the related swap agreement. The specific terms, including
the pass-through rate, of the grantor trust certificates will be further described in the Term Sheet.
The grantor trust certificates will represent the entire interest in the grantor trust. The assets of
the grantor trust will consist of the underlying grantor trust certificates and the related swap agreements.
Each class of grantor trust certificates will be entitled to payments from the related swap agreement only.
The related swap agreement may provide for payments to be made so that the related grantor trust certificates
will receive interest payments at a pass-through rate equal to one-month LIBOR plus the related margin, less
interest shortfalls allocated to such certificates. In addition, the swap agreement may provide for the
payment of an amount equal to any net deferred interest allocated to the related underlying grantor trust
certificates on each distribution date for payment to the related grantor trust certificates. Certain swap
agreements may provide for both types of payments to be made on the grantor trust certificates. Net deferred
interest allocated to the underlying grantor trust certificates will not be added to the current principal
amount of the related grantor trust certificates, however, realized losses allocated to the underlying
grantor trust certificates will be allocated to the related grantor trust certificates. On each distribution
date, distributions of principal on the grantor trust certificates will be made after the payment of amounts
due to the related swap counterparty for such distribution date and the distribution of accrued interest on
the related grantor trust certificates, each as further described in the Term Sheet.
In the event of the termination of a swap agreement because of a default or other event of termination
by either party thereto, an amount may become due and payable either from the swap counterparty to the
grantor trust (for payment to the related grantor trust certificates) or to the swap counterparty from
amounts otherwise payable from the grantor trust to the grantor trust certificates.
The Insured Certificates and the Certificate Insurance Policy
Certain classes of certificates may be entitled to the benefit of a certificate insurance policy, a
Policy, issued by a certificate insurer identified in the Term Sheet. These class of certificates are
sometimes referred to herein as the insured certificates. The certificate insurer will issue the related
Policy for the benefit of the holders of the related certificates only. The certificate insurer, in
consideration of the payment of the premium and subject to the terms of the Policy, unconditionally
guarantees the payment of certain insured amounts set forth in the Policy (as further described in the
related Prospectus Supplement) to the Trustee on behalf of the holders of the related certificates. The
certificate insurer will pay all insured amounts pursuant to and in accordance with the terms of the related
Policy.
The certificate insurer's obligation under the Policy will be discharged to the extent that funds are
received by the Trustee for payment to the holders of the related certificates whether or not those funds are
properly paid by the Trustee. Payments of any insured amounts will be made only at the time set forth in the
Policy, and no accelerated payments of insured amounts will be made regardless of any acceleration of the
related certificates, unless the acceleration is at the sole option of the certificate insurer.
The Policy will not cover Prepayment Interest Shortfalls, Basis Risk Shortfalls or any shortfalls
resulting from Net Deferred Interest or from the application of the Relief Act or similar state laws
allocated to the related class of certificates, nor does the Policy guarantee to the holders of the related
certificates any particular rate of principal payment. In addition, the Policy does not cover shortfalls, if
any, attributable to the liability of the trust, any REMIC, the Trustee or any holder of the related
certificates for withholding taxes, if any, (including interest and penalties in respect of any liability for
withholding taxes) nor any risk (unless specified in the Policy), including the failure of the Trustee to
make any payment required under the Agreement to the holders of the related certificates. The Policy will
not cover any reduction in the amount of Current Interest payable to the holders of the related certificates
on any distribution date due to the pass-through rate for such class of certificates exceeding the related
Net Rate Cap for such class of certificates on such distribution date.
The certificate insurer will be subrogated to the rights of each holder of the related class of
certificates to the extent of any payment by the certificate insurer under the related Policy.
The Policy and the obligations of the certificate insurer thereunder will terminate without any action
on the part of the certificate insurer or any other person in accordance with the terms of the Policy.
Book-Entry Registration
DTC is a limited-purpose trust company organized under the laws of the State of New York, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities for its participants and to facilitate the clearance and settlement of
securities transactions between participants through electronic book entries, thereby eliminating the need
for physical movement of certificates.
Certificate Owners that are not participants or indirect participants but desire to purchase, sell or
otherwise transfer ownership of, or other interests in, the Book-Entry Certificates may do so only through
participants and indirect participants. In addition, Certificate Owners will receive all distributions of
principal of and interest on the Book-Entry Certificates from the Trustee through DTC and DTC participants.
The Trustee will forward payments to DTC in same day funds and DTC will forward payments to participants in
next day funds settled through the New York Clearing House. Each participant will be responsible for
disbursing the payments. Unless and until definitive certificates are issued, it is anticipated that the only
certificateholders of the Book-Entry Certificates will be Cede & Co., as nominee of DTC. Certificate Owners
will not be recognized by the Trustee as certificateholders, as such term is used in the Agreement and
Certificate Owners will be permitted to exercise the rights of certificateholders only indirectly through DTC
and its participants.
Under the Rules, DTC is required to make book-entry transfers of Book-Entry Certificates among
participants and to receive and transmit distributions of principal of, and interest on, the Book-Entry
Certificates. Participants and indirect participants with which Certificate Owners have accounts with respect
to the Book-Entry Certificates similarly are required to make book-entry transfers and receive and transmit
these payments on behalf of their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess definitive certificates, the Rules provide a mechanism by which Certificate Owners through
their participants and indirect participants will receive payments and will be able to transfer their
interest.
Because DTC can only act on behalf of participants, who in turn act on behalf of indirect participants
and on behalf of certain banks, the ability of a Certificate Owner to pledge Book-Entry Certificates to
persons or entities that do not participate in the DTC system, or to otherwise act with respect to Book-Entry
Certificates, may be limited due to the absence of physical certificates for the Book-Entry Certificates. In
addition, under a book-entry format, Certificate Owners may experience delays in their receipt of payments
since distribution will be made by the Trustee to Cede & Co., as nominee for DTC.
Under the Rules, DTC will take action permitted to be taken by a certificateholders under the
Agreement only at the direction of one or more participants to whose DTC account the Book-Entry Certificates
are credited. Additionally, under the Rules, DTC will take actions with respect to specified voting rights
only at the direction of and on behalf of participants whose holdings of Book-Entry Certificates evidence
these specified voting rights. DTC may take conflicting actions with respect to voting rights, to the extent
that participants whose holdings of Book-Entry Certificates evidence voting rights authorize divergent action.
The Depositor, the Servicer, the Trustee and the grantor trustee will have no liability for any aspect
of the records relating to or payments made on account of beneficial ownership interests in the Book-Entry
Certificates held by Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to beneficial ownership interests or transfers thereof.
Definitive Certificates
Definitive certificates will be issued to Certificate Owners or their nominees, respectively, rather
than to DTC or its nominee, only if (1) the Depositor advises the Trustee in writing that DTC is no longer
willing or able to properly discharge its responsibilities as clearing agency with respect to the Book-Entry
Certificates and the Depositor is unable to locate a qualified successor within 30 days or (2) the Depositor,
at its option, elects to terminate the book-entry system through DTC. Additionally, after the occurrence of
an event of default under the Agreement, any Certificate Owner materially and adversely affected thereby may,
at its option, request and, subject to the procedures set forth in the Agreement, receive a definitive
certificate evidencing such Certificate Owner's fractional undivided interest in the related class of
certificates.
Upon its receipt of notice of the occurrence of any event described in the immediately preceding
paragraph, the Trustee is required to request that DTC notify all Certificate Owners through its participants
of the availability of definitive certificates. Upon surrender by DTC of the definitive certificates
representing the Book-Entry Certificates and receipt of instructions for re-registration, the Trustee will
reissue the Book-Entry Certificates as definitive certificates issued in the respective principal amounts
owned by individual Certificate Owners, and thereafter the Trustee will recognize the holders of definitive
certificates as certificateholders under the Agreement.
Distributions on the Certificates
Loan Group I. On each distribution date, the Trustee will withdraw the available funds for loan group
I from the Distribution Account for such distribution date and apply such amounts as follows:
First, to pay any accrued and unpaid interest on the related Class A, Class M and Class B Certificates
in the following order of priority:
1. From Interest Funds with respect to loan group I, to the related Class A Certificates and
Interest-Only Certificates (allocated as described in the Term Sheet), the Current Interest and
then any Interest Carry Forward Amount for such certificates;
2. From remaining Interest Funds with respect to loan group I, to each class of Class M Certificates,
starting with the Class M Certificates with the lowest numerical designation, sequentially, in
that order, the Current Interest for each such Class, and then, from remaining Interest Funds,
to each class of Class B Certificates, starting with the Class M Certificates with the lowest
numerical designation, sequentially, in that order, the Current Interest for each such Class;
3. Any related Excess Spread to the extent necessary to meet a level of overcollateralization equal to
the related Overcollateralization Target Amount will be the Extra Principal Distribution Amount
and will be included as part of the Principal Distribution Amount and distributed in accordance
with Second (A) and (B) below; and
4. Any remaining related Excess Spread will be the Remaining Excess Spread from such loan group and will
be applied, together with the related Overcollateralization Release Amount, as Excess Cash from
pursuant to clauses Third through Eighth below.
On any distribution date, any shortfalls resulting on the related mortgage loans from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not covered by Compensating Interest
Payments will be allocated, first, in reduction of amounts otherwise distributable to the Residual
Certificates, and thereafter, to the Current Interest payable to the Interest Only Certificates, Class A,
Class M and Class B Certificates in such loan group, on a pro rata basis, on such distribution date, based on
the respective amounts of interest accrued on such certificates for such distribution date. The holders of
the Interest Only Certificates, Class A, Class M and Class B Certificates will not be entitled to
reimbursement for any such interest shortfalls.
Second, to pay as principal on the related Class A, Class M and Class B Certificates entitled to
payments of principal, in the following order of priority:
(A) On each distribution date (i) prior to the Stepdown Date or (ii) on which a Trigger Event is in
effect, Principal Funds and the Extra Principal Distribution Amount for such distribution date will be
distributed:
1. To the Class A Certificates in loan group I (allocated as described in the Term Sheet), an amount
equal to the Principal Distribution Amount for that loan group until the Current Principal Amounts
thereof is reduced to zero;
2. To the Class M Certificates in loan group I, starting with the Class M Certificates with the lowest
numerical designation, sequentially, in that order, any remaining Principal Distribution Amount for
loan group I until the Current Principal Amount of such Class M Certificate is reduced to zero;
3. To the Class B Certificates in loan group I, starting with the Class B Certificates with the lowest
numerical designation, sequentially, in that order, any remaining Principal Distribution Amount for
loan group I until the Current Principal Amount of such Class B Certificate is reduced to zero;
(B) On each distribution date on or after the Stepdown Date, so long as a Trigger Event is not in effect,
Principal Funds and the Extra Principal Distribution Amount for such distribution date will be
distributed:
1. To the Class A Certificates in loan group I (allocated as described in the Term Sheet), an amount
equal to the Class I-A Principal Distribution Amount until the Current Principal Amounts thereof is
reduced to zero;
2. To the Class M Certificates in loan group I, starting with the Class M Certificates with the lowest
numerical designation, sequentially, in that order, such class's Class I-M Principal Distribution
Amount, until the Current Principal Amount of such class is reduced to zero;
3. To the Class B Certificates in loan group I, starting with the Class B Certificates with the lowest
numerical designation, sequentially, in that order, such class's Class I-B Principal Distribution
Amount, until the Current Principal Amount of such class is reduced to zero;
(C) Notwithstanding the provisions of clauses Second (A) and (B) above, if on any distribution date the
senior certificates in loan group I are no longer outstanding, the portion of the Principal Distribution
Amount or the Class I-A Principal Distribution Amount, as applicable, otherwise allocable to such
certificates will be allocated to the outstanding senior certificates in loan group II and will be
distributed among such certificates in the manner set forth in Second (A) and (B) below, as applicable, until
the Current Principal Amount of such classes have been reduced to zero.
Third, from any Excess Cashflow for loan group I, to the related Class A Certificates and the Interest
Only Certificates (allocated as described in the Term Sheet), an amount equal to (i) any Interest Carry
Forward Amount for such classes to the extent not fully paid pursuant to subclause First 1 above and then
(ii) any Unpaid Realized Loss Amount for such classes for such distribution date;
Fourth, from any remaining Excess Cashflow, to the related Class M certificates, starting with the
Class M certificates with the lowest numerical designation, sequentially, in that order an amount equal to
(a) any Interest Carry Forward Amount, and then (b) any Unpaid Realized Loss Amount for such class for such
distribution date;
Fifth, from any remaining Excess Cashflow, to the related Class B certificates, starting with the
Class B certificates with the lowest numerical designation, sequentially, in that order an amount equal to
(a) any Interest Carry Forward Amount, and then (b) any Unpaid Realized Loss Amount for such class for such
distribution date;
Sixth, from any remaining Excess Cashflow, to the related Class A certificates (allocated as described
in the Term Sheet) any Basis Risk Shortfall and any Basis Risk Shortfall Carry Forward Amount for such class
for such distribution date;
Seventh, from any remaining Excess Cashflow, to the related Class M certificates, starting with the
Class M certificates with the lowest numerical designation, sequentially, in that order, and then to the
Class B certificates, starting with the Class B certificates with the lowest numerical designation,
sequentially, in that order, any Basis Risk Shortfall and any Basis Risk Shortfall Carry Forward Amount, in
each case for such class for such distribution date; and
Eighth, any remaining amounts to the Residual Certificates.
Loan Group II. On each distribution date, the Trustee will withdraw the available funds for loan
group II from the Distribution Account for such distribution date and apply such amounts as follows:
First, to pay any accrued and unpaid interest on the related Class A, Class M and Class B Certificates
in the following order of priority:
1. From Interest Funds with respect to loan group II, first, to the related Class A Certificates and
Interest-Only Certificates (allocated as described in the Term Sheet), the Current Interest and
then any Interest Carry Forward Amount for such certificates and second, to the certificate
insurer, if applicable, certain amounts due under the related Policy as set forth in the
related Prospectus Supplement;
2. From remaining Interest Funds with respect to loan group II, to each class of Class M Certificates,
starting with the Class M Certificates with the lowest numerical designation, sequentially, in
that order, the Current Interest for each such Class, and then, from remaining Interest Funds,
to each class of Class B Certificates, starting with the Class M Certificates with the lowest
numerical designation, sequentially, in that order, the Current Interest for each such Class;
3. Any related Excess Spread to the extent necessary to meet a level of overcollateralization equal to
the related Overcollateralization Target Amount will be the Extra Principal Distribution Amount
and will be included as part of the Principal Distribution Amount and distributed in accordance
with Second (A) and (B) below; and
4. Any remaining related Excess Spread will be the Remaining Excess Spread from such loan group and will
be applied, together with the related Overcollateralization Release Amount, as Excess Cash from
pursuant to clauses Third through Eighth below.
On any distribution date, any shortfalls resulting on the related mortgage loans from the application
of the Relief Act and any Prepayment Interest Shortfalls to the extent not covered by Compensating Interest
Payments will be allocated, first, in reduction of amounts otherwise distributable to the Residual
Certificates, and thereafter, to the Current Interest payable to the Interest Only Certificates, Class A,
Class M and Class B Certificates in such loan group, on a pro rata basis, on such distribution date, based on
the respective amounts of interest accrued on such certificates for such distribution date. The holders of
the Interest Only Certificates, Class A, Class M and Class B Certificates will not be entitled to
reimbursement for any such interest shortfalls.
Second, to pay as principal on the related Class A, Class M and Class B Certificates entitled to
payments of principal, in the following order of priority:
(A) On each distribution date (i) prior to the Stepdown Date or (ii) on which a Trigger Event is in
effect, Principal Funds and the Extra Principal Distribution Amount for such distribution date will be
distributed:
1. To the Class A Certificates in loan group II (allocated as described in the Term Sheet), first, an
amount equal to the Principal Distribution Amount for that loan group until the Current Principal
Amounts thereof is reduced to zero and second, to the certificate insurer, if applicable, certain
amounts due under the related Policy as set forth in the related Prospectus Supplement;
2. To the Class M Certificates in loan group II, starting with the Class M Certificates with the lowest
numerical designation, sequentially, in that order, any remaining Principal Distribution Amount for
loan group II until the Current Principal Amount of such Class M Certificate is reduced to zero;
3. To the Class B Certificates in loan group II, starting with the Class B Certificates with the lowest
numerical designation, sequentially, in that order, any remaining Principal Distribution Amount for
loan group II until the Current Principal Amount of such Class B Certificate is reduced to zero;
(B) On each distribution date on or after the Stepdown Date, so long as a Trigger Event is not in effect,
Principal Funds and the Extra Principal Distribution Amount for such distribution date will be
distributed:
1. To the Class A Certificates in loan group II (allocated as described in the Term Sheet), first, an
amount equal to the Class I-A Principal Distribution Amount until the Current Principal Amounts
thereof is reduced to zero and second, to the certificate insurer, if applicable, certain amounts due
under the related Policy as set forth in the related Prospectus Supplement;
2. To the Class M Certificates in loan group II, starting with the Class M Certificates with the lowest
numerical designation, sequentially, in that order, such class's Class I-M Principal Distribution
Amount, until the Current Principal Amount of such class is reduced to zero;
3. To the Class B Certificates in loan group II, starting with the Class B Certificates with the lowest
numerical designation, sequentially, in that order, such class's Class I-B Principal Distribution
Amount, until the Current Principal Amount of such class is reduced to zero;
(C) Notwithstanding the provisions of clauses Second (A) and (B) above, if on any distribution date the
senior certificates in loan group II are no longer outstanding, the portion of the Principal Distribution
Amount or the Class I-A Principal Distribution Amount, as applicable, otherwise allocable to such
certificates will be allocated to the outstanding senior certificates in loan group I and will be distributed
among such certificates in the manner set forth in Second (A) and (B) above with respect to loan group I, as
applicable, until the Current Principal Amount of such classes have been reduced to zero.
Third, from any Excess Cashflow for loan group II, to the related Class A Certificates and the
Interest Only Certificates (allocated as described in the Term Sheet), an amount equal to (i) any Interest
Carry Forward Amount for such classes to the extent not fully paid pursuant to subclause First 1 above and
then (ii) first, any Unpaid Realized Loss Amount for such classes for such distribution date and second, to
the certificate insurer, if applicable, certain amounts due under the related Policy as set forth in the
related Prospectus Supplement;
Fourth, from any remaining Excess Cashflow, to the related Class M certificates, starting with the
Class M certificates with the lowest numerical designation, sequentially, in that order an amount equal to
(a) any Interest Carry Forward Amount, and then (b) any Unpaid Realized Loss Amount for such class for such
distribution date;
Fifth, from any remaining Excess Cashflow, to the related Class B certificates, starting with the
Class B certificates with the lowest numerical designation, sequentially, in that order an amount equal to
(a) any Interest Carry Forward Amount, and then (b) any Unpaid Realized Loss Amount for such class for such
distribution date;
Sixth, from any remaining Excess Cashflow, to the related Class A certificates (allocated as described
in the Term Sheet) any Basis Risk Shortfall and any Basis Risk Shortfall Carry Forward Amount for such class
for such distribution date;
Seventh, from any remaining Excess Cashflow, to the related Class M certificates, starting with the
Class M certificates with the lowest numerical designation, sequentially, in that order, and then to the
Class B certificates, starting with the Class B certificates with the lowest numerical designation,
sequentially, in that order, any Basis Risk Shortfall and any Basis Risk Shortfall Carry Forward Amount, in
each case for such class for such distribution date; and
Eighth, any remaining amounts to the Residual Certificates.
On each distribution date, all amounts representing prepayment charges in respect of the mortgage
loans received during the related Prepayment Period will be withdrawn from the Distribution Account and shall
not be available for distribution to the holders of the offered certificates. Prepayment charges with
respect to the mortgage loans will be distributed to the Class XP Certificates or the Servicer as set forth
in the Agreement.
When a borrower prepays all or a portion of a mortgage loan between due dates, the borrower pays
interest on the amount prepaid only to the date of prepayment. Accordingly, an interest shortfall will result
equal to the difference between the amount of interest collected and the amount of interest that would have
been due absent such prepayment. We refer to this interest shortfall as a Prepayment Interest Shortfall. Any
Prepayment Interest Shortfalls resulting from a prepayment in full or in part that are distributed to the
certificateholders in the calendar month following the month in which the prepayment was made are required to
be paid by the Servicer, but only to the extent that such amount does not exceed the aggregate of the
Servicing Fees on the mortgage loans serviced by it for the applicable distribution date. The Servicer is
not obligated to fund interest shortfalls resulting from the application of the Relief Act and any Policy
issued by the certificate insurer will not cover such shortfalls for the related certificates. The amount of
the Servicing Fees used to offset such Prepayment Interest Shortfalls is referred to herein as Compensating
Interest Payments.
Monthly Advances
If the minimum payment of interest on a mortgage loan which was due on a related Due Date is
delinquent other than as a result of application of the Relief Act or similar state law, the Servicer will be
required to deposit in to the Custodial Account on the date specified in the Agreement an amount equal to
such delinquency, net of the Servicing Fee Rate, except to the extent the Servicer determines any such
advance to be nonrecoverable from Liquidation Proceeds, Insurance Proceeds or from future payments on the
mortgage loan for which such advance was made. Subject to the foregoing, such advances will be made by the
Servicer or subservicer, if applicable, through final disposition or liquidation of the related mortgaged
property. Any failure of the Servicer to make such advances would constitute an Event of Default under the
Agreement, in which case the Trustee, as successor Servicer, will be required to make such advance in
accordance with the Agreement. See "The Agreements-Events of Default and Rights Upon Event of Default" in the
prospectus.
All Monthly Advances will be reimbursable to the party making such Monthly Advance from late
collections, Insurance Proceeds and Liquidation Proceeds from the mortgage loan as to which the unreimbursed
Monthly Advance was made. In addition, any Monthly Advances previously made in respect of any mortgage loan
that are deemed by the Servicer or a subservicer to be nonrecoverable from related late collections,
Insurance Proceeds or Liquidation Proceeds may be reimbursed to such party out of any funds in the Custodial
Account prior to the distributions on the Certificates.
Reports to Certificateholders
On each distribution date, the Trustee will make available a report setting forth certain information
with respect to the composition of the payment being made, the Current Principal Amount or notional balance,
as applicable, for each class of certificates following the payment and certain other information relating to
the Certificates and the mortgage loans (and, at its option, any additional files containing the same
information in an alternative format), to be provided to each holder of Certificates, the certificate insurer
and the Rating Agencies via the Trustee's internet website, which can be obtained by calling the Trustee's
customer service desk at (301) 815-6600. Parties that are unable to use the above distribution option are
entitled to have a paper copy mailed to them via first class mail by calling the Trustee's customer service
desk and indicating such. The Trustee will have the right to change the way such reports are distributed in
order to make such distribution more convenient and/or more accessible to the above parties and the Trustee
will provide timely and adequate notification to all above parties regarding any such changes.
Allocation of Realized Losses
Subordination provides the holders of certificates having a higher payment priority with protection
against Realized Losses on the mortgage loans. In general, this loss protection is accomplished by
allocating any Realized Losses in loan group in excess of available excess spread and any current
overcollateralization (if any) among the related subordinate certificates, beginning with the related
subordinate certificates with the lowest payment priority until the Current Principal Amount of that
subordinate class has been reduced to zero.
The Applied Realized Loss Amount for each loan group shall be allocated to the related Class B
Certificates, starting with the Class B Certificate with the highest numerical designation, then to the Class
M Certificates, starting with the Class M Certificate with the highest numerical designation (in each case,
so long as their respective Current Principal Amounts have not been reduced to zero) and thereafter Realized
Losses with respect to the mortgage loans in a loan group shall be allocated to the related Class A
Certificates, in the order of priority described in the Term Sheet, until the Current Principal Amount thereof
has been reduced to zero. Such subordination will increase the likelihood of timely receipt by the holders
of the certificates with higher relative payment priority of the maximum amount to which they are entitled on
any distribution date and will provide such holders protection against losses resulting from defaults on
mortgage loans to the extent described herein. The depositor will allocate a loss to a certificate by
reducing its principal amount by the amount of the loss.
In the event that the Servicer or any sub-servicer recovers any amount in respect of a liquidated
mortgage loan with respect to which a Realized Loss has been incurred after liquidation and disposition of
such mortgage loan, any such amount, which is referred to herein as a Subsequent Recovery, will be
distributed as part of available funds in accordance with the priorities described under "Description of the
Certificates-Distributions on the Certificates" herein. Additionally, the Current Principal Amount of each
class of subordinate certificates that has been reduced by the allocation of a Realized Loss to such
certificate will be increased, in order of seniority, by the amount of such Subsequent Recovery, but not in
excess of the amount of any Realized Losses previously allocated to such class of certificates and not
previously offset by Subsequent Recoveries. Holders of such certificates will not be entitled to any payment
in respect of Current Interest on the amount of such increases for an Interest Accrual Period preceding the
distribution date on which such increase occurs.
Subsequent Recoveries received on the mortgage loans related to the insured certificates may be
allocated first to the certificate insurer for payment of certain reimbursement amounts for such distribution
date, but only to the extent of the portion of Subsequent Recoveries that were paid by the certificate
insurer for Realized Losses that were allocated to the related Certificates paid by the certificate insurer.
Excess Spread and Overcollateralization Provisions
Excess Spread in each loan group will be required to be applied as an Extra Principal Distribution
Amount with respect to the related Class A, Class M and Class B Certificates whenever the related
Overcollateralization Amount is less than the related Overcollateralization Target Amount. If on any
distribution date, after giving effect to allocations of the related Principal Distribution Amounts, the
aggregate Current Principal Amount of the related offered certificates exceeds the aggregate Stated Principal
Balance of the related mortgage loans for such distribution date, the Current Principal Amounts of the
related subordinate certificates will be reduced, in inverse order of seniority (beginning with the Class B
Certificates with the highest numerical designation) by an amount equal to such excess. Any such reduction
is an Applied Realized Loss Amount.
Pass-Through Rates
The pass-through rate per annum for the Class A, Class M and Class B Certificates will be equal to the
least of:
1. (i) the London interbank offered rate for one month United States dollar deposits, which we refer to
as One-Month LIBOR, calculated as described below under "-Calculation of One-Month LIBOR" or
(ii) One-Year MTA, calculated as described below under "-Calculation of One-Year MTA, in each
case, plus the related Margin;
2. the fixed rate set forth in the Term Sheet, if any; and
3. the related Net Rate Cap.
The grantor trust certificates and the Interest Only Certificates, if issued, will have the
pass-through rate set forth in the Term Sheet.
Calculation of One-Year MTA
The Trustee will determine One-Year MTA for the related Interest Accrual Period as published by the
Federal Reserve Board in the Federal Reserve Statistical Release 'Selected Interest Rates (H.15)', determined
by averaging the monthly yields for the most recently available twelve months. The One-Year MTA figure used
to determine the pass-through rate on the applicable certificates will be based on One-Year MTA as of fifteen
days before the beginning of the related Interest Accrual Period. If One-Year MTA is no longer available,
the index used to determine the pass-through rate on the applicable certificates will be the same index
selected to determine the interest rates on the related mortgage loans. The establishment of One-Year MTA on
each interest determination date by the Trustee and the Trustee's calculation of the pass-through rates
applicable to the related certificates for the related Interest Accrual Period shall, in the absence of
manifest error, be final and binding.
Calculation of One-Month LIBOR
On the second LIBOR business day preceding the commencement of each Interest Accrual Period for the
offered certificates, which date we refer to as an interest determination date, the Trustee will determine
One-Month LIBOR for such Interest Accrual Period on the basis of such rate as it appears on Telerate Screen
Page 3750, as of 11:00 a.m. London time on such interest determination date. 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 reasonably selected by the
Trustee, One-Month LIBOR for the applicable Interest Accrual Period will be the Reference Bank Rate. If no
such quotations can be obtained and no Reference Bank Rate is available, One-Month LIBOR will be the
One-Month LIBOR applicable to the preceding Interest Accrual Period.
The Reference Bank Rate with respect to any Interest Accrual Period, means the arithmetic mean,
rounded upwards, if necessary, to the nearest whole multiple of 0.03125%, of the offered rates for United
States dollar deposits for one month that are quoted by the Reference Banks, as described below, as of 11:00
a.m., New York City time, on the related interest determination 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
all Classes of offered certificates for such Interest Accrual Period, provided that at least two such
Reference Banks provide such rate. If fewer than two offered rates appear, the Reference Bank Rate will be
the arithmetic mean, rounded upwards, if necessary, to the nearest whole multiple of 0.03125%, 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 all Classes of offered certificates. As used
in this section, LIBOR business day means a day on which banks are open for dealing in foreign currency and
exchange in London and New York City; and Reference Banks means leading banks selected by the Trustee and
engaged in transactions in Eurodollar deposits in the international Eurocurrency market:
1. with an established place of business in London;
2. which have been designated as such by the Trustee; and
3. which are not controlling, controlled by, or under common control with, the Depositor or the Sponsor.
The establishment of one-month LIBOR on each interest determination date by the Trustee and the
Trustee's calculation of the pass-through rates applicable to the related offered certificates for the
related Interest Accrual Period shall, in the absence of manifest error, be final and binding.
Optional Purchase of Defaulted Loans
With respect to any mortgage loan which as of the first day of a Fiscal Quarter is delinquent in
payment by 90 days or more or is an REO Property, the Sponsor shall have the right to purchase such mortgage
loan from the trust at a price equal to the Repurchase Price; provided, however (i) that such mortgage loan
is still 90 days or more delinquent or is an REO Property as of the date of such purchase and (ii) this
purchase option, if not theretofore exercised, shall terminate on the date prior to the last day of the
related Fiscal Quarter. This purchase option, if not exercised, shall not be thereafter reinstated unless
the delinquency is cured and the mortgage loan thereafter again becomes 90 days or more delinquent or becomes
an REO Property, in which case the option shall again become exercisable as of the first day of the related
Fiscal Quarter.
YIELD AND PREPAYMENT CONSIDERATIONS
General
The yield to maturity and weighted average life of each class of certificates will be affected by the
amount and timing of principal payments on the related mortgage loans, the allocation of available funds to
such class of certificates, the applicable Pass-Through Rate for such class of certificates, the purchase
price paid for such certificates and the amount of Excess Spread. In addition, the yields on the certificates
will be adversely affected by Realized Losses and interest shortfalls on the related mortgage loans. The
interaction of the foregoing factors may have different effects on the various classes of certificates, and
may have varying effects with respect to any one class of certificates during the life of such class. No
representation is made as to the anticipated rate of prepayments on the mortgage loans, the amount and timing
of Realized Losses or interest shortfalls or as to 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 mortgage loans and the suitability of the certificates to their investment
objectives. Investors should carefully consider the associated risks discussed below and under the heading
"Legal Investment" herein and under the headings "Yield Considerations,""Maturity and Prepayment
Considerations" and "Legal Investment Matters" in the prospectus.
The mortgage interest rates on the mortgage loans will adjust monthly, semi-annually or annually, as
applicable, after the expiration of the applicable initial fixed-rate period, and may vary significantly over
time. When a mortgage loan begins its adjustable period, increases and decreases in the mortgage interest
rate on that mortgage loan will be calculated for each monthly accrual period based on the index as of a
specified date. The index may not rise and fall consistently with mortgage interest rates. As a result, the
mortgage interest rates on the mortgage loans at any time may not equal the prevailing mortgage interest
rates for similar adjustable-rate loans and accordingly the prepayment rate may be lower or higher than would
otherwise be anticipated. Moreover, each mortgage loan is subject to a maximum interest rate.
Although mortgage interest rates will increase (subject to a maximum interest rate) or decrease as the
index changes (following the initial fixed-rate period), the monthly payments on the mortgage loans generally
will adjust only once a year. As a result, an increase or decrease in the index will cause the amortization
of the mortgage loans to decelerate or accelerate, thereby causing a corresponding change in the amortization
of the certificates. In the event that an increase in the index causes the interest due on a mortgage loan
for a given month to exceed the current minimum monthly payment for that month, the shortfall in interest
will be added to the outstanding principal balance of that mortgage loan as Deferred Interest. In addition,
because the initial minimum monthly payment is set based on the initial fixed rate rather than the sum of the
margin and then-current Index, it is likely that the minimum monthly payment will be less than the interest
due on that mortgage loan during at least the first year (or during the first five years, with respect to the
5 Yr. Bear Secure Option ARM loans) of a mortgage loan. If a mortgagor only pays the minimum monthly payment
due, there will likely be negative amortization on the mortgage loan until such time that the minimum monthly
payment will be reset to a fully amortizing amount.
Prepayment Considerations
The rate of principal payments on each class of offered certificates, the aggregate amount of
distributions on each class of offered certificates and the yield to maturity of each class of offered
certificates will be related to the rate and timing of payments of principal on the related mortgage loans.
The rate of principal payments on the mortgage loans will in turn be affected by the amortization schedules
of the related mortgage loans and by the rate and timing of Principal Prepayments on the related mortgage
loans (including for this purpose payments resulting from refinancings, liquidations of the mortgage loans
due to defaults, casualties, condemnations and repurchases, whether optional or required). The mortgage
loans generally may be prepaid by the mortgagors at any time; however, as described under "The Mortgage Pool"
herein, with respect to some of the mortgage loans, a prepayment may subject the related mortgagor to a
prepayment charge. Prepayment charges may be restricted under some state laws as described under "Legal
Aspects of Mortgage Loans - Enforceability of Certain Provisions" in the prospectus. Prepayment charges with
respect to the mortgage loans will not be paid to the holders of the offered certificates. Generally the
mortgage loans will contain due-on-sale clauses.
Because the interest rate on each mortgage loan adjusts monthly, semi-annually or annually, as
applicable, (after any initial fixed period) and the minimum monthly payment adjusts annually, the portion of
the monthly payment that will be applied to reduce the principal balance of the mortgage loan may vary.
The negative amortization feature of the mortgage loans may affect the yield on the related classes of
certificates. As a result of the negative amortization of the mortgage loans, the outstanding principal
balance of a mortgage loan will increase by the amount of Deferred Interest as described herein under
"Description of the Certificates-Interest." During periods in which the outstanding principal balance of a
mortgage loan is increasing due to the addition of Deferred Interest, the increasing principal balance of the
mortgage loan may approach or exceed the value of the related mortgaged property, thus increasing both the
likelihood of defaults and the risk of loss on any mortgage loan that is required to be liquidated.
Furthermore, each mortgage loan provides for the payment of any remaining unamortized principal balance of
such mortgage loan (due to the addition of Deferred Interest, if any, to the principal balance of the
mortgage loan) in a single payment at the maturity of the mortgage loan. Because the mortgagors may be so
required to make a larger single payment upon maturity, it is possible that the default risk associated with
the mortgage loans is greater than that associated with fully amortizing mortgage loans. The rate of
Deferred Interest on the mortgage loans will also affect the rate of principal distributions on the related
certificates because scheduled and unscheduled principal collections on the mortgage loans will be applied to
cover Deferred Interest on the mortgage loans.
Principal Prepayments, liquidations and repurchases of the related mortgage loans will result in
distributions in respect of principal to the holders of the related class or classes of offered certificates
then entitled to receive these principal distributions that otherwise would be distributed over the remaining
terms of the mortgage loans. See "Maturity and Prepayment Considerations" in the prospectus. Since the rate
and timing of payments of principal on the mortgage loans will depend on future events and a variety of
factors (as described more fully herein and in the prospectus under "Yield Considerations" and "Maturity and
Prepayment Considerations"), no assurance can be given as to the rate of Principal Prepayments. The extent
to which the yield to maturity of any class of offered certificates may vary from the anticipated yield will
depend upon the degree to which they are purchased at a discount or premium and the degree to which the
timing of payments on the offered certificates is sensitive to prepayments on the mortgage loans. Further, an
investor should consider, in the case of any offered certificate purchased at a discount, the risk that a
slower than anticipated rate of Principal Prepayments on the mortgage loans could result in an actual yield
to an investor that is lower than the anticipated yield and, in the case of any offered certificate purchased
at a premium, the risk that a faster than anticipated rate of principal payments could result in an actual
yield to the investor that is lower than the anticipated yield. In general, the earlier a prepayment of
principal on the mortgage loans, the greater will be the effect on the investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments occurring at a rate higher (or lower) than
the rate anticipated by the investor during the period immediately following the issuance of the offered
certificates would not be fully offset by a subsequent like reduction (or increase) in the rate of principal
payments.
It is highly unlikely that the mortgage loans will prepay at any constant rate until maturity or that
all of the mortgage loans will prepay at the same rate. Moreover, the timing of prepayments on the mortgage
loans may significantly affect the actual yield to maturity on the related offered certificates, even if the
average rate of principal payments experienced over time is consistent with an investor's expectation.
Because principal distributions are paid to some classes of offered certificates before other classes,
holders of classes of offered certificates having a later priority of payment bear a greater risk of losses
than holders of classes having earlier priorities for distribution of principal.
The rate of payments (including prepayments) on pools of mortgage loans is influenced by a variety of
economic, geographic, social and other factors. If prevailing mortgage rates fall significantly below the
mortgage rates on the mortgage loans, the rate of prepayment (and refinancing) would be expected to increase.
Conversely, if prevailing mortgage rates rise significantly above the mortgage rates on the mortgage loans,
the rate of prepayment on the mortgage loans would be expected to decrease. Other factors affecting
prepayment of mortgage loans include changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties and servicing decisions. In addition, the existence of the
applicable periodic rate cap, maximum mortgage rate and minimum mortgage rate may effect the likelihood of
prepayments resulting from refinancings. There can be no certainty as to the rate of prepayments on the
mortgage loans during any period or over the life of the certificates. See "Yield Considerations" and
"Maturity and Prepayment Considerations" in the prospectus.
In general, defaults on mortgage loans are expected to occur with greater frequency in their early
years. In addition, default rates generally are higher for mortgage loans used to refinance an existing
mortgage loan. In the event of a mortgagor's default on a mortgage loan, there can be no assurance that
recourse beyond the specific mortgaged property pledged as security for repayment will be available.
The Sponsor may, from time to time, implement programs designed to encourage refinancing. These
programs may include, without limitation, modifications of existing loans, general or targeted solicitations,
the offering of pre-approved applications, reduced origination fees or closing costs or other financial
incentives. Targeted solicitations may be based on a variety of factors, including the credit of the borrower
or the location of the mortgaged property. In addition, the Sponsor may encourage assumptions of mortgage
loans, including defaulted mortgage loans, under which creditworthy borrowers assume the outstanding
indebtedness of the mortgage loans which may be removed from the related mortgage pool. As a result of these
programs, with respect to the mortgage pool underlying any trust, the rate of Principal Prepayments of the
mortgage loans in the mortgage pool may be higher than would otherwise be the case and in some cases, the
average credit or collateral quality of the mortgage loans remaining in the mortgage pool may decline.
Pass-Through Rates
The yields to maturity on the offered certificates will be affected by their pass-through rates. The
pass-through rates on the offered certificates will be sensitive to the adjustable mortgage rates on the
related mortgage loans. As a result, these pass-through rates will be sensitive to the index on the related
mortgage loans, any periodic caps, maximum and minimum rates and the related gross margins.
Yield Sensitivity Of The Subordinate Certificates
As the Current Principal Amount of a class of subordinate certificates is reduced to zero, the yield
to maturity on the next most junior class of subordinate certificates will become extremely sensitive to
losses on the mortgage loans (and the timing thereof) that are covered by subordination, because the entire
amount of losses on the mortgage loans will be allocated such class of subordinate certificates. If the
Current Principal Amounts of the Class B Certificates in a loan group have been reduced to zero, the yield to
maturity on the Class M Certificates in such loan group will become extremely sensitive to losses on the
related mortgage loans (and the timing thereof) that are covered by subordination, because the entire amount
of losses on the related mortgage loans will be allocated to the Class M Certificates, beginning with the
class of Class M Certificates with the highest numerical designation. Investors in the subordinate
certificates should fully consider the risk that Realized Losses on the related mortgage loans could result
in the failure of these investors to fully recover their investments. For additional considerations relating
to the yield on the subordinate certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the prospectus.
Yield Sensitivity of the Interest Only Certificates
The notional amount of the Interest Only Certificates will equal the Current Principal Amount of the
related class or classes of certificates. Therefore, the yield to maturity on the Interest Only Certificates
will be extremely sensitive to both the timing of receipt of prepayments and the overall rate of principal
prepayments and defaults on the mortgage loans in the related loan group. Investors in the Interest Only
Certificates should fully consider the risk that a rapid rate of prepayments on the mortgage loans in the
related loan group could result in the failure of such investors to fully recover their investments.
Assumed Final Distribution Date
The assumed final distribution date for each class of certificates is as set forth in the Term Sheet.
Since the rate of payment (including prepayments) of principal on the mortgage loans can be expected to
exceed the scheduled rate of payments, and could exceed the scheduled rate by a substantial amount, the
disposition of the last remaining mortgage loan may be earlier, and could be substantially earlier, than the
assumed final distribution date. Furthermore, the actual final distribution date with respect to each class of
offered certificates could occur significantly earlier than the assumed final distribution date because
Excess Spread to the extent available will be applied as an accelerated payment of principal on the offered
certificates to the extent described herein. In addition, the depositor or its designee may, at its option,
repurchase all the mortgage loans from the Trust on or after any distribution date on which the aggregate
unpaid principal balances of the mortgage loans are less than a percentage (as set forth in the Term Sheet)
of the aggregate Stated Principal Balance of the mortgage loans as of the Cut-off Date. See "The Pooling and
Servicing Agreement-Termination" herein.
Weighted Average Life
The weighted average life of a security refers to the average amount of time that will elapse from the
date of its issuance until each dollar of principal of such security will be distributed to the investor. The
weighted average life of a certificate is determined by (a) multiplying the amount of the reduction, if any,
of the Current 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 Current Principal Amount of
such certificate referred to in clause (a). The weighted average life of the certificates will be influenced
by, among other factors, the rate at which principal is paid on the related mortgage loans. Principal
payments of mortgage loans may be in the form of scheduled amortization, prepayments, liquidations as a
result of foreclosure proceedings or otherwise, or by virtue of the purchase of a mortgage loan in advance of
its stated maturity as required or permitted by the Agreement. 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 related mortgage loans increases.
THE POOLING AND SERVICING AGREEMENT
General
The certificates will be issued pursuant to the Agreement, a form of which is filed as an exhibit to
the registration statement. A current report on Form 8-K relating to the certificates containing a copy of
the Agreement as executed will be filed by the Depositor with the Securities and Exchange Commission within
fifteen days of the initial issuance of the certificates. The trust fund created under the Agreement will
consist of (1) all of the Depositor's right, title and interest in and to the mortgage loans, the related
mortgage notes, mortgages and other related documents, including all interest and principal due with respect
to the mortgage loans after the Cut-off Date, but excluding any payments of principal or interest due on or
prior to the Cut-off Date, (2) any mortgaged properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure and any revenues received thereon, (3) the rights of the
Trustee under all insurance policies required to be maintained pursuant to the Agreement, (4) the rights of
the Depositor under the Mortgage Loan Purchase Agreement between the Depositor and the Sponsor, (5) such
assets relating to the mortgage loans as from time to time may be held in the Custodial Account and the
Distribution Account, (6) the Policy, if any, for the benefit of the related insured certificates and (7) any
proceeds of the foregoing. Reference is made to the prospectus for important information in addition to that
set forth herein regarding the trust fund, the terms and conditions of the Agreement and the offered
certificates. The offered certificates will be transferable and exchangeable at the corporate trust offices
of the Trustee, for these purposes and for purposes of presentment and surrender located at Sixth Street and
Marquette Avenue, Minneapolis, Minnesota55479, Attention: Corporate Trust Group, Bear Stearns Mortgage
Funding 2006-AR5 and for all other purposes located at 9062 Old Annapolis Road, Columbia, Maryland21045,
Attention: Client Manager, Bear Stearns Mortgage Funding 2006-AR5. The Depositor will provide to prospective
or actual certificateholders without charge, on written request, a copy (without exhibits) of the Agreement.
Requests should be addressed to Structured Asset Mortgage Investments II Inc., 383 Madison Avenue, New York,
New York10179.
Assignment of the Mortgage Loans
At the time of issuance of the certificates, the Depositor will cause the mortgage loans, together
with all principal and interest due on or with respect to such mortgage loans after the Cut-off Date, to be
sold to the trust. The mortgage loans will be identified in a schedule appearing as an exhibit to the
Agreement (as amended). Such schedule will include information as to the principal balance of each mortgage
loan as of the Cut-off Date, as well as information including, among other things, the mortgage rate, the Net
Rate, the Monthly Payment, the maturity date of each mortgage note and the loan-to-value Ratio.
Representations and Warranties
In the Mortgage Loan Purchase Agreement pursuant to which the Depositor purchased (or will purchase)
the mortgage loans from the Sponsor, the Sponsor made (or will make) certain representations and warranties
to the Depositor concerning the mortgage loans. The Trustee, on behalf of the certificateholders, will be
assigned all right, title and interest in the Mortgage Loan Purchase Agreement insofar as it relates to such
representations and warranties made by the Sponsor.
The representations and warranties of the Sponsor with respect to the mortgage loans generally will
include the following, among others:
(1) The information set forth in the mortgage loan schedule is true, complete and correct in all
material respects as of the date such representation was made;
(2) Immediately prior to the sale of the related mortgage loans pursuant to the Mortgage Loan
Purchase Agreement, the Sponsor was the sole owner of beneficial title and holder of each mortgage and
mortgage note relating to the related mortgage loans as of the Closing Date or as of another specified date,
is conveying the same to the Depositor free and clear of any encumbrance, equity, participation interest,
lien, pledge, charge, claim or security interest and the Sponsor has full right and authority to sell and
assign each mortgage loan pursuant to the Mortgage Loan Purchase Agreement; and
(3) As of the Closing Date, there is no monetary default existing under any mortgage or the related
mortgage note and there is no material event which, with the passage of time or with notice and the
expiration of any grace or cure period, would constitute a default, breach or event of acceleration; and
neither the Sponsor nor any of its respective affiliates has taken any action to waive any default, breach or
event of acceleration; and no foreclosure action is threatened or has been commenced with respect to the
mortgage loan.
Generally, the Mortgage Loan Purchase Agreement will provide that, in the case of a breach of any
representation or warranty set forth above which materially and adversely affects the value of the interests
of certificateholders or the Trustee in any of the mortgage loans, within 90 days from the date of discovery
or notice from the Trustee, the Depositor or the Sponsor, the Sponsor will either (i) cure such breach in all
material respects, (ii) provide the Trustee with a substitute mortgage loan (if within two years of the
Closing Date) or (iii) purchase the related mortgage loan at the applicable Repurchase Price. The obligations
of the Sponsor to cure, purchase or substitute shall constitute the Trustee's sole and exclusive remedy
respecting a breach of such representations and warranties.
Custodial Arrangements
Wells Fargo Bank, National Association ("Wells Fargo Bank") is acting as custodian of the mortgage
loan files pursuant to the Custodial Agreement. In that capacity, Wells Fargo Bank is responsible to hold
and safeguard the mortgage notes and other contents of the mortgage files on behalf of the Trustee and the
Certificateholders. Wells Fargo Bank maintains each mortgage loan file in a separate file folder marked with
a unique bar code to assure loan-level file integrity and to assist in inventory management. Files are
segregated by transaction or investor. Wells Fargo Bank has been engaged in the mortgage document custody
business for more than 25 years. Wells Fargo Bank maintains document custody facilities in its Minneapolis,
Minnesota, headquarters and in three regional offices located in Richfield, Minnesota, Irvine, California,
and Salt Lake City, Utah. As of June 30, 2006, Wells Fargo Bank maintains mortgage custody vaults in each of
those locations with an aggregate capacity of over eleven million files.
Wells Fargo Bank serves or may have served within the past two years as loan file custodian for
various mortgage loans owned by the Sponsor or an affiliate of the Sponsor and anticipates that one or more
of those mortgage loans may be included in the Trust. The terms of any custodial agreement under which those
services are provided by Wells Fargo Bank are customary for the mortgage-backed securitization industry and
provide for the delivery, receipt, review and safekeeping of mortgage loan files. For a general description
of Wells Fargo, see the description herein under "The Trustee."The Trustee
Wells Fargo Bank will act as Trustee for the certificates pursuant to the Agreement. Wells Fargo Bank
is a national banking association and a wholly-owned subsidiary of Wells Fargo & Company. A diversified
financial services company with approximately $482 billion in assets, 23 million customers and 153,000+
employees as of December 31, 2005, Wells Fargo & Company is a U.S. bank holding company, providing banking,
insurance, trust, mortgage and consumer finance services throughout the United States and internationally.
Wells Fargo Bank provides retail and commercial banking services and corporate trust, custody, securities
lending, securities transfer, cash management, investment management and other financial and fiduciary
services. The Depositor, the Sponsor and the Servicer may maintain banking and other commercial
relationships with Wells Fargo Bank and its affiliates. Wells Fargo Bank maintains principal corporate trust
offices located at 9062 Old Annapolis Road, Columbia, Maryland21045-1951 (among other locations) and its
office for certificate transfer services is located at Sixth Street and Marquette Avenue, Minneapolis,
Minnesota55479.
Wells Fargo Bank has provided corporate trust services since 1934. As of June 30, 2006, Wells Fargo
Bank acts as a trustee for a variety of transactions and asset types, including corporate and municipal
bonds, mortgage-backed and asset-backed securities and collateralized debt obligations. As of June 30, 2006,
Wells Fargo Bank was acting as trustee on approximately 1,230 series of residential mortgage-backed
securities with an aggregate principal balance of approximately $282,142,062,265.
Wells Fargo Bank serves or has served within the past two years as warehouse master servicer for
various mortgage loans owned by the Sponsor or an affiliate of the Sponsor and anticipates that one or more
of those mortgage loans may be included in the Trust. The terms of the warehouse master servicing agreement
under which those services are provided by Wells Fargo Bank are customary for the mortgage-backed
securitization industry.
The Trustee will be entitled to a fee as compensation for its services as specified in the Agreement.
The Agreement will provide that the Trustee (in its capacity as Trustee and Custodian) and any director,
officer, employee or agent of the Trustee will be entitled to recover from the Distribution Account all
reasonable out-of pocket expenses, disbursements and advances and expenses of the Trustee in connection with
any Monthly Advance, Event of Default, any breach of the Agreement or any loss, liability, expense, claim or
legal action (including any pending or threatened claim or legal action) incurred or made by the Trustee in
its capacity as Trustee or Custodian in the administration of the trust created pursuant to the Agreement
(including the reasonable compensation and disbursements of its counsel), other than any such expense,
disbursement or advance as may arise from the Trustee's negligence or intentional misconduct or for which the
certificateholders have agreed in writing to be responsible.
If an event of default has not occurred (or has occurred but is no longer continuing) under the
Agreement, then the Trustee will perform only such duties as are specifically set forth in the Agreement as
being the duties to be performed by the Trustee prior to the occurrence (or following the discontinuance) of
an event of default thereunder. If an event of default occurs and is continuing under the Agreement, the
Trustee is required to exercise such of the rights and powers vested in it by the Agreement, such as (upon
the occurrence and during the continuance of certain events of default) either acting as the successor
servicer or appointing a successor servicer, and use the same degree of care and skill in their exercise as a
prudent investor would exercise or use under the circumstances in the conduct of such investor's own
affairs. Subject to certain qualifications specified in the Agreement, the Trustee will be liable for its
own negligent action, its own negligent failure to act and its own willful misconduct.
The Trustee's duties and responsibilities under the Agreement include, upon receipt of resolutions,
certificates and reports which are specifically required to be furnished to it pursuant to the Agreement,
examining them to determine whether they are in the form required by the Agreement, providing to the Rating
Agencies notices of the occurrence of certain events of default under the Agreement, appointing a successor
servicer, and effecting any optional termination of the trust.
The Trustee may resign at any time, in which event the Depositor will be obligated to appoint a
successor trustee. The Depositor may also remove the Trustee if the Trustee ceases to be eligible to continue
as Trustee under the Agreement and fails to resign after written request therefor by the Depositor or if the
Trustee becomes insolvent. Upon becoming aware of those circumstances, the Depositor will be obligated to
appoint a successor trustee. The Trustee may also be removed at any time by the holders of certificates
evidencing not less than 51% of the aggregate voting rights in the related trust. 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 as set forth in the Agreement.
On and after the time the Servicer receives a notice of termination pursuant to the Agreement, the
Trustee shall become the successor to the Servicer, or shall appoint a successor servicer (as described
below) with respect to the transactions set forth or provided for in the Agreement and after a transition
period (not to exceed 90 days), shall be subject to all the responsibilities, duties, liabilities and
limitations on liabilities relating thereto placed on the Servicer by the terms and provisions of the
Agreement; provided, however, that the Trustee shall have no obligation whatsoever with respect to any
liability (other than advances deemed recoverable and not previously made) incurred by the Servicer at or
prior to the time of termination. Effective on the date of such notice of termination, as compensation
therefor, the Trustee shall be entitled to all compensation, reimbursement of expenses and indemnification
that the Servicer would have been entitled to if it had continued to act pursuant to the Agreement except for
those amounts due the Servicer as reimbursement permitted under this Agreement for advances previously made
or expenses previously incurred. Notwithstanding the foregoing, the Trustee may, if it shall be unwilling to
so act, or shall, if it is prohibited by applicable law from making advances or if it is otherwise unable to
so act, appoint, or petition a court of competent jurisdiction to appoint, any established mortgage loan
servicing institution the appointment of which does not adversely affect the then current rating of the
certificates by each rating agency as the successor to the pursuant to the Agreement in the assumption of all
or any part of the responsibilities, duties or liabilities of the Servicer pursuant to the Agreement. Any
successor Servicer shall be an established housing and home finance institution which is a Fannie Mae- or
Freddie Mac-approved servicer and shall have a net worth of not less than $10,000,000; provided, that the
Trustee shall obtain a letter from each Rating Agency that the ratings, if any, on each of the Certificates
will not be lowered as a result of the selection of the successor to the Servicer. If the Trustee assumes
the duties and responsibilities of the Servicer, the Trustee shall not resign as successor servicer until
another servicer has been appointed and has accepted such appointment. Pending appointment of a successor to
the Servicer under the Agreement, the Trustee, unless the Trustee is prohibited by law from so acting, shall
act in such capacity as provided in the Agreement. In connection with such appointment and assumption, the
Trustee may make such arrangements for the compensation of such successor out of payments on mortgage loans
or otherwise as it and such successor shall agree; provided that such compensation shall not be in excess of
that which the Servicer would have been entitled to if the Servicer had continued to act under the Agreement,
and that such successor shall undertake and assume the obligations of the Servicer to pay compensation to any
third Person acting as an agent or independent contractor in the performance of servicing responsibilities
under the Agreement. The Trustee and such successor shall take such action, consistent with the Agreement, as
shall be necessary to effectuate any such succession.
The costs and expenses of the Trustee in connection with the termination of the Servicer, appointment
of a successor servicer and any transfer of servicing, including, without limitation, all costs and expenses
associated with the complete transfer of all servicing data and the completion, correction or manipulation of
such servicing data as may be required by the Trustee to correct any errors or insufficiencies in the
servicing data or otherwise enable the Trustee or successor servicer to service the mortgage loans properly
and effectively, to the extent not paid by the terminated servicer, will be payable by the Trust to the
Trustee pursuant to the Agreement. Any successor Servicer shall give notice to the applicable mortgagors of
such change of servicer and will, during the term of its service as successor servicer, maintain in force the
policy or policies that the Servicer is required to maintain pursuant to the Agreement.
If the Trustee will succeed to any duties of the Servicer respecting the mortgage loans as provided
herein, it will do so in a separate capacity and not in its capacity as Trustee and, accordingly, the
provisions of the Agreement concerning the Trustee's duties will be inapplicable to the Trustee in its duties
as the successor to the Servicer in the servicing of the mortgage loans (although such provisions will
continue to apply to the Trustee in its capacity as Trustee); the provisions of the Agreement relating to the
Servicer, however, will apply to the Trustee in its capacity as successor servicer.
Upon any termination or appointment of a successor to the Servicer, the Trustee will give prompt
written notice thereof to the Rating Agencies.
Servicing and Other Compensation and Payment of Expenses
The Servicer will be entitled to receive a Servicing Fee as compensation for its activities under the
Agreement equal to 1/12 of the Servicing Fee Rate multiplied by the Scheduled Principal Balance of each
mortgage loan as of the first day of the related Due Period. The Servicing Fee Rate for each mortgage loan
will be as indicated in the Term Sheet.
In addition to the primary compensation described above, the Servicer may be entitled to retain
assumption fees, tax service fees and late payment charges, all to the extent collected from mortgagors and
as provided in the Agreement.
The Servicer will pay all related expenses incurred in connection with its servicing responsibilities
(subject to limited reimbursement as described in the Agreement).
Servicing Responsibilities
The Servicer will be responsible for servicing the mortgage loans in accordance with the provisions of
the Agreement. The responsibilities generally include:
o communicating with borrowers;
o sending monthly remittance statements to borrowers;
o collecting payments from borrowers;
o recommending a loss mitigation strategy for borrowers who have defaulted on their loans (i.e.
repayment plan, modification, foreclosure, etc.);
o accurate and timely accounting, reporting and remittance of the principal and interest portions of
monthly installment payments to the trustee, together with any other sums paid by borrowers
that are required to be remitted;
o accurate and timely accounting and administration of escrow and impound accounts, if applicable;
o accurate and timely reporting of negative amortization amounts, if any;
o paying escrows for borrowers, if applicable;
o calculating and reporting payoffs and liquidations;
o maintaining an individual file for each loan; and
o maintaining primary mortgage insurance commitments or certificates if required, and filing any primary
mortgage insurance claims.
Table of Fees
The following table indicates the fees expected to be paid from the cash flows from the mortgage loans
and other assets of the trust fund, while the offered certificates are outstanding.
All fees are expressed in basis points, at an annualized rate, applied to the outstanding aggregate
principal balance of the mortgage loans.
Item Fee Paid From
Servicing Fee(1) 0.375% per annum Mortgage Loan Collections
Trustee Fee((2)) To be Determined Mortgage Loan Collections
Premium((3)) To be Determined Mortgage Loan Collections
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(1) The servicing fee is paid on a first priority basis from collections
allocable to interest on the mortgage loans, prior to distributions to
certificateholders.
((2)) The Trustee fee is paid on a first priority basis from collections
allocable to interest on the mortgage loans, prior to distributions to
certificateholders.
((3)) Any premium on the insurance policy is paid on a first priority basis
from collections allocable to interest on the mortgage loans, prior to
distributions to certificateholders.
Realization Upon Defaulted Mortgage Loans
The Servicer will take such action as it deems to be in the best interest of the trust with respect to
defaulted mortgage loans and foreclose upon or otherwise comparably convert the ownership of properties
securing defaulted mortgage loans as to which no satisfactory collection arrangements can be made. To the
extent set forth in the Agreement, the Servicer will service the property acquired by the trust through
foreclosure or deed-in-lieu of foreclosure in accordance with procedures that the Servicer employs and
exercises in servicing and administering mortgage loans for its own account and which are in accordance with
accepted mortgage servicing practices of prudent lending institutions.
Since Insurance Proceeds cannot exceed deficiency claims and certain expenses incurred by the
Servicer, no insurance payments will result in a recovery to certificateholders which exceeds the principal
balance of the defaulted mortgage loan together with accrued interest thereon at its Net Rate.
Modifications
In instances in which a mortgage loan is in default or if default is reasonably foreseeable, the
Servicer may permit servicing modifications of the mortgage loan rather than proceeding with foreclosure.
However, the Servicer's ability to perform servicing modifications will be subject to some limitations as
described in the related Servicing Agreement, including but not limited to, the Servicer may not (i) permit
any modification that would change the related Mortgage Interest Rate, (ii) forgive the payment of principal
or interest, (iii) reduce or increase the outstanding principal balance (except for actual payments of
principal) or change the final maturity date of such Mortgage Loan.
Evidence as to Compliance
The Agreement will provide that on or before March 1 of each year, beginning with the first year after
the year in which the Cut-off Date occurs, each party participating in the servicing function will provide to
the Servicer, the Depositor and the Trustee a report on an assessment of compliance with the minimum
servicing criteria established in Item 1122(a) of Regulation AB (the "AB Servicing Criteria"). The AB
Servicing Criteria include specific criteria relating to the following areas: general servicing
considerations, cash collection and administration, investor remittances and reporting, and pool-asset
administration. Such report will indicate that the AB Servicing Criteria were used to test compliance on a
platform level basis and will set out any material instances of noncompliance.
The Agreement will also provide that each party participating in the servicing function will deliver
to the Servicer, the Depositor and the Trustee along with its report on assessment of compliance, an
attestation report from a firm of independent public accountants on the assessment of compliance with the AB
Servicing Criteria.
The Agreement will also provide for delivery on or before March 1 of each year, of a separate annual
statement of compliance from the Servicer and any sub-servicer to the effect that, to the best knowledge of
the signing officer, such person has fulfilled in all material respects its obligations under the Agreement
or related servicing agreement throughout the preceding year or, if there has been a material failure in the
fulfillment of any such obligation, the statement will specify such failure and the nature and status
thereof. This statement may be provided as a single form making the required statements as to more than one
Agreement or related servicing agreement.
Copies of the annual reports of assessment of compliance, attestation reports, and statements of
compliance may be obtained by certificateholders without charge upon written request to the Servicer at the
address of the Servicer set forth above under "The Servicer." These items will be filed with the Issuing
Entity's annual report on Form 10-K, to the extent required under Regulation AB.
The Custodial Account
The Servicer will establish and maintain in the name of the Trustee, for the benefit of the
certificateholders, an account, referred to herein as the Custodial Account, into which it will deposit daily
all collections of principal and interest on any mortgage loans, including but not limited to Principal
Prepayments, Insurance Proceeds, Liquidation Proceeds (less amounts reimbursable to the Servicer out of
Liquidation Proceeds in accordance with the Agreement), the Repurchase Price for any mortgage loans
repurchased and Monthly Advances made from the Servicer's own funds (less the Servicing Fee) and Compensating
Interest Payments. The amount at any time credited to the Custodial Account, if invested, shall be invested
in the name of the Trustee in permitted investments selected by the Servicer. The Servicer will be entitled
to any amounts earned on permitted investments in the Custodial Account. The Servicer will also deposit into
the Custodial Account any amounts required to be deposited with respect to losses on Permitted Investments
and any other amounts received by the Servicer and required to be deposited in the Custodial Account pursuant
to the Agreement. The Custodial Account and amounts at any time credited thereto shall comply with the
requirements of the Agreement and shall meet the requirements of the Rating Agencies.
The Distribution Account
The Trustee shall establish and maintain in the name of the Trustee, for the benefit of the
certificateholders, an account, referred to herein as the Distribution Account, into which on the second
business day prior to each distribution date, all available funds in the Custodial Account for such
distribution date will be transferred by the Servicer. All amounts deposited to the Distribution Account
shall be held in the name of the Trustee in trust for the benefit of the certificateholders in accordance
with the terms and provisions of the Agreement. The amount at any time credited to the Distribution Account,
if invested, shall be invested in the name of the Trustee in permitted investments selected by the Trustee.
The Trustee will be entitled to any amounts earned and will be liable for any losses on permitted investments
in the Distribution Account. To the extent grantor trust certificates are issued, a separate Grantor Trust
Distribution Account will be established.
On each distribution date, the Trustee shall pay the certificateholders in accordance with the
provisions set forth under "Description of the Certificates-Distributions on the Certificates" herein.
Voting Rights
Voting rights of the trust in general will be allocated among the classes of certificates (other than
the Residual Certificates) as set forth in the Agreement.
For so long as there does not exist a failure by the certificate insurer to make a required payment
under the related Policy, the certificate insurer may exercise all rights, including voting rights, of the
holders of the related insured certificates under the Agreement without any consent of such holders.
Termination
The obligations of the Trustee and the Servicer created by the Agreement will terminate upon (i) the
later of the making of the final payment or other liquidation or any advance with respect thereto, of the
last mortgage loan subject thereto or the disposition of all property acquired upon foreclosure or acceptance
of a deed in lieu of foreclosure of any such mortgage loans, (ii) the payment to certificateholders and the
certificate insurer, if any, of all amounts required to be paid to them pursuant to the Agreement or (iii)
the repurchase by or at the direction of the Depositor or its designee of all of the mortgage loans and all
related REO Property in the trust, as further discussed below.
On any distribution date on which the aggregate Scheduled Principal Balance of the mortgage loans is
less than a percentage (as set forth in the Term Sheet) of the aggregate Scheduled Principal Balance of the
mortgage loans as of the Cut-off Date, the Depositor or its designee, or any other person set forth in the
Agreement, may repurchase from the trust all mortgage loans remaining outstanding and any REO Property
remaining in the trust at a purchase price equal to the sum of (a) the unpaid principal balance of the
mortgage loans (other than mortgage loans related to REO Property), net of the principal portion of any
unreimbursed Monthly Advances relating to the mortgage loans made by the purchaser, plus accrued but unpaid
interest thereon at the applicable mortgage rate to, but not including, the first day of the month of
repurchase, (b) the appraised value of any REO Property, less the good faith estimate of the Servicer of
liquidation expenses to be incurred in connection with its disposal thereof (but not more than the unpaid
principal balance of the related mortgage loan, together with accrued but unpaid interest on that balance at
the applicable mortgage rate, but not including the first day of the month of repurchase), (c) unreimbursed
out-of-pocket costs of the Servicer, including unreimbursed servicing advances and the principal portion of
any unreimbursed Monthly Advances, made on the mortgage loans prior to the exercise of such repurchase and
(d) any unreimbursed costs and expenses of the Trustee and the Custodian payable in accordance with the terms
of the Agreement. Such person exercising this right, if not the Depositor or an affiliate, shall be deemed
to represent that one of the following will be true and correct: (i) the exercise of such option shall not
result in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code or (ii) such designee
is (A) not a party in interest with respect to any Plan and (B) is not a "benefit plan investor" (other than
a plan sponsored or maintained by the designee, provided that no assets of such plan are invested or deemed
to be invested in the certificates). If the holder of the option is unable to exercise such option by reason
of the preceding sentence, then the Depositor may exercise such option. Any such repurchase will result in
the retirement of all of the certificates and termination of the trust. The trust may also be terminated and
the certificates retired on any distribution date upon the Depositor's determination, based upon an opinion
of counsel, that the status of the trust fund as a REMIC has been lost or that a substantial risk exists that
such status will be lost for the then current taxable year. In no event will the trust created by the
Agreement continue beyond the expiration of 21 years from the death of the survivor of the persons named in
the Agreement. See "The Agreements-Termination; Retirement of Securities" in the prospectus.
No such purchase by the Depositor or its designee will be permitted without the consent of the
certificate insurer if a draw on the related Policy will be made or if any amounts due to the certificate
insurer would remain unreimbursed on the final distribution date under the related Policy.
FEDERAL INCOME TAX CONSIDERATIONS
Upon the issuance of the offered certificates, Orrick, Herrington & Sutcliffe LLP, counsel to the
Depositor, will deliver its opinion generally to the effect that, assuming compliance with all provisions of
the Agreement, for federal income tax purposes, each REMIC election made by the Trust Fund will qualify as a
REMIC under the Internal Revenue Code of 1986, or the Code. The certificates (other than the Residual
Certificates) will be designated as regular interests in a REMIC and are herein referred to as the "Regular
Certificates" or the "REMIC Regular Certificates." Each of the Residual Certificates will be designated as
the residual interest in the related REMIC and are herein referred to as 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 Regular Certificates will be considered regular interests in a REMIC, they generally will
be taxable as debt obligations under the Code, and interest paid or accrued on the Regular Certificates,
including original issue discount with respect to any Regular Certificates issued with original issue
discount, will be taxable to certificateholders in accordance with the accrual method of accounting,
regardless of their usual method of accounting. It is anticipated that, for federal income tax purposes, some
or all of the Regular Certificates may be issued with original issue discount. See "Federal Income Tax
Consequences-REMICS-Taxation of Owners of REMIC Regular Certificates-Original Issue Discount" in the
prospectus. The Internal Revenue Service, or the IRS, has issued OID regulations under Sections 1271 to 1275
of the Code generally addressing the treatment of debt instruments issued with original issue discount
(hereafter referred to as the OID Regulations). 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. The prepayment assumption that will be used in
determining the rate of accrual of original issue discount with respect to the certificates will be set forth
in the related prospectus supplement. The prepayment assumption represents a rate of payment of unscheduled
principal on a pool of mortgage loans, expressed as an annualized percentage of the outstanding principal
balance of such mortgage loans at the beginning of each period. However, no representation is made as to the
rate at which prepayments actually will occur.
In certain circumstances the OID Regulations permit the holder of a debt instrument to recognize
original issue discount under a method that differs from that used by the Issuing Entity. Accordingly, it is
possible that the holder of a Regular Certificate may be able to select a method for recognizing original
issue discount that differs from that used by the Trustee in preparing reports to the certificateholders and
the IRS.
Certain classes of the Regular Certificates may be treated for federal income tax purposes as having
been issued at a premium. Whether any holder of such a class of certificates will be treated as holding a
certificate with amortizable bond premium will depend on such certificateholder's purchase price and the
distributions remaining to be made on such certificate at the time of its acquisition by such
certificateholder. Holders of such classes of certificates should consult their tax advisors regarding the
possibility of making an election to amortize such premium. See "Federal Income Tax
Consequences-REMICS-Taxation of Owners of REMIC Regular Certificates- Original Issue Discount" and "-Premium"
in the prospectus.
Characterization of the Offered Certificates
All holders of the offered certificates will be entitled (subject to specific priorities and to the
extent of related Basis Risk Shortfall Carry Forward Amounts) to amounts deposited into the reserve fund from
excess cash flow. In addition, all holders of the offered certificates will be entitled (subject to specific
priorities and to the extent of related Basis Risk Shortfall Carry Forward Amounts, Unpaid Realized Loss
Amounts and Current Interest and Interest Carry Forward Amounts) to amounts deposited into the reserve fund
from the related Cap Contracts. Accordingly, holders of the offered certificates will be treated for federal
income tax purposes as owning a regular interest in a REMIC and a beneficial ownership interest in the right
to receive payments from the reserve fund, which is not included in any REMIC. The treatment of amounts
received by the certificateholder with respect to such certificateholder's right to receive Basis Risk
Shortfall Carry Forward Amounts as a result of the application of the Net Rate Cap, will depend upon the
portion of such certificateholder's purchase price allocable thereto. Under the REMIC regulations, each
certificateholder of an offered certificate must allocate its purchase price for its certificate between its
undivided interest in the related REMIC regular interest and its interest in the right to receive payments
from the reserve fund in respect of any Basis Risk Shortfall Carry Forward Amounts in accordance with the
relative fair market values of each property right. Holders of the offered certificates may also have to
allocate basis to the reserve fund on account of the right to receive Unpaid Realized Loss Amounts, Current
Interest and Interest Carry Forward Amounts, although pursuant to the Agreement, the Trustee will treat such
payments as advances (in which event it is likely that no basis should be allocated to such rights). Such
allocations will be used for, among other things, purposes of computing any original issue discount, market
discount or premium, as well as for determining gain or loss on disposition. No representation is or will be
made as to the relative fair market values thereof. Generally, payments made to certificates with respect to
any Basis Risk Shortfall Carry Forward Amounts will be included in income based on, and the purchase price
allocated to the reserve fund may be amortized in accordance with, the regulations relating to notional
principal contracts. In the case of non-corporate holders of the offered certificates the amortization of the
purchase price may be subject to limitations as an itemized deduction, and may not be useable at all, if the
taxpayer is subject to the alternative minimum tax. However, regulations have recently been proposed that
modify the taxation of notional principal contracts that contain contingent nonperiodic payments. As the
application of such regulations (i.e., whether they apply, and if so, how they apply) are, at this time,
unclear, holders of the offered certificates should consult with their own tax advisors with respect to the
proper treatment of their interest in the reserve fund.
We make no representation on whether the offered certificates (or what, if any, portion thereof) will
constitute "real estate assets" or whether the interest (or any portion) thereon will be considered "interest
on obligations secured by mortgages on real property", in each case for real estate investment trusts, or
REITs. In addition, we make no representation on whether the offered certificates (or what, if any, portion
thereof) will constitute a "regular interest in a REMIC" under section 7701(a)(19)(C) for purposes of
domestic building and loan associations.
Penalty Protection
If penalties were asserted against purchasers of the Certificates offered hereunder in respect of
their treatment of the Certificates for tax purposes, the summary of tax considerations contained, and the
opinions stated, herein and in the prospectus may not meet the conditions necessary for purchasers' reliance
on that summary and those opinions to exculpate them from the asserted penalties.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting agreement, the offered certificates,
will be purchased from the Depositor by the Underwriter upon issuance. The Underwriter is an affiliate of the
Depositor, the Sponsor and BSRM. The offered certificates will be offered by the Underwriter (only as and if
issued and delivered to and accepted by the Underwriter) from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. In connection with the purchase and sale of
the offered certificates, the Underwriter may be deemed to have received compensation from the Depositor in
the form of an underwriting discount.
The Depositor will indemnify the Underwriter against certain civil liabilities, including liabilities
under the Securities Act of 1933, as amended, or will contribute to payments the Underwriter may be required
to make in respect thereof.
The Underwriter may effect these transactions by selling the underwritten certificates to or through
dealers, and those dealers may receive compensation in the form of underwriting discounts, concessions or
commissions from the underwriter for whom they act as agent. In connection with the sale of the underwritten
certificates, the Underwriter may be deemed to have received compensation from the Depositor in the form of
underwriting compensation. The Underwriter and any dealers that participate with the underwriters in the
distribution of the related underwritten certificates may be deemed to be underwriters and any profit on the
resale of the underwritten certificates positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act.
There is currently no secondary market for the certificates and no assurances are made that such a
market will develop. The Underwriter intends to establish a market in the offered certificates, but is not
obligated to do so. Any such market, even if established, may or may not continue.
SECONDARY MARKET
There can be no assurance that a secondary market for the offered certificates will develop or, if it
does develop, that it will continue. The primary source of information available to investors concerning the
offered certificates will be the monthly statements supplied to certificateholders, which will include
information as to the Current Principal Amount of the offered certificates and the status of the applicable
form of credit enhancement. There can be no assurance that any additional information regarding the offered
certificates will be available through any other source. In addition, the Depositor is not aware of any
source through which price information about the offered certificates will be generally available on an
ongoing basis. The limited nature of information regarding the offered certificates may adversely affect the
liquidity of the offered certificates, even if a secondary market for the offered certificates becomes
available.
LEGAL MATTERS
Legal matters relating to the offered certificates will be passed upon for the Depositor and the
Underwriter by Orrick, Herrington & Sutcliffe LLP, New York, New York.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Depositor, the Trustee, the Issuing
Entity, BSRM, the certificate insurer or the Custodian, or with respect to which the property of any of the
foregoing transaction parties is subject, that are material to the certificateholders. No legal proceedings
against any of the foregoing transaction parties is known to be contemplated by governmental authorities,
that are material to the certificateholders. We refer you to "The Sponsor" and "Servicing of the Mortgage
Loans-The Servicer" for a description of the legal proceedings against the Sponsor and the Servicer.
AFFILIATIONS, RELATIONSHIPS AND RELATED TRANSACTIONS
The Sponsor, the Issuing Entity, the underwriter, BSRM and the Depositor are affiliated parties. The
Custodian and the Trustee are the same entity. There are no affiliations between the Sponsor, the Depositor,
the underwriter, BSRM or the Issuing Entity and any of the Trustee, the certificate insurer or the
Custodian. There are no affiliations among the Trustee, the certificate insurer and any 10% concentration
originator or the servicer. There are currently no business relationships, agreements, arrangements,
transactions or understandings between (a) the Sponsor, the Depositor or the Issuing Entity and (b) any of
the parties referred to in the preceding sentence, or any of their respective affiliates, that were entered
into outside the normal course of business or that contain terms other than would be obtained in an arm's
length transaction with an unrelated third party and that are material to the investor's understanding of the
certificates, or, except as disclosed herein, that relate to the certificates or the pooled assets. No such
business relationship, agreement, arrangement, transaction or understanding has existed during the past two
years, other than as described under "The Pooling and Servicing Agreement-Custodial Arrangement" and "-TheTrustee" herein.
RATINGS
It is a condition to the issuance of each class of offered certificates that it receives at least the
ratings set forth in the Term Sheet by one or more rating agencies including S&P, Moody's and/or Fitch.
The ratings assigned 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. The 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. The
ratings on the certificates do not, however, constitute a statement regarding frequency of prepayments on the
mortgages.
The ratings do not address the possibility that, as a result of principal prepayments or recoveries
certificateholders might suffer a lower than anticipated yield.
The ratings assigned to the offered certificates should be evaluated independently from similar
ratings on other types of securities. A rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the Rating Agencies.
The Depositor has not requested a rating of the offered certificates by any rating agency other than
the Rating Agencies. However, there can be no assurance as to whether any other rating agency will rate the
offered certificates or, in such event, what rating would be assigned to the offered certificates by such
other rating agency. The ratings assigned by such other rating agency to the offered certificates may be
lower than the ratings assigned by the Rating Agencies.
The fees paid by the Depositor to the Rating Agencies at closing include a fee for ongoing
surveillance by the Rating Agencies for so long as any Offered Certificates are outstanding. However, the
Rating Agencies are under no obligation to the Depositor to continue to monitor or provide a rating on the
Offered Certificates.
LEGAL INVESTMENT
It is anticipated that the classes of offered certificates that are rated in one of the two highest
rating categories by a nationally recognized statistical rating organization will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984 (or SMMEA) 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. Classes of offered certificates not rated in one of the two highest rating categories will not
constitute "mortgage related securities" for purposes of SMMEA, or the Non-SMMEA Certificates. The
appropriate characterization of the Non-SMMEA Certificates under various legal investment restrictions, and
thus the ability of investors subject to these restrictions to purchase Non-SMMEA Certificates, may be
subject to significant interpretative uncertainties.
The Office of Thrift Supervision, or the OTS, has issued Thrift Bulletins 73a, entitled "Investing in
Complex Securities," or TB 73a, which is effective as of December 18, 2001 and applies to savings
associations regulated by the OTS, and 13a, entitled "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities," or TB 13a, which is effective as of December 1, 1998, and applies to
thrift institutions regulated by the OTS.
One of the primary purposes of TB 73a is to require savings associations, prior to taking any
investment position, to determine that the investment position meets applicable regulatory and policy
requirements (including those set forth TB 13a (see below)) and internal guidelines, is suitable for the
institution, and is safe and sound. The OTS recommends, with respect to purchases of specific securities,
additional analysis, including, among others, analysis of repayment terms, legal structure, expected
performance of the issuing entity and any underlying assets as well as analysis of the effects of payment
priority, with respect to a security which is divided into separate tranches with unequal payments, and
collateral investment parameters, with respect to a security that is prefunded or involves a revolving
period. TB 73a reiterates the OTS's due diligence requirements for investing in all securities and warns that
if a savings association makes an investment that does not meet the applicable regulatory requirements, the
savings association's investment practices will be subject to criticism, and the OTS may require divestiture
of such securities. The OTS also recommends, with respect to an investment in any "complex securities," that
savings associations should take into account quality and suitability, interest rate risk, and classification
factors. For the purposes of each of TB 73a and TB 13a, "complex security" includes among other things any
collateralized mortgage obligation or real estate mortgage investment conduit security, other than any "plain
vanilla" mortgage pass-through security (that is, securities that are part of a single class of securities in
the related pool that are non-callable and do not have any special features). Accordingly, all Classes of
the offered certificates would likely be viewed as "complex securities." With respect to quality and
suitability factors, TB 73a warns (i) that a savings association's sole reliance on outside ratings for
material purchases of complex securities is an unsafe and unsound practice, (ii) that a savings association
should only use ratings and analyses from nationally recognized rating agencies in conjunction with, and in
validation of, its own underwriting processes, and (iii) that it should not use ratings as a substitute for
its own thorough underwriting analyses. With respect the interest rate risk factor, TB 73a recommends that
savings associations should follow the guidance set forth in TB 13a.
One of the primary purposes of TB 13a is to require thrift institutions, prior to taking any
investment position, to (i) conduct a pre-purchase portfolio sensitivity analysis for any "significant
transaction" involving securities or financial derivatives, and (ii) conduct a pre-purchase price sensitivity
analysis of any "complex security" or financial derivative. The OTS recommends that while a thrift
institution should conduct its own in-house pre-acquisition analysis, it may rely on an analysis conducted by
an independent third-party as long as management understands the analysis and its key assumptions. Further,
TB 13a recommends that the use of "complex securities with high price sensitivity" be limited to transactions
and strategies that lower a thrift institution's portfolio interest rate risk. TB 13a warns that investment
in complex securities by thrift institutions that do not have adequate risk measurement, monitoring and
control systems may be viewed by OTS examiners as an unsafe and unsound practice.
All investors whose investment activities are subject to legal investment laws and regulations or to
review by certain regulatory authorities may be subject to restrictions on investment in the certificates.
Any such institution should consult its own legal advisors in determining whether and to what extent there
may be restrictions on its ability to invest in the certificates. See "Legal Investment Matters" 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, or 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 that are not subject
to Title I of ERISA but 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 (hereafter collectively referred to as Plan(s)), are encouraged to consult with their legal counsel to
determine whether an investment in the certificates will cause the assets of the Trust, or Trust Assets, to
be considered plan assets pursuant to the plan asset regulations set forth at 29 C.F.R. § 2510.3-101 (or the
Plan Asset Regulations), thereby subjecting the Plan to the prohibited transaction rules with respect to the
Trust Assets and the Trustee or the Servicer to the fiduciary investments standards of ERISA, or cause the
excise tax provisions of Section 4975 of the Code to apply to the Trust Assets, unless a statutory exemption
or an exemption granted by the DOL applies to the purchase, sale, transfer or holding of the certificates.
The DOL has issued Prohibited Transaction Exemption 90-30 (as amended by Prohibited Transaction
Exemption 97-34, 2000-58 and 2002-41) (or Underwriter's Exemption) to the Underwriter which may apply to the
offered certificates. However, the Underwriter's Exemption contains a number of conditions which must be met
for the exemption to apply, including the requirements that (i) the investing Plan must be an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under the
Securities Act and (ii) the offered certificates be rated at least "BBB-" (or its equivalent) by Fitch
Rating, S&P or Moody's, at the time of the Plan's purchase, provided that no mortgage loan has an LTV in
excess of 100% on the Closing Date. See "ERISA Considerations" in the prospectus. The DOL amended the
Underwriter's Exemption, as well as the essentially identical exemptions issued to certain other financial
institutions, in PTE 2002-41 (67 Fed. Reg. 54487, September 22, 2002) to allow the trustee to be affiliated
with the underwriter in spite of the restriction in PTE 2000-58 to the contrary.
The Underwriter's Exemption is expected to apply to the certificates if the conditions described above
are satisfied. Therefore, each beneficial owner of a Subordinate 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) that certificate was rated at least "BBB-" at the time of purchase, (ii) such beneficial
owner is not a benefit plan investor as defined in Section 3(42) of ERISA, or (iii) (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 Subordinate Certificate or any interest therein is acquired or held in violation of the
conditions described in the preceding paragraph, the next preceding permitted beneficial owner will be
treated as the beneficial owner of that Subordinate Certificate, retroactive to the date of transfer to the
purported beneficial owner. Any purported beneficial owner whose acquisition or holding of that certificate
or interest therein was effected in violation of the conditions described in the preceding paragraph shall
indemnify and hold harmless the sponsor, the trustee, the servicer, any subservicer, and the trust from and
against any and all liabilities, claims, costs or expenses incurred by those parties as a result of that
acquisition or holding.
The Class R Certificates do not satisfy the requirements of the Underwriter's Exemption and may not be
purchased by or on behalf of, or with plan assets of, any Plans.
The Underwriter's Exemption may not directly apply to the acquisition or holding of the Grantor Trust
Certificates, if issued, but if the conditions described above are satisfied, it is expected to apply to
interests in the underlying certificates indirectly acquired by Plan investors that acquire the Grantor Trust
Certificates. Accordingly, the acquisition of the Grantor Trust Certificates by a Plan could result in a
prohibited transaction unless another statutory or administrative exemption to ERISA's prohibited transaction
rules is applicable. Section 408(b)(17) of ERISA or one or more alternative exemptions ("Investor-Based
Exemptions") may be available with respect to the purchase and holding of the Grantor Trust Certificates,
including, but not limited to:
o Prohibited Transaction Class Exemption 96-23, regarding transactions negotiated by certain "in-house
asset managers";
o Prohibited Transaction Class Exemption 95-60, regarding investments by insurance company general
accounts;
o Prohibited Transaction Class Exemption 91-38, regarding investments by bank collective investment
funds;
o Prohibited Transaction Class Exemption 90-1, regarding investments by insurance company pooled
separate accounts; and
o Prohibited Transaction Class Exemption 84-14, regarding transactions negotiated by independent
"qualified professional asset managers."
Each beneficial owner of a Grantor Trust Certificate or any interest therein, if issued, shall be
deemed to have represented, by virtue of its acquisition or holding of that certificate or interest therein,
that any of Section 408(b)(17) of ERISA or at least one Investor-Based Exemption or other applicable
exemption applies to the purchase and holding of the Grantor Trust Certificates. A Plan fiduciary should
also consider its general fiduciary obligations under ERISA in determining whether to purchase any Grantor
Trust Certificate on behalf of a Plan in reliance upon the Investor-Based Exemptions.
Any Plan fiduciary that proposes to cause a Plan to purchase a certificate are encouraged to consult
with its counsel with respect to the potential applicability to such investment of the fiduciary
responsibility and prohibited transaction provisions of ERISA and the Code to the proposed investment. For
further information regarding the ERISA considerations of investing in the certificates, see "ERISAConsiderations" in the prospectus.
A governmental plan, as defined in Section 3(32) of ERISA, is not subject to Title I of ERISA or
Section 4975 of the Code. However, such governmental plan may be subject to Federal, state and local law,
which is, to a material extent, similar to the provisions of Section 406 of ERISA or Section 4975 of the
Code, or Similar Law. A fiduciary of a governmental plan should make its own determination as to the propriety
of such investment under applicable fiduciary or other investment standards, and the need for and the
availability of any exemptive relief under any Similar Law.
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.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the Exchange Act and in accordance
therewith files reports and other information with the Commission. Reports and other information filed by the
Depositor can be inspected and copied at the Public Reference Room maintained by the Commission at 100 F
Street NE, Washington, DC 20549, and its Regional Offices located as follows: Chicago Regional Office, 500
West Madison, 14th Floor, Chicago, Illinois60661; New York Regional Office, 233 Broadway, New York, New York10279. Copies of the material can also be obtained from the Public Reference Section of the Commission, 100 F
Street NE, Washington, DC 20549, at prescribed rates and electronically through the Commission's Electronic
Data Gathering, Analysis and Retrieval system at the Commission's Website (http://www.sec.gov). Information
about the operation of the Public Reference Room may be obtained by calling the Securities and Exchange
Commission at (800) SEC-0330. Exchange Act reports as to any series filed with the Commission will be filed
under the Issuing Entity's name. The Depositor does not intend to send any financial reports to certificate
holders.
The Issuing Entity's annual reports on Form 10-K (including reports of assessment of compliance with
the AB Servicing Criteria, attestation reports, and statements of compliance, discussed in "Description of
the Certificates-Reports to Certificateholders" and "Servicing of the Mortgage Loans-Evidence as to
Compliance", required to be filed under Regulation AB), periodic distribution reports on Form 10-D, current
reports on Form 8-K and amendments to those reports, together with such other reports to certificate holders
or information about the certificate as shall have been filed with the Commission by the Trustee will be
posted on the Trustee's internet web site as soon as reasonably practicable after it has been electronically
filed with, or furnished to, the Commission. The address of the website is: www.ctslink.com.
REPORTS TO CERTIFICATEHOLDERS
So long as the Issuing Entity is required to file reports under the Exchange Act, those reports will
be made available as described above under "Available Information".
If the Issuing Entity is no longer required to file reports under the Exchange Act, periodic
distribution reports will be posted on the Trustee's website referenced above under "Available Information"
as soon as practicable. Annual reports of assessment of compliance with the AB Servicing Criteria,
attestation reports, and statements of compliance will be provided to registered holders of the related
securities upon request free of charge. See "Servicing of the Mortgage Loans - Evidence as to Compliance"
and "Description of the Certificates - Reports to Certificateholders."
INCORPORATION OF INFORMATION BY REFERENCE
There are incorporated into this term sheet supplement by reference all documents, including but not
limited to the financial statements and reports filed or caused to be filed or incorporated by reference by
the depositor with respect to a trust fund pursuant to the requirements of Sections 13(a) or 15(d) of the
Exchange Act, prior to the termination of the offering of the offered certificates of the related series;
provided, however, this prospectus does not incorporate by reference any of the issuing entity's annual
reports filed on Form 10-K with respect to a trust fund.
The Depositor will provide or cause to be provided without charge to each person to whom this term
sheet supplement is delivered in connection with the offering of one or more classes of offered certificates,
upon written or oral request of the person, a copy of any or all the reports incorporated in this term sheet
supplement, in each case to the extent the reports relate to one or more of such classes of the offered
certificates, other than the exhibits to the documents, unless the exhibits are specifically incorporated by
reference in the documents. Requests should be directed in writing to Structured Asset Mortgage Investments
Inc., 383 Madison Avenue, New York, New York10179, Attention: Secretary, or by telephone at (212) 272-2000.
The Depositor has determined that its financial statements will not be material to the offering of any
offered certificates.
GLOSSARY
Below are abbreviated definitions of significant capitalized terms used herein. Capitalized terms
used herein but not defined herein shall have the meanings assigned to them in the accompanying prospectus.
Agreement - The Pooling and Servicing Agreement, which will be entered into by the Depositor, the Sponsor and
Servicer and the Trustee.
Applied Realized Loss Amount - With respect to any class of offered certificates and as to any distribution
date, the sum of the Realized Losses with respect to the related mortgage loans, which have been applied in
reduction of the Current Principal Amount of such Class, in an amount equal to the amount, if any, by which,
(i) the aggregate Current Principal Amount of all of the certificates (after all distributions of principal
on such distribution date) exceeds (ii) the aggregate Stated Principal Balance of the mortgage loans for such
distribution date.
Basis Risk Shortfall Carry Forward Amount - As of any distribution date for the offered certificates, the sum
of the Basis Risk Shortfall for such distribution date and the Basis Risk Shortfall for all previous
distribution dates not previously paid, together with interest thereon at a rate equal to the applicable
pass-through rate for such distribution date.
Basis Risk Shortfall - If on the distribution date the pass-through rate for a class of Class A, Class M and
Class B Certificates is based upon the Net Rate Cap, the excess, if any of:
1. The amount of Current Interest that such class would have been entitled to receive on such
distribution date had the applicable pass-though rate been calculated at a per annum rate equal to
the lesser of (i) One-Month LIBOR plus the related Margin and (ii) a rate set forth in the Term
Sheet, over
2. The amount of Current Interest on such class calculated using a pass-though rate equal to the
Net Rate Cap for such distribution date.
Book-Entry Certificates - All certificates other than the physical certificates.
Business Day - Generally any day other than a Saturday, a Sunday or a day on which the New York Stock
Exchange or Federal Reserve is closed or on which banking institutions in New York City or in any
jurisdiction in which the Trustee, Custodian, any certificate insurer or the Servicer is located are
obligated by law or executive order to be closed.
Cede - Cede & Co.
certificate insurer - The certificate insurer under the Policy, as identified in the Term Sheet.
Certificate Owner - Any person who is the beneficial owner of a Book-entry Certificate.
Class A Certificates - Any one of the certificates with a "Class A" designation in the Term Sheet.
Class A Principal Distribution Amount - The Class I-A Principal Distribution Amount or the Class II-A
Principal Distribution Amount, as applicable.
Class B Principal Distribution Amount - The Class I-B Principal Distribution Amount or the Class II-B
Principal Distribution Amount, as applicable.
Class M Principal Distribution Amount - The Class I-M Principal Distribution Amount or the Class II-M
Principal Distribution Amount, as applicable.
Class I-A Principal Distribution Amount - The definition set forth in the Term Sheet.
Class I-B Principal Distribution Amount - For each class of Class B Certificates in loan group I, as
applicable, the related definition set forth in the Term Sheet.
Class I-M Principal Distribution Amount - For each class of Class M Certificates in loan group I, as
applicable, the related definition set forth in the Term Sheet.
Class II-A Principal Distribution Amount - The definition set forth in the Term Sheet.
Class II-B Principal Distribution Amount - For each class of Class B Certificates in loan group II, as
applicable, the related definition set forth in the Term Sheet.
Class II-M Principal Distribution Amount - For each class of Class M Certificates in loan group II, as
applicable, the related definition set forth in the Term Sheet.
Class XP Certificates- Any one of the certificates with a "Class XP" designation in the Term Sheet.
Closing Date - As set forth in the Term Sheet.
Current Interest - With respect to each class of Class A, Class M and Class B Certificates and each
distribution date, the interest accrued at the applicable pass-through rate for the applicable Interest
Accrual Period on the Current Principal Amount of such class plus any amount previously distributed with
respect to interest for such class that is recovered as a voidable preference by a trustee in bankruptcy
reduced by (x) any Net Deferred Interest allocated to such class in the manner described in the Term Sheet
and (y) any Prepayment Interest Shortfall to the extent not covered by Compensating Interest Payments and any
shortfalls resulting from the application of the Relief Act, in each case to the extent allocated to such
class of certificates as described under clause First in "Description of the Certificates-Distributions on
the Certificates" herein.
Current Principal Amount - With respect to any class of offered certificates and any distribution date, the
original current principal amount of such class plus the amount of any Net Deferred Interest allocated
thereto on the related distribution date and all previous distribution dates and, in the case of a
Subordinate Certificate, any Subsequent Recoveries added to the Current Principal Amount of such certificate,
as described under "Description of the Certificates-Allocation of Realized Losses" herein, less the sum of
(i) all amounts in respect of principal distributed to such class on previous distribution dates and (ii) any
Applied Realized Loss Amounts allocated to such class on previous distribution dates.
Current Specified Overcollateralization Percentage - For any distribution date, a percentage equivalent of a
fraction, the numerator of which is the related Overcollateralization Target Amount and the denominator of
which is the aggregate Stated Principal Balance of the related mortgage loans for such distribution date.
Custodial Agreement - The Custodial Agreement to be entered into among the Depositor, the Sponsor, the
Trustee and the Custodian.
Cut-off Date - As set forth in the Term Sheet.
Deferred Interest - The amount of interest which is deferred and added to the principal balance of a
mortgage loan due to the negative amortization feature as described in this term sheet supplement.
DOL - United States Department of Labor.
Due Date - With respect to each mortgage loan, the date in each month on which its Monthly Payment is due if
such due date is the first day of a month and otherwise is deemed to be the first day of the following month
or such other date specified in the Servicing Agreement.
Due Period - As set forth in the Term Sheet.
Excess Cashflow - With respect to any distribution date and each loan group, the sum of (i) Remaining Excess
Spread for such loan group and such distribution date and (ii) the related Overcollateralization Release
Amount for such distribution date.
Excess Spread - With respect to any distribution date and each loan group, the excess, if any, of the related
Interest Funds for such distribution date over the sum of the Current Interest on the related offered
certificates and Interest Carry Forward Amounts on the related senior certificates on such distribution date.
EMC - EMC Mortgage Corporation.
Extra Principal Distribution Amount - With respect to any distribution date and each loan group, an amount
derived from the related Excess Spread equal to the lesser of (a) the excess, if any, of the related
Overcollateralization Target Amount for such distribution date over the related Overcollateralization Amount
for such distribution date and (b) the related Excess Spread for such distribution date.
Insurance Proceeds - All proceeds of any 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 servicer's normal
servicing procedures, other than proceeds that represent reimbursement of the servicer's costs and expenses
incurred in connection with presenting claims under the related insurance policies.
insured certificates - The classes of Certificates, if any, entitled to the benefits of the Policy.
Interest Accrual Period - As set forth in the Term Sheet.
Interest Carry Forward Amount - With respect to each class of offered certificates and the first distribution
date, zero, and for each distribution date thereafter, the sum of:
1. the excess of
(a) Current Interest for such class with respect to prior distribution dates; over
(b) the amount actually distributed to such class with respect to interest on or after such
prior distribution dates, and
2. interest on such excess (to the extent permitted by applicable law) at the applicable pass-
through rate for the related Interest Accrual Period including the Interest Accrual Period
relating to such distribution date.
Interest Funds - With respect to any distribution date, the sum, without duplication, of:
1. all scheduled interest collected in respect of the related mortgage loans during the related
Due Period, less the Servicing Fee, if any, and any related amounts required to be reimbursed
to EMC, the Servicer, the Trustee and the Custodian as provided in the Agreement;
2. all advances relating to interest on the related mortgage loans made by the Servicer;
3. all Compensating Interest Payments with respect to the related mortgage loans;
4. Insurance Proceeds, Liquidation Proceeds and Subsequent Recoveries received on the related
mortgage loans during the related Prepayment Period, to the extent such proceeds relate to
interest, less all non-recoverable advances relating to interest and certain expenses;
5. the interest portion of proceeds from the related mortgage loans that were repurchased during
the related Due Period; and
6. the interest portion of the purchase price of the assets of the Trust upon exercise by EMC or
its designee of its optional termination right;
minus
7. any amounts required to be reimbursed to EMC, the Depositor, the Servicer, the Trustee and the
Custodian, as provided in the Agreement; and
8. the portion of the premium payable to the certificate insurer, if applicable, as provided in
the Agreement.
Issuing Entity or Trust - Bear Stearns Mortgage Funding Trust 2006-AR5.
Liquidation Proceeds - All net proceeds, other than Insurance Proceeds, received in connection with the
partial or complete liquidation of the related mortgage loans, whether through trustee's sale, foreclosure
sale or otherwise, or in connection with any condemnation or partial release of a mortgaged property,
together with the net proceeds received with respect to any mortgaged properties acquired by the servicer by
foreclosure or deed in lieu of foreclosure in connection with defaulted mortgage loans, other than the amount
of such net proceeds representing any profit realized by the Servicer in connection with the disposition of
any such properties, and Subsequent Recoveries.
Margin - The applicable margin for the related class of certificates as set forth in the Term Sheet.
Moody's - Moody's Investors Service, Inc., and any successor in interest.
Monthly Advance - The aggregate of all payments of interest, net of the Servicing Fee, that were due during
the related Due Period on the mortgage loans and that were delinquent on the related Due Date (other than
shortfalls in interest due to the application of the Relief Act or similar state law).
Monthly Payments - For any mortgage loan and any month, the scheduled payment or payments of principal (if
any) and interest due during such month on such mortgage loan which either is payable by a mortgagor in such
month under the related mortgage note or in the case of any mortgaged property acquired through foreclosure
or deed in lieu of foreclosure, would otherwise have been payable under the related mortgage note.
Mortgage Loan Purchase Agreement - The Mortgage Loan Purchase Agreement to be entered into by the Depositor
and the Sponsor.
Net Deferred Interest - On any distribution date, the Deferred Interest on the related mortgage loans during
the related Due Period net of prepayments in full, partial prepayments, net liquidation proceeds, repurchase
proceeds and scheduled principal payments, in that order, available to be distributed on the related
Certificates on that distribution date.
Net Rate Cap - For each class of certificates in each loan group, as defined in the Term Sheet.
Net Rate - For any mortgage loan, the then applicable mortgage rate thereon less the Servicing Fee Rate
expressed as a per annum rate.
Overcollateralization Amount - With respect to each loan group, as defined in the Term Sheet.
Overcollateralization Release Amount - With respect to each loan group, as defined in the Term Sheet.
Overcollateralization Target Amount - With respect to each loan group, as defined in the Term Sheet.
Policy - A certificate insurance policy, to be dated as of the Closing Date, endorsed by the certificate
insurer to the Trustee on behalf of the holders of the related insured certificates.
Prepayment Period - With respect to a distribution date and (i) principal prepayments in full, the period
from the sixteenth day of the calendar month preceding the calendar month in which such distribution date
occurs through the close of business on the fifteenth day of the calendar month in which such distribution
date occurs, or (ii) Liquidation Proceeds, Realized Loss, Subsequent Recoveries and partial principal
prepayments, the calendar month preceding the month in which such distribution date occurs.
Principal Distribution Amount - As defined in the Term Sheet.
Principal Funds - With respect to each distribution date and each loan group, the greater of (i) zero and
(ii) the sum, without duplication, of:
1. the principal collected on the related mortgage loans during the related Due Period on or
before the servicer advance date;
2. prepayments in respect of the related mortgage loans, exclusive of any prepayment charges,
collected in the related Prepayment Period;
3. the Stated Principal Balance of each related mortgage loan that was repurchased by the
Depositor or the Servicer during the related Due Period;
4. the amount, if any, by which the aggregate unpaid principal balance of any replacement mortgage
loans is less than the aggregate unpaid principal balance of any deleted mortgage loans
delivered by the Servicer in connection with a substitution of a mortgage loan during the
related Due Period;
5. Insurance Proceeds, all Liquidation Proceeds and Subsequent Recoveries collected on the related
mortgage loans during the related Prepayment Period on the mortgage loans, to the extent such
Liquidation Proceeds relate to principal, less all related non-recoverable advances relating to
principal reimbursed during the related Due Period;
6. the principal portion of the purchase price of the assets of the Trust upon the exercise by EMC
or its designee of its optional termination right; minus
7. any amounts required to be reimbursed to EMC, the Depositor, the Servicer, the Trustee and the
Custodian, as provided in the Agreement; and
8 if applicable, any premium payable to the certificate insurer, to the extent not available from
Interest Funds and as provided in the Agreement.
Rating Agencies - As specified in the Term Sheet.
Record Date - As set forth in the Term Sheet.
Realized Loss - The excess of the Stated Principal Balance of a defaulted mortgage loan over the net
Liquidation Proceeds with respect thereto that are allocated to principal.
Regular Certificates - All classes of certificates other than the Residual Certificates.
Remaining Excess Spread - With respect to any distribution date and each loan group, the Excess Spread for
such loan group remaining after the distribution of any Extra Principal Distribution Amount for such loan
group and such distribution date.
Repurchase Price - With respect to any mortgage loan required to be repurchased, an amount equal to the sum
of (i) (a) 100% of the Outstanding Principal Balance of such mortgage loan plus accrued but unpaid interest
on the Outstanding Principal Balance at the related mortgage rate through and including the last day of the
month of repurchase reduced by (b) any portion of the Servicing Fee or advances payable to the purchaser of
the mortgage loan and (ii) any costs and damages incurred by the trust in connection with any violation of
such mortgage loan of any predatory lending laws.
Residual Certificates - The Class R certificates. There will be a separate Class R certificate with a
specific designation for each REMIC election that is made.
Rules - The rules, regulations and procedures creating and affecting DTC and its operations.
S&P - Standard & Poor's, a division of The McGraw-Hill Companies, Inc., and any successor thereto.
Scheduled Monthly Payments - As defined in the Term Sheet.
Servicer - EMC Mortgage Corporation.
Servicing Fee - With respect to each mortgage loan, a fee that accrues at the Servicing Fee Rate on the same
principal balance on which interest on the mortgage loan accrues for the calendar month.
Servicing Fee Rate - As set forth in the Term Sheet.
Sponsor - EMC Mortgage Corporation.
Stated Principal Balance - For any mortgage loan, with respect to any distribution date, the sum of the
principal balance thereof as of the Cut-off Date plus any amount by which the principal balance thereof has
been increased for Deferred Interest pursuant to the terms of the related mortgage note on or prior to such
distribution date, minus the sum of:
1. the principal portion of the scheduled Monthly Payments due from mortgagors (if any) with
respect to such mortgage loan due during each Due Period ending prior to such distribution date
(and irrespective of any delinquency in their payment);
2. all prepayments of principal with respect to such mortgage loan received prior to or during the
related Prepayment Period, and all liquidation proceeds to the extent applied by the Servicer
as recoveries of principal in accordance with the Agreement or the Servicing Agreement that
were received by the Servicer as of the close of business on the last day of the calendar month
related to such distribution date; and
3. any Realized Loss thereon incurred prior to or during the related Prepayment Period.
The Stated Principal Balance of any liquidated mortgage loan is zero.
Stepdown Date - As defined in the Term Sheet.
Subsequent Recoveries - As of any distribution date, amounts received during the prior calendar month by the
Servicer or surplus amounts held by the Servicer to cover estimated expenses (including, but not limited to,
recoveries in respect of the representations and warranties made by the Sponsor) specifically related to a
liquidated mortgage loan or disposition of an REO property prior to the related Prepayment Period that
resulted in a Realized Loss, after liquidation or disposition of such mortgage loan.
Term Sheet - The New Issue Computational Materials for Bear Stearns Mortgage Funding Trust 2006-AR5, Mortgage
Pass-Through Certificates, Series 2006-AR5, Group I and Group II delivered by Bear, Stearns & Co. Inc.
Trigger Event - As defined in the Term Sheet.
Trust - The Trust identified in the Term Sheet.
Trustee - Wells Fargo Bank, National Association.
Unpaid Realized Loss Amount - With respect to any class of Class A, Class M and Class B Certificates in each
loan group and as to any distribution date, the excess of
1. Applied Realized Loss Amounts for such loan group with respect to such class; over
2. the sum of all distributions in reduction of the Applied Realized Loss Amounts on for such loan
group all previous distribution dates.
Any amounts distributed to a class of offered certificates in respect of any Unpaid Realized Loss
Amount will not be applied to reduce the Current Principal Amount of such class.
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the certificates, which are referred to as the global
securities, will be available only in book-entry form. Investors in the global securities may hold interests
in these global securities through any of DTC, Clearstream or Euroclear. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding interests in global securities through Clearstream
and Euroclear will be conducted in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice. Secondary market trading between investors holding interests
in global securities through DTC will be conducted according to the rules and procedures applicable to U.S.
corporate debt obligations.
Secondary cross-market trading between investors holding interests in global securities through
Clearstream or Euroclear and investors holding interests in global securities through DTC participants will
be effected on a delivery-against-payment basis through the respective depositories of Clearstream and
Euroclear, in such capacity and other DTC participants.
Although DTC, Euroclear and Clearstream are expected to follow the procedures described below in order
to facilitate transfers of interests in the global securities among participants of DTC, Euroclear and
Clearstream, they are under no obligation to perform or continue to perform those procedures and those
procedures may be discontinued at any time. None of the Depositor, the Servicer nor the Trustee will have
any responsibility for the performance by DTC, Euroclear and Clearstream or their respective participants or
indirect participants of their respective obligations under the rules and procedures governing their
obligations.
Non-U.S. holders of global securities will be subject to U.S. withholding taxes unless those holders
meet certain requirements and deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
The global securities will be registered in the name of Cede & Co. as nominee of DTC. Investors'
interests in the global securities will be represented through financial institutions acting on their behalf
as direct and indirect participants in DTC. Clearstream and Euroclear will hold positions on behalf of their
participants through their respective depositories, which in turn will hold such positions in accounts as DTC
participants.
Investors electing to hold interests in global securities through DTC participants, rather than
through Clearstream or Euroclear accounts, will be subject to the settlement practices applicable to similar
issues of mortgage-backed certificate. Investors' securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold interests in global securities through Clearstream or Euroclear accounts
will follow the settlement procedures applicable to conventional eurobonds, except that there will be no
temporary global security and no "lock-up" or restricted period. Interests in global securities will be
credited to the securities custody accounts on the settlement date against payment in same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to establish at the time of the
trade where both the purchaser's and seller's accounts are located to ensure that settlement can be made on
the desired value date.
Transfers between DTC Participants. Secondary market trading between DTC participants will be settled
using the DTC procedures applicable to similar issues of certificate in same-day funds.
Transfers between Clearstream and/or Euroclear Participants. Secondary market trading between
Clearstream participants or Euroclear participants and/or investors holding interests in global securities
through them will be settled using the procedures applicable to conventional eurobonds in same-day funds.
Transfers between DTC Seller and Clearstream or Euroclear Purchaser. When interests in global
securities are to be transferred on behalf of a seller from the account of a DTC participant to the account
of a Clearstream participant or a Euroclear participant for a purchaser, the purchaser will send instructions
to Clearstream or Euroclear through a Clearstream participant or Euroclear participant at least one business
day prior to settlement. Clearstream or the Euroclear operator will instruct its respective depository to
receive an interest in the global securities against payment. Payment will include interest accrued on the
global securities from and including the last payment date to but excluding the settlement date. Payment
will then be made by the respective depository to the DTC participant's account against delivery of an
interest in the global securities. After this settlement has been completed, the interest will be credited
to the respective clearing system and by the clearing system, in accordance with its usual procedures, to the
Clearstream participant's or Euroclear participant's account. The credit of this interest will appear on the
next business day and the cash debit will be back-valued to and the interest on the global securities will
accrue from, the value date, which would be the preceding day when settlement occurred in New York. If
settlement is not completed through DTC on the intended value date, i.e., the trade fails, the Clearstream or
Euroclear cash debit will be valued instead as of the actual settlement date.
Clearstream participants and Euroclear participants will need to make available to the respective
clearing system the funds necessary to process same-day funds settlement. The most direct means of doing so
is to pre-position funds for settlement from cash on hand, in which case the Clearstream participants or
Euroclear participants will take on credit exposure to Clearstream or the Euroclear operator until interests
in the global securities are credited to their accounts one day later.
As an alternative, if Clearstream or the Euroclear operator has extended a line of credit to them,
Clearstream participants or Euroclear participants can elect not to pre-position funds and allow that credit
line to be drawn upon. Under this procedure, Clearstream participants or Euroclear participants receiving
interests in global securities for purchasers would incur overdraft charges for one day, to the extent they
cleared the overdraft when interests in the global securities were credited to their accounts. However,
interest on the global securities would accrue from the value date. Therefore, the investment income on the
interest in the global securities earned during that one-day period would tend to offset the amount of these
overdraft charges, although this result will depend on each Clearstream participant's or Euroclear
participant's particular cost of funds.
Since the settlement through DTC will take place during New York business hours, DTC participants are
subject to DTC procedures for transferring interests in global securities to the respective depository of
Clearstream or Euroclear for the benefit of Clearstream participants or Euroclear participants. The sale
proceeds will be available to the DTC seller on the settlement date. Thus, to the seller settling the sale
through a DTC participant, a cross-market transaction will settle no differently than a sale to a purchaser
settling through a DTC participant.
Finally, intra-day traders that use Clearstream participants or Euroclear participants to purchase
interests in global securities from DTC participants or sellers settling through them for delivery to
Clearstream participants or Euroclear participants should note that these trades will automatically fail on
the sale side unless affirmative action is taken. At least three techniques should be available to eliminate
this potential condition:
o borrowing interests in global securities through Clearstream or Euroclear for one day, until the
purchase side of the intra-day trade is reflected in the relevant Clearstream or Euroclear accounts, in
accordance with the clearing system's customary procedures;
o borrowing interests in global securities in the United States from a DTC participant no later than one
day prior to settlement, which would give sufficient time for such interests to be reflected in the
relevant Clearstream or Euroclear accounts in order to settle the sale side of the trade; or
o staggering the value dates for the buy and sell sides of the trade so that the value date for the
purchase from the DTC participant is at least one day prior to the value date for the sale to the
Clearstream participant or Euroclear participant.
Transfers between Clearstream or Euroclear Seller and DTC Purchaser. Due to time zone differences in
their favor, Clearstream participants and Euroclear participants may employ their customary procedures for
transactions in which interests in global securities are to be transferred by the respective clearing system,
through the respective depository, to a DTC participant. The seller will send instructions to Clearstream or
the Euroclear operator through a Clearstream participant or Euroclear participant at least one business day
prior to settlement. Clearstream or Euroclear will instruct its respective depository, to credit an interest
in the global securities to the DTC participant's account against payment. Payment will include interest
accrued on the global securities from and including the last payment date to but excluding the settlement
date. The payment will then be reflected in the account of the Clearstream participant or Euroclear
participant the following business day and receipt of the cash proceeds in the Clearstream participant's or
Euroclear participant's account would be back-valued to the value date, which would be the preceding day,
when settlement occurred through DTC in New York. If settlement is not completed on the intended value date,
i.e., the trade fails, receipt of the cash proceeds in the Clearstream participant's or Euroclear
participant's account would instead be valued as of the actual settlement date.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner who is an individual or corporation holding the global security on its own behalf
of global securities holding securities through Clearstream or Euroclear or through DTC if the holder has an
address outside the U.S., will be subject to the 30% U.S. withholding tax that typically applies to payments
of interest, including original issue discount, on registered debt issued by U.S. persons, unless:
o each clearing system, bank or other institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between the beneficial owner or a foreign
corporation or foreign trust and the U.S. entity required to withhold tax complies with applicable
certification requirements; and
o the beneficial owner takes one of the following steps to obtain an exemption or reduced tax rate:
o Exemption for Non-U.S. Persons-Form W-8BEN. Beneficial holders of global securities that are Non-U.S.
persons generally can obtain a complete exemption from the withholding tax by filing a signed Form W-8BEN
or Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Non-U.S. persons
residing in a country that has a tax treaty with the United States can obtain an exemption or reduced tax
rate, depending on the treaty terms, by filing Form W-8BEN. If the information shown on Form W-8BEN
changes, a new Form W-8BEN must be filed within 30 days of the change.
o Exemption for Non-U.S. persons with effectively connected income-Form W-8ECI. A Non-U.S. person,
including a non-U.S. corporation or bank with a U.S. branch, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI or Certificate of Foreign Person's Claim for Exemption from
Withholding on Income Effectively Connected with the Conduct of a Trade or Business in the United States.
o Exemption for U.S. Persons-Form W-9. U.S. persons can obtain a complete exemption from the withholding
tax by filing Form W-9 or Payer's Request for Taxpayer Identification Number and Certification.
U.S. Federal Income Tax Reporting Procedure. The holder of a global security or, in the case of a
Form W-8BEN or Form W-8ECI filer, his agent, files by submitting the appropriate form to the person through
whom it holds the security-the clearing agency, in the case of persons holding directly on the books of the
clearing agency. Form W-8BEN and Form W-8ECI generally are effective until the third succeeding calendar
year from the date the form is signed. However, the W-8BEN and W-8ECI with a taxpayer identification number
will remain effective until a change in circumstances makes any information on the form incorrect, provided
that the withholding agent reports at least annually to the beneficial owner on Form 1042-S. The term "U.S.
person" means:
o a citizen or resident of the United States;
o a corporation, partnership or other entity treated as a corporation or a partnership for United States
federal income tax purposes organized in or under the laws of the United States or any state thereof,
including for this purpose the District of Columbia, unless, in the case of a partnership, future Treasury
regulations provide otherwise;
o an estate that is subject to U.S. federal income tax regardless of the source of its income; or
o a trust if a court within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States persons have the authority to control all
substantial decisions of the trust.
If the information shown on Form W-8BEN or Form W-8ECI changes, a new Form W-8BEN or Form W-8ECI, as
applicable, must be filed within 30 days of the change. Certain trusts not described in the final bullet of
the preceding sentence in existence on August 20, 1996 that elect to be treated as a United States Person
will also be a U.S. person. The term "Non-U.S. person" means any person who is not a U.S. person. This
summary does not deal with all aspects of U.S. federal income tax withholding that may be relevant to foreign
holders of the global securities. Investors are advised to consult their own tax advisors for specific tax
advice concerning their holding and disposing of the global securities.
Dates Referenced Herein and Documents Incorporated by Reference
