December 7, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Residential Asset Mortgage Products, Inc.
Amendment No. 1 to Registration Statement on Form S-3
relating to Mortgage Asset-Backed Pass-Through
Certificates and Asset-Backed Notes (Registration Statement No.
333-91561)
Ladies and Gentlemen:
On behalf of the Depositor, Residential Asset Mortgage Products, Inc., we
have caused to be filed with you electronically under EDGAR, the captioned
Amendment No. 1 ("Amendment No. 1") to the Registration Statement on Form S-3 as
filed with the Securities and Exchange Commission on November 24, 1999
(Registration Statement No. 333-91561).
We have been advised that payment of the filing fee in the amount of
$791,736 has been made to you by the Depositor on December 7, 1999, and that
$278 was paid to you by the Depositor on November 23, 1999.
The Depositor is filing Amendment No. 1 to increase the proposed maximum
amount of securities to be registered from $1,000,000 to $3,000,000,000.
Amendment No. 1 has been marked to show all changes made to the Registration
Statement since it was filed.
If you have any questions concerning Amendment No. 1, please do not
hesitate to call the undersigned at (212) 506-5043 or Katharine Crost at (212)
506-5070.
Very truly yours,
/s/ Julie Buck
Julie Buck
cc: Mark Green, Esq.
Division of Corporation Finance
Branch 11 (Mail Stop 3-10)
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON ^ DECEMBER 7, 1999
REGISTRATION NO. 333-^ 91561
=============================================================================
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 1 TO
^ FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)DELAWARE(State or other
jurisdiction of incorporation or organization)
41-1955181
(I.R.S. employer identification number)
RESIDENTIAL ASSET MORTGAGE PRODUCTS,INC.
8400 NORMANDALE LAKE BOULEVARD
MINNEAPOLIS, MINNESOTA 55437
(612) 832-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principle executive offices)
BRUCE J. PARADIS
RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
8400 NORMANDALE LAKE BOULEVARD
MINNEAPOLIS, MINNESOTA 55437
(612) 832-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:ROBERT L. SCHWARTZ, ESQ.
GMAC MORTGAGE GROUP, INC.
3031 WEST GRAND BOULEVARD
DETROIT, MICHIGAN 48232
<TABLE>
<S> <C> <C>
KATHARINE I. CROST, ESQ. ROBERT C. WIPPERMAN STEVEN S. KUDENHOLDT,ESQ.
ORRICK HERRINGTON & SUTCLIFFE LLP666 ^ STROOCK & STROOCK & LAVAN LLP PAUL D. TVETENSTRAND, ESQ.
666 FIFTH AVENUE 180 MAIDEN LANE THACHER PROFFITT & WOOD
NEW YORK, NEW YORK 10103 NEW YORK, NEW YORK 10038 TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
</TABLE>
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective as determined
by market conditions.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. ____
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. __X__
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. ____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. _____
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _____
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ------------------------------- -------------------- ---------------------- ---------------------- =================
TITLE OF SECURITIES TO BE AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
REGISTERED REGISTERED AGGREGATE PRICE PER AGGREGATE OFFERING REGISTRATION FEE
UNIT PRICE
- ------------------------------- -------------------- ---------------------- ---------------------- =================
- ------------------------------- -------------------- ---------------------- ---------------------- =================
Mortgage Asset-Backed
<S> <C> <C> <C> <C>
PASS-THROUGH CERTIFICATES ^ $3,000,000,000 100% ^ $3,000,000,000(1) $792,014(2)
============== ================= ===========
and Asset-Backed Notes
(Issuable in Series)
- ------------------------------- -------------------- ---------------------- ---------------------- =================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $278 OF THIS AMOUNT WAS PREVIOUSLY PAID AND WAS CALCULATED USING THE $278
PER $1,000,000 METHOD. THE ADDITIONAL REGISTRATION FEE OF $791,736 IS A
RESULT OF AN INCREASE IN THE AMOUNT TO BE REGISTERED BY $2,999,000,000. THE
ADDITIONAL FEE WAS CALCULATED USING THE $264 PER $1,000,000 METHOD.
-------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) the basic prospectus relating
to Mortgage Asset-Backed Pass-Through Certificates and Asset-Backed Notes, (ii)
an illustrative form of prospectus supplement for use in an offering of Mortgage
Asset-Backed Pass-Through Certificates representing beneficial ownership
interests in a trust fund consisting primarily of mortgage loans and (iii) an
illustrative form of prospectus supplement for use in an offering of
Asset-Backed Notes representing beneficial ownership interests in a trust fund
consisting primarily of closed-end home equity loans and second lien fixed rate
home loans.
<PAGE>
PROSPECTUS
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES AND
ASSET -BACKED NOTES
RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
Depositor
The depositor may periodically form separate trusts to issue securities in
series, secured by assets of that trust.
OFFERED SECURITIES
The securities in a series will consist of certificates or NOTES
REPRESENTING INTERESTS IN A TRUST AND WILL BE PAID ONLY from the assets of that
trust. Each series may include multiple classes of securities with differing
payment terms and priorities. Credit enhancement will be provided for all
offered securities.
TRUST ASSETS Each trust will consist primarily of:
o mortgage loans secured by first or junior liens on one- to four-family
residential properties;
o home equity revolving lines of credit secured by first or junior liens on
one- to four-family residential properties, including partial balances of
those lines of credit;
o home improvement installment sales contracts and installment loan
agreements, either unsecured or secured;
o manufactured housing installment sales contracts and installment loan
agreements; or
o mortgage or asset-backed securities backed by, and whole or partial
participations in, the types of assets listed above.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
, 1999
<PAGE>
TABLE OF CONTENTS PAGE
INTRODUCTION..............................1
THE TRUSTS................................1
General...............................1
Characteristics of Loans..............4
Revolving Credit Loans...............12
The Contracts........................15
Mexico Loans.........................16
The Mortgaged Properties.............17
The Agency Securities................18
Private Securities...................20
TRUST ASSET PROGRAM......................20
Underwriting Standards...............20
The Portfolio Transaction Program....26
DESCRIPTION OF THE SECURITIES............28
General..............................28
Form of Securities...................29
Assignment of Loans..................31
Representations with Respect to Loans33
Repurchases of Loans.................35
Limited Right of Substitution........37
Certain Insolvency and Bankruptcy
Issues ............................38
Assignment of Agency or Private
Securities ....................38
Excess Spread and Excluded Spread....39
Payments on Loans....................39
Withdrawals from the Custodial Account42
Distributions of Principal and
Interest on the Securities .........43
Advances............................ 45
Prepayment Interest Shortfalls.......46
Funding Account......................46
Reports to Securityholders...........47
Servicing and Administration of Loans48
DESCRIPTION OF CREDIT ENHANCEMENT........54
General..............................54
Letters of Credit....................55
Subordination........................56
Overcollateralization................57
Mortgage Pool Insurance Policies.....58
Special Hazard Insurance Policies....60
Bankruptcy Bonds.....................60
Reserve Funds........................61
Financial Guaranty Insurance
Policies; Surety Bonds .............62
Maintenance of Credit Enhancement....62
Reduction or Substitution of Credit
Enhancement ........................63
OTHER FINANCIAL OBLIGATIONS RELATED TO
THE SECURITIES ................63
Swaps and Yield Supplement Agreements63
Purchase Obligations.................64
INSURANCE POLICIES ON LOANS..............64
Primary Insurance Policies...........65
Standard Hazard Insurance on Mortgaged
Properties .........................67
Standard Hazard Insurance on
Manufactured Homes ............68
Description of FHA Insurance Under
Title I ..................69
FHA Mortgage Insurance...............71
VA Mortgage Guaranty.................71
THE DEPOSITOR............................72
RESIDENTIAL FUNDING CORPORATION..........72
THE AGREEMENTS...........................73
Events of Default; Rights Upon Event
of Default .........................74
Amendment............................77
Termination; Retirement of Securities79
The Trustee..........................80
The Owner Trustee....................80
The Indenture Trustee................80
YIELD CONSIDERATIONS.....................81
MATURITY AND PREPAYMENT CONSIDERATIONS...86
CERTAIN LEGAL ASPECTS OF THE LOANS.......90
The Mortgage Loans...................91
The Manufactured Housing Contracts..102
The Home Improvement Contracts......104
Enforceability of Certain Provisions106
Consumer Protection Laws............107
Applicability of Usury Laws.........107
Environmental Legislation...........107
Soldiers' and Sailors' Civil Relief
Act of 1940 .......................109
Default Interest and Limitations on
Prepayments ..................109
Forfeitures in Drug and RICO
Proceedings ..................109
Negative Amortization Loans.........110
MATERIAL FEDERAL INCOME TAX CONSEQUENCES110
General.............................110
Classification of REMICs and FASITs.111
Taxation of Owners of REMIC and FASIT
Regular Certificates ..............112
Pass-through Entities Holding FASIT
Regular Certificates ..............118
Taxation of Owners of REMIC Residual
Certificates ......................118
Backup Withholding with Respect to
Securities ........................128
Foreign Investors in Regular
Certificates ......................129
STATE AND OTHER TAX CONSEQUENCES........129
ERISA CONSIDERATIONS....................130
ERISA Plan Asset Regulations....130
Prohibited Transaction Exemptions...132
Insurance Company General Accounts..135
Representations From Investing Plans136
Tax-Exempt Investors................137
Consultation with Counsel...........137
LEGAL INVESTMENT MATTERS................138
USE OF PROCEEDS.........................139
METHODS OF DISTRIBUTION.................139
LEGAL MATTERS...........................140
FINANCIAL INFORMATION...................141
ADDITIONAL INFORMATION..................141
REPORTS TO SECURITYHOLDERS..............141
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE .........................142
GLOSSARY....... ..........................1
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate documents
that provide progressively more detail:
o this prospectus, which provides general information, some of which may not
apply to your series of securities; and
o the accompanying prospectus supplement, which describes the specific terms
of your series of securities.
IF THE DESCRIPTION OF YOUR SECURITIES IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT
DIFFERS FROM THE RELATED DESCRIPTION IN THIS PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THAT PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See "Additional Information", "Reports to Securityholders" and
"Incorporation of Certain Information by Reference" in this prospectus. You can
request information incorporated by reference from Residential Asset Mortgage
Products, Inc. by calling us at (612) 832-7000 or writing to us at 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. We have not
authorized anyone to provide you with different information. We are not offering
the securities in any state where the offer is not permitted.
Some capitalized terms used in this prospectus are defined in the Glossary
beginning on page _________.
<PAGE>
TABLE OF CONTENTS
Page
<PAGE>
INTRODUCTION
The securities offered may be sold from time to time in series. Each
series of certificates will represent in the aggregate the entire beneficial
ownership interest in, and each series of notes in the aggregate will represent
indebtedness of, a trust consisting primarily of the trust assets described in
the following section. The trust assets will have been acquired by the depositor
from one or more affiliated or unaffiliated institutions. Each series of
certificates will be issued under a pooling and servicing agreement among the
depositor, the trustee and master servicer or servicer, or a trust agreement
between the depositor and trustee, all as specified in the accompanying
prospectus supplement. Each series of notes will be issued under an indenture
between the related trust and the indenture trustee specified in the
accompanying prospectus supplement. Unless the context indicates otherwise,
references in this prospectus to the trustee refer to the indenture trustee in
the case of a series of notes. The trust assets for each series of notes will be
held in a trust under a trust agreement and pledged under the indenture to
secure a series of notes as described in this prospectus and in the accompanying
prospectus supplement. The ownership of the trust fund for each series of notes
will be evidenced by certificates issued under the trust agreement, which
certificates are not offered by this prospectus.
THE TRUSTS
GENERAL
As specified in the accompanying prospectus supplement, the trust for a
series of securities will consist primarily of a segregated pool of assets. The
trust assets will primarily include any combination of the following:
o one- to four-family first or junior lien mortgage loans,
including closed-end home equity loans, Home Loans and Cooperative
Loans;
o one- to four-family first or junior lien home equity revolving lines
of credit, which are referred to in this prospectus as revolving
credit loans, including partial balances of revolving credit loans;
o home improvement installment sales contracts and installment loan
agreements, which are referred to in this prospectus as home
improvement contracts, that are either unsecured or secured by first
or junior liens on one- to four-family residential properties or by
purchase money security interests in the home improvements financed
by those home improvement contracts;
o manufactured housing installment sales contracts and installment loan
agreements, which are referred to in this prospectus as manufactured
housing contracts, secured by security interests in manufactured
homes;
o partial balances of, or partial interests in, any of the assets described
above;
o Agency Securities and private securities, which as used in this
prospectus, are mortgage-backed or asset-backed securities issued by
entities other than Freddie Mac, Fannie Mae and Ginnie Mae that
represent interests in or are secured by any of the assets described
above, including pass-through certificates, participation
certificates or other instruments that evidence interests in or are
secured by these assets;
o all payments and collections derived from the trust assets described
above after the related cut-off date, other than Excluded Spread or
other interest retained by the
<PAGE>
depositor or any of its affiliates with respect to any trust asset, as
from time to time are identified as deposited in the Custodial Account
and in the related Payment Account;
o property acquired by foreclosure on the mortgaged properties or other
security for the trust assets or deed in lieu of foreclosure, and
portions of proceeds from the disposition of any related Additional
Collateral or Pledged Assets;
o hazard insurance policies and primary insurance policies, if any; and
o any one or a combination, if applicable and to the extent specified
in the accompanying prospectus supplement, of a letter of credit,
purchase obligation, mortgage pool insurance policy, contract pool
insurance policy, special hazard insurance policy, bankruptcy bond,
financial guaranty insurance policy, derivative products, surety bond
or other type of credit enhancement as described under "Description
of Credit Enhancement."
Unless the context indicates otherwise, as used in this prospectus,
mortgage loans includes:
o mortgage loans or closed-end home equity loans secured by first or junior
liens on one-to four- family residential properties;
o Home Loans; and
o Cooperative Loans.
Unless the context indicates otherwise, as used in this prospectus,
Contracts includes:
o manufactured housing contracts; and
o home improvement contracts.
The mortgage loans, revolving credit loans and, if applicable, the
contracts will be evidenced by mortgage notes secured by mortgages, deeds of
trust or other similar security instruments creating first or junior liens on
one- to four-family residential properties. Unless the context indicates
otherwise, mortgage notes includes Cooperative Notes; mortgages includes
security agreements for Cooperative Notes; and mortgaged properties may include
shares in the related Cooperative and the related proprietary leases or
occupancy agreements securing Cooperative Notes. In addition, if specified in
the accompanying prospectus supplement relating to a series of securities, a
mortgage pool may contain Additional Collateral Loans or Pledged Asset Mortgage
Loans that are secured, in addition to the related mortgaged property, by
Additional Collateral or Pledged Assets.
The mortgage loans, revolving credit loans and the contracts are
referred to in this prospectus collectively as the loans. In connection with a
series of securities backed by revolving credit loans, if the accompanying
prospectus supplement indicates that the pool consists of certain balances of
the revolving credit loans, then the term "revolving credit loans" in this
prospectus refers only to those balances.
If specified in the accompanying prospectus supplement, the trust
underlying a series of securities may include private securities. The private
securities in the trust may have been issued previously by the depositor or an
affiliate, an unaffiliated financial institution or other entity engaged in the
business of mortgage lending or a limited purpose corporation organized for the
purpose of, among other things, acquiring and depositing loans into trusts, and
selling beneficial
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<PAGE>
interests in those trusts. As to any series of securities, the accompanying
prospectus supplement will include a description of any private securities along
with any related credit enhancement, and the trust assets underlying those
private securities will be described together with any other trust assets
included in the pool relating to that series.
Each trust asset will be selected by the depositor for inclusion in a
pool from among those purchased by the depositor from any of the following
sources:
o directly or through its affiliates, including Residential Funding
Corporation;
o sellers who are affiliates of the depositor including HomeComings Financial
Network, Inc., Residential Money Centers, Inc., and GMAC Mortgage
Corporation; or
o savings banks, savings and loan associations, commercial banks, credit
unions, insurance companies or similar institutions that are supervised
and/or examined by a federal or state authority, lenders approved by the
United States Department of Housing and Urban Development, known as HUD,
mortgage bankers, investment banking firms, the Federal Deposit Insurance
Corporation, known as the FDIC, or other regulated and unregulated mortgage
loan originators or sellers, including brokers, not affiliated with the
depositor, all as described in the accompanying prospectus supplement.
The sellers may include state or local government housing finance
agencies. If so described in the accompanying prospectus supplement, the
depositor may issue one or more classes of securities to a seller as
consideration for the purchase of the trust assets securing such series of
securities. If a pool is composed of trust assets acquired by the depositor
directly from sellers other than Residential Funding Corporation, the
accompanying prospectus supplement will specify the extent of trust assets so
acquired.
The trust assets may also be delivered to the depositor in a Designated
Seller Transaction. Those securities may be sold in whole or in part to any
designated seller identified in the accompanying prospectus supplement in
exchange for the related trust assets, or may be offered under any of the other
methods described in this prospectus under "Methods of Distributions." The
accompanying prospectus supplement for a Designated Seller Transaction will
include information provided by the designated seller about the designated
seller, the trust assets and the underwriting standards applicable to the loans.
None of the depositor, Residential Funding Corporation, GMAC Mortgage
Corporation or any of their affiliates will make any representation or warranty
with respect to the trust assets sold in a Designated Seller Transaction, or any
representation as to the accuracy or completeness of the information provided by
the designated seller, unless that entity is the designated seller. GMAC
Mortgage Corporation, an affiliate of the depositor, may be a designated seller.
Any seller, including any designated seller, or Residential Funding
Corporation may retain or acquire any Excluded Balances for any related
revolving credit loans, or any loan secured by a mortgage senior or subordinate
to any loan included in any pool.
The depositor will cause the trust assets constituting each pool to be
assigned without recourse to the trustee named in the accompanying prospectus
supplement, for the benefit of the holders of all of the securities of a series.
The master servicer or servicer, which may be an affiliate of the depositor,
named in the accompanying prospectus supplement will service the loans, either
directly or through subservicers under a servicing agreement and will receive a
fee for its services. See "The Trusts" and "Description of the Securities." As
to those loans serviced by the master servicer or a servicer through a
subservicer, the master servicer or servicer, as applicable, will remain liable
for its servicing obligations under the related servicing agreement as if the
master
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servicer or servicer alone were servicing the trust assets. In addition
to or in place of the master servicer or servicer for a series of securities,
the accompanying prospectus supplement may identify an Administrator for the
trust. The Administrator may be an affiliate of the depositor. All references in
this prospectus to the master servicer and any discussions of the servicing and
administration functions of the master servicer or servicer will also apply to
the Administrator to the extent applicable. The master servicer's obligations
relating to the trust assets will consist principally of its contractual
servicing obligations under the related pooling and servicing agreement or
servicing agreement, including its obligation to use its best efforts to enforce
purchase obligations of Residential Funding Corporation or, in some instances,
the designated seller or seller, as described in this prospectus under
"Description of the Securities--Representations with Respect to Loans" and
"--Assignment of Loans" or under the terms of any private securities.
CHARACTERISTICS OF LOANS
The loans may be secured by mortgages or deeds of trust, deeds to secure
debt or other similar security instruments creating a first or junior lien on or
other interests in the related mortgaged properties. Cooperative Loans are
evidenced by promissory notes secured by a first or junior lien on the shares
issued by Cooperatives and on the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific units within a
Cooperative.
The loans may include loans insured by the Federal Housing
Administration, known as FHA, a division of HUD, loans partially guaranteed by
the Veterans Administration, known as VA, and loans that are not insured or
guaranteed by the FHA or VA. As described in the accompanying prospectus
supplement, the loans may include one or more of the following:
o adjustable rate loans, known as ARM loans;
o negatively amortizing ARM loans;
o Balloon Loans;
o Convertible Mortgage Loans;
o Buy-Down Loans;
o Additional Collateral Loans;
o Pledged Asset Mortgage Loans;
o simple interest loans;
o actuarial loans;
o delinquent loans;
o re-performing loans;
o Mexico Loans;
o Cooperative Loans;
o High Cost Loans;
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o GPM Loans;
o GEM Loans;
o fixed rate loans;
o loans that have been modified;
o loans that provide for payment on a bi-weekly or other non-monthly basis
during the term of the loan; and
o loans that provide for the reduction of the interest rate based on the
payment performance of the loans.
The accompanying prospectus supplement will provide information
concerning the types and characteristics of the loans and other assets included
in the related trust. Each prospectus supplement applicable to a series of
securities will include information to the extent then available to the
depositor, as of the related cut-off date, if appropriate, on an approximate
basis. No more than five percent (5%) of the trust assets by aggregate principal
balance as of the cut-off date will have characteristics that deviate from those
characteristics described in the accompanying prospectus supplement. Other trust
assets available for purchase by the depositor may have characteristics which
would make them eligible for inclusion in a pool but were not selected for
inclusion in a pool at that time.
The information in the accompanying prospectus supplement may include,
if applicable:
o the aggregate principal balance of the loans;
o the type of property securing the loans and related lien priority, if any;
o the original or modified and/or remaining terms to maturity of the loans;
o the range of principal balances of the loans at origination or
modification;
o the aggregate credit limits and the range of credit limits of the related
credit line agreements in the case of revolving credit loans;
o the range of the years of origination of the loans;
o the earliest origination or modification date and latest maturity date of
the loans;
o the loan-to-value ratios, known as LTV ratios, or the combined LTV ratios
of the loans, as applicable;
o the weighted average loan rate and range of loan rates borne by the
loans;
o the applicable index, the range of gross margins, the weighted average
gross margin, the frequency of adjustments and maximum loan rate;
o the geographic distribution of the mortgaged properties;
o the number and percentage of home improvement contracts that are partially
insured by the FHA under Title I;
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o the weighted average junior ratio and Credit Utilization Rate;
o the weighted average and range of debt-to-income ratios;
o the distribution of loan purposes; and
o the range of Credit Scores.
A Current Report on Form 8-K will be available on request to holders of
the related series of securities and will be filed, together with the related
pooling and servicing agreement or trust agreement, for each series of
certificates, or the related trust agreement and indenture, for each series of
notes, with the Securities and Exchange Commission within fifteen days after the
initial issuance of the securities. The composition and characteristics of a
pool containing revolving credit loans may change from time to time as a result
of any Draws made after the related cut-off date under the related credit line
agreements that are included in the pool. If trust assets are added to or
deleted from the trust after the date of the accompanying prospectus supplement
other than as a result of any Draws, the addition or deletion will be noted in
the Form 8-K. Additions or deletions of this type, if any, will be made prior to
the closing date.
In some cases, loans may be prepaid by the borrowers at any time without
payment of any prepayment fee or penalty. The prospectus supplement will
disclose whether a material portion of the loans provide for payment of a
prepayment charge if the borrower prepays within a specified time period. This
charge may affect the rate of prepayment. The master servicer or servicer will
be entitled to all prepayment charges and late payment charges received on the
loans and those amounts will not be available for payment on the securities.
However, some states' laws restrict the imposition of prepayment charges even
when the loans expressly provide for the collection of those charges. As a
result, it is possible that prepayment charges may not be collected even on
loans that provide for the payment of these charges.
Some of the loans may be "equity refinance" loans, as to which a portion
of the proceeds are used to refinance an existing loan, and the remaining
proceeds may be retained by the borrower or used for purposes unrelated to the
mortgaged property. Alternatively, the loans may be "rate and term refinance"
loans, as to which substantially all of the proceeds, net of related costs
incurred by the borrower, are used to refinance an existing loan or loans, which
may include a junior lien, primarily in order to change the interest rate or
other terms of the existing loan.
The loans may be loans that have been consolidated and/or have had
various terms changed, loans that have been converted from adjustable rate loans
to fixed rate loans, or construction loans which have been converted to
permanent loans. If a loan is a modified loan, references to origination
typically shall refer to the date of modification.
ARM LOANS
In most cases, ARM loans will have an original or modified term to
maturity of not more than 30 years. The loan rate for ARM loans usually adjusts
initially after a specified period subsequent to the initial payment date and
thereafter at either one-month, three-month, six-month, one-year or other
intervals, with corresponding adjustments in the amount of monthly payments,
over the term of the loan, and at any time is equal the sum of a fixed
percentage described in the related mortgage note, known as the gross margin,
and an index, subject to the maximum rate specified in the mortgage note and
permitted by applicable law. The accompanying prospectus supplement will
describe the relevant index and the highest, lowest and weighted average gross
margin for the ARM loans in the related pool. The accompanying prospectus
supplement will also indicate any periodic or lifetime limitations on changes in
any per annum loan rate at the time of
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any adjustment. An ARM loan may include a provision that allows the borrower to
convert the adjustable loan rate to a fixed rate at specified times during the
term of the ARM loan. The index or indices for a particular pool will be
specified in the accompanying prospectus supplement and may include one of the
following indexes:
o the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of six months, one year or other terms to maturity;
o the weekly auction average investment yield of U.S. Treasury bills of
various maturities;
o the daily bank prime loan rate made available by the Federal Reserve Board;
o the cost of funds of member institutions of any of the regional Federal
Home Loan Banks;
o the interbank offered rates for U.S. dollar deposits in the London market,
each calculated as of a date prior to each scheduled interest rate
adjustment date which will be specified in the accompanying prospectus
supplement; or
o the weekly average of secondary market interest rates on six-month
negotiable certificates of deposit.
ARM loans have features that provide different investment considerations
than fixed-rate loans. Adjustable loan rates can cause payment increases that
may exceed some borrowers' capacity to cover those payments. Some ARM loans, may
be teaser loans, with an introductory rate that is lower than the rate that
would be in effect if the applicable index and gross margin were used to
determine the loan rate. As a result of the introductory rate, interest
collections on the loans may initially be lower than expected. Commencing on
their first adjustment date, the loan rates on the teaser loans will be based on
the applicable index and gross margin, subject to any rate caps applicable to
the first adjustment date. An ARM loan may provide that its loan rate may not be
adjusted to a rate above the applicable maximum loan rate or below the
applicable minimum loan rate, if any, for the ARM loan. In addition, some of the
ARM loans may provide for limitations on the maximum amount by which their loan
rates may adjust for any single adjustment period. Some ARM loans provide for
limitations on the amount of scheduled payments of principal and interest, or
may have other features relating to payment adjustment as described in the
accompanying prospectus supplement.
NEGATIVELY AMORTIZING ARM LOANS
Certain ARM loans may be subject to negative amortization from time to
time prior to their maturity. Negative amortization results if the accrued
monthly interest exceeds the scheduled payment. In addition, negative
amortization often results from either the adjustment of the loan rate on a more
frequent basis than the adjustment of the scheduled payment or the application
of a cap on the size of the scheduled payment. If the scheduled payment is not
sufficient to pay the accrued monthly interest on a negative amortization ARM
loan, the amount of accrued monthly interest that exceeds the scheduled payment
on the loans is added to the principal balance of the ARM loan, bears interest
at the loan rate and is repaid from future scheduled payments.
Negatively amortizing ARM loans in most cases do not provide for the
extension of their original stated maturity to accommodate changes in their loan
rate. Investors should be aware that a loan secured by a junior lien may be
subordinate to a negatively amortizing senior loan. An increase in the principal
balance of the loan secured by a senior lien on the related mortgaged property
may cause the sum of the outstanding principal balance of the senior loan and
the outstanding principal
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balance of the junior loan to exceed the sum of the principal balances at the
time of origination of the junior loan. The accompanying prospectus supplement
will specify whether the ARM loans underlying a series allow for negative
amortization and the percentage, if known, of any loans that are subordinate to
any related senior loan that allows for negative amortization.
BALLOON LOANS
With respect to Balloon Loans, payment of the Balloon Amount, which,
based on the amortization schedule of those loans, is expected to be a
substantial amount and will typically depend on the mortgagor's ability to
obtain refinancing of the related mortgage loan or to sell the mortgaged
property prior to the maturity of the Balloon Loan. The ability to obtain
refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, including, without limitation, real estate
values, the mortgagor's financial situation, the level of available mortgage
loan interest rates, the mortgagor's equity in the related mortgaged property,
tax laws, prevailing general economic conditions and the terms of any related
first lien mortgage loan. Neither the depositor, the master servicer or
servicer, the trustee, as applicable, nor any of their affiliates will be
obligated to refinance or repurchase any mortgage loan or to sell the mortgaged
property.
CONVERTIBLE MORTGAGE LOANS
On any conversion of a Convertible Mortgage Loan, the depositor, the
master servicer or servicer or a third party may be obligated to purchase the
converted mortgage loan. Alternatively, if specified in the accompanying
prospectus supplement, the depositor, Residential Funding Corporation or another
party may agree to act as remarketing agent for the converted mortgage loans
and, in that capacity, to use its best efforts to arrange for the sale of the
converted mortgage loans under specified conditions. On the failure of any party
so obligated to purchase any converted mortgage loan, the inability of any
remarketing agent to arrange for the sale of any converted mortgage loan or the
unwillingness of the remarketing agent to exercise any election to purchase any
converted mortgage loan for its own account, the related pool will thereafter
include both fixed rate and adjustable rate mortgage loans. If specified in the
accompanying prospectus supplement, neither the depositor nor any other party
will be obligated to repurchase or remarket any converted mortgage loan, and, as
a result, converted mortgage loans will remain in the related pool.
BUY-DOWN LOANS
In the case of Buy-Down Loans, the monthly payments made by the borrower
during the Buy-Down Period will be less than the scheduled monthly payments on
the mortgage loan, the resulting difference to be made up from:
o Buy-Down Funds contributed by the seller of the mortgaged property or
another source and placed in the Buy-Down Account;
o if the Buy-Down Funds are contributed on a present value basis, investment
earnings
on the Buy-Down Funds; or
o additional buydown funds to be contributed over time by the borrower's
employer or another source.
ADDITIONAL COLLATERAL LOANS
If stated in the accompanying prospectus supplement, a trust will
contain Additional Collateral Loans. The Additional Collateral Requirement will
in most cases terminate when the
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LTV Ratio of the mortgage loan is reduced to a predetermined level, which in
most cases shall not be more than 75%, as a result of a reduction in the loan
amount caused by principal payments by the borrower under the mortgage loan or
an increase in the appraised value of the related mortgaged property.
The servicer of the Additional Collateral Loan will be required, in
accordance with the master servicer's or servicer's servicing guidelines or its
normal servicing procedures, to attempt to realize on any Additional Collateral
if the related Additional Collateral Loan is liquidated on default. The right to
receive proceeds from the realization of Additional Collateral on any
liquidation will be assigned to the related trustee. No assurance can be given
as to the amount of proceeds, if any, that might be realized from the Additional
Collateral and thereafter remitted to the trustee.
Unless otherwise specified in the accompanying prospectus supplement, an
insurance company whose claims-paying ability is rated by at least one
nationally recognized rating agency in a rating category at least as high as the
highest long-term rating category assigned to one or more classes of the
applicable series of securities will have issued a limited purpose surety bond
insuring any deficiency in the amounts realized by the Additional Collateral
Loan seller from the liquidation of Additional Collateral, up to the amount of
the Additional Collateral Requirement. For additional considerations concerning
the Additional Collateral Loans, see "Certain Legal Aspects of Loans--The
Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on Lenders" in
this prospectus.
PLEDGED ASSET MORTGAGE LOANS
If stated in the accompanying prospectus supplement, a mortgage pool may
include Pledged Asset Mortgage Loans. Each Pledged Asset will be held by a
custodian for the benefit of the trustee for the trust in which the related
Pledged Asset Mortgage Loan is held, and will be invested in investment
obligations permitted by the rating agencies rating the related series of
securities. The amount of the Pledged Assets will be determined by the seller in
accordance with its underwriting standards, but in most cases will not be more
than an amount that, if applied to reduce the original principal balance of the
mortgage loan, would reduce that principal balance to less than 70% of the
appraised value of the mortgaged property.
If, following a default by the borrower and the liquidation of the
related mortgaged property, there remains a loss on the related mortgage loan, a
limited liability company will be required to pay to the master servicer or the
servicer on behalf of the trustee the amount of that loss, up to the pledged
amount for that mortgage loan. If the borrower becomes a debtor in a bankruptcy
proceeding, there is a significant risk that the Pledged Assets will not be
available to be paid to the securityholders. At the borrower's request, and in
accordance with some conditions, the Pledged Assets may be applied as a partial
prepayment of the mortgage loan. The Pledged Assets will be released to the
limited liability company if the outstanding principal balance of the mortgage
loan has been reduced by the amount of the Pledged Assets.
ACTUARIAL LOANS
Monthly payments made by or on behalf of the borrower for each loan, in
most cases, WILL BE ONE-TWELFTH of the applicable loan rate times the unpaid
principal balance, with any remainder of the payment applied to principal. This
is known as an actuarial loan.
SIMPLE INTEREST LOANS
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If specified in the accompanying prospectus supplement, a portion of the
loans underlying a series of securities may be simple interest loans. A simple
interest loan provides the amortization of the amount financed under the loan
over a series of equal monthly payments, except, in the case of a Balloon Loan,
the final payment. Each monthly payment consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of the
loan multiplied by the stated loan rate and further multiplied by a fraction,
with the numerator equal to the number of days in the period elapsed since the
preceding payment of interest was made and the denominator equal to the number
of days in the annual period for which interest accrues on the loan. As payments
are received under a simple interest loan, the amount received is applied first
to interest accrued to the date of payment and then the remaining amount is
applied to pay any unpaid fees and then to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on a simple interest
loan before its scheduled due date, the portion of the payment allocable to
interest for the period since the preceding payment was made will be less than
it would have been had the payment been made as scheduled, and the portion of
the payment applied to reduce the unpaid principal balance will be
correspondingly greater. On the other hand, if a borrower pays a fixed monthly
installment after its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made as scheduled, and the
remaining portion, if any, of the payment applied to reduce the unpaid principal
balance will be correspondingly less. If each scheduled payment under a simple
interest loan is made on or prior to its scheduled due date, the principal
balance of the loan will amortize more quickly than scheduled. However, if the
borrower consistently makes scheduled payments after the scheduled due date, the
loan will amortize more slowly than scheduled. If a simple interest loan is
prepaid, the borrower is required to pay interest only to the date of
prepayment. The variable allocations among principal and interest of a simple
interest loan may affect the distributions of principal and interest on the
securities, as described in the accompanying prospectus supplement.
DELINQUENT LOANS
Some pools may include loans that are one or more months delinquent with
regard to payment of principal or interest at the time of their deposit into a
trust. The accompanying prospectus supplement will set forth the percentage of
loans that are so delinquent. Delinquent loans are more likely to result in
losses than loans that have a current payment status.
RE-PERFORMING LOANS
The term "re-performing loans" includes (i) repayment plan loans and
bankruptcy plan loans that had arrearages of at least three monthly payments
when the repayment plan was entered into, and (ii) trial modification loans.
These loans may be acquired by a designated seller or Residential Funding
Corporation from a wide variety of sources through bulk or periodic sales. The
re-performing loans were originally either:
o acquired by the designated seller or Residential Funding Corporation as a
performing loan;
o acquired under Residential Funding Corporation's portfolio transaction
program; or
o acquired by the designated seller or Residential Funding Corporation
as a delinquent loan with a view toward establishing a repayment
plan.
In the case of loans that are acquired by Residential Funding
Corporation as delinquent loans with a view toward establishing a repayment
plan, no determination is made as to whether the loans complied with the
underwriting criteria of any specific origination program. In each case,
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however, at the time of purchase, every loan is evaluated by Residential Funding
Corporation. This evaluation includes obtaining at least validation of the
related property value, a review of the credit and collateral files, and a
review of the servicing history on the loan. The information is used to assess
both the borrower's willingness and capacity to pay, and the underlying
collateral value. The rate of default on re-performing loans is more likely to
be higher than the rate of default on loans that have not previously been in
arrears.
REPAYMENT PLAN LOANS AND BANKRUPTCY PLAN LOANS. Some of the loans may be
loans where the borrower in the past has failed to pay one or more required
scheduled monthly payments or tax and insurance payments, and the borrower has
entered into either a repayment plan, or a confirmed bankruptcy plan in a case
under Chapter 13 of Title 11 of the United States Code, known as the Bankruptcy
Code, under which the borrower has agreed to repay these arrearages in
installments under a schedule, in exchange for the related master servicer or
servicer agreeing not to foreclose on the related mortgaged property or other
security. For each loan subject to a repayment plan, or a confirmed bankruptcy
plan, the borrower shall have made at least an aggregate of its three most
recent scheduled monthly payments prior to the cut-off date.
The right to receive all arrearages payable under the repayment plan
will not be included as part of the trust and, accordingly, payments made on
these arrearages will not be payable to the securityholders. The borrowers under
any confirmed bankruptcy plan will make separate payments for their scheduled
monthly payments and for their arrearages. The borrowers under any repayment
plan will make a single payment, which will be applied first to their scheduled
monthly payment and second to the arrearage. In either case, the master servicer
or servicer may immediately commence foreclosure if, in the case of a bankruptcy
plan, both payments are not received and the bankruptcy court has authorized
that action or, in the case of a repayment plan, the payment is insufficient to
cover both the monthly payment and the arrearage.
TRIAL MODIFICATION LOANS. Some of the loans may be loans where the
borrower in the past has failed to pay three or more required scheduled monthly
payments, and the borrower has entered into a trial modification agreement.
Under this arrangement:
o the borrower agrees to pay a reduced monthly payment for a specified trial
period typically lasting 3 to 6 months;
o if the borrower makes all required monthly payments during the trial
period, at the end of the trial period, the original loan terms will
be modified to reflect terms stated in the trial modification
agreement. The modifications may include a reduced interest rate, the
forgiveness of some arrearages, the capitalization of some
arrearages, an extension of the maturity, or a provision for a
balloon payment at maturity;
o if the borrower makes all required payments during the trial period,
the monthly payment amount will continue to be the monthly payment in
effect during the trial period, with no additional repayment of
arrearages; and
o if the borrower fails to make any of the required payments during the
trial period, the modified terms will not take effect, and a
foreclosure action may be commenced immediately. None of the
depositor, the seller, the designated seller, the master servicer or
the servicer, as applicable, will have any obligation to repurchase
the related loan under those circumstances.
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For each trial modification loan, the borrower shall have made at least
its aggregate of the three most recent scheduled monthly payments as of the
cut-off date under the terms of the trial modification agreement.
REVOLVING CREDIT LOANS
GENERAL
The revolving credit loans will be originated under credit line
agreements subject to a maximum amount or credit limit. In most instances,
interest on each revolving credit loan will be calculated based on the average
daily balance outstanding during the billing cycle. The billing cycle in most
cases will be the calendar month preceding a due date. Each revolving credit
loan will have a loan rate that is subject to adjustment on the day specified in
the related mortgage note, which may be daily or monthly, equal to the sum of
the index on the day specified in the accompanying prospectus supplement, and
the gross margin specified in the related mortgage note, which may vary under
circumstances if stated in the accompanying prospectus supplement, subject to
the maximum rate specified in the mortgage note and the maximum rate permitted
by applicable law. If specified in the prospectus supplement, some revolving
credit loans may be teaser loans with an introductory rate that is lower than
the rate that would be in effect if the applicable index and gross margin were
used to determine the loan rate. As a result of the introductory rate, interest
collections on the loans may initially be lower than expected. Commencing on
their first adjustment date, the loan rates on the teaser loans will be based on
the applicable index and gross margin. The index or indices will be specified in
the related prospectus supplement and may include one of the indices mentioned
under "--Characteristics of Loans," in this prospectus.
Unless specified in the accompanying prospectus supplement, each
revolving credit loan will have a term to maturity from the date of origination
of not more than 25 years. The borrower for each revolving credit loan may make
a Draw under the related credit line agreement at any time during the Draw
Period. Unless specified in the accompanying prospectus supplement, the Draw
Period will not be more than 15 years. Unless specified in the accompanying
prospectus supplement, for each revolving credit loan, if the Draw Period is
less than the full term of the revolving credit loan, the related borrower will
not be permitted to make any Draw during the Repayment Period. Prior to the
Repayment Period, or prior to the date of maturity for loans without Repayment
Periods, the borrower for each revolving credit loan will be obligated to make
monthly payments on the revolving credit loan in a minimum amount as specified
in the related mortgage note, which usually will be the finance charge for each
billing cycle as described in the second following paragraph. In addition, if a
revolving credit loan has a Repayment Period, during this period, the borrower
is required to make monthly payments consisting of principal installments that
would substantially amortize the principal balance by the maturity date, and to
pay any current finance charges and additional charges.
The borrower for each revolving credit loan will be obligated to pay off
the remaining account balance on the related maturity date, which may be a
substantial principal amount. The maximum amount of any Draw for any revolving
credit loan is equal to the excess, if any, of the credit limit over the
principal balance outstanding under the mortgage note at the time of the Draw.
Draws will be funded by the master servicer or servicer or other entity
specified in the accompanying prospectus supplement.
Unless specified in the accompanying prospectus supplement, for each
revolving credit loan:
o the finance charge for any billing cycle, in most cases, will be an
amount equal to the aggregate of, as calculated for each day in the
billing cycle, the then-applicable loan rate divided by 365
multiplied by that day's principal balance,
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o the account balance on any day in most cases will be the aggregate of
the unpaid principal of the revolving credit loan outstanding at the
beginning of the day, PLUS all related Draws funded on that day and
outstanding at the beginning of THAT DAY, PLUS the sum of any unpaid
finance charges and any unpaid fees, insurance premiums and other
charges, collectively known as additional charges, THAT ARE DUE ON
THE REVOLVING CREDIT LOAN MINUS the aggregate of all payments and
credits that are applied to the repayment of any Draws on that day,
and
o the principal balance on any day usually will be the related account
balance minus the sum of any unpaid finance charges and additional
charges that are due on the revolving credit loan.
Payments made by or on behalf of the borrower for each revolving credit
loan, in most cases, will be applied, first, to any unpaid finance charges that
are due on the revolving credit loan, second, to any unpaid additional charges
that are due thereon, and third, to any related Draws outstanding.
The mortgaged property securing each revolving credit loan will be
subject to the lien created by the related loan in the amount of the outstanding
principal balance of each related Draw or portion thereof, if any, that is not
included in the related pool, whether made on or prior to the related cut-off
date or thereafter. The lien will be the same rank as the lien created by the
mortgage relating to the revolving credit loan, and monthly payments,
collections and other recoveries under the credit line agreement related to the
revolving credit loan will be allocated as described in the related prospectus
supplement among the revolving credit loan and the outstanding principal balance
of each Draw or portion of Draw excluded from the pool. The depositor, an
affiliate of the depositor or an unaffiliated seller may have an interest in any
Draw or portion thereof excluded from the pool. If any entity with an interest
in a Draw or portion thereof excluded from the pool or any other Excluded
Balance were to become a debtor under the Bankruptcy Code and regardless of
whether the transfer of the related revolving credit loan constitutes an
absolute assignment, a bankruptcy trustee or creditor of such entity or such
entity as a debtor-in-possession could assert that such entity retains rights in
the related revolving credit loan and therefore compel the sale of such
revolving credit loan, including any Trust Balance, over the objection of the
trust and the securityholders. If that occurs, delays and reductions in payments
to the trust and the securityholders could result.
In most cases, each revolving credit loan may be prepaid in full or in
part at any time and without penalty, and the related borrower will have the
right during the related Draw Period to make a Draw in the amount of any
prepayment made for the revolving credit loan. The mortgage note or mortgage
related to each revolving credit loan will usually contain a customary
"due-on-sale" clause.
As to each revolving credit loan, the borrower's rights to receive Draws
during the Draw Period may be suspended, or the credit limit may be reduced, for
cause under a limited number of circumstances, including, but not limited to:
o a materially adverse change in the borrower's financial circumstances;
o a decline in the value of the mortgaged property significantly below its
appraised value at origination; or
o a payment default by the borrower.
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However, as to each revolving credit loan, a suspension or reduction usually
will not affect the payment terms for previously drawn balances. The master
servicer or the servicer, as applicable, will have no obligation to investigate
as to whether any of those circumstances have occurred or may have no knowledge
of their occurrence. Therefore, there can be no assurance that any borrower's
ability to receive Draws will be suspended or reduced if the foregoing
circumstances occur. In the event of default under a revolving credit loan, at
the discretion of the master servicer or servicer, the revolving credit loan may
be terminated and declared immediately due and payable in full. For this
purpose, a default includes but is not limited to:
o the borrower's failure to make any payment as required;
o any action or inaction by the borrower that materially and adversely
affects the mortgaged property or the rights in the mortgaged property; or
o any fraud or material misrepresentation by a borrower in connection with
the loan.
The master servicer or servicer will have the option to allow an
increase in the credit limit applicable to any revolving credit loan in certain
limited circumstances. In most cases, the master servicer or servicer will have
an unlimited ability to allow increases provided that the specified conditions
are met including:
o a new appraisal or other indication of value is obtained; and
o the new combined LTV ratio is less than or equal to the original combined
LTV ratio.
If a new appraisal is not obtained and the other conditions in the
preceding sentence are met, the master servicer or servicer will have the option
to allow a credit limit increase for any revolving credit loan subject to the
limitations described in the related agreement
The proceeds of the revolving credit loans may be used by the borrower
to improve the related mortgaged properties, may be retained by the related
borrowers or may be used for purposes unrelated to the mortgaged properties.
ALLOCATION OF REVOLVING CREDIT LOAN BALANCES
For any series of securities backed by revolving credit loans, the
related trust may include either (i) the entire principal balance of each
revolving credit loan outstanding at any time, including balances attributable
to Draws made after the related cut-off date, or (ii) the Trust Balance of each
revolving credit loan.
The accompanying prospectus supplement will describe the specific
provisions by which payments and losses on any revolving credit loan will be
allocated as between the Trust Balance and any Excluded Balance. Typically, the
provisions (i) may provide that principal payments made by the borrower will be
allocated as between the Trust Balance and any Excluded Balance either on a pro
rata basis, or first to the Trust Balance until reduced to zero, then to the
Excluded Balance, or according to other priorities specified in the accompanying
prospectus supplement, and (ii) may provide that interest payments, as well as
liquidation proceeds or similar proceeds following a default and any Realized
Losses, will be allocated between the Trust Balance and any Excluded Balance on
a pro rata basis or according to other priorities specified in the accompanying
prospectus supplement.
Even where a trust initially includes the entire principal balance of
the revolving credit loans, the related agreement may provide that after a
specified
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date or on the occurrence of specified events, the trust may not include
balances attributable to additional Draws made thereafter. The accompanying
prospectus supplement will describe these provisions as well as the related
allocation provisions that would be applicable.
THE CONTRACTS
HOME IMPROVEMENT CONTRACTS
The trust for a series may include a contract pool evidencing interests
in home improvement contracts. The home improvement contracts may be
conventional home improvement contracts or, to the extent specified in the
accompanying prospectus supplement, the home improvement contracts may be
partially insured by the FHA under Title I.
In most cases, the home improvement contracts will be fully amortizing
and may have fixed loan rates or adjustable loan rates and may provide for other
payment characteristics as described in the accompanying prospectus supplement.
The home improvements securing the home improvement contracts may
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels. The proceeds of contracts under the Title I Program may be
used only for permitted purposes, including, but not limited to, the alteration,
repair or improvement of residential property, the purchase of a manufactured
home and/or lot on which to place that home, or cooperative interest in the home
and/or lot.
Home improvements, unlike mortgaged properties, in most cases,
depreciate in value. Consequently, at any time after origination it is possible,
especially in the case of home improvement contracts with high LTV ratios at
origination, that the market value of a home improvement may be lower than the
principal amount outstanding under the related contract.
MANUFACTURED HOUSING CONTRACTS
The trust for a series may include a contract pool evidencing interests
in manufactured housing contracts originated by one or more manufactured housing
dealers, or the other entity or entities described in the accompanying
prospectus supplement. The manufactured housing contracts may be conventional
manufactured housing contracts or manufactured housing contracts insured by the
FHA or partially guaranteed by the VA. Each manufactured housing contract will
be secured by a manufactured home. The manufactured housing contracts will be
fully amortizing or, if specified in the accompanying prospectus supplement,
Balloon Loans.
The manufactured homes securing the manufactured housing contracts will
consist of "manufactured homes" within the meaning of 42 U.S.C. ss. 5402(6),
which are treated as "single family residences" for the purposes of the REMIC
provisions of the Internal Revenue Code of 1986, or Internal Revenue Code.
Accordingly, a manufactured home will be a structure built on a permanent
chassis, which is transportable in one or more sections and customarily used at
a fixed location, has a minimum of 400 square feet of living space and minimum
width in excess of 8 1/2 feet, is designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air conditioning, and electrical systems
contained therein.
Manufactured homes, unlike mortgaged properties, in most cases,
depreciate in value. Consequently, at any time after origination it is possible,
especially in the case of manufactured housing contracts with high LTV ratios at
origination, that the market value of a manufactured home may be lower than the
principal amount outstanding under the related contract.
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MEXICO LOANS
Each Mexico Loan will be secured by the beneficial ownership interest in
a separate trust, the sole asset of which is a residential property located in
Mexico. The residential property may be a second home, vacation home or the
primary residence of the borrower. The borrower of a Mexico Loan may be a U.S.
borrower or an international borrower.
Because of the uncertainty and delays in foreclosing on real property
interests in Mexico and because non-Mexican citizens are prohibited from owning
real property located in some areas of Mexico, the nature of the security
interest and the manner in which the Mexico Loans are secured differ from that
of mortgage loans typically made in the United States. Record ownership and
title to the Mexican property will be held in the name of a Mexican financial
institution acting as Mexican trustee for a Mexican trust under the terms of a
trust agreement. The trust agreement will be governed by Mexican law and will be
filed (in Spanish) in the real property records in the jurisdiction in which the
property is located. The original term of the Mexican trust will be 50 years and
will be renewable at the option of the borrower. To secure the repayment of the
Mexico Loan, the lender is named as a beneficiary of the Mexican trust. The
lender's beneficial interest in the Mexican trust grants to the lender the right
to direct the Mexican trustee to transfer the borrower's beneficial interest in
the Mexican trust or to terminate the Mexican trust and sell the Mexican
property. The borrower's beneficial interest in the Mexican trust grants to the
borrower the right to use, occupy and enjoy the Mexican property so long as it
is not in default of its obligations relating to the Mexico Loan.
As security for repayment of the Mexico Loan, under the loan agreement,
the borrower grants to the lender a security interest in the borrower's
beneficial interest in the Mexican trust. If the borrower is domiciled in the
United States, the borrower's beneficial interest in the Mexican trust should be
considered under applicable state law to be an interest in personal property,
not real property, and, accordingly, the lender will file financing statements
in the appropriate state to perfect the lender's security interest. Because the
lender's security interest in the borrower's beneficial interest in the Mexican
trust is not, for purposes of foreclosing on that collateral, an interest in
real property, the depositor either will rely on its remedies that are available
in the United States under the applicable Uniform Commercial Code, or UCC, and
under the trust agreement and foreclose on the collateral securing a Mexico Loan
under the UCC, or direct the Mexican trustee to conduct an auction to sell the
borrower's beneficial interest or the Mexican property under the trust
agreement. If a borrower is not a resident of the United States, the lender's
security interest in the borrower's beneficial interest in the Mexican trust may
be unperfected under the UCC. If the lender conducts its principal lending
activities in the United States, the loan agreement will provide that rights and
obligations of the borrower and the lender under the loan agreement will be
governed under applicable United States state law. See "Certain Legal Aspects of
the Loans -- The Mortgage Loans."
In connection with the assignment of a Mexico Loan into a trust created
under the related pooling and servicing agreement or trust agreement, the
depositor will transfer to the trustee, on behalf of the securityholders, all of
its right, title and interest in the mortgage note, the lender's beneficial
interest in the Mexican trust, the lender's security interest in the borrower's
beneficial interest in the Mexican trust, and its interest in any policies of
insurance on the Mexico Loan or the Mexican property. The percentage of mortgage
loans, if any, that are Mexico Loans will be specified in the accompanying
prospectus supplement.
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THE MORTGAGED PROPERTIES
The mortgaged properties will consist primarily of attached or detached
individual dwellings, Cooperative dwellings, individual or adjacent
condominiums, townhouses, duplexes, row houses, modular housing, manufactured
homes, individual units or two-to four-unit dwellings in planned unit
developments and two- to four-family dwellings. Each mortgaged property, other
than a Cooperative dwelling or Mexican property, will be located on land owned
by the borrower or, if specified in the accompanying prospectus supplement, land
leased by the borrower. The ownership of the Mexican properties will be held in
a Mexican trust. Attached dwellings may include structures where each borrower
owns the land on which the unit is built with the remaining adjacent land owned
in common. Mortgaged properties may also include dwellings on non-contiguous
properties, multiple dwellings on one property, or dwelling units subject to a
proprietary lease or occupancy agreement in an apartment building owned by a
Cooperative. The proprietary lease or occupancy agreement securing a Cooperative
Loan is subordinate, in most cases, to any blanket mortgage on the related
cooperative apartment building or on the underlying land. Additionally, in the
case of a Cooperative Loan, the proprietary lease or occupancy agreement may be
terminated and the cooperative shares may be cancelled by the Cooperative if the
tenant-stockholder fails to pay maintenance or other obligations or charges owed
by the tenant-stockholder. See "Certain Legal Aspects of the Loans."
Mortgaged properties consisting of modular housing, also known as
pre-assembled, pre-fabricated, sectional or pre-built homes, are factory built
and constructed in two or more three dimensional sections, including interior
and exterior finish, plumbing, wiring and mechanical systems. On completion, the
modular home is transported to the property site to be joined together on a
permanent foundation.
Mortgaged properties consisting of manufactured homes must be legally
classified as real estate, have the wheels and axles removed and be attached to
a permanent foundation and may not be located in a mobile home park. The
manufactured homes will also have other characteristics as specified in the
prospectus supplement.
The mortgaged properties may be located in any of the fifty states, the
District of Columbia or the Commonwealth of Puerto Rico. In addition, if
specified in the accompanying prospectus supplement, the trust assets may
contain Mexico Loans, which are secured by interests in trusts that own
residential properties located in Mexico. The Mexico Loans will not exceed ten
percent (10%) by aggregate principal balance of the mortgage loans in any
mortgage pool as of the cut-off date specified in the accompanying prospectus
supplement.
The mortgaged properties may be owner occupied or non-owner occupied and
may include vacation homes, second homes and investment properties. The
percentage of loans secured by mortgaged properties that are owner-occupied will
be disclosed in the accompanying prospectus supplement. The basis for any
statement that a given percentage of the loans are secured by mortgaged
properties that are owner-occupied will be one of the following:
o the making of a representation by the borrower at origination of a
loan that the borrower intends to use the mortgaged property as a
primary residence for at least the first six months of occupancy,
o a representation by the originator of the loan, which may be based solely
on the above clause, or
o the fact that the mailing address for the borrower is the same as the
address of the mortgaged property.
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Any representation and warranty regarding owner-occupancy may be based solely on
this information. Loans secured by investment properties, including two- to
four-unit dwellings, may also be secured by an assignment of leases and rents
and operating or other cash flow guarantees relating to the loans.
A mortgaged property securing a loan may be subject to the senior liens
securing one or more conventional mortgage loans at the time of origination and
may be subject to one or more junior liens at the time of origination or after
that origination. Loans evidencing liens junior or senior to the loans in the
trust will likely not be included in the related trust, but the depositor, an
affiliate of the depositor or an unaffiliated seller may have an interest in the
junior or senior loan.
THE AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
Ginnie Mae is a wholly-owned corporate instrumentality of the United
States within HUD. Section 306(g) of Title III of the National Housing Act of
1934, as amended, referred to in this prospectus as the Housing Act, authorizes
Ginnie Mae to guarantee the timely payment of the principal of and interest on
securities representing interests in a pool of mortgages insured by the FHA,
under the Housing Act or under Title V of the Housing Act of 1949, or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or under Chapter 37 of Title 38, United States Code.
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under that guarantee, Ginnie Mae may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury an amount that is at
any time sufficient to enable Ginnie Mae to perform its obligations under its
guarantee. See "Additional Information" for the availability of further
information regarding Ginnie Mae and Ginnie Mae securities.
GINNIE MAE SECURITIES
In most cases, each Ginnie Mae security relating to a series, which may
be a Ginnie Mae I Certificate or a Ginnie Mae II Certificate as referred to by
Ginnie Mae, will be a "fully modified pass-through" mortgage-backed certificate
issued and serviced by a mortgage banking company or other financial concern
approved by Ginnie Mae, except any stripped mortgage backed securities
guaranteed by Ginnie Mae or any REMIC securities issued by Ginnie Mae. The
characteristics of any Ginnie Mae securities included in the trust for a series
of securities will be described in the accompanying prospectus supplement.
FEDERAL HOME LOAN MORTGAGE CORPORATION
Freddie Mac is a corporate instrumentality of the United States created
under Title III of the Emergency Home Finance Act of 1970, as amended, or the
Freddie Mac Act. Freddie Mac was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of Freddie Mac currently consists of purchasing
first-lien, conventional, residential mortgage loans or participation interests
in mortgage loans and reselling the mortgage loans so purchased in the form of
guaranteed mortgage securities, primarily Freddie Mac securities. In 1981,
Freddie Mac initiated its Home Mortgage Guaranty Program under which it
purchases mortgage loans from sellers with Freddie Mac securities representing
interests in the mortgage loans so purchased. All mortgage loans purchased by
Freddie Mac must meet certain standards set forth in the Freddie Mac Act.
Freddie Mac is confined to purchasing, so far as
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practicable, mortgage loans that it deems to be of the quality and type that
generally meets the purchase standards imposed by private institutional mortgage
investors. See "Additional Information" for the availability of further
information regarding Freddie Mac and Freddie Mac securities. Neither the United
States nor any agency thereof is obligated to finance Freddie Mac's operations
or to assist Freddie Mac in any other manner.
FREDDIE MAC SECURITIES
In most cases, each Freddie Mac security relating to a series will
represent an undivided interest in a pool of mortgage loans that typically
consists of conventional loans, but may include FHA loans and VA loans,
purchased by Freddie Mac, except any stripped mortgage backed securities issued
by Freddie Mac. Each of those pools will consist of mortgage loans,
substantially all of which are secured by one- to four-family residential
properties or, if specified in the accompanying prospectus supplement, are
secured by multi-family residential properties. The characteristics of any
Freddie Mac Securities included in the trust for a series of securities will be
set forth in the accompanying prospectus supplement.
FEDERAL NATIONAL MORTGAGE ASSOCIATION
Fannie Mae is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act (12 U.S.C. ss. 1716 et seq.). It is the nation's largest supplier of
residential mortgage funds. Fannie Mae was originally established in 1938 as a
United States government agency to provide supplemental liquidity to the
mortgage market and was transformed into a stockholder-owned and privately
managed corporation by legislation enacted in 1968. Fannie Mae provides funds to
the mortgage market primarily by purchasing home mortgage loans from local
lenders, thereby replenishing their funds for additional lending. See
"Additional Information" for the availability of further information respecting
Fannie Mae and Fannie Mae securities. Although the Secretary of the Treasury of
the United States has authority to lend Fannie Mae up to $2.25 billion
outstanding at any time, neither the United States nor any agency thereof is
obligated to finance Fannie Mae's operations or to assist Fannie Mae in any
other manner.
FANNIE MAE SECURITIES
In most cases, each Fannie Mae security relating to a series will
represent a fractional undivided interest in a pool of mortgage loans formed by
Fannie Mae, except any stripped mortgage backed securities issued by Fannie Mae.
Mortgage loans underlying Fannie Mae securities will consist of fixed, variable
or adjustable rate conventional mortgage loans or fixed-rate FHA loans or VA
loans. Those mortgage loans may be secured by either one- to four-family or
multi-family residential properties. The characteristics of any Fannie Mae
securities included in the trust for a series of securities will be set forth in
the accompanying prospectus supplement.
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PRIVATE SECURITIES
Any private securities underlying any securities will (i) either (a)
have been previously registered under the Securities Act, or (b) will be
eligible for sale under Rule 144(k) under the Securities Act of 1933, as
amended, and (ii) will be acquired in secondary market transactions from persons
other than the issuer or its affiliates. Alternatively, if the private
securities were acquired from their issuer or its affiliates, or were issued by
the depositor or any of its affiliates, then the private securities will be
registered under the Securities Act of 1933, as amended, at the same time as the
securities.
For any series of securities backed by private securities or Agency
Securities, the entity that administers the private securities or Agency
securities may be referred to as the manager, if stated in the accompanying
prospectus supplement. References in this prospectus to Advances to be made and
other actions to be taken by the master servicer or servicer in connection with
the loans may include Advances made and other actions taken under the terms of
the private securities. Each security offered by this prospectus will evidence
an interest in only the related pool and corresponding trust, and not in any
other pool or trust related to securities issued in this prospectus.
In addition, as to any series of securities secured by private
securities, the private securities may consist of an ownership interest in a
structuring entity formed by the depositor for the limited purpose of holding
the trust assets relating to a series of securities. This special purpose entity
may be organized in the form of a trust, limited partnership or limited
liability company, and will be structured in a manner that will insulate the
holders of securities from liabilities of the special purpose entity. The
provisions governing the special purpose entity will restrict the special
purpose entity from engaging in or conducting any business other than the
holding of trust assets and the issuance of ownership interests in the trust
assets and some incidental activities. Any ownership interest will evidence an
ownership interest in the related trust assets as well as the right to receive
specified cash flows derived from the trust assets, as described in the
accompanying prospectus supplement. The obligations of the depositor as to any
ownership interest will be limited to some representations and warranties
relating to the trust assets, as described in this prospectus. Credit support of
any of the types described in this prospectus under "Description of Credit
Enhancement" may be provided for the benefit of any ownership interest, if
stated in the accompanying prospectus supplement.
TRUST ASSET PROGRAM
UNDERWRITING STANDARDS
GENERAL
The depositor expects that the originator of each of the loans will have
applied, consistent with applicable federal and state laws and regulations,
underwriting procedures intended to evaluate the borrower's credit standing and
repayment ability and/or the value and adequacy of the related property as
collateral. The depositor expects that any FHA loans or VA loans will have been
originated in compliance with the underwriting policies of the FHA or VA,
respectively. The underwriting criteria applied by the originators of the loans
included in a pool may vary significantly among sellers. The accompanying
prospectus supplement will describe most aspects of the underwriting criteria,
to the extent known by the depositor, that were applied by the originators of
the loans. In most cases, the depositor will have less detailed information
concerning the origination of seasoned loans than it will have concerning
newly-originated loans.
The underwriting standards of any particular originator typically
include a set of specific criteria by which the underwriting evaluation is made.
However, the application of the underwriting standards does not imply that each
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specific criterion was satisfied individually. Rather, a loan will be considered
to be originated in accordance with a given set of underwriting standards if,
based on an overall qualitative evaluation, the loan is in substantial
compliance with the underwriting standards. For example, a loan may be
considered to comply with a set of underwriting standards, even if one or more
specific criteria included in the underwriting standards were not satisfied, if
other factors compensated for the criteria that were not satisfied or if the
loan is considered to be in substantial compliance with the underwriting
standards. In the case of a Designated Seller Transaction, the applicable
underwriting standards will be those of the designated seller or of the
originator of the loans, and will be described in the accompanying prospectus
supplement.
The depositor anticipates that loans, other than the Mexico Loans and
some loans secured by mortgaged properties located in Puerto Rico, included in
pools for certain series of securities will have been originated based on
underwriting standards and documentation requirements that are less restrictive
than for other mortgage loan lending programs. In such cases, borrowers may have
credit histories that contain delinquencies on mortgage and/or consumer debts.
Some borrowers may have initiated bankruptcy proceedings within a few years of
the time of origination of the related loan. In addition, some loans with LTV
ratios over 80% will not be required to have and may not have the benefit of
primary mortgage insurance. Loans and contracts that are secured by junior liens
generally will not be required by the depositor to be covered by primary
mortgage insurance. Likewise, loans included in a trust may have been originated
in connection with a governmental program under which underwriting standards
were significantly less stringent and designed to promote home ownership or the
availability of affordable residential rental property regardless of higher
risks of default and losses. As discussed above, in evaluating seasoned loans,
the depositor may place greater weight on payment history or market and other
economic trends and less weight on underwriting factors usually applied to newly
originated loans.
LOAN DOCUMENTATION
In most cases, under a traditional "full documentation" program, each
borrower will have been required to complete an application designed to provide
to the original lender pertinent credit information concerning the borrower. As
part of the description of the borrower's financial condition, the borrower will
have furnished information, which may or may not be verified, describing the
borrower's assets, liabilities, income, credit history and employment history,
and furnished an authorization to apply for a credit report that summarizes the
borrower's available credit history with local merchants and lenders and any
record of bankruptcy. The borrower may also have been required to authorize
verifications of deposits at financial institutions where the borrower had
demand or savings accounts. In the case of investment properties, only income
derived from the mortgaged property may have been considered for underwriting
purposes, rather than the income of the borrower from other sources. For
mortgaged property consisting of vacation or second homes, no income derived
from the property will typically have been considered for underwriting purposes.
The underwriting standards applied by originators in some cases allow
for loans to be supported by alternative documentation. For alternatively
documented loans, a borrower may demonstrate income and employment directly by
providing alternative documentation in the form of copies of the borrower's own
records relating to income and employment, rather than having the originator
obtain independent verifications from third parties, such as the borrower's
employer or mortgage servicer.
As described in the accompanying prospectus supplement, some loans may
have been originated under "limited documentation" or "no documentation"
programs that require less documentation and verification than do traditional
"full documentation" programs. Under a limited
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documentation or no documentation program, minimal or no investigation into the
borrower's credit history and income profile is undertaken by the originator and
the underwriting may be based primarily or entirely on an appraisal or other
valuation of the mortgaged property and the LTV or combined LTV ratio at
origination.
APPRAISALS
The adequacy at origination of a mortgaged property as security for
repayment of the related loan will typically have been determined by an
appraisal. Appraisers may be either staff appraisers employed by the originator
or independent appraisers selected in accordance with guidelines established by
or acceptable to the originator. The appraisal procedure guidelines in most
cases will have required the appraiser or an agent on its behalf to personally
inspect the property and to verify whether the property was in good condition
and that construction, if new, had been substantially completed. The appraisal
will have considered a market data analysis of recent sales of comparable
properties and, when deemed applicable, an analysis based on income generated
from the property or replacement cost analysis based on the current cost of
constructing or purchasing a similar property. In certain instances, the LTV
ratio or combined LTV ratio may have been based on the appraised value as
indicated on a review appraisal conducted by the seller or originator.
Alternatively, as specified in the accompanying prospectus supplement, values
may be supported by:
o a statistical valuation;
o a broker's price opinion;
o an automated appraisal, drive by appraisal or other certification of value;
or
o a statement of value by the borrower.
A statistical valuation estimates the value of the property as
determined by a form of appraisal which uses a statistical model to estimate the
value of a property. The stated value will be value of the property as stated by
the related borrower in his or her application. Unless otherwise specified in
the accompanying prospectus supplement, an appraisal of any manufactured home
will not be required.
LOAN-TO-VALUE AND COMBINED LOAN-TO-VALUE RATIOS
In the case of each first lien loan made to finance the purchase of a
mortgaged property, the Loan-to-Value Ratio, or LTV ratio, in most cases is the
ratio, expressed as a percentage, of the original principal amount or credit
limit, as applicable, of the related loan to the lesser of (1) the appraised
value determined in an appraisal obtained at origination of the related loan and
(2) the sales price for the related mortgaged property, except that in the case
of some employee or preferred customer loans, the denominator of the ratio may
be the sales price.
In the case of some non-purchase first lien mortgage loans including
refinance, modified or converted mortgage loans, the LTV ratio at origination is
defined as the ratio, expressed as a percentage, of the principal amount of the
mortgage loan to either the appraised value determined in an appraisal obtained
at the time of refinancing, modification or conversion or, if no appraisal has
been obtained, the value of the related mortgaged property which value generally
will be supported by either:
o a representation by the related seller as to value;
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o an appraisal or other valuation obtained prior to origination; or
o the sales price, if the related mortgaged property was purchased within the
previous twelve months.
In the case of some mortgage loans seasoned for over twelve months, the
LTV ratio may be determined at the time of purchase from the related seller
based on the ratio of the current loan amount to the current value of the
mortgaged property as determined by an appraisal or other valuation.
For any loan secured by a junior lien on the related mortgaged property,
the combined LTV ratio, in most cases, will be the ratio, expressed as a
percentage, of (A) the sum of (1) the original principal balance or the credit
limit, as applicable, and (2) the principal balance of any related senior
mortgage loan at origination of the loan together with any loan subordinate to
it, to (B) the appraised value of the related mortgaged property. The appraised
value for any junior lien loan will be the appraised value of the related
mortgaged property determined in the appraisal used in the origination of the
loan, which may have been obtained at an earlier time. However, if the loan was
originated simultaneously with or not more than 12 months after a senior lien on
the related mortgaged property, the appraised value will in most cases be the
lesser of the appraised value at the origination of the senior lien and the
sales price for the mortgaged property.
As to each loan secured by a junior lien on the mortgaged property, the
junior ratio will be the ratio, expressed as a percentage, of the original
principal balance or the credit limit, as applicable, of the loan to the sum of
(1) the original principal balance or the credit limit, as applicable, of the
loan and (2) the principal balance of any related senior loan at origination of
the loan. The credit utilization rate for any revolving credit loan is
determined by dividing the cut-off date principal balance of the revolving
credit loan by the credit limit of the related credit line agreement.
Some of the loans which are subject to negative amortization will have
LTV ratios that will increase after origination as a result of their negative
amortization. In the case of some seasoned loans, the values used in calculating
LTV ratios may no longer be accurate valuations of the mortgaged properties.
Some mortgaged properties may be located in regions where property values have
declined significantly since the time of origination.
The underwriting standards applied by an originator typically require
that the underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal or other acceptable valuation method as
described above, currently supports, except with respect to Home Loans, and is
anticipated to support in the future the outstanding loan balance. In fact, some
states where the mortgaged properties may be located have "anti-deficiency" laws
requiring, in general, that lenders providing credit on single family property
look solely to the property for repayment in the event of foreclosure. See
"Certain Legal Aspects of the Loans." Any of these factors could change
nationwide or merely could affect a locality or region in which all or some of
the mortgaged properties are located. However, declining values of real estate,
as experienced periodically in certain regions, or increases in the principal
balances of some loans, such as GPM Loans and negative amortization ARM loans,
could cause the principal balance of some or all of these loans to exceed the
value of the mortgaged properties.
CREDIT SCORES
Credit Scores are obtained by some mortgage lenders in connection with
loan applications to help assess a borrower's credit-worthiness. In addition,
Credit Scores may be obtained by Residential Funding Corporation or the
designated seller after the origination of a loan if the seller does not provide
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a current Credit Score. Credit Scores are obtained from credit reports provided
by various credit reporting organizations, each of which may employ differing
computer models and methodologies.
The Credit Score is designed to assess a borrower's credit history at a
single point in time, using objective information currently on file for the
borrower at a particular credit reporting organization. Although each scoring
model varies, typically Credit Scores range from approximately 350 to
approximately 840, with higher scores indicating an individual with a more
favorable credit history compared to an individual with a lower score. However,
a Credit Score purports only to be a measurement of the relative degree of risk
a borrower represents to a lender, i.e., a borrower with a higher score is
statistically expected to be less likely to default in payment than a borrower
with a lower score. In addition, it should be noted that Credit Scores were
developed to indicate a level of default probability over a two-year period,
which in most cases, does not correspond to the life of a loan. Furthermore,
many Credit Scores were not developed specifically for use in connection with
mortgage loans, but for consumer loans in general, and assess only the
borrower's past credit history. Therefore, in most cases, a Credit Score may not
take into consideration the differences between mortgage loans and consumer
loans, or the specific characteristics of the related loan, including the LTV
ratio or combined LTV ratio, as applicable, the collateral for the loan, or the
debt to income ratio. There can be no assurance that the Credit Scores of the
borrowers will be an accurate predictor of the likelihood of repayment of the
related loans or that any borrower's Credit Score would not be lower if obtained
as of the date of the accompanying prospectus supplement.
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APPLICATION OF UNDERWRITING STANDARDS
Based on the data provided in the application and certain verifications,
if required, and the appraisal or other valuation of the mortgaged property, a
determination will have been generally made by the original lender that the
borrower's monthly income would be sufficient to enable the borrower to meet its
monthly obligations on the loan and other expenses related to the property.
Examples of other expenses include property taxes, utility costs, standard
hazard and primary mortgage insurance, maintenance fees and other levies
assessed by a Cooperative, if applicable, and other fixed obligations other than
housing expenses including, in the case of loans secured by a junior lien on the
related mortgaged property, payments required to be made on any senior mortgage.
The originator's guidelines for loans will, in most cases, specify that
scheduled payments on a loan during the first year of its term plus taxes and
insurance, including primary mortgage insurance, and all scheduled payments on
obligations that extend beyond one year, including those mentioned above and
other fixed obligations, would equal no more than specified percentages of the
prospective borrower's gross income. The originator may also consider the amount
of liquid assets available to the borrower after origination. The loan rate in
effect from the origination date of an ARM loan or other types of loans to the
first adjustment date are likely to be lower, and may be significantly lower,
than the sum of the then applicable index and Note Margin. Similarly, the amount
of the monthly payment on Buy-Down Loans, GEM Loans or other graduated payment
loans will, and on negative amortization loans may, increase periodically. If
the borrowers' incomes do not increase in an amount commensurate with the
increases in monthly payments, the likelihood of default will increase. In
addition, in the case of either ARM loans or graduated payment or other loans
that are subject to negative amortization, due to the addition of deferred
interest the principal balances of those loans are more likely to equal or
exceed the value of the underlying mortgaged properties, thereby increasing the
likelihood of defaults and losses. For Balloon Loans, payment of the Balloon
Amount will depend on the borrower's ability to obtain refinancing or to sell
the mortgaged property prior to the maturity of the Balloon Loan, and there can
be no assurance that refinancing will be available to the borrower or that a
sale will be possible.
In some circumstances, the loans have been made to employees or
preferred customers of the originator for which, in accordance with the
originator's mortgage loan programs, income, asset and employment verifications
and appraisals may not have been required. As to loans made under any employee
loan program maintained by Residential Funding Corporation, GMAC Mortgage
Corporation or any of their affiliates, in limited circumstances preferential
note rates may be allowed.
A portion of the loans may be purchased in negotiated transactions, and
those negotiated transactions may be governed by agreements, known as master
commitments, relating to ongoing purchases of loans by Residential Funding
Corporation or the designated seller, from sellers who will represent that the
loans have been originated in accordance with underwriting standards agreed to
by Residential Funding Corporation or the designated seller, as applicable.
Residential Funding Corporation or the designated seller, as the case may be, on
behalf of the depositor or a designated third party, will normally review only a
limited portion of the loans in any delivery from the related seller for
conformity with the applicable underwriting standards. A portion of loans may be
purchased from sellers who may represent that the loans were originated under
underwriting standards acceptable to Residential Funding Corporation or the
designated seller. Loans purchased under Residential Funding Corporation's
portfolio transaction program are not typically purchased pursuant to master
commitments.
The level of review by Residential Funding Corporation, if any, will
vary depending on several factors, including its experience with the seller.
Residential Funding Corporation, on behalf of the depositor, typically will
review a portion of the loans constituting the pool for a series of securities
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for conformity with Residential Funding Corporation's underwriting standards or
applicable underwriting standards specified in the accompanying prospectus
supplement, and to assess the likelihood of repayment of the loan from the
various sources for such repayment, including the borrower, the mortgaged
property, and primary mortgage insurance, if any. In reviewing seasoned loans,
or loans that have been outstanding for more than 12 months, Residential Funding
Corporation may take into consideration, in addition to or in lieu of the
factors described above, the borrower's actual payment history in assessing a
borrower's current ability to make payments on the loan. In addition,
Residential Funding Corporation may conduct additional procedures to assess the
current value of the mortgaged properties. Those procedures may consist of
statistical valuations, drive-by appraisals or real estate broker's price
opinions. The depositor may also consider a specific area's housing value
trends. These alternative valuation methods are not necessarily as reliable as
the type of borrower financial information or appraisals that are typically
obtained at origination. In its underwriting analysis, Residential Funding
Corporation may also consider the applicable Credit Score of the related
borrower used in connection with the origination or acquisition of the loan, as
determined based on a credit scoring model acceptable to the depositor.
Residential Funding Corporation will not undertake any review of loans sold to
the depositor in a Designated Seller Transaction.
THE PORTFOLIO TRANSACTION PROGRAM
Some of the loans included in a trust may have been acquired and
evaluated under Residential Funding Corporations' portfolio transaction program.
The portfolio transaction program targets loans with document deficiencies,
program violations, unusual property types, seasoned loans, delinquent loans,
and loans not eligible for Residential Funding Corporations' other programs. In
most cases, the portfolio transaction loans fall into three categories:
Portfolio Programs, Program Violations and Seasoned Loans.
PORTFOLIO PROGRAMS: These loans are originated by various originators
for their own mortgage loan portfolio and not under any of Residential Funding
Corporation's standard programs or any other secondary market program.
Typically, these loans are originated under programs offered by financial
depository institutions that were designed to provide the financial institution
with a competitive origination advantage. This is achieved by permitting loan
terms and underwriting criteria that did not conform with typical secondary
market standards, with the intention that these loans would be held in the
originating institution's portfolio rather than sold in the secondary market.
However, for various reasons including merger or acquisition or other financial
considerations specific to the originating institution, that institution may
offer the loans for sale, and the loans are then acquired by Residential Funding
Corporation in the secondary market.
PROGRAM VIOLATIONS: These loans are originated for sale in the secondary
market with the intention that the loans will meet the criteria and underwriting
guidelines of a standard loan purchase program of Residential Funding
Corporation, Fannie Mae, Freddie Mac, or another secondary market participant.
However, after origination it may be determined that the loans do not meet the
requirements of the intended program for any of a number of reasons, including
the failure to reach required loan-to-value ratios, debt-to-income ratios or
credit scores, or because the mortgage file has document deficiencies.
SEASONED LOANS: These loans are acquired by Residential Funding
Corporation through the exercise of a right to repurchase loans in a pool
previously securitized by the depositor or any of its affiliates, or are other
seasoned loans. In most cases, these loans are seasoned longer than twelve
months. Due to the length of time since origination, no assurance can be given
as to whether such loans will conform with current underwriting criteria or
documentation requirements. Although at origination some of the loans may have
been purchased through one of Residential Funding Corporation's standard loan
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purchase programs, seasoned loans are typically not purchased through these
programs because these programs require current information regarding the
mortgagor's credit and the property value.
EVALUATION STANDARDS FOR PORTFOLIO TRANSACTION LOANS: Every portfolio
transaction loan is evaluated by Residential Funding Corporation to determine
whether the characteristics of the loan, the borrower and the collateral, taken
as a whole, represent a prudent lending risk. The factors considered include:
o the mortgage loan's payment terms and characteristics,
o the borrower's credit score,
o the value of the mortgaged property which may be estimated using a broker's
price opinion or a statistical valuation,
o the credit and legal documentation associated with the loan,
o the seasoning of the loan,
o a reevaluation of the financial capacity, eligibility and experience of the
seller and/or servicer of the loan, and
o the representations and warranties made by the seller.
In most cases, Residential Funding Corporation orders an updated credit
score for each loan reviewed. For seasoned loans, an updated credit score is
ordered for the primary borrower as reported on the tape data or loan file
submitted by the seller. Periodic quality control reviews are performed.
Broker's price opinions are obtained if, among other reasons, the loan is
delinquent or the principal balance of the mortgage loan exceeds $400,000. In
addition, statistical property valuations and drive-by appraisals may be used,
or a review may be done of the original appraisal.
Many of the portfolio transaction loans include characteristics
representing underwriting deficiencies as compared to other mortgage loans
originated in compliance with standard origination programs for the secondary
mortgage market. In addition, some of the mortgaged properties for these loans
are not typically permitted in the secondary market, including mixed-use
properties, incomplete properties, properties with deferred maintenance, and
properties with excess acreage.
The portfolio transaction loans may have missing or defective loan
documentation. Neither Residential Funding Corporation nor the seller will be
obligated to repurchase a portfolio transaction loan because of such missing or
defective documentation unless the omission or defect materially interferes with
the servicer's or master servicer's ability to foreclose on the related
mortgaged property.
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DESCRIPTION OF THE SECURITIES
GENERAL
The securities will be issued in series. Each series of certificates or,
in some instances, two or more series of certificates, will be issued under a
pooling and servicing agreement or, in the case of certificates backed by
private securities, a trust agreement, similar to one of the forms filed as an
exhibit to the registration statement under the Securities Act of 1933, as
amended, for the certificates of which this prospectus is a part. Each series of
notes will be issued under an indenture between the related trust and the entity
named in the accompanying prospectus supplement as indenture trustee for the
series. A form of indenture has been filed as an exhibit to the registration
statement under the Securities Act of 1933, as amended, for the notes of which
this prospectus forms a part. In the case of each series of notes, the
depositor, the related trust and the entity named in the accompanying prospectus
supplement as master servicer for the series will enter into a separate
servicing agreement. Each pooling and servicing agreement, trust agreement,
servicing agreement, and indenture will be filed with the Securities and
Exchange Commission as an exhibit to a Form 8-K. The following summaries
(together with additional summaries under "The Agreements" below) describe all
material terms and provisions relating to the securities common to each
agreement. All references to an "agreement" and any discussion of the provisions
of any agreement applies to pooling and servicing agreements, trust agreements,
servicing agreements and indentures, as applicable. The summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all of the provisions of related agreement for each trust and the
accompanying prospectus supplement.
Each series of securities may consist of any one or a combination of the
following:
o a single class of securities;
o one or more classes of senior securities, of which one or more
classes of securities may be senior in right of payment to any other
class or classes of securities subordinate to it, and as to which
some classes of senior securities may be senior to other classes of
senior securities, as described in the respective prospectus
supplement;
o one or more classes of mezzanine securities which are subordinate
securities but which are senior to other classes of subordinate
securities relating to such distributions or losses;
o one or more classes of strip securities which will be entitled to (a)
principal distributions, with disproportionate, nominal or no
interest distributions or (b) interest distributions, with
disproportionate, nominal or no principal distributions;
o two or more classes of securities which differ as to the timing, sequential
order, rate, pass-through rate or amount of distributions of principal or
interest or both, or as to which distributions of principal or interest or
both on any class may be made on the occurrence of specified events, in
accordance with a schedule or formula, including "planned amortization
classes" and "targeted amortization classes", or on the basis of
collections from designated portions of the pool, which series may include
one or more classes of accrual securities for which some accrued interest
will not be distributed but rather will be added to their principal balance
on the distribution date, which will be specified in the accompanying
prospectus supplement; or
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o other types of classes of securities, as described in the accompanying
prospectus supplement.
Credit support for each series of securities will be provided by a
mortgage pool insurance policy, special hazard insurance policy, bankruptcy
bond, letter of credit, purchase obligation, reserve fund, excess spread,
overcollateralization, financial guaranty insurance policy, derivative products,
surety bond or other credit enhancement as described under "Description of
Credit Enhancement," or by the subordination of one or more classes of
securities as described under "Description of Credit Enhancement--Subordination"
or by any combination of the foregoing.
FORM OF SECURITIES
As specified in the accompanying prospectus supplement, the securities
of each series will be issued either as physical securities or in book-entry
form. If issued as physical securities, the securities will be in fully
registered form only in the denominations specified in the accompanying
prospectus supplement, and will be transferable and exchangeable at the
corporate trust office of the certificate registrar appointed under the related
pooling and servicing agreement or indenture to register the certificates. No
service charge will be made for any registration of exchange or transfer of
securities, but the trustee may require payment of a sum sufficient to cover any
tax or other governmental charge. The term securityholder or holder refers to
the entity whose name appears on the records of the security registrar or, if
applicable, a transfer agent, as the registered holder of the certificate,
except as otherwise indicated in the accompanying prospectus supplement.
If issued in book-entry form, the classes of a series of securities will
be initially issued through the book-entry facilities of The Depository Trust
Company, or DTC, or Cedelbank, SA or the Euroclear System (in Europe) if they
are participants of those systems, or indirectly through organizations which are
participants in those systems, or through any other depository or facility as
may be specified in the accompanying prospectus supplement. As to any class of
book-entry securities so issued, the record holder of those securities will be
DTC's nominee. Cedelbank, SA and Euroclear System will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Cedelbank, SA's and Euroclear System's names on the books of their respective
depositaries, which in turn will hold those positions in customers' securities
accounts in the depositaries' names on the books of DTC. DTC is a
limited-purpose trust company organized under the laws of the State of New York,
which holds securities for its DTC participants, which include securities
brokers and dealers, banks, trust companies and clearing corporations. DTC
together with the Cedelbank, SA and Euroclear System participating organizations
facilitates the clearance and settlement of securities transactions between
participants through electronic book-entry changes in the accounts of
participants. Other institutions that are not participants but indirect
participants which clear through or maintain a custodial relationship with
participants have indirect access to DTC's clearance system.
Unless otherwise specified in the accompanying prospectus supplement, no
beneficial owner in an interest in any book-entry security will be entitled to
receive a security representing that interest in registered, certificated form,
unless either (i) DTC ceases to act as depository for that security and a
successor depository is not obtained, or (ii) the depositor elects in its sole
discretion to discontinue the registration of the securities through DTC. Prior
to any such event, beneficial owners will not be recognized by the trustee, the
master servicer or the servicer as holders of the related securities for
purposes of the related agreement, and beneficial owners will be able to
exercise their rights as owners of their securities only indirectly through DTC,
participants and indirect participants. Any beneficial owner that desires to
purchase, sell or otherwise transfer any interest in book-entry securities may
do so only through DTC, either directly if the beneficial owner is a participant
or indirectly through participants and, if applicable, indirect participants.
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Under the procedures of DTC, transfers of the beneficial ownership of any
book-entry securities will be required to be made in minimum denominations
specified in the accompanying prospectus supplement. The ability of a beneficial
owner to pledge book-entry securities to persons or entities that are not
participants in the DTC system, or to otherwise act with respect to the
securities, may be limited because of the lack of physical securities evidencing
the securities and because DTC may act only on behalf of participants.
Because of time zone differences, the securities account of a Cedelbank,
SA or Euroclear System participant as a result of a transaction with a DTC
participant, other than a depositary holding on behalf of Cedelbank, SA or
Euroclear System, will be credited during a subsequent securities settlement
processing day, which must be a business day for Cedelbank, SA or Euroclear
System, as the case may be, immediately following the DTC settlement date.
Credits or any transactions in those securities settled during this processing
will be reported to the relevant Euroclear System participant or Cedelbank, SA
participants on that business day. Cash received in Cedelbank, SA or Euroclear
System as a result of sales of securities by or through a Cedelbank, SA
participant or Euroclear System participant to a DTC participant, other than the
depositary for Cedelbank, SA or Euroclear System, will be received with value on
the DTC settlement date, but will be available in the relevant Cedelbank, SA or
Euroclear System cash account only as of the business day following settlement
in DTC.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Cedelbank, SA participants and Euroclear System participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank, SA
participants or Euroclear System participants, on the other, will be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the relevant depositaries; however, the cross
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in that system in
accordance with its rules and procedures and within its established deadlines
defined with respect to European time. The relevant European international
clearing system will, if the transaction meets its settlement requirements,
deliver instructions to its depositary to take action to effect final settlement
on its behalf by delivering or receiving securities in DTC, and making or
receiving payment in accordance with normal procedures for same day funds
settlement applicable to DTC. Cedelbank, SA participants and Euroclear System
participants may not deliver instructions directly to the depositaries.
Cedelbank, SA, as a professional depository, holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between Cedelbank, SA participants through electronic
book-entry changes in accounts of Cedelbank, SA participants, thereby
eliminating the need for physical movement of securities. As a professional
depository, Cedelbank, SA is subject to regulation by the Luxembourg Monetary
Institute.
Euroclear System was created to hold securities for participants of
Euroclear System and to clear and settle transactions between Euroclear System
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of securities and
any risk from lack of simultaneous transfers of securities and cash. Euroclear
System operator is the Brussels, Belgium office of Morgan Guaranty Trust Company
of New York, under contract with the clearance cooperative, Euroclear System
Clearance Systems S.C., a Belgian co-operative corporation. All operations are
conducted by the Euroclear System operator, and all Euroclear System securities
clearance accounts and Euroclear System cash accounts are accounts with the
Euroclear System operator, not the clearance cooperative.
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The clearance cooperative establishes policy for Euroclear System on
behalf of Euroclear System participants. The Euroclear System operator is the
Belgian branch of a New York banking corporation which is a member bank of the
Federal Reserve System. As a result, it is regulated and examined by the Board
of Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear System operator are governed by
the terms and conditions Governing Use of Euroclear System and the related
operating procedures of the Euroclear System and applicable Belgian law. The
terms and conditions govern transfers of securities and cash within Euroclear
System, withdrawals of securities and cash from Euroclear System, and receipts
of payments for securities in Euroclear System. All securities in Euroclear
System are held on a fungible basis without attribution of specific securities
to specific securities clearance accounts.
Distributions on the book-entry securities will be forwarded by the
trustee to DTC, and DTC will be responsible for forwarding those payments to
participants, each of which will be responsible for disbursing the payments to
the beneficial owners it represents or, if applicable, to indirect participants.
Accordingly, beneficial owners may experience delays in the receipt of payments
relating to their securities. Under DTC's procedures, DTC will take actions
permitted to be taken by holders of any class of book-entry securities under the
related agreement only at the direction of one or more participants to whose
account the book-entry securities are credited and whose aggregate holdings
represent no less than any minimum amount of percentage interests or voting
rights required therefor. DTC may take conflicting actions for any action of
securityholders of any class to the extent that participants authorize those
actions. None of the master servicer, the servicer, the depositor, the trustee
or any of their respective affiliates will have any liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the book-entry securities, or for maintaining, supervising or
reviewing any records relating to those beneficial ownership interests.
ASSIGNMENT OF LOANS
At the time of issuance of a series of securities, the depositor will
cause the loans and any other assets included in the related trust to be
assigned without recourse to the trustee or owner trustee or its nominee, which
may be the custodian, together with, unless specified in the accompanying
prospectus supplement, all principal and interest received on the trust assets
after the cut-off date, but not including principal and interest due on or
before the cut-off date or any Excluded Spread. Each loan will be identified in
a schedule appearing as an exhibit to the related agreement. Each schedule of
loans will include, among other things, information as to the principal balance
of each loan as of the cut-off date, as well as information respecting the loan
rate, the currently scheduled monthly payment of principal and interest, the
maturity of the mortgage note and the LTV ratio or combined LTV ratio and junior
mortgage ratio, as applicable, at origination or modification.
If stated in the accompanying prospectus supplement, and in accordance
with the rules of membership of MERSCORP, Inc. and/or Mortgage Electronic
Registration Systems, Inc. or, MERS(R), assignments of mortgages for any trust
asset in the related trust will be registered electronically through Mortgage
Electronic Registration Systems, Inc., or MERS(R) System. For trust assets
registered through the MERS(R) System, MERS(R) shall serve as mortgagee of
record solely as a nominee in an administrative capacity on behalf of the
trustee and shall not have any interest in any of those trust assets.
In addition, except as provided below for some series of securities
backed by Trust Balances of revolving credit loans, the depositor will, as to
each loan that is a trust asset, deliver to an entity specified in the
accompanying prospectus supplement, which may be the trustee, a custodian or
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another entity appointed by the trustee, the legal documents relating to each
loan that are in possession of the depositor. Depending on the type of trust
asset, the legal documents may include the following, as applicable:
o the mortgage note and any modification or amendment thereto endorsed
without recourse either in blank or to the order of the trustee or
owner trustee or a nominee or a lost note affidavit together with a
copy of the related mortgage note;
o the mortgage, except for any mortgage not returned from the public
recording office, with evidence of recording indicated thereon or, in
the case of a Cooperative Loan or a Mexico Loan, the respective
security agreements and any applicable UCC financing statements;
o an assignment in recordable form of the mortgage, except in the case
of a mortgage registered with MERS(R) or, for a Cooperative Loan, an
assignment of the respective security agreements, any applicable
financing statements, recognition agreements, relevant stock
certificates, related blank stock powers and the related proprietary
leases or occupancy agreements and, with respect to a Mexico Loan, an
assignment of the borrower's beneficial interest in the Mexican
trust;
o if applicable, any riders or modifications to the mortgage note and
mortgage, together with any other documents at such times as described in
the related agreement; and
o if applicable, the original contract and copies of documents and
instruments related to each contract and, other than in the case of
unsecured contracts, the security interest in the property securing
the related contract.
Assignments of the loans, including contracts secured by liens on
mortgaged property, will be recorded in the appropriate public recording office,
except for mortgages registered with MERS(R) or in states where, in the opinion
of counsel acceptable to the trustee, the recording is not required to protect
the trustee's interests in the loans against the claim of any subsequent
transferee or any successor to or creditor of the depositor or the originator of
the loans, or except as otherwise specified in the accompanying prospectus
supplement.
The assignments may be blanket assignments covering mortgages secured by
mortgaged properties located in the same county, if permitted by law. If so
provided in the accompanying prospectus supplement, the depositor may not be
required to deliver one or more of the related documents if any of the documents
are missing from the files of the party from whom the loans were purchased.
In the case of contracts, the depositor, the master servicer or the
servicer will cause a financing statement to be executed by the depositor
identifying the trustee as the secured party and identifying all contracts as
collateral. However, unless otherwise specified in the accompanying prospectus
supplement, the contracts will not be stamped or otherwise marked to reflect
their assignment from the depositor to the trust and no recordings or filings
will be made in the jurisdictions in which the manufactured homes are located.
See "Certain Legal Aspects of the Loans -- The Manufactured Housing Contracts"
and "--The Home Improvement Contracts."
Any mortgage for a loan secured by mortgaged property located in Puerto
Rico will be either a Direct Puerto Rico Mortgage or an Endorsable Puerto Rico
Mortgage. Endorsable Puerto Rico Mortgages do not require an assignment to
transfer the related lien. Rather, transfer of those mortgages follows an
effective endorsement of the related mortgage note and, therefore, delivery of
the assignment referred to in the fifth preceding paragraph would be
inapplicable. Direct Puerto Rico Mortgages, however, require an assignment to be
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recorded for any transfer of the related lien and the assignment would be
delivered to the trustee, or the custodian.
If, for any loan including any contract secured by a lien on mortgaged
property, the depositor cannot deliver the mortgage or any assignment with
evidence of recording thereon concurrently with the execution and delivery of
the related agreement because of a delay caused by the public recording office,
the depositor will deliver or cause to be delivered to the trustee or the
custodian a true and correct photocopy of the mortgage or assignment. The
depositor will deliver or cause to be delivered to the trustee or the custodian
such mortgage or assignment with evidence of recording indicated thereon after
receipt thereof from the public recording office or from the related master
servicer or servicer.
In most cases, the trustee or the custodian will review the legal
documents within 90 days after receipt. If any document is found to be defective
in any material respect, the trustee or the custodian shall notify the master
servicer or servicer and the depositor, and the master servicer, the servicer or
the trustee shall notify the seller, including a designated seller. Other than
with respect to loans purchased under Residential Funding Corporation's
portfolio transaction program, if the seller cannot cure the defect within 60
days, or within the other period specified in the related prospectus supplement,
after notice of the defect is given to the seller, the seller is required to,
not later than 90 days after such notice, or within the other period specified
in the related prospectus supplement, either repurchase the related loan or any
property acquired in respect of it from the trustee or, if permitted, substitute
for that loan a new loan in accordance with the standards described in this
prospectus. Unless otherwise specified in the accompanying prospectus
supplement, the purchase price for any loan will be equal to the principal
balance thereof as of the date of purchase plus accrued and unpaid interest less
the amount, expressed as a percentage per annum, payable for servicing or
administrative compensation and the Excluded Spread, if any. There can be no
assurance that the applicable seller or designated seller will fulfill its
obligation to purchase or substitute any loan as described above. In most cases
only the seller or the designated seller, and not Residential Funding
Corporation, will be obligated to repurchase a loan for a material defect in a
constituent document. The obligation to repurchase or substitute for a loan
constitutes the sole remedy available to the securityholder or the trustee for a
material defect in a constituent document. Any loan not so purchased or
substituted for shall remain in the related trust.
For any series of securities backed by Trust Balances of revolving
credit loans, the foregoing documents in most cases will have been delivered to
an entity specified in the accompanying prospectus supplement, which may be the
trustee, a custodian or another entity appointed by the trustee. That entity
shall hold those documents as or on behalf of the trustee for the benefit of the
securityholders, for the Trust Balances thereof, and on behalf of any other
applicable entity for any Excluded Balance thereof, as their respective
interests may appear. In those cases, the review of the related documents need
not be performed if a similar review has previously been performed by the entity
holding the documents for an Excluded Balance and such review covered all
documentation for any Trust Balance.
Under some circumstances, as to any series of securities, the depositor
may have the option to repurchase trust assets from the trust for cash, or in
exchange for other trust assets or Permitted Investments. Alternatively, for any
series of securities secured by private securities, the depositor may have the
right to repurchase loans from the entity that issued the private securities.
All provisions relating to these optional repurchase provisions will be
described in the accompanying prospectus supplement.
REPRESENTATIONS WITH RESPECT TO LOANS
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Sellers will typically make certain limited representations and
warranties with respect to the trust assets that they sell. However, trust
assets purchased from certain unaffiliated sellers may be purchased with very
limited or no representations and warranties. In addition, unless provided in
the accompanying prospectus supplement, the representations and warranties of
the seller will not be assigned to the trustee for the benefit of the holders of
the related series of securities, and therefore a breach of the representations
and warranties of the seller, in most cases, will not be enforceable on behalf
of the trust.
Except in the case of a Designated Seller Transaction, all of the
representations and warranties of a seller relating to a trust asset will have
been made as of the date on which the related seller sold the trust asset to the
depositor, Residential Funding Corporation, GMAC Mortgage Corporation or one of
their affiliates. The date as of which the representations and warranties were
made typically will be a date prior to the date of issuance of the related
series of securities. A substantial period of time may elapse between the date
as of which the representations and warranties were made and the date of
issuance of the related series of securities. The seller's repurchase obligation
if any, or, if specified in the accompanying prospectus supplement, limited
substitution option, will not arise if, after the sale of the related trust
asset, an event occurs that would have given rise to such an obligation had the
event occurred prior to that period.
Except in the case of a Designated Seller Transaction, loans acquired
under Residential Funding Corporation's portfolio transaction program, or loans
underlying any private securities, for any loan, in most cases, Residential
Funding Corporation will represent and warrant that:
o as of the cut-off date, the information set forth in a listing of the
related loans was true and correct in all material respects;
o except in the case of Cooperative Loans, a policy of title insurance in
the form and amount acceptable to Residential Funding Corporation or
similar alternative coverage was effective or an attorney's certificate
was received at origination or, if not in place at origination, was
subsequently obtained, and each policy remained in full force and effect
on the date of sale of the related loan to the depositor;
o to the best of Residential Funding Corporation's knowledge, if required
by applicable underwriting standards or unless otherwise stated in the
accompanying prospectus supplement, each loan that is secured by a first
lien on the related mortgaged property is the subject of a primary
insurance policy;
o Residential Funding Corporation had good title to the loan and the loan
is not subject to offsets, defenses or counterclaims except as may be
provided under the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, or Relief Act, and except for any buydown agreement for a
Buy-Down Loan;
o to the best of Residential Funding Corporation's knowledge, each mortgaged
property is free of material damage and is in good repair;
o each loan complied in all material respects with all applicable local,
state and federal laws at the time of origination;
o to the best of Residential Funding Corporation's knowledge, there is no
delinquent tax or assessment lien against the related mortgaged property;
and
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o to the best of Residential Funding Corporation's knowledge, any home
improvement contract that is partially insured by the FHA under Title I
was originated in accordance with applicable FHA regulations and is
insured, without set-off, surcharge or defense by the FHA.
In addition, except in the case of a Designated Seller Transaction,
unless otherwise specified in the accompanying prospectus supplement,
Residential Funding Corporation will be obligated to repurchase or substitute
for any loan as to which it is discovered that the related mortgage does not
create a valid lien having at least the priority represented and warranted in
the related agreement on or, in the case of a Cooperative Loan, a perfected
security interest in, the related mortgaged property, subject only to the
following:
o liens of real property taxes and assessments not yet due and payable;
o covenants, conditions and restrictions, rights of way, easements and
other matters of public record as of the date of recording of such
mortgage and certain other permissible title exceptions;
o liens of any senior mortgages, in the case of loans secured by junior liens
on the related mortgaged property; and
o other encumbrances to which like properties are commonly subject which
do not materially adversely affect the value, use, enjoyment or
marketability of the mortgaged property.
In a Designated Seller Transaction, unless otherwise specified in the
accompanying prospectus supplement, the designated seller will have made
representations and warranties regarding the loans to the depositor in most
cases similar to those made by Residential Funding Corporation and described
above.
REPURCHASES OF LOANS
If a designated seller, Residential Funding Corporation or the seller,
if the agreement under which Residential Funding Corporation purchased loans
from a seller is assigned to the trust, cannot cure a breach of any
representation or warranty made by it relating to any loan within 90 days after
notice from the master servicer, the servicer or the trustee, and the breach
materially and adversely affects the interests of the securityholders in the
loan, the designated seller, Residential Funding Corporation or the seller, as
the case may be, will be obligated to purchase the loan. Unless otherwise
specified in the accompanying prospectus supplement, the purchase price for any
loan will be equal to the principal balance thereof as of the date of purchase
plus accrued and unpaid interest less the amount, expressed as a percentage per
annum, payable for servicing or administrative compensation and the Excluded
Spread, if any. In certain limited cases, a substitution may be made in lieu of
such repurchase obligation. See "--Limited Right of Substitution" below.
In most instances, Residential Funding Corporation will not be required
to repurchase or substitute for any loan if the circumstances giving rise to the
requirement also constitute fraud in the origination of the related loan.
Furthermore, because the listing of the related loan in most cases contains
information for the loan as of the cut-off date, prepayments and, in certain
limited circumstances, modifications to the interest rate and principal and
interest payments may have been made for one or more of the related loans
between the cut-off date and the closing date. No seller will be required to
repurchase or substitute for any loan as a result of any such prepayment or
modification.
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In addition, except in the case of a Designated Seller Transaction,
unless otherwise specified in the accompanying prospectus supplement, the loan
files for certain of the loans may be missing the original executed mortgage
notes as a result of being lost, misfiled, misplaced or destroyed. With respect
to all such loans, the depositor in most cases will deliver a lost note
affidavit to the trustee or custodian certifying that the original mortgage note
has been lost or destroyed, together with a copy of the related mortgage note.
In addition, some of the loans may be missing intervening assignments. Neither
the depositor nor Residential Funding Corporation will be obligated to purchase
loans acquired under the portfolio transaction program for missing or defective
documentation. However, in the event of foreclosure on one of these loans, to
the extent those missing documents materially adversely affects the master
servicer's or servicer's ability to foreclose on the related loan, Residential
Funding Corporation will be obligated to repurchase or substitute for such.
Residential Funding will not be required to repurchase or substitute for any
loan if the circumstances giving rise to the requirement also constitute fraud
in the origination of the related loan.
The master servicer or the servicer, as applicable, will be required
under the related pooling and servicing agreement or trust agreement to use its
best reasonable efforts to enforce the repurchase obligations of the designated
seller, Residential Funding Corporation or the seller, for the benefit of the
trustee and the securityholders, using practices it would employ in its good
faith business judgment and which are normal and usual in its general servicing
activities.
The master servicer or servicer will be entitled to reimbursement for
any costs and expenses incurred in pursuing these purchase or substitution
obligations, including but not limited to any costs or expenses associated with
litigation. In instances where a seller is unable, or disputes its obligation,
to purchase affected loans, the master servicer or servicer, employing the
standards described in the preceding paragraph, may negotiate and enter into one
or more settlement agreements with that seller that could provide for, among
other things, the purchase of only a portion of the affected loans or coverage
of some loss amounts. Any such settlement could lead to losses on the loans
which would be borne by the related credit enhancement, and to the extent not
available, on the related securities.
Furthermore, the master servicer or servicer may pursue foreclosure or
similar remedies concurrently with pursuing any remedy for a breach of a
representation and warranty. However, the master servicer or servicer is not
required to continue to pursue both remedies if it determines that one remedy is
more likely to result in a greater recovery. In accordance with the above
described practices, the master servicer or servicer will not be required to
enforce any purchase obligation of a designated seller, Residential Funding
Corporation or seller, if the master servicer or servicer determines in the
reasonable exercise of its business judgment that the matters related to the
misrepresentation did not directly cause or are not likely to directly cause a
loss on the related loan. The foregoing obligations will constitute the sole
remedies available to securityholders or the trustee for a breach of any
representation by a designated seller, Residential Funding Corporation in its
capacity as a seller of loans to the depositor or the seller, or for any other
event giving rise to the obligations.
Neither the depositor nor the master servicer or servicer will be
obligated to purchase a loan if a seller or designated seller defaults on its
obligation to do so, and no assurance can be given that the sellers will carry
out those obligations for loans. This type of default by a seller or designated
seller is not a default by the depositor or by the master servicer or servicer.
However, to the extent that a breach of the representations and warranties of a
seller or designated seller also constitutes a breach of a representation made
by Residential Funding Corporation, Residential Funding Corporation may have a
purchase or substitution obligation. Any loan not so purchased or substituted
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for shall remain in the related trust and any losses related thereto shall be
allocated to the related credit enhancement, and to the extent not available, to
the related securities.
For any seller that requests the master servicer's or servicer's consent
to the transfer of subservicing rights relating to any loans to a successor
servicer, the master servicer or servicer may release that seller from liability
under its representations and warranties described above, on the assumption of
the successor servicer of the seller's liability for the representations and
warranties as of the date they were made. In that event, the master servicer's
or servicer's rights under the instrument by which the successor servicer
assumes the seller's liability will be assigned to the trustee, and the
successor servicer shall be deemed to be the "seller" for purposes of the
foregoing provisions.
The depositor generally monitors whether each seller or, in the case of
a Designated Seller Transaction, the designated seller, is under the control of
the FDIC, or are insolvent, otherwise in receivership or conservatorship or
financially distressed. Those sellers may not be able or permitted to repurchase
loans for which there has been a breach of representation or warranty. Moreover,
any seller may make no representations or warranties for loans sold by it. The
FDIC, either in its corporate capacity or as receiver or conservator for a
depository institution, may also be a seller, in which event neither the FDIC
nor the related depository institution may make representations or warranties
for the loans sold, or only limited representations or warranties may be made,
for example, that the related legal documents are enforceable. The FDIC may have
no obligation to repurchase any loan for a breach of a representation or
warranty.
LIMITED RIGHT OF SUBSTITUTION
In the case of a loan required to be repurchased from the trust, a
designated seller or Residential Funding Corporation may substitute a new loan
for the repurchased loan that was removed from the trust, during the limited
time period described below. Any such substitution must be effected within 120
days of the date of the issuance of the securities for a trust for which no
REMIC election is to be made. For a trust for which a REMIC election is to be
made, except as otherwise provided in the accompanying prospectus supplement,
the substitution must be effected within two years of the date of the issuance
of the securities, and may not be made if the substitution would cause the trust
to fail to qualify as a REMIC or result in a prohibited transaction tax under
the Internal Revenue Code.
In most cases, any qualified substitute loan will, on the date of
substitution:
o have an outstanding principal balance, after deduction of the principal
portion of the monthly payment due in the month of substitution, not in
excess of the outstanding principal balance of the repurchased loan;
o have a loan rate and a Net Loan Rate not less than, and not more than
one percentage point greater than, the loan rate and Net Loan Rate,
respectively, of the repurchased loan as of the date of substitution;
o have an LTV ratio or combined LTV ratio, as applicable, at the time of
substitution no higher than that of the repurchased loan;
o have a remaining term to maturity not greater than, and not more than one
year less than, that of the repurchased loan;
o be secured by mortgaged property located in the United States, unless
the repurchased loan was a Mexico Loan or a loan secured by mortgaged
property located in Puerto Rico, in which case the qualified substitute
loan may be a Mexico Loan or a loan secured by mortgaged property
located in Puerto Rico, respectively; and
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o comply with all of the representations and warranties made with respect to
the repurchased loans as of the date of substitution.
If the outstanding principal balance of a qualified substitute loan is
less than the outstanding principal balance of the related repurchased loan, the
amount of the shortfall shall be deposited into the Custodial Account in the
month of substitution for distribution to the related securityholders. There may
be additional requirements relating to ARM loans, revolving credit loans,
negative amortization loans or other specific types of loans, or additional
provisions relating to meeting the foregoing requirements on an aggregate basis
where a number of substitutions occur contemporaneously. Unless otherwise
specified in the accompanying prospectus supplement, a seller, will have no
option to substitute for a loan that it is obligated to repurchase in connection
with a breach of a representation and warranty.
CERTAIN INSOLVENCY AND BANKRUPTCY ISSUES
Each seller, including a designated seller, and the depositor will
represent and warrant that its respective transfer of trust assets constitutes a
valid sale and assignment of all of its right, title and interest in and to such
trust assets, except to the extent that such seller or the depositor retains any
security. Nevertheless, if a seller were to become a debtor in a bankruptcy case
and a creditor or bankruptcy trustee of such seller, or such seller as a
debtor-in-possession, were to assert that the sale of the trust assets from such
seller to the depositor should be recharacterized as a pledge of such trust
assets to secure a borrowing by such seller, then delays in payments to the
depositor (and therefore to the trust and the securityholders) could occur and
possible reductions in the amount of such payments could result. In addition, if
a court were to recharacterize the transfer as a pledge and a subsequent
assignee were to take physical possession of any mortgage notes, through
negligence, fraud or otherwise, the trustee's interest in such mortgage notes
could be defeated.
If an entity with an interest in a loan of which only a partial balance
has been transferred to the trust were to become a debtor under the Bankruptcy
Code and regardless of whether the transfer of the related loan constitutes an
absolute assignment, a bankruptcy trustee or creditor of such entity or such
entity as a debtor-in-possession could assert that such entity retains rights in
the related loan and therefore compel the sale of such loan, including any
partial balance included in the trust, over the objection of the trust and the
securityholders. If that occurs, delays and reductions in payments to the trust
and the securityholders could result.
The depositor has been structured such that (i) the filing of a
voluntary or involuntary petition for relief by or against the depositor under
the Bankruptcy Code and (ii) the substantive consolidation of the assets and
liabilities of the depositor with those of an affiliated seller is unlikely. The
certificate of incorporation of the depositor restricts the nature of the
depositor's business and the ability of the depositor to commence a voluntary
case or proceeding under such laws without the prior unanimous consent of all
directors.
ASSIGNMENT OF AGENCY OR PRIVATE SECURITIES
The depositor will transfer, convey and assign to the trustee or its
nominee, which may be the custodian, all right, title and interest of the
depositor in the Agency Securities or private securities and other property to
be included in the trust for a series. The assignment will include all principal
and interest due on or for the Agency Securities or private securities after the
cut-off date specified in the accompanying prospectus supplement, except for any
Excluded Spread. The depositor will cause the Agency Securities or private
securities to be registered in the name of the trustee or its nominee, and the
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trustee will concurrently authenticate and deliver the securities. Unless
otherwise specified in the accompanying prospectus supplement, the trustee will
not be in possession of or be assignee of record of any underlying assets for an
Agency Security or private security. Each Agency Security or private security
will be identified in a schedule appearing as an exhibit to the related
agreement, which will specify as to each Agency Security or private security
information regarding the original principal amount and outstanding principal
balance of each Agency Security or private security as of the cut-off date, as
well as the annual pass-through rate or interest rate for each Agency Security
or private security conveyed to the trustee.
EXCESS SPREAD AND EXCLUDED SPREAD
The depositor, the servicer, the seller, the master servicer or any of
their affiliates, or any other entity specified in the accompanying prospectus
supplement may retain or be paid a portion of interest due for the related trust
assets. The payment of any portion of interest in this manner will be disclosed
in the accompanying prospectus supplement. This payment may be in addition to
any other payment, including a servicing fee, that the specified entity is
otherwise entitled to receive for the trust assets. Any of these payments
generated from the trust assets will represent the Excess Spread or will be
excluded from the assets transferred to the related trust, referred to as
Excluded Spread. The interest portion of a Realized Loss and any partial
recovery of interest on the trust assets will be allocated between the owners of
any Excess Spread or Excluded Spread and the securityholders entitled to
payments of interest.
PAYMENTS ON LOANS
COLLECTION OF PAYMENTS ON LOANS
The servicer or the master servicer, as applicable, will deposit or will
cause to be deposited into the Custodial Account payments and collections
received by it subsequent to the cut-off date, other than payments due on or
before the cut-off date, as specifically described in the related agreement,
which in most cases, except as otherwise provided, will include the following:
o all payments on account of principal of the loans comprising a trust;
o all payments on account of interest on the loans comprising that
trust, net of the portion of each payment thereof retained by the
master servicer or servicer, if any, as Excess or Excluded Spread,
its servicing or other compensation;
o Liquidation Proceeds;
o all amounts, net of unreimbursed liquidation expenses and insured
expenses incurred, and unreimbursed Servicing Advances made, by the
related subservicer, received and retained, including Insurance
Proceeds or proceeds from any alternative arrangements established in
lieu of any such insurance and described in the applicable prospectus
supplement, other than proceeds to be applied to the restoration of
the related property or released to the borrower in accordance with
the master servicer's or servicer's normal servicing procedures;
o any Buy-Down Funds and, if applicable, investment earnings thereon,
required to be paid to securityholders;
o all proceeds of any loan in the trust purchased or, in the case of a
substitution, amounts representing a principal adjustment, by the
depositor, the designated seller, Residential Funding Corporation,
any seller or any other person under the terms of the related
agreement;
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o any amount required to be deposited by the master servicer or servicer in
connection with losses realized on investments of funds held in the
Custodial Account; and
o any amounts required to be transferred from the Payment Account to the
Custodial Account.
See "Description of the Securities -- Representations with Respect to
Loans" and "--Repurchases of Loans".
In addition to the Custodial Account, the master servicer or servicer
will establish and maintain the Payment Account. Both the Custodial Account and
the Payment Account must be either:
o maintained with a depository institution whose debt obligations at
the time of any deposit therein are rated by any rating agency that
rated any securities of the related series not less than a specified
level comparable to the rating category of the securities;
o an account or accounts the deposits in which are fully insured to the
limits established by the FDIC, provided that any deposits not so
insured shall be otherwise maintained so that, as evidenced by an
opinion of counsel, the securityholders have a claim with respect to
the funds in such accounts or a perfected first priority security
interest in any collateral securing those funds that is superior to
the claims of any other depositors or creditors of the depository
institution with which the accounts are maintained;
o in the case of the Custodial Account, a trust account or accounts
maintained in either the corporate trust department or the corporate
asset services department of a financial institution which has debt
obligations that meet specified rating criteria;
o in the case of the Payment Account, a trust account or accounts maintained
with the trustee; or
o any other Eligible Account.
The collateral that is eligible to secure amounts in an Eligible Account
is limited to some Permitted Investments. A Payment Account may be maintained as
an interest-bearing or a non-interest-bearing account, or funds therein may be
invested in Permitted Investments as described in this prospectus under
"Description of the Securities--Payments on Loans". The Custodial Account may
contain funds relating to more than one series of securities as well as payments
received on other loans and assets serviced or master serviced by the master
servicer or servicer that have been deposited into the Custodial Account.
Unless otherwise described in the accompanying prospectus supplement,
not later than the business day preceding each distribution date, the master
servicer or servicer, as applicable, will withdraw from the Custodial Account
and deposit into the applicable Payment Account, in immediately available funds,
the amount to be distributed therefrom to securityholders on that distribution
date. The master servicer, the servicer or the trustee will also deposit or
cause to be deposited into the Payment Account:
o the amount of any Advances made by the master servicer or the servicer as
described in this prospectus under "--Advances;"
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o any payments under any letter of credit, financial guaranty insurance
policy, derivative product, and any amounts required to be
transferred to the Payment Account from a reserve fund, as described
under "Description of Credit Enhancement" in this prospectus;
o any amounts required to be paid by the master servicer or servicer
out of its own funds due to the operation of a deductible clause in
any blanket policy maintained by the master servicer or servicer to
cover hazard losses on the loans as described under "Insurance
Policies on Loans" below;
o any distributions received on any Agency Securities or private securities
included in the trust; and
o any other amounts as described in the related agreement.
The portion of any payment received by the master servicer or the
servicer relating to a trust asset that is allocable to Excess Spread or
Excluded Spread will typically be deposited into the Custodial Account, but any
Excluded Spread will not be deposited in the Payment Account for the related
series of securities and will be distributed as provided in the related
agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next distribution date and funds on deposit in the related Payment Account may
be invested in Permitted Investments maturing, in general, no later than the
distribution date. Except as otherwise specified in the accompanying prospectus
supplement, all income and gain realized from any investment will be for the
account of the servicer or the master servicer as additional servicing
compensation. The amount of any loss incurred in connection with any such
investment must be deposited in the Custodial Account or in the Payment Account,
as the case may be, by the servicer or the master servicer out of its own funds
at the time of the realization of the loss.
For each Buy-Down Loan, the subservicer will deposit the related
Buy-Down Funds provided to it in a Buy-Down Account which will comply with the
requirements described in this prospectus for a Subservicing Account. Unless
otherwise specified in the accompanying prospectus supplement, the terms of all
Buy-Down Loans provide for the contribution of Buy-Down Funds in an amount equal
to or exceeding either (i) the total payments to be made from those funds under
the related buydown plan or (ii) if the Buy-Down Funds are to be deposited on a
discounted basis, that amount of Buy-Down Funds which, together with investment
earnings thereon will support the scheduled level of payments due under the
Buy-Down Loan.
Neither the master servicer nor the servicer nor the depositor will be
obligated to add to any discounted Buy-Down Funds any of its own funds should
investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any insufficiency is not recoverable from the
borrower or, in an appropriate case, from the subservicer, distributions to
securityholders may be affected. For each Buy-Down Loan, the subservicer will
withdraw from the Buy-Down Account and remit to the master servicer or servicer
on or before the date specified in the subservicing agreement described in this
prospectus under "Description of the Securities--Payments on Loans" the amount,
if any, of the Buy-Down Funds, and, if applicable, investment earnings thereon,
for each Buy-Down Loan that, when added to the amount due from the borrower on
the Buy-Down Loan, equals the full monthly payment which would be due on the
Buy-Down Loan if it were not subject to the buydown plan. The Buy-Down Funds
will in no event be a part of the related trust.
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If the borrower on a Buy-Down Loan prepays the mortgage loan in its
entirety during the Buy-Down Period, the subservicer will withdraw from the
Buy-Down Account and remit to the borrower or any other designated party in
accordance with the related buydown plan any Buy-Down Funds remaining in the
Buy-Down Account. If a prepayment by a borrower during the Buy-Down Period
together with Buy-Down Funds will result in full prepayment of a Buy-Down Loan,
the subservicer will, in most cases, be required to withdraw from the Buy-Down
Account and remit to the master servicer or servicer the Buy-Down Funds and
investment earnings thereon, if any, which together with such prepayment will
result in a prepayment in full; provided that Buy-Down Funds may not be
available to cover a prepayment under some mortgage loan programs. Any Buy-Down
Funds so remitted to the master servicer or servicer in connection with a
prepayment described in the preceding sentence will be deemed to reduce the
amount that would be required to be paid by the borrower to repay fully the
related mortgage loan if the mortgage loan were not subject to the buydown plan.
Any investment earnings remaining in the Buy-Down Account after
prepayment or after termination of the Buy-Down Period will be remitted to the
related borrower or any other designated party under the Buy-Down Agreement. If
the borrower defaults during the Buy-Down Period for a Buy-Down Loan and the
property securing that Buy-Down Loan is sold in liquidation either by the master
servicer, the servicer, the primary insurer, the pool insurer under the mortgage
pool insurance policy or any other insurer, the subservicer will be required to
withdraw from the Buy-Down Account the Buy-Down Funds and all investment
earnings thereon, if any, and remit the same to the master servicer or servicer
or, if instructed by the master servicer, pay the same to the primary insurer or
the pool insurer, as the case may be, if the mortgaged property is transferred
to that insurer and the insurer pays all of the loss incurred relating to such
default.
COLLECTION OF PAYMENTS ON AGENCY SECURITIES OR PRIVATE SECURITIES
The trustee will deposit in the Payment Account all payments on the
Agency Securities or private securities as they are received after the cut-off
date. If the trustee has not received a distribution for any Agency Security or
private security by the second business day after the date on which such
distribution was due and payable, the trustee will request the issuer or
guarantor, if any, of such Agency Security or private security to make such
payment as promptly as possible and legally permitted. The trustee may take any
legal action against the related issuer or guarantor as is appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of any legal action will be reimbursable to the trustee out
of the proceeds of the action and will be retained by the trustee prior to the
deposit of any remaining proceeds in the Payment Account pending distribution
thereof to the securityholders of the affected series. If the trustee has reason
to believe that the proceeds of the legal action may be insufficient to cover
its projected legal fees and expenses, the trustee will notify the related
securityholders that it is not obligated to pursue any available remedies unless
adequate indemnity for its legal fees and expenses is provided by the
securityholders.
WITHDRAWALS FROM THE CUSTODIAL ACCOUNT
The servicer or the master servicer, as applicable, may, from time to
time, make withdrawals from the Custodial Account for various purposes, as
specifically described in the pooling and servicing agreement or servicing
agreement, which in most cases will include the following:
o to make deposits to the Payment Account as described in this prospectus
under "--Payments on Loans;"
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o to reimburse itself or any subservicer for any Advances, or for any
Servicing Advances, out of late payments, Insurance Proceeds,
Liquidation Proceeds, any proceeds relating to any REO Loan or
collections on the loan for which those Advances or Servicing
Advances were made;
o to pay to itself or any subservicer unpaid servicing fees and subservicing
fees, out of payments or collections of interest on each loan;
o to pay to itself as additional servicing compensation any investment
income on funds deposited in the Custodial Account, any amounts
remitted by subservicers as interest on partial prepayments on the
loans, and, if so provided in the related agreement, any profits
realized on the disposition of a mortgaged property acquired by deed
in lieu of foreclosure or repossession or otherwise allowed under the
agreement;
o to pay to itself, a subservicer, Residential Funding Corporation, the
depositor or the designated seller all amounts received for each loan
purchased, repurchased or removed under the terms of the related
agreement and not required to be distributed as of the date on which
the related purchase price is determined;
o to pay the depositor or its assignee, or any other party named in the
accompanying prospectus supplement, all amounts allocable to the
Excluded Spread, if any, out of collections or payments which
represent interest on each loan, including any loan as to which title
to the underlying mortgaged property was acquired;
o to reimburse itself or any subservicer for any Nonrecoverable Advance,
limited by the terms of the related agreement as described in the
accompanying prospectus supplement;
o to reimburse itself or the depositor for other expenses incurred for
which it or the depositor is entitled to reimbursement, including
reimbursement in connection with enforcing any repurchase,
substitution or indemnification obligation of any seller, or against
which it or the depositor is indemnified under the related agreement;
o to withdraw any amount deposited in the Custodial Account that was not
required to be deposited in the Custodial Account;
o to reimburse itself or the depositor for payment of FHA insurance premiums,
if applicable, or against which it or the depositor is indemnified under
the related agreement;
o to pay to itself or any subservicer for the funding of any draws made on
the revolving credit loans, if applicable;
o to make deposits to the funding account in the amounts and in the manner
provided in the related agreement, if applicable; and
o to clear the Custodial Account of amounts relating to the
corresponding loans in connection with the termination of the trust
under the related agreement, as described in "The
Agreements--Termination; Retirement of Securities."
DISTRIBUTIONS OF PRINCIPAL AND INTEREST ON THE SECURITIES
Beginning on the distribution date in the month next succeeding the
month in which the cut-off date occurs, or any other date as may be set forth in
the accompanying prospectus supplement, for a series of securities, distribution
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of principal and interest, or, where applicable, of principal only or interest
only, on each class of securities entitled to such payments will be made either
by the trustee, the master servicer or servicer, as applicable, acting on behalf
of the trustee or a paying agent appointed by the trustee. The distributions
will be made to the persons who are registered as the holders of the securities
at the close of business on the last business day of the preceding month or on
such other day as is specified in the accompanying prospectus supplement.
Distributions will be made in immediately available funds, by wire
transfer or otherwise, to the account of a securityholder at a bank or other
entity having appropriate facilities, if the securityholder has so notified the
trustee, the master servicer or the servicer, as applicable, or the paying
agent, as the case may be, and the applicable agreement provides for that form
of payment, or by check mailed to the address of the person entitled to such
payment as it appears on the security register. Except as otherwise provided in
the related agreement, the final distribution in retirement of the securities
will be made only on the presentation and surrender of the securities at the
office or agency of the trustee specified in the notice to the securityholders.
Distributions will be made to each securityholder in accordance with that
holder's percentage interest in a particular class.
The method of determining, and the amount of, distributions of principal
and interest, or, where applicable, of principal only or interest only, on a
particular series of securities will be described in the accompanying prospectus
supplement. Distributions of interest on each class of securities will be made
prior to distributions of principal thereon. Each class of securities, other
than classes of strip securities, may have a different specified interest rate,
or pass-through rate, which may be a fixed, variable or adjustable pass-through
rate, or any combination of two or more pass-through rates. The accompanying
prospectus supplement will specify the pass-through rate or rates for each
class, or the initial pass-through rate or rates, the interest accrual period
and the method for determining the pass-through rate or rates. Unless otherwise
specified in the accompanying prospectus supplement, interest on the securities
will accrue during each calendar month and will be payable on the distribution
date in the following calendar month. If stated in the accompanying prospectus
supplement, interest on any class of securities for any distribution date may be
limited to the extent of available funds for that distribution date. Interest on
the securities will be calculated on the basis of a 360-day year consisting of
twelve 30-day months or, if specified in the accompanying prospectus supplement,
the actual number of days in the related interest period and a 360 or
365/366-day year.
On each distribution date for a series of securities, the trustee or the
master servicer or servicer, as applicable, on behalf of the trustee will
distribute or cause the paying agent to distribute, as the case may be, to each
holder of record on the record date of a class of securities specified in the
accompanying prospectus supplement, an amount equal to the percentage interest
represented by the security held by that holder multiplied by that class's
Distribution Amount.
In the case of a series of securities which includes two or more classes
of securities, the timing, sequential order, priority of payment or amount of
distributions of principal, and any schedule or formula or other provisions
applicable to that determination, including distributions among multiple classes
of senior securities or subordinate securities, shall be described in the
accompanying prospectus supplement. Distributions of principal on any class of
securities will be made on a pro rata basis among all of the securities of that
class unless otherwise set forth in the accompanying prospectus supplement. In
addition, as specified in the accompanying prospectus supplement, payments of
principal on the notes will be limited to monthly principal payments on the
loans, any excess interest, if applicable, applied as principal payments on the
notes and any amount paid as a payment of principal under the related form of
credit enhancement. If stated in the accompanying prospectus supplement, a
series of notes may provide for a revolving period during which all or a portion
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of the principal collections on the loans otherwise available for payment to the
notes are reinvested in additional balances or additional loans or accumulated
in a trust account pending the commencement of an amortization period specified
in the accompanying prospectus supplement or the occurrence of events specified
in the accompanying prospectus supplement.
On the day of the month specified in the accompanying prospectus
supplement as the determination date, the master servicer or servicer, as
applicable, will determine the amounts of principal and interest which will be
paid to securityholders on the immediately succeeding distribution date. Prior
to the close of business on the business day next succeeding each determination
date, the master servicer or servicer, as applicable, will furnish a statement
to the trustee, setting forth, among other things, the amount to be distributed
on the next succeeding distribution date.
ADVANCES
If specified accompanying prospectus supplement, the master servicer or
servicer, as applicable, will agree to make Advances, either out of its own
funds, funds advanced to it by subservicers or funds being held in the Custodial
Account for future distribution, for the benefit of the securityholders, on or
before each distribution date, of monthly payments on the loans that were
delinquent as of the close of business on the business day preceding the
determination date on the loans in the related pool, but only to the extent that
the Advances would, in the judgment of the master servicer or servicer, as
applicable, be recoverable out of late payments by the borrowers, Liquidation
Proceeds, Insurance Proceeds or otherwise. Advances will not be made in
connection with revolving credit loans, Home Loans, home improvement contracts,
closed-end home equity loans, negative amortization loans and loans acquired
under Residential Funding Corporation's portfolio transaction program, except as
otherwise provided in the accompanying prospectus supplement. As specified in
the accompanying prospectus supplement for any series of securities as to which
the trust includes private securities, the master servicer's or servicer's, as
applicable, advancing obligations will be under the terms of such private
securities, as may be supplemented by the terms of the applicable agreement, and
may differ from the provisions relating to Advances described in this
prospectus. Unless specified in the accompanying prospectus supplement, the
master servicer or servicer, as applicable, will not make any advance with
respect to principal on any simple interest loan.
The amount of any Advance will be determined based on the amount payable
under the loan as adjusted from time to time and as may be modified as described
in this prospectus under "--Servicing and Administration of Loans," and no
Advance will be required in connection with any reduction in amounts payable
under the Relief Act or as a result of certain actions taken by a bankruptcy
court.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to related securityholders. Advances do not represent an
obligation of the master servicer or servicer to guarantee or insure against
losses. If Advances have been made by the master servicer or servicer from cash
being held for future distribution to securityholders, those funds will be
required to be replaced on or before any future distribution date to the extent
that funds in the Payment Account on that distribution date would be less than
payments required to be made to securityholders. Any Advances will be
reimbursable to the master servicer or servicer out of recoveries on the related
loans for which those amounts were advanced, including late payments made by the
related borrower, any related Liquidation Proceeds and Insurance Proceeds,
proceeds of any applicable form of credit enhancement, or proceeds of any loans
purchased by the depositor, Residential Funding Corporation, a subservicer, a
seller, or a designated seller.
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Advances will also be reimbursable from cash otherwise distributable to
securityholders to the extent that the master servicer or servicer shall
determine that any Advances previously made are not ultimately recoverable as
described in the third preceding paragraph. For any senior/subordinate series,
so long as the related subordinate securities remain outstanding and limited for
Special Hazard Losses, Fraud Losses, Bankruptcy Losses and Extraordinary Losses,
the Advances may also be reimbursable out of amounts otherwise distributable to
holders of the subordinate securities, if any. The master servicer or the
servicer may also be obligated to make Servicing Advances, to the extent
recoverable out of Liquidation Proceeds or otherwise, relating to some taxes and
insurance premiums not paid by borrowers on a timely basis. Funds so advanced
will be reimbursable to the master servicer or servicer to the extent permitted
by the related agreement.
In the case of revolving credit loans, the master servicer or servicer
is required to advance funds to cover any Draws made on a revolving credit loan,
subject to reimbursement by the entity specified in the accompanying prospectus
supplement, provided that as specified in the accompanying prospectus supplement
during any revolving period associated with the related series of securities,
Draws may be covered first from principal collections on the other loans in the
pool.
The master servicer's or servicer's obligation to make Advances may be
supported by another entity, the trustee, a financial guaranty insurance policy,
a letter of credit or other method as may be described in the related agreement.
If the short-term or long-term obligations of the provider of the support are
downgraded by a rating agency rating the related securities or if any collateral
supporting such obligation is not performing or is removed under the terms of
any agreement described in the accompanying prospectus supplement, the
securities may also be downgraded.
PREPAYMENT INTEREST SHORTFALLS
When a borrower prepays a loan in full between scheduled due dates for
the loan, the borrower pays interest on the amount prepaid only to but not
including the date on which the Principal Prepayment is made. Prepayments in
full in most cases will be applied as of the date of prepayment so that interest
on the related securities will be paid only until that date. Similarly,
Liquidation Proceeds from a mortgaged property will not include interest for any
period after the date on which the liquidation took place. Partial prepayments
will in most cases be applied as of the most recent due date, so that no
interest is due on the following due date on the amount prepaid.
If stated in the accompanying prospectus supplement, to the extent funds
are available from the servicing fee, the master servicer or servicer may make
an additional payment to securityholders out of the servicing fee otherwise
payable to it for any loan that prepaid during the related prepayment period
equal to the Compensating Interest for that loan from the date of the prepayment
to the related due date. Compensating Interest will be limited to the aggregate
amount specified in the accompanying prospectus supplement and may not be
sufficient to cover the Prepayment Interest Shortfall. Compensating Interest is
not generally paid with respect to closed-end home equity loans, Home Loans and
revolving credit loans. If so disclosed in the accompanying prospectus
supplement, Prepayment Interest Shortfalls may be applied to reduce interest
otherwise payable for one or more classes of securities of a series. See "Yield
Considerations" in this prospectus.
FUNDING ACCOUNT
If specified in the accompanying prospectus supplement, a pooling and
servicing agreement, trust agreement or other agreement may provide for the
transfer by the sellers of additional loans to the related trust after the
closing date for the related securities. Any additional loans will be required
to conform to the requirements set forth in the related agreement providing for
such transfer. If a Funding Account is established, all or a portion of the
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proceeds of the sale of one or more classes of securities of the related series
or a portion of collections on the loans of principal will be deposited in such
account to be released as additional loans are transferred. Unless otherwise
specified in the accompanying prospectus supplement, a Funding Account will be
required to be maintained as an Eligible Account. All amounts in the Funding
Account will be required to be invested in Permitted Investments and the amount
held in the Funding Account shall at no time exceed 25% of the aggregate
outstanding principal balance of the securities. Unless otherwise specified in
the accompanying prospectus supplement, the related agreement providing for the
transfer of additional loans will provide that all transfers must be made within
90 days, and that amounts set aside to fund the transfers, whether in a Funding
Account or otherwise, and not so applied within the required period of time will
be deemed to be Principal Prepayments and applied in the manner described in the
prospectus supplement.
REPORTS TO SECURITYHOLDERS
On each distribution date, the master servicer or servicer will forward
or cause to be forwarded to each securityholder of record a statement or
statements for the related trust setting forth the information described in the
related agreement. Except as otherwise provided in the related agreement, the
information will in most cases include the following (as applicable):
o the aggregate amount of interest collections and principal collections, if
applicable;
o the amount, if any, of the distribution allocable to principal;
o the amount, if any, of the distribution allocable to interest and the
amount, if any, of any shortfall in the amount of interest and principal;
o the aggregate unpaid principal balance of the loans after giving effect to
the distribution of principal on that distribution date;
o the outstanding principal balance or notional amount of each class of
securities after giving effect to the distribution of principal on
that distribution date;
o based on the most recent reports furnished by subservicers, the
number and aggregate principal balances of loans in the related trust
that are delinquent (a) one month, (b) two months and (c) three
months, and that are in foreclosure;
o the book value of any property acquired by the trust through foreclosure or
grant of a deed in lieu of foreclosure;
o the balance of the reserve fund, if any, at the close of business on that
distribution date;
o the percentage of the outstanding principal balances of the senior
securities, if applicable, after giving effect to the distributions on that
distribution date;
o the amount of credit enhancement remaining or credit enhancement
payments made under any letter of credit, mortgage pool insurance
policy or other form of credit enhancement covering default risk as
of the close of business on the applicable determination date and a
description of any credit enhancement substituted therefor;
o if applicable, the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
distribution date and a description of any change in the calculation
of those amounts, as well as the aggregate amount of each type of
loss;
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o in the case of securities benefiting from alternative credit
enhancement arrangements described in a prospectus supplement, the
amount of coverage under the alternative arrangements as of the close
of business on the applicable determination date;
o the servicing fee payable to the master servicer or the servicer and the
subservicer;
o the aggregate amount of any Draws;
o the FHA insurance amount, if any; and
o for any series of securities as to which the trust includes Agency
Securities or private securities, any additional information as
required under the related agreement.
In addition to the information described above, reports to
securityholders will contain any other information as is described in the
applicable agreement, which may include, without limitation, information as to
Advances, reimbursements to subservicers, servicers and the master servicer and
losses borne by the related trust.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or servicer will furnish or cause to be
furnished report to each person that was a holder of record of any class of
securities at any time during that calendar year. The report will include
information as to the aggregate of principal and interest distributions for that
calendar year or, if the person was a holder of record of a class of securities
during a portion of that calendar year, for the applicable portion of that year.
SERVICING AND ADMINISTRATION OF LOANS
GENERAL
The master servicer or any servicer, as applicable, that is a party to a
pooling and servicing agreement or servicing agreement, will be required to
perform the services and duties specified in the related agreement. The master
servicer or servicer may be an affiliate of the depositor. As to any series of
securities secured by Agency Securities or private securities the requirements
for servicing the underlying assets will be described in the accompanying
prospectus supplement. The duties to be performed by the master servicer or
servicer will include the customary functions of a servicer, including but not
limited to:
o collection of payments from borrowers and remittance of those collections
to the master servicer or servicer in the case of a subservicer;
o maintenance of escrow or impoundment accounts of borrowers for payment of
taxes, insurance and other items required to be paid by the borrower, if
applicable;
o processing of assumptions or substitutions, although, as specified in
the accompanying prospectus supplement, the master servicer or
servicer is, in most cases, required to exercise due-on-sale clauses
to the extent that exercise is permitted by law and would not
adversely affect insurance coverage;
o attempting to cure delinquencies;
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o supervising foreclosures;
o collections on Additional Collateral;
o inspection and management of mortgaged properties under various
circumstances; and
o maintaining accounting records relating to the trust assets.
Under each servicing agreement, the servicer or the master servicer may
enter into subservicing agreements with one or more subservicers who will agree
to perform certain functions for the servicer or master servicer relating to the
servicing and administration of the loans included in the trust relating to the
subservicing agreement. A subservicer may be an affiliate of the depositor.
Under any subservicing agreement, each subservicer will agree, among other
things, to perform some or all of the servicer's or the master servicer's
servicing obligations, including but not limited to, making Advances to the
related securityholders. The servicer or the master servicer, as applicable,
will remain liable for its servicing obligations that are delegated to a
subservicer as if the servicer or the master servicer alone were servicing such
loans.
In the event of a bankruptcy, receivership or conservatorship of the
master servicer or servicer or any subservicer, the bankruptcy court or the
receiver or conservator may have the power to prevent both the appointment of a
successor to service the trust assets and the transfer of collections commingled
with funds of the master servicer, servicer or subservicer at the time of its
bankruptcy, receivership or conservatorship. In addition, if the master servicer
or servicer or any subservicer were to become a debtor in a bankruptcy case, its
rights under the related agreement, including the right to service the trust
assets, would be property of its bankruptcy estate and therefore, under the
Bankruptcy Code, subject to its right to assume or reject such agreement.
COLLECTION AND OTHER SERVICING PROCEDURES
The servicer or the master servicer, directly or through subservicers,
as the case may be, will make reasonable efforts to collect all payments called
for under the loans and will, consistent with the related servicing agreement
and any applicable insurance policy, FHA insurance or other credit enhancement,
follow the collection procedures which are normal and usual in its general loan
servicing activities that are comparable to the loans. Consistent with the
previous sentence, the servicer or the master servicer may, in its discretion,
waive any prepayment charge in connection with the prepayment of a loan or
extend the due dates for payments due on a mortgage note, provided that the
insurance coverage for the loan or any coverage provided by any alternative
credit enhancement will not be adversely affected by the waiver or extension.
The master servicer or servicer may also waive or modify any term of a loan so
long as the master servicer or servicer has determined that the waiver or
modification is not materially adverse to any securityholders, taking into
account any estimated loss that may result absent that action. For any series of
securities as to which the trust includes private securities, the master
servicer's or servicer's servicing and administration obligations will be under
the terms of those private securities.
Under some circumstances, as to any series of securities, the master
servicer or servicer may have the option to repurchase trust assets from the
trust for cash, or in exchange for other trust assets or Permitted Investments.
All provisions relating to these optional repurchase provisions will be
described in the accompanying prospectus supplement.
In instances in which a loan is in default, or if default is reasonably
foreseeable, and if determined by the master servicer or servicer to be in the
best interests of the related securityholders, the master servicer or servicer
may engage, either directly or through subservicers, in a wide variety of loss
mitigation practices including waivers, modifications, payment forbearances,
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partial forgiveness, entering into repayment schedule arrangements, and
capitalization of arrearages rather than proceeding with foreclosure or
repossession, if applicable. In making that determination, the estimated
Realized Loss that might result if the loan were liquidated would be taken into
account. Modifications may have the effect of reducing the loan rate or
extending the final maturity date of the loan. Any modified loan may remain in
the related trust, and the reduction in collections resulting from a
modification may result in reduced distributions of interest or other amounts
on, or may extend the final maturity of, one or more classes of the related
notes.
Borrowers may, from time to time, request partial releases of the
mortgaged properties, easements, consents to alteration or demolition and other
similar matters. The master servicer or servicer may approve that request if it
has determined, exercising its good faith business judgment in the same manner
as it would if it were the owner of the related loan, that the approval will not
adversely affect the security for, and the timely and full collectability of,
the related loan. Any fee collected by the master servicer or the servicer for
processing that request will be retained by the master servicer or servicer as
additional servicing compensation.
In instances in which a loan is in default or if default is reasonably
foreseeable, and if determined by the master servicer or servicer to be in the
best interests of the related securityholders, the master servicer or servicer
may permit modifications of the loan rather than proceeding with foreclosure. In
making this determination, the estimated Realized Loss that might result if the
loans were liquidated would be taken into account. These modifications may have
the effect of reducing the loan rate or extending the final maturity date of the
loan. Any modified loan may remain in the related trust, and the reduction in
collections resulting from the modification may result in reduced distributions
of interest, or other amounts, on, or may extend the final maturity of, one or
more classes of the related securities.
In connection with any significant partial prepayment of a loan, the
master servicer or servicer, to the extent not inconsistent with the terms of
the mortgage note and local law and practice, may permit the loan to be
re-amortized so that the monthly payment is recalculated as an amount that will
fully amortize its remaining principal amount by the original maturity date
based on the original loan rate, provided that the re-amortization shall not be
permitted if it would constitute a modification of the loan for federal income
tax purposes.
The master servicer or servicer for a given trust may establish and
maintain an escrow account in which borrowers will be required to deposit
amounts sufficient to pay taxes, assessments, certain mortgage and hazard
insurance premiums and other comparable items unless, in the case of loans
secured by junior liens on the related mortgaged property, the borrower is
required to escrow such amounts under the senior mortgage documents. Withdrawals
from any escrow account may be made to effect timely payment of taxes,
assessments, mortgage and hazard insurance, to refund to borrowers amounts
determined to be owed, to pay interest on balances in the escrow account, if
required, to repair or otherwise protect the mortgaged properties and to clear
and terminate such account. The master servicer or any servicer, as the case may
be, will be responsible for the administration of each such escrow account and
will be obligated to make advances to the escrow accounts when a deficiency
exists therein. The master servicer or servicer will be entitled to
reimbursement for any advances from the Custodial Account.
Other duties and responsibilities of each servicer and master servicer
are described above under "--Payments on Loans."
SPECIAL SERVICING
If provided for in the accompanying prospectus supplement, the related
agreement or servicing agreement for a series of securities may name a Special
Servicer. The Special Servicer will be responsible for the servicing of certain
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delinquent loans as described in the prospectus supplement. The Special Servicer
may have certain discretion to extend relief to borrowers whose payments become
delinquent. The Special Servicer may be permitted to grant a period of temporary
indulgence to a borrower or may enter into a liquidating plan providing for
repayment by the borrower, in each case without the prior approval of the master
servicer or the servicer, as applicable. Other types of forbearance typically
will require the approval of the master servicer or servicer, as applicable.
In addition, the master servicer or servicer may enter into various
agreements with holders of one or more classes of subordinate securities or of a
class of securities representing interests in one or more classes of subordinate
securities. Under the terms of those agreements, the holder may, for some
delinquent loans:
o instruct the master servicer or servicer to commence or delay
foreclosure proceedings, provided that the holder deposits a
specified amount of cash with the master servicer or servicer which
will be available for distribution to securityholders if Liquidation
Proceeds are less than they otherwise may have been had the master
servicer or servicer acted under its normal servicing procedures;
o instruct the master servicer or servicer to purchase the loans from
the trust prior to the commencement of foreclosure proceedings at the
purchase price and to resell the loans to the holder at such purchase
price, in which case any subsequent loss on the loans will not be
allocated to the securityholders;
o become, or designate a third party to become, a subservicer for the
loans so long as (i) the master servicer or servicer has the right to
transfer the subservicing rights and obligations of the loans to
another subservicer at any time or (ii) the holder or its servicing
designee is required to service the loans according to the master
servicer's or servicer's servicing guidelines; or
o the accompanying prospectus supplement may provide for the other types of
special servicing arrangements.
ENFORCEMENT OF "DUE-ON-SALE" CLAUSES
Unless otherwise specified in the accompanying prospectus supplement,
when any mortgaged property relating to a loan, other than an ARM loan, is about
to be conveyed by the borrower, the master servicer or the servicer, as
applicable, directly or through a subservicer, to the extent it has knowledge of
the proposed conveyance, in most cases will be obligated to exercise the
trustee's rights to accelerate the maturity of such loan under any due-on-sale
clause applicable thereto. A due-on-sale clause will be enforced only if the
exercise of such rights is permitted by applicable law and only to the extent it
would not adversely affect or jeopardize coverage under any primary insurance
policy or applicable credit enhancement arrangements. See "Certain Legal Aspects
of the Loans -- Enforceability of Certain Provisions."
If the master servicer or servicer is prevented from enforcing a
due-on-sale clause under applicable law or if the master servicer or servicer
determines that it is reasonably likely that a legal action would be instituted
by the related borrower to avoid enforcement of such due-on-sale clause, the
master servicer or servicer will enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, under which such person becomes liable under the mortgage note subject
to certain specified conditions. The original borrower may be released from
liability on a loan if the master servicer or servicer shall have determined in
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good faith that such release will not adversely affect the collectability of the
loan. An ARM loan may be assumed if it is by its terms assumable and if, in the
reasonable judgment of the master servicer or servicer, the proposed transferee
of the related mortgaged property establishes its ability to repay the loan and
the security for the ARM loan would not be impaired by the assumption. If a
borrower transfers the mortgaged property subject to an ARM loan without
consent, such ARM loan may be declared due and payable. Any fee collected by the
master servicer or servicer for entering into an assumption or substitution of
liability agreement or for processing a request for partial release of the
mortgaged property in most cases will be retained by the master servicer or
servicer as additional servicing compensation. In connection with any
assumption, the loan rate borne by the related mortgage note may not be altered.
Borrowers may, from time to time, request partial releases of the mortgaged
properties, easements, consents to alteration or demolition and other similar
matters. The master servicer or servicer may approve such a request if it has
determined, exercising its good faith business judgment, that such approval will
not adversely affect the security for, and the timely and full collectability
of, the related loan.
REALIZATION UPON DEFAULTED LOANS
If a loan, including a contract secured by a lien on a mortgaged
property, is in default, the master servicer or servicer may take a variety of
actions, including foreclosing on the mortgaged property, writing off the
principal balance of the loan as a bad debt, taking a deed in lieu of
foreclosure, accepting a short sale, permitting a short refinancing, arranging
for a repayment plan or modification as described above, or taking an unsecured
note. Realization on other contracts may be accomplished through repossession
and subsequent resale of the underlying home improvement. In connection with
that decision, the master servicer or servicer will, following usual practices
in connection with senior and junior mortgage servicing activities or
repossession and resale activities, estimate the proceeds expected to be
received and the expenses expected to be incurred in connection with that
foreclosure or repossession and resale to determine whether a foreclosure
proceeding or a repossession and resale is appropriate. To the extent that a
loan secured by a lien on a mortgaged property is junior to another lien on the
related mortgaged property, unless foreclosure proceeds for that loan are
expected to at least satisfy the related senior mortgage loan in full and to pay
foreclosure costs, it is likely that that loan will be written off as bad debt
with no foreclosure proceeding. Similarly, the expense and delay that may be
associated with foreclosing on the borrower's beneficial interest in the Mexican
trust following a default on a Mexico Loan, particularly if eviction or other
proceedings are required to be commenced in the Mexican courts, may make
attempts to realize on the collateral securing the Mexico Loans uneconomical,
thus significantly increasing the amount of the loss on the Mexico Loan. If
title to any mortgaged property is acquired in foreclosure or by deed in lieu of
foreclosure, the deed or certificate of sale will be issued to the trustee or to
its nominee on behalf of securityholders and, if applicable, the holders of any
Excluded Balances.
Any acquisition of title and cancellation of any REO Loan will be
considered for most purposes to be an outstanding loan held in the trust until
it is converted into a Liquidated Loan.
For purposes of calculations of amounts distributable to securityholders
relating to an REO Loan, the amortization schedule in effect at the time of any
acquisition of title, before any adjustment by reason of any bankruptcy or any
similar proceeding or any moratorium or similar waiver or grace period, will be
deemed to have continued in effect and, in the case of an ARM loan, the
amortization schedule will be deemed to have adjusted in accordance with any
interest rate changes occurring on any adjustment date, so long as the REO Loan
is considered to remain in the trust. If a REMIC election has been made, any
mortgaged property so acquired by the trust must be disposed of in accordance
with applicable federal income tax regulations and consistent with the status of
the trust as a REMIC. To the extent provided in the related agreement, any
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income, net of expenses and other than gains described in the second succeeding
paragraph, received by the servicer or the master servicer on the mortgaged
property prior to its disposition will be deposited in the Custodial Account on
receipt and will be available at that time for making payments to
securityholders.
For a loan in default, the master servicer or servicer may pursue
foreclosure or similar remedies subject to any senior loan positions and certain
other restrictions pertaining to junior loans as described under "Certain Legal
Aspects of the Loans" concurrently with pursuing any remedy for a breach of a
representation and warranty. However, the master servicer or servicer is not
required to continue to pursue both remedies if it determines that one remedy is
more likely to result in a greater recovery. If the mortgage loan is an
Additional Collateral Loan or a Pledged Asset Mortgage Loan, the master servicer
or the servicer may proceed against the related mortgaged property or the
related Additional Collateral or Pledged Assets first, or may proceed against
both concurrently, as permitted by applicable law and the terms under which the
Additional Collateral or Pledged Assets are held, including any third-party
guarantee.
On the first to occur of final liquidation and a repurchase or
substitution under a breach of a representation and warranty, the loan will be
removed from the related trust. The master servicer or servicer may elect to
treat a defaulted loan as having been finally liquidated if substantially all
amounts expected to be received in connection therewith have been received. Any
additional liquidation expenses relating to the loan thereafter incurred will be
reimbursable to the master servicer or servicer from any amounts otherwise
distributable to the related securityholders, or may be offset by any subsequent
recovery related to the loan. Alternatively, for purposes of determining the
amount of related Liquidation Proceeds to be distributed to securityholders, the
amount of any Realized Loss or the amount required to be drawn under any
applicable form of credit enhancement, the master servicer or servicer may take
into account minimal amounts of additional receipts expected to be received, as
well as estimated additional liquidation expenses expected to be incurred in
connection with the defaulted loan. On foreclosure of a revolving credit loan,
the related Liquidation Proceeds will be allocated among the Trust Balances and
Excluded Balances as described in the prospectus supplement.
For some series of securities, the applicable form of credit enhancement
may provide, to the extent of coverage, that a defaulted loan or REO Loan will
be removed from the trust prior to its final liquidation. In addition, the
master servicer, the servicer or the holder of the most subordinate class of
certificates of a series may have the option to purchase from the trust any
defaulted loan after a specified period of delinquency. If a final liquidation
of a loan resulted in a Realized Loss and within two years thereafter the master
servicer or servicer receives a subsequent recovery specifically related to that
loan, in connection with a related breach of a representation or warranty or
otherwise, such subsequent recovery shall be distributed to the then-current
securityholders of any outstanding class to which the Realized Loss was
allocated, with the amounts to be distributed allocated among such classes in
the same proportions as such Realized Loss was allocated, provided that no such
distribution shall result in distributions on the securities of any class in
excess of the total amount of the Realized Loss that was allocated to that
class. In the case of a series of securities other than a senior/subordinate
series, if so provided in the accompanying prospectus supplement, the applicable
form of credit enhancement may provide for reinstatement in accordance with
specified conditions if, following the final liquidation of a loan and a draw
under the related credit enhancement, subsequent recoveries are received. If a
defaulted loan or REO Loan is not so removed from the trust, then, on its final
liquidation, if a loss is realized which is not covered by any applicable form
of credit enhancement or other insurance, the securityholders will bear the
loss. However, if a gain results from the final liquidation of an REO Loan which
is not required by law to be remitted to the related borrower, the master
servicer or servicer will be entitled to retain that gain as additional
servicing compensation unless the accompanying prospectus supplement provides
otherwise. For a description of the master servicer's or the servicer's
obligations to maintain and make claims under applicable forms of credit
enhancement and insurance relating to the loans, see "Description of Credit
Enhancement" and "Insurance Policies on Loans."
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For a discussion of legal rights and limitations associated with the
foreclosure of a loan, see "Certain Legal Aspects of the Loans."
The master servicer or servicer will deal with any defaulted private
securities in the manner set forth in the accompanying prospectus supplement.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
As described in the accompanying prospectus supplement, credit support
provided for each series of securities may include one or more or any
combination of the following:
o a letter of credit;
o subordination provided by any class of subordinated securities for the
related series;
o overcollateralization;
o a mortgage repurchase bond, mortgage pool insurance policy, special
hazard insurance policy, bankruptcy bond or other types of insurance
policies, or a secured or unsecured corporate guaranty, as described
in the accompanying prospectus supplement;
o a reserve fund;
o a financial guaranty insurance policy or surety bond;
o derivatives products; or
o another form as may be described in the accompanying prospectus supplement.
If specified in the accompanying prospectus supplement, the loans or home
improvement contracts may be partially insured by the FHA under Title I.
Credit support for each series of securities may be comprised of one or
more of the following components. Each component will have a dollar limit and
will provide coverage for Realized Losses that are:
o Defaulted Mortgage Losses;
o Special Hazard Losses;
o Bankruptcy Losses; and
o Fraud Losses.
Most forms of credit support will not provide protection against all
risks of loss and will not guarantee repayment of the entire outstanding
principal balance of the securities and interest thereon. If losses occur that
exceed the amount covered by credit support or are of a type that is not covered
by the credit support, securityholders will bear their allocable share of
deficiencies. In particular, Defaulted Mortgage Losses, Special Hazard Losses,
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Bankruptcy Losses and Fraud Losses in excess of the amount of coverage provided
therefor and Extraordinary Losses will not be covered. To the extent that the
credit enhancement for any series of securities is exhausted, the
securityholders will bear all further risks of loss not otherwise insured
against.
Credit support may also be provided in the form of an insurance policy
covering the risk of collection and adequacy of any Additional Collateral
provided in connection with any Additional Collateral Loan, as limited by that
insurance policy. As described in the related agreement, credit support may
apply to all of the loans or to some loans contained in a pool.
For any series of securities backed by Trust Balances of revolving
credit loans, the credit enhancement provided for the securities will cover any
portion of any Realized Losses allocated to the Trust Balances, subject to any
limitations described in this prospectus and in the accompanying prospectus
supplement. See "The Trusts--Revolving Credit Loans" in this prospectus.
Each prospectus supplement will include a description of:
o the amount payable under the credit enhancement arrangement, if any,
provided for a series;
o any conditions to payment thereunder not otherwise described in this
prospectus;
o the conditions under which the amount payable under the credit support may
be reduced and under which the credit support may be terminated or
replaced; and
o the material provisions of any agreement relating to the credit support.
Additionally, each prospectus supplement will contain information for
the issuer of any third-party credit enhancement, if applicable. The related
agreement or other documents may be modified in connection with the provisions
of any credit enhancement arrangement to provide for reimbursement rights,
control rights or other provisions that may be required by the credit enhancer.
To the extent provided in the applicable agreement, the credit enhancement
arrangements may be periodically modified, reduced and substituted for based on
the performance of or on the aggregate outstanding principal balance of the
loans covered thereby. See "Description of Credit Enhancement--Reduction or
Substitution of Credit Enhancement." If specified in the applicable prospectus
supplement, credit support for a series of securities may cover one or more
other series of securities.
The descriptions of any insurance policies, bonds or other instruments
described in this prospectus or any prospectus supplement and the coverage
thereunder do not purport to be complete and are qualified in their entirety by
reference to the actual forms of the policies, copies of which typically will be
exhibits to the Form 8-K to be filed with the Securities and Exchange Commission
in connection with the issuance of the related series of securities.
LETTERS OF CREDIT
If any component of credit enhancement as to any series of securities is
to be provided by a letter of credit, a bank will deliver to the trustee an
irrevocable letter of credit. The letter of credit may provide direct coverage
for the loans. The letter of credit bank, the amount available under the letter
of credit for each component of credit enhancement, the expiration date of the
letter of credit, and a more detailed description of the letter of credit will
be specified in the accompanying prospectus supplement. On or before each
distribution date, the letter of credit bank will be required to make payments
after notification from the trustee, to be deposited in the related Payment
Account for the coverage provided thereby. The letter of credit may also provide
for the payment of Advances.
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SUBORDINATION
A senior/subordinate series of securities will consist of one or more
classes of senior securities and one or more classes of subordinate securities,
as specified in the accompanying prospectus supplement. Subordination of the
subordinate securities of any senior/subordinate series will be effected by the
following method, unless an alternative method is specified in the accompanying
prospectus supplement. In addition, some classes of senior or subordinate
securities may be senior to other classes of senior or subordinate securities,
as specified in the accompanying prospectus supplement.
For any senior/subordinate series, the total amount available for
distribution on each distribution date, as well as the method for allocating
that amount among the various classes of securities included in the series, will
be described in the accompanying prospectus supplement. In most cases, for any
series, the amount available for distribution will be allocated first to
interest on the senior securities of that series, and then to principal of the
senior securities up to the amounts described in the accompanying prospectus
supplement, prior to allocation of any amounts to the subordinate securities.
If so provided in the related agreement, the master servicer or servicer
may be permitted, under certain circumstances, to purchase any loan that is two
or more months delinquent in payments of principal and interest, at the
repurchase price. If specified in the accompanying prospectus supplement, any
Realized Loss subsequently incurred in connection with any such loan will be
passed through to the then outstanding securityholders of the related series in
the same manner as Realized Losses on loans that have not been so purchased,
unless that purchase was made on the request of the holder of the most junior
class of securities of the related series. See "Description of the
Securities--Servicing and Administration of Loans--Special Servicing" above.
In the event of any Realized Losses not in excess of the limitations
described below (other than Extraordinary Losses), the rights of the subordinate
securityholders to receive distributions will be subordinate to the rights of
the senior securityholders and the owner of Excluded Spread and, as to certain
classes of subordinated securities, may be subordinate to the rights of other
subordinate securityholders.
Except as noted below, Realized Losses will be allocated to the
subordinate securities of the related series until their outstanding principal
balances have been reduced to zero. Additional Realized Losses, if any, will be
allocated to the senior securities. If the series includes more than one class
of senior securities, the additional Realized Losses will be allocated either on
a pro rata basis among all of the senior securities in proportion to their
respective outstanding principal balances or as otherwise provided in the
accompanying prospectus supplement.
Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of securities of the related series,
either on a pro rata basis in proportion to their outstanding principal
balances, or as otherwise provided in the accompanying prospectus supplement.
The respective amounts of other specified types of losses, including Fraud
Losses, Special Hazard Losses and Bankruptcy Losses, that may be borne solely by
the subordinate securities may be similarly limited to the Fraud Loss Amount,
Special Hazard Amount and Bankruptcy Amount, and the subordinate securities may
provide no coverage for Extraordinary Losses or other specified types of losses,
as described in the accompanying prospectus supplement, in which case those
losses would be allocated on a pro rata basis among all outstanding classes of
securities or as otherwise specified in the accompanying prospectus supplement.
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Each of the Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount may
be subject to periodic reductions and may be subject to further reduction or
termination, without the consent of the securityholders, on the written
confirmation from each applicable rating agency that the then-current rating of
the related series of securities will not be adversely affected.
In most cases, any allocation of a Realized Loss, including a Special
Hazard Loss, Fraud Loss or Bankruptcy Loss, to a security in a
senior/subordinate series will be made by reducing its outstanding principal
balance as of the distribution date following the calendar month in which the
Realized Loss was incurred.
The rights of holders of the various classes of securities of any series
to receive distributions of principal and interest is determined by the
aggregate outstanding principal balance of each class or, if applicable, the
related notional amount. The outstanding principal balance of any security will
be reduced by all amounts previously distributed on that security representing
principal, and by any Realized Losses allocated thereto. If there are no
Realized Losses or Principal Prepayments on any loan, the respective rights of
the holders of securities of any series to future distributions in most cases
would not change. However, to the extent described in the accompanying
prospectus supplement, holders of senior securities may be entitled to receive a
disproportionately larger amount of prepayments received during specified
periods, which will have the effect, absent offsetting losses, of accelerating
the amortization of the senior securities and increasing the respective
percentage ownership interest evidenced by the subordinate securities in the
related trust, with a corresponding decrease in the percentage of the
outstanding principal balances of the senior securities, thereby preserving the
availability of the subordination provided by the subordinate securities. In
addition, some Realized Losses will be allocated first to subordinate securities
by reduction of their outstanding principal balance, which will have the effect
of increasing the respective ownership interest evidenced by the senior
securities in the related trust.
If so provided in the accompanying prospectus supplement, some amounts
otherwise payable on any distribution date to holders of subordinate securities
may be deposited into a reserve fund. Amounts held in any reserve fund may be
applied as described under "Description of Credit Enhancement--Reserve Funds"
and in the accompanying prospectus supplement.
In lieu of the foregoing provisions, subordination may be effected in
the following manner, or in any other manner as may be described in the
accompanying prospectus supplement. The rights of the holders of subordinate
securities to receive the Subordinate Amount will be limited to the extent
described in the accompanying prospectus supplement. As specified in the
accompanying prospectus supplement, the Subordinate Amount may be reduced based
on the amount of losses borne by the holders of the subordinate securities as a
result of the subordination, a specified schedule or other method of reduction
as the prospectus supplement may specify.
For any senior/subordinate series, the terms and provisions of the
subordination may vary from those described in this prospectus. Any variation
and any additional credit enhancement will be described in the accompanying
prospectus supplement.
OVERCOLLATERALIZATION
If stated in the accompanying prospectus supplement, interest
collections on the loans may exceed interest payments on the securities for the
related distribution date. To the extent such excess interest is applied as
principal payments on the securities, the effect will be to reduce the principal
balance of the securities relative to the outstanding balance of the loan,
thereby creating overcollateralization and additional protection to the
securityholders, if and to the extent specified in the accompanying prospectus
supplement.
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MORTGAGE POOL INSURANCE POLICIES
Any insurance policy covering losses on a loan pool obtained by the
depositor for a trust will be issued by the mortgage pool insurer. Each mortgage
pool insurance policy, in accordance with the limitations described in this
prospectus and in the prospectus supplement, if any, will cover Defaulted
Mortgage Losses in an amount specified in the prospectus supplement. As
described under "--Maintenance of Credit Enhancement," the master servicer or
servicer will use its best reasonable efforts to maintain the mortgage pool
insurance policy and to present claims thereunder to the pool insurer on behalf
of itself, the trustee and the securityholders. The mortgage pool insurance
policies, however, are not blanket policies against loss, since claims
thereunder may only be made respecting particular defaulted loans and only on
satisfaction of specified conditions precedent described in the succeeding
paragraph. Unless specified in the accompanying prospectus supplement, the
mortgage pool insurance policies may not cover losses due to a failure to pay or
denial of a claim under a primary insurance policy, irrespective of the reason
therefor.
Each mortgage pool insurance policy will provide that no claims may be
validly presented thereunder unless, among other things:
o any required primary insurance policy is in effect for the defaulted loan
and a claim thereunder has been submitted and settled;
o hazard insurance on the property securing the loan has been kept in
force and real estate taxes and other protection and preservation
expenses have been paid by the master servicer or servicer;
o if there has been physical loss or damage to the mortgaged property,
it has been restored to its condition, reasonable wear and tear
excepted, at the cut-off date; and
o the insured has acquired good and merchantable title to the mortgaged
property free and clear of liens except permitted encumbrances.
On satisfaction of these conditions, the pool insurer will have the
option either (a) to purchase the property securing the defaulted loan at a
price equal to its outstanding principal balance plus accrued and unpaid
interest at the applicable loan rate to the date of purchase and some expenses
incurred by the master servicer or servicer on behalf of the trustee and
securityholders, or (b) to pay the amount by which the sum of the outstanding
principal balance of the defaulted loan plus accrued and unpaid interest at the
loan rate to the date of payment of the claim and the aforementioned expenses
exceeds the proceeds received from an approved sale of the mortgaged property,
in either case net of some amounts paid or assumed to have been paid under any
related primary insurance policy.
Securityholders may experience a shortfall in the amount of interest
payable on the related securities in connection with the payment of claims under
a mortgage pool insurance policy because the pool insurer is only required to
remit unpaid interest through the date a claim is paid rather than through the
end of the month in which the claim is paid. In addition, the securityholders
may also experience losses for the related securities in connection with
payments made under a mortgage pool insurance policy to the extent that the
master servicer or servicer expends funds to cover unpaid real estate taxes or
to repair the related mortgaged property in order to make a claim under a
mortgage pool insurance policy, as those amounts will not be covered by payments
under the policy and will be reimbursable to the master servicer or servicer
from funds otherwise payable to the securityholders. If any mortgaged property
securing a defaulted loan is damaged and proceeds, if any (see "--Special Hazard
Insurance Policies" below for risks which are not covered by those policies),
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from the related hazard insurance policy or applicable special hazard insurance
policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under the mortgage pool insurance policy, the
master servicer or servicer is not required to expend its own funds to restore
the damaged property unless it determines that (a) restoration will increase the
proceeds to securityholders on liquidation of the mortgage loan after
reimbursement of the master servicer or servicer for its expenses and (b) the
expenses will be recoverable by it through Liquidation Proceeds or Insurance
Proceeds.
A mortgage pool insurance policy and some primary insurance policies
will likely not insure against loss sustained by reason of a default arising
from, among other things, fraud or negligence in the origination or servicing of
a mortgage loan, including misrepresentation by the borrower, the seller or
other persons involved in the origination thereof, failure to construct a
mortgaged property in accordance with plans and specifications or bankruptcy,
unless, if specified in the accompanying prospectus supplement, an endorsement
to the mortgage pool insurance policy provides for insurance against that type
of loss. Depending on the nature of the event, a breach of representation made
by a seller may also have occurred. That breach, if it materially and adversely
affects the interests of securityholders and cannot be cured, would give rise to
a repurchase obligation on the part of the seller, as described under
"Description of the Securities--Repurchases of Loans." However, such an event
would not give rise to a breach of a representation and warranty or a repurchase
obligation on the part of the depositor or Residential Funding Corporation.
The original amount of coverage under each mortgage pool insurance
policy will be reduced over the life of the related series of securities by the
aggregate amount of claims paid less the aggregate of the net amounts realized
by the pool insurer on disposition of all foreclosed properties. The amount of
claims paid includes some expenses incurred by the master servicer or servicer
as well as accrued interest on delinquent mortgage loans to the date of payment
of the claim. See "Certain Legal Aspects of the Loans." Accordingly, if
aggregate net claims paid under any mortgage pool insurance policy reach the
original policy limit, coverage under that mortgage pool insurance policy will
be exhausted and any further losses will be borne by the related
securityholders. In addition, unless the master servicer or servicer determines
that an Advance relating to a delinquent mortgage loan would be recoverable to
it from the proceeds of the liquidation of the mortgage loan or otherwise, the
master servicer or servicer would not be obligated to make an Advance respecting
any delinquency since the Advance would not be ultimately recoverable to it from
either the mortgage pool insurance policy or from any other related source. See
"Description of the Securities--Advances."
Since each mortgage pool insurance policy will require that the property
subject to a defaulted mortgage loan be restored to its original condition prior
to claiming against the pool insurer, the policy will not provide coverage
against hazard losses. As described under "Insurance Policies on Loans--Standard
Hazard Insurance on Mortgaged Properties," the hazard policies covering the
mortgage loans typically exclude from coverage physical damage resulting from a
number of causes and, even when the damage is covered, may afford recoveries
which are significantly less than full replacement cost of those losses.
Additionally, no coverage for Special Hazard Losses, Fraud Losses or Bankruptcy
Losses will cover all risks, and the amount of any such coverage will be
limited. See "--Special Hazard Insurance Policies" below. As a result, certain
hazard risks will not be insured against and may be borne by securityholders.
Contract pools may be covered by pool insurance policies that are
similar to the mortgage pool insurance policies described above.
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SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses obtained for a trust
will be issued by the insurer named in the accompanying prospectus supplement.
Each special hazard insurance policy subject to limitations described in this
paragraph and in the accompanying prospectus supplement, if any, will protect
the related securityholders from Special Hazard Losses. Aggregate claims under a
special hazard insurance policy will be limited to the amount set forth in the
related agreement and will be subject to reduction as described in the related
agreement. A special hazard insurance policy will provide that no claim may be
paid unless hazard and, if applicable, flood insurance on the property securing
the loan has been kept in force and other protection and preservation expenses
have been paid by the master servicer or servicer.
In accordance with the foregoing limitations, a special hazard insurance
policy will provide that, where there has been damage to property securing a
foreclosed loan, title to which has been acquired by the insured, and to the
extent the damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the borrower or the master servicer or
servicer, the insurer will pay the lesser of (i) the cost of repair or
replacement of the related property or (ii) on transfer of the property to the
insurer, the unpaid principal balance of the loan at the time of acquisition of
the related property by foreclosure or deed in lieu of foreclosure, plus accrued
interest at the loan rate to the date of claim settlement and certain expenses
incurred by the master servicer or servicer for the related property.
If the property is transferred to a third party in a sale approved by
the special hazard insurer, the amount that the special hazard insurer will pay
will be the amount under (ii) above reduced by the net proceeds of the sale of
the property. If the unpaid principal balance plus accrued interest and some
expenses is paid by the special hazard insurer, the amount of further coverage
under the related special hazard insurance policy will be reduced by that amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair of the property will further reduce coverage by that amount.
Restoration of the property with the proceeds described under (i) above will
satisfy the condition under each mortgage pool insurance policy or contract pool
insurance policy that the property be restored before a claim under the policy
may be validly presented for the defaulted loan secured by the related property.
The payment described under (ii) above will render presentation of a claim
relating to a loan under the related mortgage pool insurance policy or contract
pool insurance policy unnecessary. Therefore, so long as a mortgage pool
insurance policy or contract pool insurance policy remains in effect, the
payment by the insurer under a special hazard insurance policy of the cost of
repair or of the unpaid principal balance of the related loan plus accrued
interest and some expenses will not affect the total Insurance Proceeds paid to
securityholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and mortgage pool insurance
policy or contract pool insurance policy.
To the extent described in the accompanying prospectus supplement,
coverage of Special Hazard Losses for a series of securities may be provided, in
whole or in part, by a type of special hazard coverage other than a special
hazard insurance policy or by means of a representation of the depositor or
Residential Funding Corporation.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a borrower, a bankruptcy court
may establish the value of the mortgaged property of the borrower, and, if
specified in the accompanying prospectus supplement, any related Additional
Collateral, at a Deficient Valuation. The amount of the secured debt could then
be reduced to that value, and, thus, the holder of the loan would become an
unsecured creditor to the extent the outstanding principal balance of the loan,
together with any senior loan in the case of a loan secured by a junior lien on
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the related mortgaged property, exceeds the value assigned to the mortgaged
property, and any related Additional Collateral, by the bankruptcy court.
In addition, other modifications of the terms of a loan can result from
a bankruptcy proceeding, including a Debt Service Reduction. See "Certain Legal
Aspects of the Loans--The Mortgage Loans--Anti-Deficiency Legislation and Other
Limitations on Lenders." Any bankruptcy policy to provide coverage for
Bankruptcy Losses resulting from proceedings under the federal Bankruptcy Code
obtained for a trust will be issued by an insurer named in the accompanying
prospectus supplement. The level of coverage under each bankruptcy policy will
be set forth in the accompanying prospectus supplement.
RESERVE FUNDS
If stated in the accompanying prospectus supplement, the depositor will
deposit or cause to be deposited in a reserve fund, any combination of cash or
Permitted Investments in specified amounts, or any other instrument satisfactory
to the rating agency or agencies, which will be applied and maintained in the
manner and under the conditions specified in the accompanying prospectus
supplement. In the alternative or in addition to that deposit, to the extent
described in the accompanying prospectus supplement, a reserve fund may be
funded through application of all or a portion of amounts otherwise payable on
any related subordinate securities, from the Excess Spread or otherwise. To the
extent that the funding of the reserve fund is dependent on amounts otherwise
payable on related subordinate securities, Excess Spread or other cash flows
attributable to the related loans or on reinvestment income, the reserve fund
may provide less coverage than initially expected if the cash flows or
reinvestment income on which the funding is dependent are lower than
anticipated.
For any series of securities as to which credit enhancement includes a
letter of credit, if stated in the accompanying prospectus supplement, under
specified circumstances the remaining amount of the letter of credit may be
drawn by the trustee and deposited in a reserve fund. Amounts in a reserve fund
may be distributed to securityholders, or applied to reimburse the master
servicer or servicer for outstanding Advances, or may be used for other
purposes, in the manner and to the extent specified in the accompanying
prospectus supplement. If stated in the accompanying prospectus supplement,
amounts in a reserve fund may be available only to cover specific types of
losses, or losses on specific loans. Unless otherwise specified in the
accompanying prospectus supplement, any reserve fund will not be deemed to be
part of the related trust. A reserve fund may provide coverage to more than one
series of securities, if set forth in the accompanying prospectus supplement.
The trustee will have a perfected security interest for the benefit of
the securityholders in the assets in the reserve fund, unless the assets are
owned by the related trust. However, to the extent that the depositor, any
affiliate of the depositor or any other entity has an interest in any reserve
fund, in the event of the bankruptcy, receivership or insolvency of that entity,
there could be delays in withdrawals from the reserve fund and the corresponding
payments to the securityholders. These delays could adversely affect the yield
to investors on the related securities.
Amounts deposited in any reserve fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of a
servicer, the master servicer or any other person named in the accompanying
prospectus supplement.
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FINANCIAL GUARANTY INSURANCE POLICIES; SURETY BONDS
The depositor may obtain one or more financial guaranty insurance
policies or guaranties or one or more surety bonds, or one or more guarantees
issued by insurers or other parties acceptable to the rating agency or agencies
rating the securities offered insuring the holders of one or more classes of
securities the payment of amounts due in accordance with the terms of that class
or those classes of securities. Any financial guaranty insurance policy, surety
bond or guaranty will have the characteristics described in, and will be in
accordance with any limitations and exceptions described in, the accompanying
prospectus supplement.
Unless specified in the accompanying prospectus supplement, a financial
guaranty insurance policy will be unconditional and irrevocable and will
guarantee to holders of the applicable securities that an amount equal to the
full amount of payments due to these holders will be received by the trustee or
its agent on behalf of the holders for payment on each payment date. The
specific terms of any financial guaranty insurance policy will be described in
the accompanying prospectus supplement. A financial guaranty insurance policy
may have limitations and, in most cases, will not insure the obligation of the
sellers or the master servicer or servicer to purchase or substitute for a
defective trust asset and will not guarantee any specific rate of Principal
Prepayments or cover specific interest shortfalls. In most cases, the insurer
will be subrogated to the rights of each holder to the extent the insurer makes
payments under the financial guaranty insurance policy.
MAINTENANCE OF CREDIT ENHANCEMENT
If credit enhancement has been obtained for a series of securities, the
master servicer or the servicer will be obligated to exercise its best
reasonable efforts to keep or cause to be kept the credit enhancement in full
force and effect throughout the term of the applicable agreement, unless
coverage thereunder has been exhausted through payment of claims or otherwise,
or substitution therefor is made as described below under "--Reduction or
Substitution of Credit Enhancement." The master servicer or the servicer, as
applicable, on behalf of itself, the trustee and securityholders, will be
required to provide information required for the trustee to draw under any
applicable credit enhancement.
The master servicer or the servicer will agree to pay the premiums for
each mortgage pool insurance policy, special hazard insurance policy, bankruptcy
policy, financial guaranty insurance policy or surety bond, as applicable, on a
timely basis, unless the premiums are paid directly by the trust. As to mortgage
pool insurance policies generally, if the related insurer ceases to be a
Qualified Insurer, the master servicer or the servicer will use its best
reasonable efforts to obtain from another Qualified Insurer a comparable
replacement insurance policy or bond with a total coverage equal to the then
outstanding coverage of the policy or bond. If the cost of the replacement
policy is greater than the cost of the existing policy or bond, the coverage of
the replacement policy or bond will, unless otherwise agreed to by the
depositor, be reduced to a level so that its premium rate does not exceed the
premium rate on the original insurance policy. If a pool insurer ceases to be a
Qualified Insurer because it ceases to be approved as an insurer by Freddie Mac
or Fannie Mae or any successor entity, the master servicer or the servicer will
review, not less often than monthly, the financial condition of the pool insurer
with a view toward determining whether recoveries under the mortgage pool
insurance policy or contract pool insurance policy are jeopardized for reasons
related to the financial condition of the pool insurer. If the master servicer
or the servicer determines that recoveries are so jeopardized, it will exercise
its best reasonable efforts to obtain from another Qualified Insurer a
replacement insurance policy as described above, at the same cost limit. Any
losses in market value of the securities associated with any reduction or
withdrawal in rating by an applicable rating agency shall be borne by the
securityholders.
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If any property securing a defaulted loan is damaged and proceeds, if
any, from the related hazard insurance policy or any applicable special hazard
insurance policy are insufficient to restore the damaged property to a condition
sufficient to permit recovery under any letter of credit, mortgage pool
insurance policy, contract pool insurance policy or any related primary
insurance policy, the master servicer or the servicer is not required to expend
its own funds to restore the damaged property unless it determines (i) that
restoration will increase the proceeds to one or more classes of securityholders
on liquidation of the loan after reimbursement of the master servicer or the
servicer for its expenses and (ii) that the expenses will be recoverable by it
through Liquidation Proceeds or Insurance Proceeds. If recovery under any letter
of credit, mortgage pool insurance policy, contract pool insurance policy other
credit enhancement or any related primary insurance policy is not available
because the master servicer or the servicer has been unable to make the above
determinations, has made the determinations incorrectly or recovery is not
available for any other reason, the master servicer or the servicer is
nevertheless obligated to follow whatever normal practices and procedures, in
accordance with the preceding sentence, that it deems necessary or advisable to
realize upon the defaulted loan and if this determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with the
restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided for any series of securities and
relating to various types of losses incurred may be reduced under specified
circumstances. In most cases, the amount available as credit support will be
subject to periodic reduction on a non-discretionary basis in accordance with a
schedule or formula set forth in the related agreement. Additionally, in most
cases, the credit support may be replaced, reduced or terminated, and the
formula used in calculating the amount of coverage for Bankruptcy Losses,
Special Hazard Losses or Fraud Losses may be changed, without the consent of the
securityholders, on the written assurance from each applicable rating agency
that the then-current rating of the related series of securities will not be
adversely affected thereby.
Furthermore, if the credit rating of any obligor under any applicable
credit enhancement is downgraded or the amount of credit enhancement is no
longer sufficient to support the rating on the related securities, the credit
rating of each class of the related securities may be downgraded to a
corresponding level, and, unless otherwise specified in the accompanying
prospectus supplement, neither the master servicer, the servicer nor the
depositor will be obligated to obtain replacement credit support in order to
restore the rating of the securities. The master servicer or the servicer, as
applicable, will also be permitted to replace any credit support with other
credit enhancement instruments issued by obligors whose credit ratings are
equivalent to the downgraded level and in lower amounts which would satisfy the
downgraded level, provided that the then-current rating of each class of the
related series of securities is maintained. Where the credit support is in the
form of a reserve fund, a permitted reduction in the amount of credit
enhancement will result in a release of all or a portion of the assets in the
reserve fund to the depositor, the master servicer or the servicer or any other
person that is entitled to the credit support. Any assets so released and any
amount by which the credit enhancement is reduced will not be available for
distributions in future periods.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE SECURITIES
SWAPS AND YIELD SUPPLEMENT AGREEMENTS
The trustee on behalf of the trust may enter into interest rate swaps
and related caps, floors and collars to minimize the risk to securityholders of
adverse changes in interest rates, and other yield supplement agreements or
similar yield maintenance arrangements that do not involve swap agreements or
other notional principal contracts.
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An interest rate swap is an agreement between two parties to exchange a
stream of interest payments on an agreed hypothetical or "notional" principal
amount. No principal amount is exchanged between the counterparties to an
interest rate swap. In the typical swap, one party agrees to pay a fixed rate on
a notional principal amount, while the counterparty pays a floating rate based
on one or more reference interest rates including the London Interbank Offered
Rate or, LIBOR, a specified bank's prime rate or U.S. Treasury Bill rates.
Interest rate swaps also permit counterparties to exchange a floating rate
obligation based on one reference interest rate (such as LIBOR) for a floating
rate obligation based on another referenced interest rate (such as U.S. Treasury
Bill rates).
The swap market has grown substantially in recent years with a
significant number of banks and financial service firms acting both as
principals and as agents utilizing standardized Swap documentation. Caps, floors
and collars are more recent innovations, and they are less liquid than other
swaps.
Yield supplement agreements may be entered into to supplement the
interest rate or rates on one or more classes of the securities of any series.
There can be no assurance that the trust will be able to enter into or
offset swaps or enter into yield supplement agreements at any specific time or
at prices or on other terms that are advantageous. In addition, although the
terms of the swaps and yield supplement agreements may provide for termination
under some circumstances, there can be no assurance that the trust will be able
to terminate a swap or yield supplement agreement when it would be economically
advantageous to the trust to do so.
PURCHASE OBLIGATIONS
Some types of loans and classes of securities of any series, as
specified in the accompanying prospectus supplement, may be subject to a
purchase obligation. The terms and conditions of each purchase obligation,
including the purchase price, timing and payment procedure, will be described in
the accompanying prospectus supplement. A purchase obligation for loans may
apply to the loans or to the related securities. Each purchase obligation may be
a secured or unsecured obligation of its provider, which may include a bank or
other financial institution or an insurance company. Each purchase obligation
will be evidenced by an instrument delivered to the trustee for the benefit of
the applicable securityholders of the related series. Unless otherwise specified
in the accompanying prospectus supplement, each purchase obligation for loans
will be payable solely to the trustee for the benefit of the securityholders of
the related series. Other purchase obligations may be payable to the trustee or
directly to the holders of the securities to which the obligations relate.
INSURANCE POLICIES ON LOANS
The mortgaged property related to each loan (other than a Cooperative
Loan) will be required to be covered by a hazard insurance policy (as described
below). In addition, some loans will be required to be covered by a primary
insurance policy. FHA loans and VA loans will be covered by the government
mortgage insurance programs described below. The descriptions of any insurance
policies contained in this prospectus or any prospectus supplement and the
coverage thereunder do not purport to be complete and are qualified in their
entirety by reference to the forms of policies.
PRIMARY INSURANCE POLICIES
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Unless otherwise specified in the accompanying prospectus supplement and
except as described below, (i) each mortgage loan having a LTV ratio at
origination of over 80% will be covered by a primary mortgage guaranty insurance
policy insuring against default on the mortgage loan up to an amount set forth
in the accompanying prospectus supplement, unless and until the principal
balance of the mortgage loan is reduced to a level that would produce a LTV
ratio equal to or less than 80%, and (ii) the depositor or the related seller
will represent and warrant that, to the best of its knowledge, the mortgage
loans are so covered. Alternatively, coverage of the type that would be provided
by a primary insurance policy if obtained may be provided by another form of
credit enhancement as described in this prospectus under "Description of Credit
Enhancement." However, the foregoing standard may vary significantly depending
on the characteristics of the mortgage loans and the applicable underwriting
standards. A mortgage loan will not be considered to be an exception to the
foregoing standard if no primary insurance policy was obtained at origination
but the mortgage loan has amortized to an 80% or less LTV ratio level as of the
applicable cut-off date. In most cases, the depositor will have the ability to
cancel any primary insurance policy if the LTV ratio of the mortgage loan is
reduced to 80% or less (or a lesser specified percentage) based on an appraisal
of the mortgaged property after the related closing date or as a result of
principal payments that reduce the principal balance of the mortgage loan after
the closing date. Trust assets secured by a junior lien on the related mortgaged
property usually will not be required by the depositor to be covered by a
primary mortgage guaranty insurance policy insuring against default on the
mortgage loan.
Under recently enacted federal legislation, borrowers with respect to
many residential mortgage loans originated on or after July 29, 1999, will have
a right to request the cancellation of any private mortgage insurance policy
insuring loans when the outstanding principal amount of the mortgage loan has
been reduced or is scheduled to have been reduced to 80% or less of the value of
the mortgaged property at the time the mortgage loan was originated. The
borrower's right to request the cancellation of the policy is subject to certain
conditions, including (i) the condition that no monthly payment has been thirty
days or more past due during the twelve months prior to the cancellation date,
and no monthly payment has been sixty days or more past due during the twelve
months prior to that period, (ii) there has been no decline in the value of the
mortgaged property since the time the mortgage loan was originated and (iii) the
mortgaged property is not encumbered by subordinate liens. In addition, any
requirement for private mortgage insurance will automatically terminate when the
scheduled principal balance of the mortgage loan, based on the original
amortization schedule for the mortgage loan, is reduced to 78% or less of the
value of the mortgaged property at the time of origination, provided the
mortgage loan is current. The legislation requires that borrowers be provided
written notice of these cancellation rights at the origination of the mortgage
loans.
If the private mortgage insurance is not otherwise canceled or
terminated by borrower request in the circumstances described above, it must be
terminated no later than the first day of the month immediately following the
date that is the midpoint of the mortgage loan's amortization period, if on that
date, the borrower is current on the payments required by the terms of the
mortgage loan. The mortgagee's or master servicer's or servicer's failure to
comply with the law could subject such parties to civil money penalties but
would not affect the validity or enforceability of the mortgage loan. The law
does not preempt any state law regulating private mortgage insurance except to
the extent that such law is inconsistent with the federal law and then only to
the extent of the inconsistency.
In most cases, Mexico Loans will have LTV ratios of less than 80% and
will not be insured under a primary insurance policy. Primary mortgage insurance
or similar credit enhancement on a Mexico Loan may be issued by a private
corporation or a governmental agency and may be in the form of a guarantee,
insurance policy or another type of credit enhancement.
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Mortgage loans which are subject to negative amortization will only be
covered by a primary insurance policy if that coverage was required on their
origination, regardless that subsequent negative amortization may cause that
mortgage loan's LTV ratio based on the then-current balance, to subsequently
exceed the limits which would have required coverage on their origination.
Primary insurance policies may be required to be obtained and paid for
by the borrower, or may be paid for by the master servicer, the servicer, the
seller or a third party.
While the terms and conditions of the primary insurance policies issued
by one primary mortgage guaranty insurer will usually differ from those in
primary insurance policies issued by other primary insurers, each primary
insurance policy generally will pay either:
o the insured percentage of the loss on the related mortgaged property;
o the entire amount of the loss, after receipt by the primary insurer of good
and merchantable title to, and possession of, the mortgaged property; or
o at the option of the primary insurer under certain primary insurance
policies, the sum of the delinquent monthly payments plus any
Advances made by the insured, both to the date of the claim payment
and, thereafter, monthly payments in the amount that would have
become due under the mortgage loan if it had not been discharged plus
any Advances made by the insured until the earlier of (a) the date
the mortgage loan would have been discharged in full if the default
had not occurred or (b) an approved sale.
The amount of the loss as calculated under a primary insurance policy
covering a mortgage loan will in most cases consist of the unpaid principal
amount of such mortgage loan and accrued and unpaid interest thereon and
reimbursement of some expenses, less:
o rents or other payments received by the insured (other than the
proceeds of hazard insurance) that are derived from the related
mortgaged property;
o hazard insurance proceeds received by the insured in excess of the
amount required to restore the mortgaged property and which have not
been applied to the payment of the mortgage loan;
o amounts expended but not approved by the primary insurer;
o claim payments previously made on the mortgage loan; and
o unpaid premiums and other amounts.
As conditions precedent to the filing or payment of a claim under a
primary insurance policy, in the event of default by the borrower, the insured
will typically be required, among other things, to:
o advance or discharge (a) hazard insurance premiums and (b) as
necessary and approved in advance by the primary insurer, real estate
taxes, protection and preservation expenses and foreclosure and
related costs;
o in the event of any physical loss or damage to the mortgaged
property, have the mortgaged property restored to at least its
condition at the effective date of the primary insurance policy
(ordinary wear and tear excepted); and
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o tender to the primary insurer good and merchantable title to, and
possession of, the mortgaged property.
For any securities offered under this prospectus, the master servicer or
the servicer will maintain or cause each subservicer to maintain, as the case
may be, in full force and effect and to the extent coverage is available a
primary insurance policy with regard to each mortgage loan for which coverage is
required under the standard described above unless an exception to such standard
applies or alternate credit enhancement is provided as described in the
accompanying prospectus supplement; provided that the primary insurance policy
was in place as of the cut-off date and the depositor had knowledge of such
primary insurance policy.
STANDARD HAZARD INSURANCE ON MORTGAGED PROPERTIES
The terms of the mortgage loans (other than Cooperative Loans) require
each borrower to maintain a hazard insurance policy covering the related
mortgaged property and providing for coverage at least equal to that of the
standard form of fire insurance policy with extended coverage customary in the
state in which the property is located. Most coverage will be in an amount equal
to the lesser of the principal balance of the mortgage loan and, in the case of
loans secured by junior liens on the related mortgaged property, the principal
balance of any senior mortgage loans, or 100% of the insurable value of the
improvements securing the mortgage loan. The pooling and servicing agreement
will provide that the master servicer or the servicer shall cause the hazard
policies to be maintained or shall obtain a blanket policy insuring against
losses on the mortgage loans. The master servicer or the servicer may satisfy
its obligation to cause hazard policies to be maintained by maintaining a
blanket policy insuring against losses on those mortgage loans. The ability of
the master servicer or the servicer to ensure that hazard insurance proceeds are
appropriately applied may be dependent on its being named as an additional
insured under any hazard insurance policy and under any flood insurance policy
referred to below, or on the extent to which information in this regard is
furnished to the master servicer or the servicer by borrowers or subservicers.
If loans secured by junior liens on the related mortgaged property are included
within any trust, investors should also consider the application of hazard
insurance proceeds discussed in this prospectus under "Certain Legal Aspects of
the Loans -- The Mortgage Loans -- Junior Mortgages, Rights of Senior
Mortgagees.".
The standard form of fire and extended coverage policy covers physical
damage to or destruction of the improvements on the property by fire, lightning,
explosion, smoke, windstorm, hail, riot, strike and civil commotion, in
accordance with the conditions and exclusions specified in each policy. The
policies relating to the mortgage loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms and therefore will not contain identical terms and conditions, the
basic terms of which are dictated by respective state laws. These policies
typically do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement, including earthquakes, landslides and mudflows, nuclear reactions, wet
or dry rot, vermin, rodents, insects or domestic animals, theft and, in some
cases, vandalism. The foregoing list is merely indicative of some kinds of
uninsured risks and is not intended to be all-inclusive. Where the improvements
securing a mortgage loan are located in a federally designated flood area at the
time of origination of that mortgage loan, the pooling and servicing agreement
typically requires the master servicer or the servicer to cause to be maintained
for each such mortgage loan serviced, flood insurance, to the extent available,
in an amount equal to the lesser of the amount required to compensate for any
loss or damage on a replacement cost basis or the maximum insurance available
under the federal flood insurance program.
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The hazard insurance policies covering the mortgaged properties
typically contain a co-insurance clause that in effect requires the related
borrower at all times to carry insurance of a specified percentage, typically
80% to 90%, of the full replacement value of the improvements on the property in
order to recover the full amount of any partial loss. If the related borrower's
coverage falls below this specified percentage, this clause usually provides
that the insurer's liability in the event of partial loss does not exceed the
greater of (i) the replacement cost of the improvements damaged or destroyed
less physical depreciation or (ii) the proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of the improvements.
Since the amount of hazard insurance that borrowers are required to
maintain on the improvements securing the mortgage loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "Description of Credit Enhancement--Subordination" above for a
description of when subordination is provided, the protection, limited to the
Special Hazard Amount as described in the accompanying prospectus supplement,
afforded by subordination, and "Description of Credit Enhancement--Special
Hazard Insurance Policies" for a description of the limited protection afforded
by any special hazard insurance policy against losses occasioned by hazards
which are otherwise uninsured against.
Hazard insurance on the Mexican properties will usually be provided by
insurers located in Mexico. The depositor may not be able to obtain as much
information about the financial condition of the companies issuing hazard
insurance policies in Mexico as it is able to obtain for companies based in the
United States. The ability of the insurers to pay claims also may be affected
by, among other things, adverse political and economic developments in Mexico.
STANDARD HAZARD INSURANCE ON MANUFACTURED HOMES
The terms of the related agreement will require the servicer or the
master servicer, as applicable, to cause to be maintained for each manufactured
housing contract one or more standard hazard insurance policies that provide, at
a minimum, the same coverage as a standard form fire and extended coverage
insurance policy that is customary for manufactured housing, issued by a company
authorized to issue the policies in the state in which the manufactured home is
located, and in an amount that is not less than the maximum insurable value of
the manufactured home or the principal balance due from the borrower on the
related manufactured housing contract, whichever is less. Coverage may be
provided by one or more blanket insurance policies covering losses on the
manufactured housing contracts resulting from the absence or insufficiency of
individual standard hazard insurance policies. If a manufactured home's location
was, at the time of origination of the related manufactured housing contract,
within a federally designated flood area, the servicer or the master servicer
also will be required to maintain flood insurance.
If the servicer or the master servicer repossesses a manufactured home
on behalf of the trustee, the servicer or the master servicer will either
maintain at its expense hazard insurance for the manufactured home or indemnify
the trustee against any damage to the manufactured home prior to resale or other
disposition.
DESCRIPTION OF FHA INSURANCE UNDER TITLE I
Some of the home improvement contracts contained in a trust may be Title
I loans which are insured under the Title I Program as described in this section
and in the accompanying prospectus supplement. The regulations, rules and
procedures promulgated by the FHA under the Title I, or FHA Regulations, contain
the requirements under which a lender approved for participation in the Title I
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Program may obtain insurance against a portion of losses incurred on eligible
loans that have been originated and serviced in accordance with FHA Regulations,
subject to the amount of insurance coverage available in that Title I lender's
FHA reserve, as described in this section and in the accompanying prospectus
supplement, and subject to the terms and conditions established under the
National Housing Act and FHA Regulations. FHA Regulations permit the Secretary
of the Department of Housing and Urban Development, or HUD, subject to statutory
limitations, to waive a Title I lender's noncompliance with FHA Regulations if
enforcement would impose an injustice on the lender, provided the Title I lender
has substantially complied with the FHA Regulations in good faith and has
credited the borrower for any excess charge. In general, an insurance claim
against the FHA will be denied if the Title I loan to which it relates does not
strictly satisfy the requirements of the National Housing Act and FHA
Regulations.
Unlike some other government loan insurance programs, loans under the
Title I Program other than loans in excess of $25,000, are not subject to prior
review by the FHA. Under the Title I Program, the FHA disburses insurance
proceeds for defaulted loans for which insurance claims have been filed by a
Title I lender prior to any review of those loans. A Title I lender is required
to repurchase a Title I loan from the FHA that is determined to be ineligible
for insurance after insurance claim payments for that loan have been paid to
that lender. Under the FHA Regulations, if the Title I lender's obligation to
repurchase the Title I loan is unsatisfied, the FHA is permitted to offset the
unsatisfied obligation against future insurance claim payments owed by the FHA
to that lender. FHA Regulations permit the FHA to disallow an insurance claim
for any loan that does not qualify for insurance for a period of up to two years
after the claim is made and to require the Title I lender that has submitted the
insurance claim to repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home and/or
lot, or cooperative interest in a manufactured home and/or lot, on which to
place that home.
Subject to the limitations described below, eligible Title I loans are
in most cases insured by the FHA for 90% of an amount equal to the sum of:
o the net unpaid principal amount and the uncollected interest earned to the
date of default,
o interest on the unpaid loan obligation from the date of default to
the date of the initial submission of the insurance claim, plus 15
calendar days, the total period not to exceed nine months, at a rate
of 7% per annum,
o uncollected court costs,
o amount of attorney's fees on an hourly or other basis for time actually
expended and billed not to exceed $500, and
o amount of expenses for recording the assignment of the security to the
United States.
However, the insurance coverage provided by the FHA is limited to the
extent of the balance in the Title I lender's FHA reserve maintained by the FHA.
Accordingly, if sufficient insurance coverage is available in that FHA reserve,
then the Title I lender bears the risk of losses on a Title I loan for which a
claim for reimbursement is paid by the FHA of at least 10% of the unpaid
principal, uncollected interest earned to the date of default, interest from the
date of default to the date of the initial claim submission and various
expenses. Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a Title I lender for losses in the portfolio of insured loans held by
that Title I lender is limited to the amount in an FHA reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis.
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Under Title I, the FHA maintains an FHA insurance coverage reserve
account, referred to as an FHA reserve for each Title I lender. The amount in
each Title I lender's FHA reserve is 10% of the amounts disbursed, advanced or
expended by a Title I lender in originating or purchasing eligible loans
registered with the FHA for Title I insurance, with some adjustments permitted
or required by FHA Regulations. The balance of that FHA reserve is the maximum
amount of insurance claims the FHA is required to pay to the related Title I
lender. Title I loans to be insured under Title I will be registered for
insurance by the FHA. Following either the origination or transfer of loans
eligible under Title I, the Title I lender will submit those loans for FHA
insurance coverage within its FHA reserve by delivering a transfer report or
through an electronic submission to the FHA in the form prescribed under the FHA
Regulations. The increase in the FHA insurance coverage for those loans in the
Title I lender's FHA reserve will occur on the date following the receipt and
acknowledgment by the FHA of the transfer report for those loans. The insurance
available to any trust will be subject to the availability, from time to time,
of amounts in each Title I lender's FHA reserve, which will initially be limited
to the FHA insurance amount as specified in the accompanying prospectus
supplement.
Under Title I, the FHA will reduce the insurance coverage available in a
Title I lender's FHA reserve relating to loans insured under that Title I
lender's contract of insurance by:
o the amount of FHA insurance claims approved for payment related to those
loans, and
o the amount of reduction of the Title I lender's FHA reserve by reason
of the sale, assignment or transfer of loans registered under the
Title I lender's contract of insurance.
This insurance coverage also may be reduced for any FHA insurance claims
previously disbursed to the Title I lender that are subsequently rejected by the
FHA.
In most cases, the FHA will insure home improvement contracts up to
$25,000 for a single-family property, with a maximum term of 20 years. The FHA
will insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit for a
$60,000 limit for an apartment house or a dwelling for two or more families. If
the loan amount is $15,000 or more, the FHA requires a drive-by appraisal, the
current tax assessment value, or a full Uniform Residential Appraisal Report
dated within 12 months of the closing to verify the property's value. The
maximum loan amount on transactions requiring an appraisal is the amount of
equity in the property shown by the market value determination of the property.
Following a default on a home improvement contract partially insured by
the FHA, the master servicer or the servicer, either directly or through a
subservicer, may, subject to various conditions, either commence foreclosure
proceedings against the improved property securing the loan, if applicable, or
submit a claim to FHA, but may submit a claim to FHA after proceeding against
the improved property only with the prior approval of the Secretary of HUD. The
availability of FHA insurance following a default on a home improvement contract
is subject to a number of conditions, including strict compliance with FHA
Regulations in originating and servicing the home improvement contract. Failure
to comply with FHA Regulations may result in a denial of or surcharge on the FHA
insurance claim. Prior to declaring a home improvement contract in default and
submitting a claim to FHA, the master servicer or the servicer must take steps
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to attempt to cure the default, including personal contact with the borrower
either by telephone or in a meeting and providing the borrower with 30 days'
written notice prior to declaration of default. FHA may deny insurance coverage
if the borrower's nonpayment is related to a valid objection to faulty
contractor performance. In that event, the master servicer or the servicer or
other entity as specified in the accompanying prospectus supplement will seek to
obtain payment by or a judgment against the borrower, and may resubmit the claim
to FHA following that judgment.
FHA MORTGAGE INSURANCE
The Housing Act authorizes various FHA mortgage insurance programs. Some
of the mortgage loans may be insured under either Section 203(b), Section 234 or
Section 235 of the Housing Act. Under Section 203(b), FHA insures mortgage loans
of up to 30 years' duration for the purchase of one- to four-family dwelling
units. Mortgage loans for the purchase of condominium units are insured by FHA
under Section 234. Trust assets insured under these programs must bear interest
at a rate not exceeding the maximum rate in effect at the time the loan is made,
as established by HUD, and may not exceed specified percentages of the lesser of
the appraised value of the property and the sales price, less seller-paid
closing costs for the property, up to certain specified maximums. In addition,
FHA imposes initial investment minimums and other requirements on mortgage loans
insured under the Section 203(b) and Section 234 programs.
Under Section 235, assistance payments are paid by HUD to the mortgagee
on behalf of eligible borrowers for as long as the borrowers continue to be
eligible for the payments. To be eligible, a borrower must be part of a family,
have income within the limits prescribed by HUD at the time of initial
occupancy, occupy the property and meet requirements for recertification at
least annually.
The regulations governing these programs provide that insurance benefits
are payable either on foreclosure, or other acquisition of possession, and
conveyance of the mortgaged premises to HUD or on assignment of the defaulted
mortgage loan to HUD. The FHA insurance that may be provided under these
programs on the conveyance of the home to HUD is equal to 100% of the
outstanding principal balance of the mortgage loan, plus accrued interest, as
described below, and certain additional costs and expenses. When entitlement to
insurance benefits results from assignment of the mortgage loan to HUD, the
insurance payment is computed as of the date of the assignment and includes the
unpaid principal amount of the mortgage loan plus mortgage interest accrued and
unpaid to the assignment date.
When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance, the insurance payment is equal
to the unpaid principal amount of the mortgage loan, adjusted to reimburse the
mortgagee for certain tax, insurance and similar payments made by it and to
deduct certain amounts received or retained by the mortgagee after default, plus
reimbursement not to exceed two-thirds of the mortgagee's foreclosure costs. Any
FHA insurance relating to underlying a series of securities will be described in
the accompanying prospectus supplement.
VA MORTGAGE GUARANTY
The Servicemen's Readjustment Act of 1944, as amended, permits a
veteran, or, in certain instances, his or her spouse, to obtain a mortgage loan
guaranty by the VA, covering mortgage financing of the purchase of a one- to
four-family dwelling unit to be occupied as the veteran's home, at an interest
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment from the purchaser and permits the guaranty of mortgage
loans with terms, limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50% of the original principal amount of the mortgage loan up to a certain
dollar limit established by the VA. The liability on the guaranty is reduced or
increased pro rata with any reduction or increase in the amount of indebtedness,
but in no event will the amount payable on the guaranty exceed the amount of the
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original guaranty. Regardless of the dollar and percentage limitations of the
guaranty, a mortgagee will ordinarily suffer a monetary loss only when the
difference between the unsatisfied indebtedness and the proceeds of a
foreclosure sale of mortgaged premises is greater than the original guaranty as
adjusted. The VA may, at its option, and without regard to the guaranty, make
full payment to a mortgagee of the unsatisfied indebtedness on a mortgage on its
assignment to the VA.
Since there is no limit imposed by the VA on the principal amount of a
VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a primary mortgage insurance policy may be
required by the depositor for VA loans in excess of certain amounts. The amount
of any additional coverage will be set forth in the accompanying prospectus
supplement. Any VA guaranty relating to underlying a series of securities will
be described in the accompanying prospectus supplement.
THE DEPOSITOR
The depositor is an indirect wholly-owned subsidiary of GMAC Mortgage
Group, Inc., which is a wholly-owned subsidiary of General Motors Acceptance
Corporation. The depositor was incorporated in the State of Delaware in November
17, 1999. The depositor was organized for the limited purpose of acquiring loans
and issuing securities backed by such loans. The depositor anticipates that it
will in many cases have acquired loans indirectly through Residential Funding
Corporation, which is an indirect wholly-owned subsidiary of GMAC Mortgage
Group, Inc. The depositor anticipates that it will in many cases acquire loans
from GMAC Mortgage Corporation, which is also an indirect wholly-owned
subsidiary of GMAC Mortgage Group, Inc. The depositor does not have, nor is it
expected in the future to have, any significant assets.
The securities do not represent an interest in or an obligation of the
depositor. The depositor's only obligations for a series of securities will be
the limited representations and warranties made by the depositor or as otherwise
provided in the accompanying prospectus supplement.
The depositor maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
If specified in the accompanying prospectus supplement, Residential
Funding Corporation, an affiliate of the depositor, will act as the master
servicer or the servicer for each series of securities.
Residential Funding Corporation buys loans under several loan purchase
programs from mortgage loan originators or sellers nationwide, including
affiliates, that meet its seller/servicer eligibility requirements and services
loans for its own account and for others. Residential Funding Corporation's
principal executive offices are located at 8400 Normandale Lake Boulevard, Suite
600, Minneapolis, Minnesota 55437. Its telephone number is (612) 832-7000.
Residential Funding Corporation conducts operations from its headquarters in
Minneapolis and from offices located primarily in California, Texas and
Maryland.
THE AGREEMENTS
As described in this prospectus under "Introduction" and "Description of
the Securities--General," each series of certificates will be issued under a
pooling and servicing agreement or trust agreement, as applicable, and each
series of notes will be issued under an indenture, each as described in that
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section. In the case of each series of notes, the provisions relating to the
servicing of the loans will be contained in the related servicing agreements.
The following summaries describe additional provisions common to each pooling
and servicing agreement and trust agreement relating to a series of
certificates, and each indenture and servicing agreement relating to a series of
notes.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Each servicer or the master servicer, as applicable, will be paid
compensation for the performance of its servicing obligations at the percentage
per annum described in the accompanying prospectus supplement of the outstanding
principal balance of each loan. Any subservicer will also be entitled to the
servicing fee as described in the accompanying prospectus supplement. Except as
otherwise provided in the accompanying prospectus supplement, the servicer or
the master servicer, if any, will deduct the servicing fee for the loans
underlying the securities of a series in an amount to be specified in the
accompanying prospectus supplement. The servicing fees may be fixed or variable.
In addition, the master servicer, any servicer or the relevant subservicers, if
any, will be entitled to servicing compensation in the form of assumption fees,
late payment charges or excess proceeds following disposition of property in
connection with defaulted loans and any earnings on investments held in the
Payment Account or any Custodial Account, to the extent not applied as
Compensating Interest. Any Excess Spread or Excluded Spread retained by a
seller, the master servicer or servicer will not constitute part of the
servicing fee. Regardless of the foregoing, for a series of securities as to
which the trust includes private securities, the compensation payable to the
master servicer or servicer for servicing and administering such private
securities on behalf of the holders of such securities may be based on a
percentage per annum described in the accompanying prospectus supplement of the
outstanding balance of such private securities and may be retained from
distributions of interest thereon, if stated in the accompanying prospectus
supplement. In addition, some reasonable duties of the master servicer or the
servicer may be performed by an affiliate of the master servicer or the servicer
who will be entitled to compensation for performance of those duties.
The master servicer or the servicer will pay or cause to be paid some of
the ongoing expenses associated with each trust and incurred by it in connection
with its responsibilities under the related agreement, including, without
limitation, payment of any fee or other amount payable for any alternative
credit enhancement arrangements, payment of the fees and disbursements of the
trustee, any custodian appointed by the trustee, the security registrar and any
paying agent, and payment of expenses incurred in enforcing the obligations of
subservicers and sellers. The master servicer or the servicer will be entitled
to reimbursement of expenses incurred in enforcing the obligations of
subservicers and sellers under limited circumstances. In addition, as indicated
in the preceding section, the master servicer or the servicer will be entitled
to reimbursements for some of the expenses incurred by it in connection with
Liquidated Loans and in connection with the restoration of mortgaged properties,
such right of reimbursement being prior to the rights of securityholders to
receive any related Liquidation Proceeds, including Insurance Proceeds.
EVIDENCE AS TO COMPLIANCE
Each pooling and servicing agreement or servicing agreement will provide
that the master servicer or the servicer will, for each series of securities,
deliver to the trustee, on or before the date in each year specified in the
agreement, an officer's certificate stating that a review of the activities of
the master servicer or the servicer during the preceding calendar year relating
to its servicing of loans and its performance under pooling and servicing
agreements or servicing agreements, as applicable, including the related
agreement, has been made under the supervision of that officer.
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CERTAIN OTHER MATTERS REGARDING SERVICING
Each servicer or the master servicer, as applicable, may not resign from
its obligations and duties under the related pooling and servicing agreement or
servicing agreement unless each rating agency has confirmed in writing that the
resignation will not qualify, reduce or cause to be withdrawn the then current
ratings on the securities except on a determination that its duties thereunder
are no longer permissible under applicable law. No resignation will become
effective until the trustee or a successor servicer or master servicer has
assumed the servicer's or the master servicer's obligations and duties under the
related pooling and servicing agreement.
Each pooling and servicing agreement or servicing agreement will also
provide that neither the servicer, the master servicer, nor any director,
officer, employee or agent of the master servicer or servicer, as applicable,
will be under any liability to the trust or the securityholders for any action
taken or for refraining from taking any action in good faith under the related
agreement, or for errors in judgment. However, neither the servicer, the master
servicer nor any such person will be protected against any liability that would
otherwise be imposed by reason of the failure to perform its obligations in
compliance with any standard of care set forth in the related agreement. The
servicer or the master servicer, as applicable, may, in its discretion,
undertake any action that it may deem necessary or desirable with respect to the
servicing agreement and the rights and duties of the parties thereto and the
interest of the related securityholders. The legal expenses and costs of the
action and any liability resulting therefrom will be expenses, costs and
liabilities of the trust and the servicer or the master servicer will be
entitled to be reimbursed out of funds otherwise distributable to
securityholders.
The master servicer or the servicer will be required to maintain a
fidelity bond and errors and omissions policy for its officers and employees and
other persons acting on behalf of the master servicer or the servicer in
connection with its activities under the related servicing agreement.
A servicer or the master servicer may have other business relationships
with the company, any seller or their affiliates.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT
Events of default under the related pooling and servicing agreement or
servicing agreement for a series of securities will include:
o any failure by the servicer or master servicer to make a required deposit
to the Custodial Account or the Payment Account or, if the master servicer
or servicer is the paying agent, to distribute to the holders of any class
of securities of that series any required payment which continues
unremedied for five days after the giving of written notice of the failure
to the master servicer or the servicer by the trustee or the depositor, or
to the master servicer or the servicer, the depositor and the trustee by
the holders of securities of such class evidencing not less than 25% of the
aggregate percentage interests constituting that class or the credit
enhancer, if applicable;
o any failure by the master servicer or servicer duly to observe or perform
in any material respect any other of its covenants or agreements in the
related agreement for that series of securities which continues unremedied
for a period of not more than 45 days, or 15 days in the case of a failure
to pay the premium for any insurance policy which is required to be
maintained under the related servicing agreement, after the giving of
written notice of the failure to the master servicer or the servicer by the
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trustee or the depositor, or to the master servicer or servicer, the
depositor and the trustee by the holders of any class of securities of that
series evidencing not less than 25%, 33% in the case of a trust including
private securities or a majority in the case of a series of notes, of the
aggregate percentage interests constituting that class, or the credit
enhancer, if applicable; and
o some events of insolvency, bankruptcy or similar proceedings
regarding the master servicer or servicer and certain actions by the
master servicer or servicer indicating its insolvency or inability to
pay its obligations.
A default under the terms of any private securities included in any
trust will not constitute an event of default under the related agreement.
So long as an event of default remains unremedied, except as otherwise
provided for in the related agreement with respect to any third party credit
enhancer, either the depositor or the trustee may, and, in the case of an event
of default under a pooling and servicing agreement, at the direction of the
holders of securities evidencing not less than 51% of the aggregate voting
rights in the related trust, the trustee shall, by written notification to the
master servicer or servicer and to the depositor or the trustee, terminate all
of the rights and obligations of the master servicer or servicer under the
related agreement, other than any rights of the master servicer or servicer as
securityholder, and, in the case of termination under a servicing agreement, the
right to receive servicing compensation, expenses for servicing the trust assets
during any period prior to the date of that termination, and other reimbursement
of amounts the master servicer or the servicer is entitled to withdraw from the
Custodial Account. The trustee or, on notice to the depositor and with the
depositor's consent, its designee will succeed to all responsibilities, duties
and liabilities of the master servicer or the servicer under the related
agreement, other than the obligation to purchase loans under some circumstances,
and will be entitled to similar compensation arrangements. If the trustee would
be obligated to succeed the master servicer or the servicer but is unwilling so
to act, it may appoint or if it is unable so to act, it shall appoint or
petition a court of competent jurisdiction for the appointment of, a Fannie Mae-
or Freddie Mac-approved mortgage servicing institution with a net worth of at
least $10,000,000 to act as successor to the master servicer or the servicer
under the related agreement, unless otherwise set forth in the agreement.
Pending appointment, the trustee is obligated to act in that capacity. The
trustee and such successor may agree on the servicing compensation to be paid,
which in no event may be greater than the compensation to the initial master
servicer or the servicer under the related agreement.
No securityholder will have any right under a pooling and servicing
agreement to institute any proceeding with respect to the pooling and servicing
agreement, except as otherwise provided for in the related pooling and servicing
agreement with respect to the credit enhancer, unless the holder previously has
given to the trustee written notice of default and the continuance thereof and
unless the holders of securities of any class evidencing not less than 25% of
the aggregate percentage interests constituting that class have made written
request upon the trustee to institute the proceeding in its own name as trustee
thereunder and have offered to the trustee reasonable indemnity and the trustee
for 60 days after receipt of the request and indemnity has neglected or refused
to institute any proceeding. However, the trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the pooling and servicing
agreement or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
securities covered by the pooling and servicing agreement, unless the
securityholders have offered to the trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
INDENTURE
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An event of default under the indenture for each series of notes, in
most cases, will include:
o default for five days or more in the payment of any principal of or
interest on any note of the series;
o failure to perform any other covenant of the depositor or the trust
in the indenture which continues for a period of thirty days after
notice of that failure is given in accordance with the procedures
described in the accompanying prospectus supplement;
o any representation or warranty made by the depositor or the trust in
the indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith as to or affecting the
series having been incorrect in a material respect as of the time
made, and the breach is not cured within thirty days after notice of
that error is given in accordance with the procedures described in
the accompanying prospectus supplement; and
o certain bankruptcy, insolvency, or similar events relating to the depositor
or the trust.
If an event of default as to the notes of any series at the time
outstanding occurs and is continuing, either the trustee, the credit enhancer,
if applicable, or the holders of a majority of the then aggregate outstanding
amount of the notes of the series with the written consent of the credit
enhancer may declare the principal amount, or, if the notes of that series are
accrual notes, that portion of the principal amount as may be specified in the
terms of that series, of all the notes of the series to be due and payable
immediately. That declaration may, under some circumstances, be rescinded and
annulled by the holders of a majority in aggregate outstanding amount of the
related notes.
If, following an event of default for any series of notes, the notes of
the series have been declared to be due and payable, the trustee may, in its
discretion, or, if directed in writing by the credit enhancer, will, regardless
of that acceleration, elect to maintain possession of the collateral securing
the notes of that series and to continue to apply payments on that collateral as
if there had been no declaration of acceleration if that collateral continues to
provide sufficient funds for the payment of principal of and interest on the
notes of the series as they would have become due if there had not been a
declaration. In addition, the trustee may not sell or otherwise liquidate the
collateral securing the notes of a series following an event of default, unless:
o the holders of 100% of the then aggregate outstanding amount of the notes
of the series consent to that sale,
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series, and to reimburse the credit
enhancer, if applicable, at the date of that sale, or
o the trustee determines that the collateral would not be sufficient on
an ongoing basis to make all payments on those notes as those
payments would have become due if those notes had not been declared
due and payable, and the trustee obtains the consent of the holders
of 66 2/3% of the then aggregate outstanding amount of the notes of
the series and the credit enhancer, if applicable.
In the event that the trustee liquidates the collateral in connection
with an event of default, the indenture provides that the trustee will have a
prior lien on the proceeds of that liquidation for unpaid fees and expenses. As
a result, on the occurrence of that event of default, the amount available for
payments to the securityholders would be less than would otherwise be the case.
However, the trustee may not institute a proceeding for the enforcement of its
lien except in connection with a proceeding for the enforcement of the lien of
the indenture for the benefit of the securityholders after the occurrence of an
event of default.
If stated in the accompanying prospectus supplement, in the event the
principal of the notes of a series is declared due and payable, as described in
the second preceding paragraph, the holders of any notes issued at a discount
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from par may be entitled to receive no more than an amount equal to the unpaid
principal amount of those notes less the amount of the discount that is
unamortized.
In most cases, no noteholder will have any right under an indenture to
institute any proceeding in connection with the agreement unless: o the holder
previously has given to the trustee written notice of default and the
continuance of that default,
o the holders of securities of any class evidencing not less than 25%
of the aggregate percentage interests constituting the class (1) have
made written request upon the trustee to institute that proceeding in
its own name as trustee thereunder and (2) have offered to the
trustee reasonable indemnity,
o the trustee has neglected or refused to institute that proceeding for 60
days after receipt of that request and indemnity, and
o no direction inconsistent with that written request has been given to
the trustee during that 60 day period by the holders of a majority of
the security balances of that class, except as otherwise provided for
in the related agreement regarding the credit enhancer.
However, the trustee will be under no obligation to exercise any of the
trusts or powers vested in it by the applicable agreement or to institute,
conduct or defend any litigation thereunder or in relation thereto at the
request, order or direction of any of the holders of securities covered by the
agreement, unless the securityholders have offered to the trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred in or by exercise of that power.
AMENDMENT
In most cases, each agreement may be amended by the parties to the
agreement, except as otherwise provided for in the related agreement with
respect to the credit enhancer, without the consent of the related
securityholders:
o to cure any ambiguity;
o to correct or supplement any provision therein which may be inconsistent
with any other provision therein or to correct any error;
o to change the timing and/or nature of deposits in the Custodial Account or
the Payment Account or to change the name in which the Custodial Account is
maintained, except that (a) deposits to the Payment Account may not occur
later than the related distribution date, (b) the change may not adversely
affect in any material respect the interests of any securityholder, as
evidenced by an opinion of counsel, and (c) the change may not adversely
affect the then-current rating of any rated classes of securities, as
evidenced by a letter from each applicable rating agency;
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o if an election to treat the related trust as a "real estate mortgage
investment conduit" or, REMIC has been made, to modify, eliminate or add to
any of its provisions (a) to the extent necessary to maintain the
qualification of the trust as a REMIC or to avoid or minimize the risk of
imposition of any tax on the related trust, provided that the trustee has
received an opinion of counsel to the effect that (1) the action is
necessary or desirable to maintain qualification or to avoid or minimize
that risk, and (2) the action will not adversely affect in any material
respect the interests of any related securityholder, or (b) to modify the
provisions regarding the transferability of the REMIC Residual
Certificates, provided that the depositor has determined that the change
would not adversely affect the applicable ratings of any classes of the
certificates, as evidenced by a letter from each applicable rating agency,
and that any such amendment will not give rise to any tax for the transfer
of the REMIC Residual Certificates to a non-permitted transferee;
o to make any other provisions for matters or questions arising under
the related agreement which are not materially inconsistent with its
provisions, so long as the action will not adversely affect in any
material respect the interests of any securityholder; or
o to amend any provision that is not material to holders of any class of
related securities.
In most cases, each agreement may also be amended by the parties to the
agreement, except as otherwise provided for in the related agreement with
respect to the credit enhancer, with the consent of the holders of securities of
each class affected thereby evidencing not less than 66%, in the case of a
series of securities issued under a pooling and servicing agreement, or a
majority, in the case of a series of securities issued under an indenture, of
the aggregate outstanding principal amount of securities of that class for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the related agreement or of modifying in any manner the
rights of the related securityholders, except that no such amendment may (i)
reduce in any manner the amount of, or delay the timing of, payments received on
loans which are required to be distributed on a security of any class without
the consent of the holder of the security, (ii) adversely affect in any material
respect the interests of the holders of any class of securities in a manner
other than as described in the preceding clause, without the consent of the
holders of securities of that class evidencing not less than 66%, in the case of
a series of securities issued under a pooling and servicing agreement, or a
majority, in the case of a series of securities issued under an indenture, of
the aggregate outstanding principal amount of the securities of each class of
that series affected by that amendment or (iii) reduce the percentage of
securities of any class the holders of which are required to consent to any such
amendment unless the holders of all securities of that class have consented to
the change in the percentage.
Regardless of the foregoing, if a REMIC election has been made with
respect to the related trust, the trustee will not be entitled to consent to any
amendment to a pooling and servicing agreement without having first received an
opinion of counsel to the effect that the amendment or the exercise of any power
granted to the master servicer, the servicer, the depositor or the trustee in
accordance with the amendment will not result in the imposition of a tax on the
related trust or cause the trust to fail to qualify as a REMIC.
TERMINATION; RETIREMENT OF SECURITIES
The primary obligations created by the trust agreement or pooling and
servicing agreement for each series of certificates will terminate on the
payment to the related securityholders of all amounts held in the Payment
Account or by the master servicer or any servicer and required to be paid to the
securityholders following the earlier of
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o the final payment or other liquidation or disposition, or any Advance
with respect thereto, of the last loan subject thereto and all
property acquired on foreclosure or deed in lieu of foreclosure of
any loan, and
o the purchase by the master servicer, the servicer or the depositor
or, if specified in the accompanying prospectus supplement, by the
holder of the REMIC Residual Certificates (see "Material Federal
Income Tax Consequences" below) from the trust, or from the special
purpose entity, if applicable, for such series of all remaining loans
and all property acquired relating to the loans.
Any option to purchase described in the second item above will be
limited to cases in which the aggregate Stated Principal Balance of the
remaining loans is less than or equal to ten percent (10%) of the initial
aggregate Stated Principal Balance of the loans. In addition to the foregoing,
the master servicer, the servicer, or the depositor may have the option to
purchase, in whole but not in part, the securities specified in the accompanying
prospectus supplement in the manner described in the accompanying prospectus
supplement. At the time of the purchase of such securities or at any time
thereafter, at the option of the master servicer, the servicer, or the
depositor, the loans may be sold, thereby effecting a retirement of the
securities and the termination of the trust, or the securities so purchased may
be held or resold by the master servicer, the servicer, or the depositor.
Written notice of termination of the related agreement will be given to each
securityholder, and the final distribution will be made only at the time of the
surrender and cancellation of the securities at an office or agency appointed by
the trustee which will be specified in the notice of termination. If the
securityholders are permitted to terminate the trust under the applicable
agreement, a penalty may be imposed on the securityholders based on the fee that
would be foregone by the master servicer or the servicer, as applicable, because
of the related termination.
Any purchase described in the preceding paragraph of loans and property
acquired relating to the loans evidenced by a series of securities shall be made
at the option of the master servicer, servicer, depositor or, if applicable, the
holder of the REMIC Residual Certificates at the price specified in the
accompanying prospectus supplement. The exercise of that right will effect early
retirement of the securities of that series, but the right of any entity to
purchase the loans and related property will be in accordance with the criteria,
and will be at the price, set forth in the accompanying prospectus supplement.
Early termination in this manner may adversely affect the yield to holders of
some classes of the securities. If a REMIC election has been made, the
termination of the related trust will be effected in a manner consistent with
applicable federal income tax regulations and its status as a REMIC.
In addition to the optional repurchase of the property in the related
trust, if stated in the accompanying prospectus supplement, a holder of the Call
Class will have the right, solely at its discretion, to terminate the related
trust and thereby effect early retirement of the securities of the series, on
any distribution date after the 12th distribution date following the date of
initial issuance of the related series of securities and until the date when the
optional termination rights of the master servicer or the servicer and the
depositor become exercisable. The Call Class will not be offered under the
prospectus supplement. Any such call will be of the entire trust at one time;
multiple calls for any series of securities will not be permitted. In the case
of a call, the holders of the securities will be paid a price equal to the Call
Price. To exercise the call, the holder of the Call Security must remit to the
related trustee for distribution to the certificateholders, funds equal to the
Call Price. If those funds are not deposited with the related trustee, the
securities of that series will remain outstanding. In addition, in the case of a
trust for which a REMIC election or elections have been made, this termination
will be effected in a manner consistent with applicable Federal income tax
regulations and its status as a REMIC. In connection with a call by the holder
of a Call Security, the final payment to the certificateholders will be made at
the time of surrender of the related securities to the trustee. Once the
securities have been surrendered and paid in full, there will not be any further
liability to certificateholders.
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The indenture will be discharged as to a series of notes, except for
some continuing rights specified in the indenture, at the time of the
distribution to noteholders of all amounts required to be distributed under the
indenture.
THE TRUSTEE
The trustee under each pooling and servicing agreement or trust
agreement under which a series of certificates is issued will be named in the
accompanying prospectus supplement. The commercial bank or trust company serving
as trustee may have normal banking relationships with the depositor and/or its
affiliates, including Residential Funding Corporation and GMAC Mortgage
Corporation.
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
related agreement or if the trustee becomes insolvent. After 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
securities 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.
THE OWNER TRUSTEE
The owner trustee under the trust agreement will be named in the
accompanying prospectus supplement. The commercial bank or trust company serving
as owner trustee may have normal banking relationships with the depositor and/or
its affiliates, including Residential Funding Corporation and GMAC Mortgage
Corporation.
The owner trustee may resign at any time, in which case the
Administrator or the indenture trustee will be obligated to appoint a successor
owner trustee as described in the agreements. The Administrator or the indenture
trustee may also remove the owner trustee if the owner trustee ceases to be
eligible to continue as such under the trust agreement or if the owner trustee
becomes insolvent. After becoming aware of those circumstances, the
Administrator or the indenture trustee will be obligated to appoint a successor
owner trustee. Any resignation or removal of the owner trustee and appointment
of a successor owner trustee will not become effective until acceptance of the
appointment by the successor owner trustee.
THE INDENTURE TRUSTEE
The indenture trustee under the indenture will be named in the
accompanying prospectus supplement. The commercial bank or trust company serving
as indenture trustee may have normal banking relationships with the depositor
and/or its affiliates, including Residential Funding Corporation and GMAC
Mortgage Corporation.
The indenture trustee may resign at any time, in which case the
depositor, the owner trustee or the Administrator will be obligated to appoint a
successor indenture trustee as described in the indenture. The depositor, the
owner trustee or the Administrator as described in the indenture may also remove
the indenture trustee if the indenture trustee ceases to be eligible to continue
as such under the indenture or if the indenture trustee becomes insolvent. After
becoming aware of those circumstances, the depositor, the owner trustee or the
Administrator will be obligated to appoint a successor indenture trustee. If
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stated in the indenture, the indenture trustee may also be removed at any time
by the holders of a majority by principal balance of the notes. Any resignation
or removal of the indenture trustee and appointment of a successor indenture
trustee will not become effective until acceptance of the appointment by the
successor indenture trustee.
YIELD CONSIDERATIONS
The yield to maturity of a security will depend on the price paid by the
holder for the security, the pass-through rate on any security entitled to
payments of interest, which pass-through rate may vary if stated in the
accompanying prospectus supplement, and the rate and timing of principal
payments on the loans, including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases, the rate and timing
of Draws in the case of revolving credit loans, and the allocation of principal
payments to reduce the principal balance of the security or notional amount
thereof, if applicable.
In general, defaults on loans are expected to occur with greater
frequency in their early years. The rate of default on cash out refinance,
limited documentation or no documentation mortgage loans, and on loans with high
LTV ratios or combined LTV ratios, as applicable, may be higher than for other
types of loans. Likewise, the rate of default on loans that have been originated
under lower than traditional underwriting standards may be higher than those
originated under traditional standards. A trust may include loans that are one
month or more delinquent at the time of offering of the related series of
securities or which have recently been several months delinquent. The rate of
default on delinquent loans or loans with a recent history of delinquency is
more likely to be higher than the rate of default on loans that have a current
payment status. In addition, the rate and timing of prepayments, defaults and
liquidations on the loans will be affected by the general economic condition of
the region of the country or the locality in which the related mortgaged
properties are located. The risk of delinquencies and loss is greater and
prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. The risk of loss may also be greater on loans with LTV
ratios or combined LTV ratios greater than 80% and no primary insurance
policies. The yield on any class of securities and the timing of principal
payments on that class may also be affected by modifications or actions that may
be taken or approved by the master servicer, the servicer or any of their
affiliates as described in this prospectus under "Description of the
Securities--Servicing and Administration of Loans," in connection with a loan
that is in default, or if a default is reasonably foreseeable.
The risk of loss on loans made on loans secured by mortgaged properties
located in Puerto Rico may be greater than on loans that are made to borrowers
who are United States residents and citizens or that are secured by properties
located in the United States. See "Certain Legal Aspects of the Loans" in this
prospectus.
Because of the uncertainty, delays and costs that may be associated with
realizing on collateral securing the Mexico Loans, as well as the additional
risks of a decline in the value and marketability of the collateral, the risk of
loss for Mexico Loans may be greater than for mortgage loans secured by
mortgaged properties located in the United States. The risk of loss on loans
made to international borrowers may be greater than loans that are made to U.S.
borrowers located in the United States. See "Certain Legal Aspects of the Loans"
in this prospectus.
The application of any withholding tax on payments made by borrowers of
Mexico Loans residing outside of the United States may increase the risk of
default because the borrower may have qualified for the loan on the basis of the
lower mortgage payment, and may have difficulty making the increased payments
required to cover the withholding tax payments. The application of withholding
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tax may increase the risk of loss because the applicable taxing authorities may
be permitted to place a lien on the mortgaged property or effectively prevent
the transfer of an interest in the mortgaged property until any delinquent
withholding taxes have been paid.
To the extent that any document relating to a loan is not in the
possession of the trustee, the deficiency may make it difficult or impossible to
realize on the mortgaged property in the event of foreclosure, which will affect
the timing and the amount of Liquidation Proceeds received by the Trustee. See
"Description of the Securities --Assignment of Loans" in this prospectus.
The amount of interest payments on a loans distributed monthly to
holders of a class of securities entitled to payments of interest will be
calculated, or accrued in the case of deferred interest or accrual securities,
on the basis of that class's specified percentage of each payment of interest,
or accrual in the case of accrual securities, and will be expressed as a fixed,
adjustable or variable pass-through rate payable on the outstanding principal
balance or notional amount of the security, or any combination of pass-through
rates, calculated as described in this prospectus and in the accompanying
prospectus supplement under "Description of the Securities - Distributions of
Principal and Interest on the Securities." Holders of strip securities or a
class of securities having a pass-through rate that varies based on the weighted
average interest rate of the underlying loans will be affected by
disproportionate prepayments and repurchases of loans having higher net interest
rates or higher rates applicable to the strip securities, as applicable.
The effective yield to maturity to each holder of securities entitled to
payments of interest will be below that otherwise produced by the applicable
pass-through rate and purchase price of the security because, while interest
will accrue on each loan from the first day of each month, the distribution of
interest will be made on the 25th day or, if the 25th day is not a business day,
the next succeeding business day, of the month following the month of accrual
or, in the case of a trust including private securities, such other day that is
specified in the accompanying prospectus supplement.
A class of securities may be entitled to payments of interest at a
fixed, variable or adjustable pass-through rate, or any combination of
pass-through rates, each as specified in the accompanying prospectus supplement.
A variable pass-through rate may be calculated based on the weighted average of
the Net Loan Rates, net of servicing fees and any Excess Spread or Excluded
Spread, of the related loan or certain balances thereof for the month preceding
the distribution date. An adjustable pass-through rate may be calculated by
reference to an index or otherwise.
The aggregate payments of interest on a class of securities, and the
yield to maturity thereon, will be affected by the rate of payment of principal
on the securities, or the rate of reduction in the notional amount of securities
entitled to payments of interest only, and, in the case of securities evidencing
interests in ARM loans, by changes in the Net Loan Rates on the ARM loans. See
"Maturity and Prepayment Considerations" below. The yield on the securities will
also be affected by liquidations of loans following borrower defaults and by
purchases of loans in the event of breaches of representations made for the
loans by the depositor, the master servicer or the servicer and others, or
conversions of ARM loans to a fixed interest rate. See "Description of the
Securities - Representations with Respect to Loans" in this prospectus.
In general, if a security is purchased at a premium over its face amount
and payments of principal on the related loan occur at a rate faster than
anticipated at the time of purchase, the purchaser's actual yield to maturity
will be lower than that assumed at the time of purchase. On the other hand, if a
class of securities is purchased at a discount from its face amount and payments
of principal on the related loan occur at a rate slower than anticipated at the
time of purchase, the purchaser's actual yield to maturity will be lower than
assumed. The effect of Principal Prepayments, liquidations and purchases on
yield will be particularly significant in the case of a class of securities
entitled to payments of interest only or disproportionate payments of interest.
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In addition, the total return to investors of securities evidencing a right to
distributions of interest at a rate that is based on the weighted average Net
Loan Rate of the loans from time to time will be adversely affected by principal
prepayments on loans with loan rates higher than the weighted average loan rate
on the loans. In general, loans with higher loan rates prepay at a faster rate
than loans with lower loan rates. In some circumstances, rapid prepayments may
result in the failure of the holders to recoup their original investment. In
addition, the yield to maturity on other types of classes of securities,
including accrual securities, securities with a pass-through rate that
fluctuates inversely with or at a multiple of an index or other classes in a
series including more than one class of securities, may be relatively more
sensitive to the rate of prepayment on the related loans than other classes of
securities.
The outstanding principal balances of revolving credit loans, closed-end
home equity loans, home improvement contracts and Home Loans are, in most cases,
much smaller than traditional first lien mortgage loan balances, and the
original terms to maturity of those loans and contracts are often shorter than
those of traditional first lien mortgage loans. As a result, changes in interest
rates will not affect the monthly payments on those loans or contracts to the
same degree that changes in mortgage interest rates will affect the monthly
payments on traditional first lien mortgage loans. Consequently, the effect of
changes in prevailing interest rates on the prepayment rates on shorter-term,
smaller balance loans and contracts may not be similar to the effects of those
changes on traditional first lien mortgage loan prepayment rates, or those
effects may be similar to the effects of those changes on mortgage loan
prepayment rates, but to a smaller degree.
The timing of changes in the rate of principal payments on or
repurchases of the loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. In general, the earlier a
prepayment of principal on the loans or a repurchase of loans, the greater will
be the effect on an investor's yield to maturity. As a result, the effect on an
investor's yield of principal payments and repurchases occurring at a rate
higher or lower than the rate anticipated by the investor during the period
immediately following the issuance of a series of securities would not be fully
offset by a subsequent like reduction or increase in the rate of principal
payments.
When a full prepayment is made on a loan, the borrower is charged
interest on the principal amount of the loan so prepaid for the number of days
in the month actually elapsed up to the date of the prepayment, at a daily rate
determined by dividing the loan rate by 365. Prepayments in full or final
liquidations of loans in most cases may reduce the amount of interest
distributed in the following month to holders of securities entitled to
distributions of interest if the resulting Prepayment Interest Shortfall is not
covered by Compensating Interest. See "Description of the Securities--Prepayment
Interest Shortfalls." A partial prepayment of principal is applied so as to
reduce the outstanding principal balance of the related mortgage loan, other
than a revolving credit loan, as of the first day of the month in which the
partial prepayment is received. As a result, the effect of a partial prepayment
on a mortgage loan, other than a revolving credit loan, will be to reduce the
amount of interest distributed to holders of securities in the month following
the receipt of the partial prepayment by an amount equal to one month's interest
at the applicable pass-through rate or Net Loan Rate, as the case may be, on the
prepaid amount if such shortfall is not covered by Compensating Interest. See
"Description of the Securities--Prepayment Interest Shortfalls." Neither full or
partial Principal Prepayments nor Liquidation Proceeds will be distributed until
the distribution date in the month following receipt. See "Maturity and
Prepayment Considerations."
For some loans, including revolving credit loans and ARM loans, the loan
rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. Under the applicable
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underwriting standards, the borrower under each of the loans, other than a
revolving credit loan, usually will be qualified on the basis of the loan rate
in effect at origination, and borrowers under revolving credit loans are usually
qualified based on an assumed payment which reflects a rate significantly lower
than the maximum rate. The repayment of any such loan may thus be dependent on
the ability of the borrower to make larger monthly payments following the
adjustment of the loan rate. In addition, the periodic increase in the amount
paid by the borrower of a Buy-Down Loan during or at the end of the applicable
Buy-Down Period may create a greater financial burden for the borrower, who
might not have otherwise qualified for a mortgage under the applicable
underwriting guidelines, and may accordingly increase the risk of default for
the related loan.
For any loans secured by junior liens on the related mortgaged property,
the inability of the borrower to pay off the balance thereof may affect the
ability of the borrower to obtain refinancing of any related senior loan,
thereby preventing a potential improvement in the borrower's circumstances.
Furthermore, unless stated in the accompanying prospectus supplement, under the
applicable agreement the master servicer or the servicer may be restricted or
prohibited from consenting to any refinancing of any related senior loan, which
in turn could adversely affect the borrower's circumstances or result in a
prepayment or default under the corresponding loan.
The holder of a loan secured by a junior lien on the related mortgaged
property will be subject to a loss of its mortgage if the holder of a senior
mortgage is successful in foreclosure of its mortgage and its claim, including
any related foreclosure costs, is not paid in full, since no junior liens or
encumbrances survive such a foreclosure. Also, due to the priority of the senior
mortgage, the holder of a loan secured by a junior lien on the related mortgaged
property may not be able to control the timing, method or procedure of any
foreclosure action relating to the mortgaged property. Investors should be aware
that any liquidation, insurance or condemnation proceeds received relating to
any loans secured by junior liens on the related mortgaged property will be
available to satisfy the outstanding balance of such loans only to the extent
that the claims of the holders of the senior mortgages have been satisfied in
full, including any related foreclosure costs. For loans secured by junior liens
that have low junior mortgage ratios, foreclosure costs may be substantial
relative to the outstanding balance of the loan, and therefore the amount of any
Liquidation Proceeds available to securityholders may be smaller as a percentage
of the outstanding balance of the loan than would be the case in a typical pool
of first lien residential loans. In addition, the holder of a loan secured by a
junior lien on the related mortgaged property may only foreclose on the property
securing the related loan subject to any senior mortgages, in which case the
holder must either pay the entire amount due on the senior mortgages to the
senior mortgagees at or prior to the foreclosure sale or undertake the
obligation to make payments on the senior mortgages.
Depending upon the use of the revolving credit line and the payment
patterns, during the repayment period, a borrower may be obligated to make
payments that are higher than the borrower originally qualified for. Some of the
revolving credit loans are not expected to significantly amortize prior to
maturity. As a result, a borrower will, in these cases, be required to pay a
substantial principal amount at the maturity of a revolving credit loan.
Similarly, a borrower of a Balloon Loan will be required to pay the Balloon
Amount at maturity. Those loans pose a greater risk of default than
fully-amortizing loans, because the borrower's ability to make such a
substantial payment at maturity will in most cases depend on the borrower's
ability to obtain refinancing of those loans or to sell the mortgaged property
prior to the maturity of the loan. The ability to obtain refinancing will depend
on a number of factors prevailing at the time refinancing or sale is required,
including, without limitation, the borrower's personal economic circumstances,
the borrower's equity in the related mortgaged property, real estate values,
prevailing market interest rates, tax laws and national and regional economic
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conditions. None of the seller, the depositor, Residential Funding Corporation,
GMAC Mortgage Group, Inc. or any of their affiliates will be obligated to
refinance or repurchase any loan or to sell any mortgaged property, unless that
obligation is specified in the accompanying prospectus supplement.
The loan rates on ARM loans that are subject to negative amortization
typically adjust monthly and their amortization schedules adjust less
frequently. Because initial loan rates are typically lower than the sum of the
indices applicable at origination and the related Note Margins, during a period
of rising interest rates as well as immediately after origination, the amount of
interest accruing on the principal balance of those loans may exceed the amount
of the scheduled 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 balance and will bear interest at the applicable loan rate.
Unless otherwise specified in the accompanying prospectus supplement, revolving
credit loans will not be subject to negative amortization.
The addition of any deferred interest to the principal balance of any
related class of securities will lengthen the weighted average life of that
class of securities and may adversely affect yield to holders of those
securities. In addition, for ARM loans that are subject to negative
amortization, during a period of declining interest rates, it might be expected
that each scheduled monthly payment on such a loan would exceed the amount of
scheduled principal and accrued interest on its principal balance, and since the
excess will be applied to reduce the principal balance of the related class or
classes of securities, the weighted average life of those securities will be
reduced and may adversely affect yield to holders thereof.
If stated in the accompanying prospectus supplement, a trust may contain
GPM Loans, GEM Loans or Buy-Down Loans that have monthly payments that increase
during the first few years following origination. Borrowers in most cases will
be qualified for such loans on the basis of the initial monthly payment. To the
extent that the related borrower's income does not increase at the same rate as
the monthly payment, such a loan may be more likely to default than a mortgage
loan with level monthly payments.
If credit enhancement for a series of securities is provided by a letter
of credit, insurance policy or bond that is issued or guaranteed by an entity
that suffers financial difficulty, such credit enhancement may not provide the
level of support that was anticipated at the time an investor purchased its
security. In the event of a default under the terms of a letter of credit,
insurance policy or bond, any Realized Losses on the loans not covered by the
credit enhancement will be applied to a series of securities in the manner
described in the accompanying prospectus supplement and may reduce an investor's
anticipated yield to maturity.
The accompanying prospectus supplement may set forth other factors
concerning the loans securing a series of securities or the structure of such
series that will affect the yield on the securities.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Trusts," the original terms to maturity of
the loans in a given trust will vary depending on the type of loans included in
the trust. The prospectus supplement for a series of securities will contain
information for the types and maturities of the loans in the related trust. The
prepayment experience, the timing and rate of repurchases and the timing and
amount of liquidations for the related loans will affect the life and yield of
the related series of securities.
If the related agreement for a series of securities provides for a
Funding Account or other means of funding the transfer of additional loans to
the related trust, as described under "Description of the Securities--Funding
Account", and the trust is unable to acquire any additional loans within any
applicable time limit, the amounts set aside for such purpose may be applied as
principal distributions on one or more classes of securities of such series.
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Prepayments on loans are commonly measured relative to a prepayment
standard or model. The prospectus supplement for each series of securities may
describe one or more prepayment standard or model and may contain tables setting
forth the projected yields to maturity on each class of securities or the
weighted average life of each class of securities and the percentage of the
original principal amount of each class of securities of that series that would
be outstanding on specified payment dates for the series based on the
assumptions stated in the accompanying prospectus supplement, including
assumptions that prepayments on the loans are made at rates corresponding to
various percentages of the prepayment standard or model. There is no assurance
that prepayment of the loans underlying a series of securities will conform to
any level of the prepayment standard or model specified in the accompanying
prospectus supplement.
The following is a list of factors that may affect prepayment
experience:
o homeowner mobility;
o economic conditions;
o changes in borrowers' housing needs;
o job transfers;
o unemployment;
o borrowers' equity in the properties securing the mortgages;
o servicing decisions;
o enforceability of due-on-sale clauses;
o mortgage market interest rates;
o mortgage recording taxes;
o solicitations and the availability of mortgage funds; and
o the obtaining of secondary financing by the borrower.
All statistics known to the depositor that have been compiled for
prepayment experience on loans indicate that while some loans may remain
outstanding until their stated maturities, a substantial number will be paid
significantly earlier than their respective stated maturities. The rate of
prepayment for conventional fixed-rate loans has fluctuated significantly in
recent years. In general, however, if prevailing interest rates fall
significantly below the loan rates on the loans underlying a series of
securities, the prepayment rate of such loans is likely to be significantly
higher than if prevailing rates remain at or above the rates borne by those
loans. Conversely, when prevailing interest rates increase, borrowers are less
likely to prepay their loans. The depositor is not aware of any historical
prepayment experience for loans secured by properties located in Mexico or
Puerto Rico and, accordingly, prepayments on such loans may not occur at the
same rate or be affected by the same factors as more traditional loans.
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An increase in the amount of the monthly payments owed on a Mexico Loan
due to the imposition of withholding taxes may increase the risk of prepayment
on that loan if alternative financing on more favorable terms are available.
There can be no assurance as to the rate of principal payments or Draws
on the revolving credit loans. In most cases, the revolving credit loans may be
prepaid in full or in part without penalty. The closed-end home equity loans may
provide for a prepayment charge. The prospectus supplement will specify whether
loans may not be prepaid in full or in part without penalty. The depositor has
no significant experience regarding the rate of Principal Prepayments on home
improvement contracts, but in most cases expects that prepayments on home
improvement contracts will be higher than other loans due to the possibility of
increased property value resulting from the home improvement and greater
refinance options. The rate of principal payments and the rate of Draws, if
applicable, may fluctuate substantially from time to time. In most cases, home
equity loans are not viewed by borrowers as permanent financing. Accordingly,
such loans may experience a higher rate of prepayment than typical first lien
mortgage loans. Due to the unpredictable nature of both principal payments and
Draws, the rates of principal payments net of Draws for those loans may be much
more volatile than for typical first lien mortgage loans.
The yield to maturity of the securities of any series, or the rate and
timing of principal payments or Draws, if applicable, on the related loans, may
also be affected by a wide variety of specific terms and conditions applicable
to the respective programs under which the loans were originated. For example,
the revolving credit loans may provide for future Draws to be made only in
specified minimum amounts, or alternatively may permit Draws to be made by check
or through a credit card in any amount. A pool of revolving credit loans subject
to the latter provisions may be likely to remain outstanding longer with a
higher aggregate principal balance than a pool of revolving credit loans with
the former provisions, because of the relative ease of making new Draws.
Furthermore, the loans may provide for interest rate changes on a daily or
monthly basis, or may have gross margins that may vary under some circumstances
over the term of the loan. In extremely high market interest rate scenarios,
securities backed by loans with adjustable rates subject to substantially higher
maximum rates than typically apply to adjustable rate first mortgage loans may
experience rates of default and liquidation substantially higher than those that
have been experienced on other adjustable rate mortgage loan pools.
The yield to maturity of the securities of any series, or the rate and
timing of principal payments on the loans or Draws on the related revolving
credit loans and corresponding payments on the securities, will also be affected
by the specific terms and conditions applicable to the securities. For example,
if the index used to determine the loan rates for a series of securities is
different from the index applicable to the loan rates of the underlying loans,
the yield on the securities may be reduced by application of a cap on the loan
rates based on the weighted average of the loan rates. Depending on applicable
cash flow allocation provisions, changes in the relationship between the two
indexes may also affect the timing of some principal payments on the securities,
or may affect the amount of any overcollateralization, or the amount on deposit
in any reserve fund, which could in turn accelerate the payment of principal on
the securities if so provided in the prospectus supplement. For any series of
securities backed by revolving credit loans, provisions governing whether future
Draws on the revolving credit loans will be included in the trust will have a
significant effect on the rate and timing of principal payments on the
securities. The rate at which additional balances are generated may be affected
by a variety of factors. The yield to maturity of the securities of any series,
or the rate and timing of principal payments on the loans may also be affected
by the risks associated with other loans.
As a result of the payment terms of the revolving credit loans or of the
mortgage provisions relating to future Draws, there may be no principal payments
on those securities in any given month. In addition, it is possible that the
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aggregate Draws on revolving credit loans included in a pool may exceed the
aggregate payments of principal on those revolving credit loans for the related
period. If specified in the accompanying prospectus supplement, a series of
securities may provide for a period during which all or a portion of the
principal collections on the revolving credit loans are reinvested in additional
balances or are accumulated in a trust account pending commencement of an
amortization period relating to the securities.
Unless otherwise specified in the accompanying prospectus supplement, in
most cases mortgage loans (other than ARM loans) and revolving credit loans
will, and closed-end home equity loans and home improvement contracts may,
contain due-on-sale provisions permitting the mortgagee to accelerate the
maturity of the loan upon sale or some transfers by the borrower of the
underlying mortgaged property. Unless the accompanying prospectus supplement
indicates otherwise, the master servicer or servicer will enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying mortgaged property and it is entitled to do so
under applicable law, provided, however, that the master servicer or servicer
will not take any action in relation to the enforcement of any due-on-sale
provision which would adversely affect or jeopardize coverage under any
applicable insurance policy.
An ARM loan is assumable, in some circumstances, if the proposed
transferee of the related mortgaged property establishes its ability to repay
the loan and, in the reasonable judgment of the master servicer or the servicer,
the security for the ARM loan would not be impaired by the assumption. The
extent to which ARM loans are assumed by purchasers of the mortgaged properties
rather than prepaid by the related borrowers in connection with the sales of the
mortgaged properties will affect the weighted average life of the related series
of securities. See "Description of the Securities -- Servicing and
Administration of Loans -- Enforcement of `Due-on-Sale' Clauses" and "Certain
Legal Aspects of the Loans--Enforceability of Certain Provisions" for a
description of provisions of each agreement and legal developments that may
affect the prepayment rate of loans.
While most manufactured housing contracts will contain "due-on-sale"
provisions permitting the holder of the manufactured housing contract to
accelerate the maturity of the manufactured housing contract on conveyance by
the borrower, the master servicer or servicer, as applicable, may permit
proposed assumptions of manufactured housing contracts where the proposed buyer
of the manufactured home meets the underwriting standards described above. Such
assumption would have the effect of extending the average life of the
manufactured housing contract. FHA loans and VA loans are not permitted to
contain "due-on-sale" clauses, and are freely assumable.
In addition, some private securities included in a pool may be backed by
underlying loans having differing interest rates. Accordingly, the rate at which
principal payments are received on the related securities will, to some extent,
depend on the interest rates on the underlying loans.
Some types of loans included in a trust may have characteristics that
make it more likely to default than collateral provided for mortgage
pass-through securities from other mortgage purchase programs. The depositor
anticipates including "limited documentation" and "no documentation" mortgage
loans, loans acquired under Residential Funding Corporation's portfolio
transaction program, Mexico Loans, loans secured by mortgaged properties located
in Puerto Rico and mortgage loans that were made to international borrowers or
that were originated in accordance with lower underwriting standards and which
may have been made to borrowers with imperfect credit histories and prior
bankruptcies. Likewise, a trust may include loans that are one month or more
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delinquent at the time of offering of the related series of securities or are
secured by junior liens on the related mortgaged property. Such loans may be
susceptible to a greater risk of default and liquidation than might otherwise be
expected by investors in the related securities.
The mortgage loans may in most cases be prepaid by the borrowers at any
time without payment of any prepayment fee or penalty, although some of the
mortgage loans as described in the accompanying prospectus supplement provide
for payment of a prepayment charge. This may have an effect on the rate of
prepayment. Some states' laws restrict the imposition of prepayment charges even
when the mortgage loans expressly provide for the collection of those charges.
As a result, it is possible that prepayment charges may not be collected even on
mortgage loans that provide for the payment of these charges.
The master servicer or the servicer may allow the refinancing of a loans
in any trust by accepting prepayments thereon and permitting a new loan to the
same borrower secured by a mortgage on the same property, which may be
originated by the servicer or the master servicer or any of their respective
affiliates or by an unrelated entity. In the event of a refinancing, the new
loan would not be included in the related trust and, therefore, the refinancing
would have the same effect as a prepayment in full of the related loan. A
servicer or the master servicer 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, reduced or no documentation 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, servicers or
the master servicer may encourage assumption of loans, including defaulted
loans, under which creditworthy borrowers assume the outstanding indebtedness of
the loans, which may be removed from the related pool. As a result of these
programs, for the pool underlying any trust:
o the rate of Principal Prepayments of the loans in the pool may be higher
than would otherwise be the case;
o in some cases, the average credit or collateral quality of the loans
remaining in the pool may decline; and
o weighted average interest rate on the loans that remain in the trust
may be lower, thus reducing the rate of prepayments on the loans in
the future.
Although the loan rates on revolving credit loans and ARM loans will be
subject to periodic adjustments, the adjustments in most cases will:
o as to ARM loans, not increase or decrease the loan rates by more than a
fixed percentage amount on each adjustment date;
o not increase the loan rates over a fixed percentage amount during the life
of any revolving credit loan or ARM loan; and
o be based on an index, which may not rise and fall consistently with
mortgage interest rates, plus the related Gross Margin, which may be
different from margins being used at the time for newly originated
adjustable rate loans.
As a result, the loan rates on the revolving credit loans or ARM loans
in a trust at any time may not equal the prevailing rates for similar, newly
originated adjustable rate loans or lines of credit, and accordingly the rate of
principal payments and Draws, if applicable, may be lower or higher that would
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otherwise be anticipated. In some rate environments, the prevailing rates on
fixed-rate loans may be sufficiently low in relation to the then-current loan
rates on revolving credit loans or ARM loans that the rate of prepayment may
increase as a result of refinancings. There can be no certainty as to the rate
of prepayments or Draws, if applicable, on the loans during any period or over
the life of any series of securities.
For any index used in determining the rate of interest applicable to any
series of securities or loan rates of the underlying loans, there are a number
of factors affect the performance of those indices and may cause those indices
to move in a manner different from other indices. If an index applicable to a
series responds to changes in the general level of interest rates less quickly
than other indices, in a period of rising interest rates, increases in the yield
to securityholders due to those rising interest rates may occur later than that
which would be produced by other indices, and in a period of declining rates,
that index may remain higher than other market interest rates which may result
in a higher level of prepayments of the loans, which adjust in accordance with
that index, than of loans which adjust in accordance with other indices.
No assurance can be given that the value of the mortgaged property
securing a loan has remained or will remain at the level existing on the date of
origination. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the loans and
any secondary financing on the mortgaged properties in a particular 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. The value of any Mexican
property could also be adversely affected by, among other things, adverse
political and economic developments in Mexico. In addition, the value of
property securing Cooperative Loans and the delinquency rates for Cooperative
Loans could be adversely affected if the current favorable tax treatment of
cooperative tenant stockholders were to become less favorable. See "Certain
Legal Aspects of the Loans."
To the extent that losses resulting from delinquencies, losses and
foreclosures or repossession of mortgaged property for loans included in a trust
for a series of securities are not covered by the methods of credit enhancement
described in this prospectus under "Description of Credit Enhancement" or in the
accompanying prospectus supplement, the losses will be borne by holders of the
securities of the related series. Even where credit enhancement covers all
Realized Losses resulting from delinquency and foreclosure or repossession, the
effect of foreclosures and repossessions may be to increase prepayment
experience on the loans, thus reducing average weighted life and affecting yield
to maturity. See "Yield Considerations."
Under some circumstances, the master servicer, a servicer, the depositor
or, if specified in the accompanying prospectus supplement, the holders of the
REMIC Residual Certificates may have the option to purchase the loans in a
trust. See "The Agreements--Termination; Retirement of Securities." Any
repurchase will shorten the weighted average lives of the related securities.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of some legal aspects of the
loans that are general in nature. Because these legal aspects are governed in
part by state law, which laws may differ substantially from state to state, the
summaries do not purport to be complete, to reflect the laws of any particular
state or to encompass the laws of all states in which the mortgaged properties
may be situated. These legal aspects are in addition to the requirements of any
applicable FHA Regulations described in "Description of FHA Insurance" in this
prospectus and in the accompanying prospectus supplement regarding the home
improvement contracts partially insured by FHA under Title I. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the loans.
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THE MORTGAGE LOANS
GENERAL
The loans, other than Cooperative Loans, Mexico Loans and contracts,
will be secured by deeds of trust, mortgages or deeds to secure debt depending
on the prevailing practice in the state in which the related mortgaged property
is located. In some states, a mortgage, deed of trust or deed to secure debt
creates a lien on the related real property. In other states, the mortgage, deed
of trust or deed to secure debt conveys legal title to the property to the
mortgagee subject to a condition subsequent, for example, the payment of the
indebtedness secured thereby. These instruments are not prior to the lien for
real estate taxes and assessments and other charges imposed under governmental
police powers. Priority with respect to these instruments depends on their terms
and in some cases on the terms of separate subordination or inter-creditor
agreements, and in most cases on the order of recordation of the mortgage deed
of trust or deed to secure debt in the appropriate recording office.
There are two parties to a mortgage, the mortgagor, who is the borrower
and homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In some states, three parties may be involved in a mortgage financing
when title to the property is held by a land trustee under a land trust
agreement of which the borrower is the beneficiary; at origination of a mortgage
loan, the land trustee, as fee owner of the property, executes the mortgage and
the borrower executes a separate undertaking to make payments on the mortgage
note. Although a deed of trust is similar to a mortgage, a deed of trust has
three parties: the grantor, who is the borrower/homeowner; the beneficiary, who
is the lender; and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the mortgaged property to the trustee, irrevocably
until satisfaction of the debt. A deed to secure debt typically has two parties,
under which the borrower, or grantor, conveys title to the real property to the
grantee, or lender, typically with a power of sale, until the time when the debt
is repaid. The trustee's authority under a deed of trust and the mortgagee's or
grantee's authority under a mortgage or a deed to secure debt, as applicable,
are governed by the law of the state in which the real property is located, the
express provisions of the deed of trust, mortgage or deed to secure debt and, in
some deed of trust transactions, the directions of the beneficiary.
COOPERATIVE LOANS
If specified in the prospectus supplement relating to a series of
securities, the loans may include Cooperative Loans. Each Cooperative Note
evidencing a Cooperative Loan will be secured by a security interest in shares
issued by the Cooperative that owns the related apartment building, which is a
corporation entitled to be treated as a housing cooperative under federal tax
law, and in the related proprietary lease or occupancy agreement granting
exclusive rights to occupy a specific dwelling unit in the Cooperative's
building. The security agreement will create a lien on, or grant a security
interest in, the Cooperative shares and proprietary leases or occupancy
agreements, the priority of which will depend on, among other things, the terms
of the particular security agreement as well as the order of recordation of the
agreement, or the filing of the financing statements related thereto, in the
appropriate recording office or the taking of possession of the Cooperative
shares, depending on the law of the state in which the Cooperative is located.
This type of lien or security interest is not, in general, prior to liens in
favor of the cooperative corporation for unpaid assessments or common charges.
In most cases, each Cooperative owns in fee or has a leasehold interest
in all the real property and owns in fee or leases the building and all separate
dwelling units therein. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is an underlying
mortgage or mortgages on the Cooperative's building or underlying land, as is
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typically the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as mortgagor or lessee, as the case may be, is also
responsible for fulfilling the mortgage or rental obligations.
An underlying mortgage loan is ordinarily obtained by the Cooperative in
connection with either the construction or purchase of the Cooperative's
building or the obtaining of capital by the Cooperative. The interest of the
occupant under proprietary leases or occupancy agreements as to which that
Cooperative is the landlord is usually subordinate to the interest of the holder
of an underlying mortgage and to the interest of the holder of a land lease. If
the Cooperative is unable to meet the payment obligations (i) arising under an
underlying mortgage, the mortgagee holding an underlying mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (ii) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. In addition, an underlying mortgage
on a Cooperative may provide financing in the form of a mortgage that does not
fully amortize, with a significant portion of principal being due in one final
payment at maturity. The inability of the Cooperative to refinance a mortgage
and its consequent inability to make the final payment could lead to foreclosure
by the mortgagee. Similarly, a land lease has an expiration date and the
inability of the Cooperative to extend its term or, in the alternative, to
purchase the land, could lead to termination of the Cooperative's interest in
the property and termination of all proprietary leases and occupancy agreements.
In either event, a foreclosure by the holder of an underlying mortgage or the
termination of the underlying lease could eliminate or significantly diminish
the value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of shares of the Cooperative, or in the case of
the loans, the collateral securing the Cooperative Loans.
Each Cooperative is owned by shareholders, referred to as
tenant-stockholders, who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. In most instances, a
tenant-stockholder of a Cooperative must make a monthly maintenance payment to
the Cooperative under the proprietary lease, which rental payment represents the
tenant-stockholder's pro rata share of the Cooperative's payments for its
underlying mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a Cooperative and accompanying
occupancy rights may be financed through a Cooperative Loan evidenced by a
Cooperative Note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the related
shares of the related Cooperative. The lender usually takes possession of the
stock certificate and a counterpart of the proprietary lease or occupancy
agreement and a financing statement covering the proprietary lease or occupancy
agreement and the Cooperative shares is filed in the appropriate state or local
offices to perfect the lender's interest in its collateral. In accordance with
the limitations discussed below, on default of the tenant-stockholder, the
lender may sue for judgment on the Cooperative Note, dispose of the collateral
at a public or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of Cooperative shares. See "--Foreclosure on Shares of Cooperatives"
below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of
the Internal Revenue Code, of a corporation that qualifies as a "cooperative
housing corporation" within the meaning of Section 216(b)(1) of the Internal
Revenue Code is allowed a deduction for amounts paid or accrued within his or
her taxable year to the corporation representing his or her proportionate share
of certain interest expenses and real estate taxes allowable as a deduction
under Section 216(a) of the Internal Revenue Code to the corporation under
Sections 163 and 164 of the Internal Revenue Code. In order for a corporation to
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qualify under Section 216(b)(1) of the Internal Revenue Code for its taxable
year in which those items are allowable as a deduction to the corporation, the
section requires, among other things, that at least 80% of the gross income of
the corporation be derived from its tenant-stockholders. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the Internal Revenue Code must be determined on a year-to-year basis.
Consequently, there can be no assurance that Cooperatives relating to the
Cooperative Loans will qualify under this section for any particular year. If a
Cooperative fails to qualify for one or more years, the value of the collateral
securing any related Cooperative Loans could be significantly impaired because
no deduction would be allowable to tenant-stockholders under Section 216(a) of
the Internal Revenue Code with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies under Section 216(b)(1) of the Internal Revenue Code, the
likelihood that this type of failure would be permitted to continue over a
period of years appears remote.
MEXICO LOANS
If specified in the accompanying prospectus supplement, the mortgage
loans may include Mexico Loans. See "The Trusts--Mexico Loans" for a description
of the security for the Mexico Loans.
FORECLOSURE ON MORTGAGE LOANS
Although a deed of trust or a deed to secure debt may also be foreclosed
by judicial action, foreclosure of a deed of trust or a deed to secure debt is
typically accomplished by a non-judicial sale under a specific provision in the
deed of trust or deed to secure debt which authorizes the trustee or grantee, as
applicable, to sell the property on default by the borrower under the terms of
the note or deed of trust or deed to secure debt. In addition to any notice
requirements contained in a deed of trust or deed to secure debt, in some
states, the trustee or grantee, as applicable, must record a notice of default
and send a copy to the borrower and to any person who has recorded a request for
a copy of notice of default and notice of sale. In addition, in some states, the
trustee or grantee, as applicable, must provide notice to any other individual
having an interest of record in the real property, including any junior
lienholders. If the deed of trust or deed to secure debt is not reinstated
within a specified period, a notice of sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some states' laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest of
record in the real property.
Foreclosure of a mortgage usually is accomplished by judicial action. In
most cases, the action is initiated by the service of legal pleadings on all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may result from difficulties in locating and serving
necessary parties, including borrowers, such as international borrowers, located
outside the jurisdiction in which the mortgaged property is located.
Difficulties in foreclosing on mortgaged properties owned by international
borrowers may result in increased foreclosure costs, which may reduce the amount
of proceeds from the liquidation of the related loan available to be distributed
to the securityholders of the related series. In addition, delays in completion
of the foreclosure and additional losses may result where loan documents
relating to the loan are missing. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower has the right to reinstate the loan at any
time following default until shortly before the trustee's sale. In general, in
those states, the borrower, or any other person having a junior encumbrance on
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the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation.
In the case of foreclosure under a mortgage, a deed of trust or deed to
secure debt, the sale by the referee or other designated officer or by the
trustee or grantee, as applicable, is a public sale. However, because of the
difficulty a potential buyer at the sale may have in determining the exact
status of title and because the physical condition of the property may have
deteriorated during the foreclosure proceedings, it is uncommon for a third
party to purchase the property at a foreclosure sale. Rather, it is common for
the lender to purchase the property from the trustee or grantee, as applicable,
or referee for a credit bid less than or equal to the unpaid principal amount of
the loan, accrued and unpaid interest and the expense of foreclosure, in which
case the mortgagor's debt will be extinguished unless the lender purchases the
property for a lesser amount and preserves its right against a borrower to seek
a deficiency judgment and the remedy is available under state law and the
related loan documents. In some states, there is a statutory minimum purchase
price that the lender may offer for the property and in most cases, state law
controls the amount of foreclosure costs and expenses, including attorneys'
fees, which may be recovered by a lender. Thereafter, subject to the right of
the borrower in some states to remain in possession during the redemption
period, the lender will assume the burdens of ownership, including obtaining
hazard insurance, paying taxes and making repairs at its own expense that are
necessary to render the property suitable for sale. In most cases, the lender
will obtain the services of a real estate broker and pay the broker's commission
in connection with the sale of the property. Depending on market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property and, in some states, the lender may be entitled to a
deficiency judgment. In some cases, a deficiency judgment may be pursued in lieu
of foreclosure. Any loss may be reduced by the receipt of any mortgage insurance
proceeds or other forms of credit enhancement for a series of securities. See
"Description of Credit Enhancement."
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FORECLOSURE ON JUNIOR MORTGAGE LOANS
A junior mortgagee may not foreclose on the property securing a junior
loan unless it forecloses subject to the senior mortgages, in which case it must
either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages if the mortgagor is in
default thereunder, in either event adding the amounts expended to the balance
due on the junior loan. In addition, if the foreclosure by a junior mortgagee
triggers the enforcement of a "due-on-sale" clause in a senior mortgage, the
junior mortgagee may be required to pay the full amount of the senior mortgages
to the senior mortgagees, to avoid a default with respect thereto. Accordingly,
if the junior lender purchases the property, the lender's title will be subject
to all senior liens and claims and certain governmental liens. The proceeds
received by the referee or trustee from the sale are applied first to the costs,
fees and expenses of sale and then in satisfaction of the indebtedness secured
by the mortgage or deed of trust that is being foreclosed. Any remaining
proceeds are typically payable to the holders of junior mortgages or deeds of
trust and other liens and claims in order of their priority, whether or not the
borrower is in default. Any additional proceeds are usually payable to the
mortgagor or trustor. The payment of the proceeds to the holders of junior
mortgages may occur in the foreclosure action of the senior mortgagee or may
require the institution of separate legal proceedings. See "Description of the
Securities - Servicing and Administration of Loans -- Realization Upon Defaulted
Loans" in this prospectus.
FORECLOSURE ON MEXICO LOANS
Foreclosure on the borrower's beneficial interest in the Mexican trust
typically is expected to be accomplished by public sale in accordance with the
provisions of Article 9 of the UCC and the security agreement relating to that
beneficial interest or by public auction held by the Mexican trustee under the
Mexico trust agreement. Article 9 of the UCC requires that a sale be conducted
in a "commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale and the sale
price. In most cases, a sale conducted according to the usual practice of banks
selling similar collateral in the same area will be considered reasonably
conducted. Under the trust agreement, the lender may direct the Mexican trustee
to transfer the borrower's beneficial interest in the Mexican trust to the
purchaser on completion of the public sale and notice from the lender. That
purchaser will be entitled to rely on the terms of the Mexico trust agreement to
direct the Mexican trustee to transfer the borrower's beneficial interest in the
Mexican trust into the name of the purchaser or its nominee, or the trust may be
terminated and a new trust may be established.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. If there are proceeds
remaining, the lender must account to the borrower for the surplus. On the other
hand, if a portion of the indebtedness remains unpaid, the borrower is usually
responsible for the deficiency. However, some states limit the rights of lenders
to obtain deficiency judgments. See "--Anti-Deficiency Legislation and Other
Limitations on Lenders" below. The costs of sale may be substantially higher
than the costs associated with foreclosure sales for property located in the
United States, and may include transfer taxes, notary public fees, trustee fees,
capital gains and other taxes on the proceeds of sale, and the cost of amending
or terminating the Mexico trust agreement and preparing a new trust agreement.
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Additional costs associated with realizing on the collateral may include
eviction proceedings, the costs of defending actions brought by the defaulting
borrower and enforcement actions. Any of the additional foreclosure costs may
make the cost of foreclosing on the collateral uneconomical, which may increase
the risk of loss on the Mexico Loans substantially.
Where the borrower does not maintain its principal residence in the
United States, or, if a borrower residing in the United States moves its
principal residence from the state in which the UCC financing statements have
been filed, and the lender, because it has no knowledge of the relocation of the
borrower or otherwise, fails to refile in the state to which the borrower has
moved within four months after relocation, or if the borrower no longer resides
in the United States, the lender's security interest in the borrower's
beneficial interest in the Mexican trust may be unperfected. In those
circumstances, if the borrower defaults on the Mexico Loan, the Mexico loan
agreement will nonetheless permit the lender to terminate the borrower's rights
to occupy the Mexican property, and the Mexico trust agreement will permit the
lender to instruct the Mexican trustee to transfer the Mexican property to a
subsequent purchaser or to recognize the subsequent purchaser as the beneficiary
of the borrower's beneficial interest in the Mexican trust. However, because the
lender's security interest in the borrower's beneficial interest in the Mexican
trust will be unperfected, no assurance can be given that the lender will be
successful in realizing on its interest in the collateral under those
circumstances. The lender's security interest in the borrower's beneficial
interest in the Mexican trust is not, for purposes of foreclosing on that
collateral, an interest in real property. The depositor either will rely on its
remedies that are available in the United States under the applicable UCC and
under the Mexico trust agreement and foreclose on the collateral securing a
Mexico Loan under the UCC, or follow the procedures described below.
In the case of some Mexico Loans, the Mexico trust agreement may permit
the Mexican trustee, on notice from the lender of a default by the borrower, to
notify the borrower that the borrower's beneficial interest in the Mexican trust
or the Mexican property will be sold at an auction in accordance with the Mexico
trust agreement. Under the terms of the Mexico trust agreement, the borrower may
avoid foreclosure by paying in full prior to sale the outstanding principal
balance of, together with all accrued and unpaid interest and other amounts owed
on, the Mexico Loan. At the auction, the Mexican trustee may sell the borrower's
beneficial interest in the Mexican trust to a third party, sell the Mexican
property to another trust established to hold title to that property, or sell
the Mexican property directly to a Mexican citizen.
The depositor is not aware of any other mortgage loan programs involving
mortgage loans that are secured in a manner similar to the Mexico Loans. As a
result, there may be uncertainty and delays in the process of attempting to
realize on the mortgage collateral and gaining possession of the mortgaged
property, and the process of marketing the borrower's beneficial interest in the
Mexican trust to persons interested in purchasing a Mexican property may be
difficult.
FORECLOSURE ON MORTGAGED PROPERTIES LOCATED IN THE COMMONWEALTH OF PUERTO
RICO
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a
real estate mortgage usually follows an ordinary "civil action" filed in the
Superior Court for the district where the mortgaged property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property. If the defendant contests the foreclosure, the
case may be tried and judgment rendered based on the merits of the case.
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There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of those actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale on
foreclosure of a mortgaged property that (a) is subject to a mortgage loan that
was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of the property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of the property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of the property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year after the sale. This payment
would reduce the amount of sales proceeds available to satisfy the mortgage loan
and may increase the amount of the loss.
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with
the rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, in accordance
with restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay
rent or other obligations or charges owed by the tenant-stockholder, including
mechanics' liens against the Cooperative's building incurred by the
tenant-stockholder.
In most cases, rent and other obligations and charges arising under a
proprietary lease or occupancy agreement which are owed to the Cooperative are
made liens on the shares to which the proprietary lease or occupancy agreement
relates. In addition, the proprietary lease or occupancy agreement in most cases
permits the Cooperative to terminate the lease or agreement if the borrower
defaults in the performance of covenants thereunder. Typically, the lender and
the Cooperative enter into a recognition agreement which, together with any
lender protection provisions contained in the proprietary lease or occupancy
agreement, establishes the rights and obligations of both parties in the event
of a default by the tenant-stockholder on its obligations under the proprietary
lease or occupancy agreement. A default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default under
the security agreement between the lender and the tenant-stockholder.
The recognition agreement in most cases provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under the proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender in most cases cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
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Recognition agreements also typically provide that if the lender
succeeds to the tenant-shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon its collateral for a Cooperative Loan,
the lender must obtain the approval or consent of the board of directors of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares and assigning the proprietary lease. This approval or consent
is usually based on the prospective purchaser's income and net worth, among
other factors, and may significantly reduce the number of potential purchasers,
which could limit the ability of the lender to sell and realize upon the value
of the collateral. In most cases, the lender is not limited in any rights it may
have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
A foreclosure on the Cooperative shares is accomplished by public sale
in accordance with the provisions of Article 9 of the Uniform Commercial Code,
or UCC, and the security agreement relating to those shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the sale and the sale price. In most instances, a sale
conducted according to the usual practice of creditors selling similar
collateral in the same area will be considered reasonably conducted.
Where the lienholder is the junior lienholder, any foreclosure may be
delayed until the junior lienholder obtains actual possession of such
Cooperative shares. Additionally, if the lender does not have a first priority
perfected security interest in the Cooperative shares, any foreclosure sale
would be subject to the rights and interests of any creditor holding senior
interests in the shares. Also, a junior lienholder may not be able to obtain a
recognition agreement from a Cooperative since many cooperatives do not permit
subordinate financing. Without a recognition agreement, the junior lienholder
will not be afforded the usual lender protections from the Cooperative which are
in most cases provided for in recognition agreements.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, in most cases provides that the lender's right to
reimbursement is subject to the right of the Cooperative corporation to receive
sums due under the proprietary lease or occupancy agreement. If there are
proceeds remaining, the lender must account to the tenant-stockholder for the
surplus. On the other hand, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is in most cases responsible for the deficiency. See
"--Anti-Deficiency Legislation and Other Limitations on Lenders" below.
RIGHTS OF REDEMPTION
In some states, after sale under a deed of trust, or a deed to secure
debt or foreclosure of a mortgage, the borrower and foreclosed junior lienors or
other parties are given a statutory period, typically ranging from six months to
two years, in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only on payment of the entire principal balance of
the mortgage loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. In some states, the right to redeem is an equitable right. The
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equity of redemption, which is a non-statutory right, should be distinguished
from statutory rights of redemption. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser
subsequent to foreclosure or sale under a deed of trust or a deed to secure
debt. Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Some states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust, a mortgagee under a mortgage or a
grantee under a deed to secure debt. In some states, including California,
statutes limit the right of the beneficiary, mortgagee or grantee to obtain a
deficiency judgment against the borrower following foreclosure. A deficiency
judgment is a personal judgment against the former borrower equal in most cases
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. In the case of a mortgage loan
secured by a property owned by a trust where the Mortgage Note is executed on
behalf of the trust, a deficiency judgment against the trust following
foreclosure or sale under a deed of trust or deed to secure debt, even if
obtainable under applicable law, may be of little value to the beneficiary,
grantee or mortgagee if there are no mortgage loans against which the deficiency
judgment may be executed. Some state statutes require the beneficiary, grantee
or mortgagee to exhaust the security afforded under a deed of trust, deed to
secure debt or mortgage by foreclosure in an attempt to satisfy the full debt
before bringing a personal action against the borrower.
In other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting the security; however,
in some of these states, the lender, following judgment on the personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies for the security. Consequently, the practical effect of the election
requirement, in those states permitting this election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, in some states, statutory provisions limit
any deficiency judgment against the borrower following a foreclosure to the
excess of the outstanding debt over the fair value of the property at the time
of the public sale. The purpose of these statutes is in most cases to prevent a
beneficiary, grantee or mortgagee from obtaining a large deficiency judgment
against the borrower as a result of low or no bids at the judicial sale.
In most cases, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Article 9 to prohibit or limit a deficiency award in some
circumstances, including circumstances where the disposition of the collateral,
which, in the case of a Cooperative Loan, would be the shares of the Cooperative
and the related proprietary lease or occupancy agreement, was not conducted in a
commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon its
collateral and/or enforce a deficiency judgment. For example, under the federal
bankruptcy law, all actions against the debtor, the debtor's property and any
co-debtor are automatically stayed upon the filing of a bankruptcy petition.
Moreover, a court having federal bankruptcy jurisdiction may permit a debtor
through its Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default relating to a mortgage loan or revolving credit loan on the debtor's
residence by paying arrearages within a reasonable time period and reinstating
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the original loan payment schedule, even though the lender accelerated the
mortgage loan or revolving credit loan and final judgment of foreclosure had
been entered in state court. Some courts with federal bankruptcy jurisdiction
have approved plans, based on the particular facts of the reorganization case,
that effected the curing of a mortgage loan or revolving credit loan default by
paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan or revolving credit loan secured by property of the
debtor may be modified. These courts have allowed modifications that include
reducing the amount of each monthly payment, changing the rate of interest,
altering the repayment schedule, forgiving all or a portion of the debt and
reducing the lender's security interest to the value of the residence, thus
leaving the lender a general unsecured creditor for the difference between the
value of the residence and the outstanding balance of the mortgage loan or
revolving credit loan. In most cases, however, the terms of a mortgage loan or
revolving credit loan secured only by a mortgage on real property that is the
debtor's principal residence may not be modified under a plan confirmed under
Chapter 13, as opposed to Chapter 11, except for mortgage payment arrearages,
which may be cured within a reasonable time period. Courts with federal
bankruptcy jurisdiction similarly may be able to modify the terms of a
Cooperative Loan.
Certain tax liens arising under the Internal Revenue Code may, in some
circumstances, have priority over the lien of a mortgage, deed to secure debt or
deed of trust. This may have the effect of delaying or interfering with the
enforcement of rights for a defaulted mortgage loan or revolving credit loan.
In addition, substantive requirements are imposed on mortgage lenders in
connection with the origination and the servicing of mortgage loans or revolving
credit loans by numerous federal and some state consumer protection laws. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes. These federal laws impose specific statutory
liabilities on lenders who originate mortgage loans or revolving credit loans
and who fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the mortgage loans or revolving credit loans.
Some of the mortgage loans or revolving credit loans may be High Cost
Loans. Purchasers or assignees of any High Cost Loan, including any trust, could
be liable for all claims and subject to all defenses arising under any
applicable law that the borrower could assert against the originator of the High
Cost Loan. Remedies available to the borrower include monetary penalties, as
well as rescission rights if the appropriate disclosures were not given as
required.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including ARM loans and early
ownership mortgage loans or revolving credit loans, originated by non-federally
chartered lenders, have historically been subjected to a variety of
restrictions. These restrictions differed from state to state, resulting in
difficulties in determining whether a particular alternative mortgage instrument
originated by a state-chartered lender was in compliance with applicable law.
These difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St Germain Act, or Title VIII. Title VIII provides that,
regardless of any state law to the contrary;
o state-chartered banks may originate alternative mortgage instruments
in accordance with regulations promulgated by the Comptroller of the
Currency for the origination of alternative mortgage instruments by
national banks,
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o state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the
National Credit Union Administration for origination of alternative
mortgage instruments by federal credit unions and
o all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered
savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan
Bank Board, predecessor to the OTS, for origination of alternative
mortgage instruments by federal savings and loan associations.
Title VIII also provides that any state may reject applicability of the
provisions of Title VIII by adopting, prior to October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of these
provisions. Some states have taken this action.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
The mortgage loans or revolving credit loans included in the trust may
be junior to other mortgages, deeds to secure debt or deeds of trust held by
other lenders. Absent an intercreditor agreement, the rights of the trust, and
therefore the securityholders, as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee under the senior mortgage, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan or
revolving credit loan to be sold on default of the mortgagor. The sale of the
mortgaged property may extinguish the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, in certain cases, either reinstates or satisfies the defaulted
senior mortgage loan or revolving credit loan or mortgage loans or revolving
credit loans. A junior mortgagee may satisfy a defaulted senior mortgage loan or
revolving credit loan in full or, in some states, may cure the default and bring
the senior mortgage loan or revolving credit loan current thereby reinstating
the senior mortgage loan or revolving credit loan, in either event usually
adding the amounts expended to the balance due on the junior mortgage loan or
revolving credit loan. In most states, absent a provision in the mortgage, deed
to secure debt or deed of trust, or an intercreditor agreement, no notice of
default is required to be given to a junior mortgagee. Where applicable law or
the terms of the senior mortgage, deed to secure debt or deed of trust do not
require notice of default to the junior mortgagee, the lack of any notice may
prevent the junior mortgagee from exercising any right to reinstate the mortgage
loan or revolving credit loan which applicable law may provide.
The standard form of the mortgage, deed to secure debt or deed of trust
used by most institutional lenders confers on the mortgagee the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with condemnation proceedings, and to apply the proceeds and
awards to any indebtedness secured by the mortgage, deed to secure debt or deed
of trust, in the order as the mortgagee may determine. Thus, if improvements on
the property are damaged or destroyed by fire or other casualty, or if the
property is taken by condemnation, the mortgagee or beneficiary under underlying
senior mortgages will have the prior right to collect any insurance proceeds
payable under a hazard insurance policy and any award of damages in connection
with the condemnation and to apply the same to the indebtedness secured by the
senior mortgages. Proceeds in excess of the amount of senior mortgage
indebtedness, in most cases, may be applied to the indebtedness of junior
mortgages in the order of their priority.
Another provision sometimes found in the form of the mortgage, deed to
secure debt or deed of trust used by institutional lenders obligates the
mortgagor to pay before delinquency all taxes and assessments on the property
and, when due, all encumbrances, charges and liens on the property which are
prior to the mortgage, deed to secure debt or deed of trust, to provide and
maintain fire insurance on the property, to maintain and repair the property and
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not to commit or permit any waste thereof, and to appear in and defend any
action or proceeding purporting to affect the property or the rights of the
mortgagee under the mortgage or deed of trust. After a failure of the mortgagor
to perform any of these obligations, the mortgagee or beneficiary is given the
right under certain mortgages, deeds to secure debt or deeds of trust to perform
the obligation itself, at its election, with the mortgagor agreeing to reimburse
the mortgagee for any sums expended by the mortgagee on behalf of the mortgagor.
All sums so expended by a senior mortgagee become part of the indebtedness
secured by the senior mortgage. Also, since most senior mortgages require the
related mortgagor to make escrow deposits with the holder of the senior mortgage
for all real estate taxes and insurance premiums, many junior mortgagees will
not collect and retain the escrows and will rely on the holder of the senior
mortgage to collect and disburse the escrows.
The form of credit line trust deed or mortgage used by most
institutional lenders that make revolving credit loans typically contains a
"future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. The priority of the lien securing any
advance made under the clause may depend in most states on whether the deed of
trust or mortgage is designated as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust deed
or mortgage, regardless of the fact that there may be junior trust deeds or
mortgages and other liens that intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and regardless that
the beneficiary or lender had actual knowledge of these intervening junior trust
deeds or mortgages and other liens at the time of the advance. In most states,
the trust deed or mortgage lien securing mortgage loans or revolving credit
loans of the type that includes revolving credit loans applies retroactively to
the date of the original recording of the trust deed or mortgage, provided that
the total amount of advances under the credit limit does not exceed the maximum
specified principal amount of the recorded trust deed or mortgage, except as to
advances made after receipt by the lender of a written notice of lien from a
judgment lien creditor of the trustor.
THE MANUFACTURED HOUSING CONTRACTS
GENERAL
A manufactured housing contract evidences both (a) the obligation of the
mortgagor to repay the loan evidenced thereby and (b) the grant of a security
interest in the manufactured home to secure repayment of the loan. Certain
aspects of both features of the manufactured housing contracts are described
below.
SECURITY INTERESTS IN MANUFACTURED HOMES
The law governing perfection of a security interest in a manufactured
home varies from state to state. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payments of a fee to the
state motor vehicle authority, depending on state law. In some non-title states,
perfection under the provisions of the UCC is required. The lender, the servicer
or the master servicer may effect the notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home securing
a manufactured housing contract is registered. If the master servicer, the
servicer or the lender fails to effect the notation or delivery, or files the
security interest under the wrong law, for example, under a motor vehicle title
statute rather than under the UCC, in a few states, the certificateholders may
not have a first priority security interest in the manufactured home securing a
manufactured housing contract. As manufactured homes have become larger and
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often have been attached to their sites without any apparent intention to move
them, courts in many states have held that manufactured homes, under certain
circumstances, may become subject to real estate title and recording laws. As a
result, a security interest in a manufactured home could be rendered subordinate
to the interests of other parties claiming an interest in the home under
applicable state real estate law. In order to perfect a security interest in a
manufactured home under real estate laws, the holder of the security interest
must record a mortgage, deed of trust or deed to secure debt, as applicable,
under the real estate laws of the state where the manufactured home is located.
These filings must be made in the real estate records office of the county where
the manufactured home is located. In some cases, a security interest in the
manufactured home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the seller's security interest in the manufactured home. If, however, a
manufactured home is permanently attached to its site or if a court determines
that a manufactured home is real property, other parties could obtain an
interest in the manufactured home which is prior to the security interest
originally retained by the mortgage collateral seller and transferred to the
depositor. In certain cases, the master servicer or the servicer, as applicable,
may be required to perfect a security interest in the manufactured home under
applicable real estate laws. If the real estate recordings are not required and
if any of the foregoing events were to occur, the only recourse of the
certificateholders would be against the mortgage collateral seller under its
repurchase obligation for breach of representations or warranties.
The depositor will assign its security interests in the manufactured
homes to the trustee on behalf of the certificateholders. See "Description of
the Securities --Assignment of Loans" in this prospectus. Unless otherwise
specified in the accompanying prospectus supplement, if a manufactured home is
governed by the applicable motor vehicle laws of the relevant state neither the
depositor nor the trustee will amend the certificates of title to identify the
trustee as the new secured party. Accordingly, the depositor or any other entity
as may be specified in the prospectus supplement will continue to be named as
the secured party on the certificates of title relating to the manufactured
homes. However, there exists a risk that, in the absence of an amendment to the
certificate of title, the assignment of the security interest may not be held
effective against subsequent purchasers of a manufactured home or subsequent
lenders who take a security interest in the manufactured home or creditors of
the assignor.
If the owner of a manufactured home moves it to a state other than the
state in which the manufactured home initially is registered and if steps are
not taken to re-perfect the trustee's security interest in the state, the
security interest in the manufactured home will cease to be perfected. While in
many circumstances the trustee would have the opportunity to re-perfect its
security interest in the manufactured home in the state of relocation, there can
be no assurance that the trustee will be able to do so.
When a mortgagor under a manufactured housing contract sells a
manufactured home, the trustee, or the servicer or the master servicer on behalf
of the trustee, must surrender possession of the certificate of title or will
receive notice as a result of its lien noted thereon and accordingly will have
an opportunity to require satisfaction of the related lien before release of the
lien.
Under the laws of most states, liens for repairs performed on a
manufactured home take priority over a perfected security interest. The
applicable mortgage collateral seller typically will represent that it has no
knowledge of any liens for any manufactured home securing payment on any
manufactured housing contract. However, the liens could arise at any time during
the term of a manufactured housing contract. No notice will be given to the
trustee or certificateholders if a lien arises and the lien would not give rise
to a repurchase obligation on the part of the party specified in the related
agreement.
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To the extent that manufactured homes are not treated as real property
under applicable state law, manufactured housing contracts in most cases are
"chattel paper" as defined in the UCC in effect in the states in which the
manufactured homes initially were registered. Under the UCC, the sale of chattel
paper is treated in a manner similar to perfection of a security interest in
chattel paper. Under the related agreement, the master servicer, the servicer or
the depositor, as the case may be, will transfer physical possession of the
manufactured housing contracts to the trustee or its custodian. In addition, the
master servicer or the servicer will make an appropriate filing of a financing
statement in the appropriate states to give notice of the trustee's ownership of
the manufactured housing contracts. Unless otherwise specified in the
accompanying prospectus supplement, the manufactured housing contracts will not
be stamped or marked otherwise to reflect their assignment from the depositor to
the trustee. Therefore, if a subsequent purchaser were able to take physical
possession of the manufactured housing contracts without notice of the
assignment, the trustee's interest in the manufactured housing contracts could
be defeated. To the extent that manufactured homes are treated as real property
under applicable state law, contracts will be treated in a manner similar to
that described above with regard to mortgage loans. See "--The Mortgage Loans"
above.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The servicer or the master servicer on behalf of the trustee, to the
extent required by the related agreement, may take action to enforce the
trustee's security interest for manufactured housing contracts in default by
repossession and sale of the manufactured homes securing the defaulted
manufactured housing contracts. So long as the manufactured home has not become
subject to real estate law, a creditor in most cases can repossess a
manufactured home securing a contract by voluntary surrender, by "self-help"
repossession that is "peaceful" or, in the absence of voluntary surrender and
the ability to repossess without breach of the peace, by judicial process. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting the sale. The debtor may also have a
right to redeem the manufactured home at or before resale.
Certain statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
For a discussion of deficiency judgments, see "--The Mortgage Loans --
Anti-Deficiency Legislation and Other Limitations on Lenders" above.
THE HOME IMPROVEMENT CONTRACTS
GENERAL
The home improvement contracts, other than those home improvement
contracts that are unsecured or secured by mortgages on real estate, in most
cases, are "chattel paper" and include "purchase money security interests" each
as defined in the UCC. Those home improvement contracts are referred to in this
section as "contracts". Under the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under the
related agreement, the depositor will transfer physical possession of the
contracts to the trustee or a designated custodian or may retain possession of
the contracts as custodian for the trustee. In addition, the depositor will make
an appropriate filing of a financing statement in the appropriate states to give
notice of the trustee's ownership of the contracts. Unless specified in the
accompanying prospectus supplement, the contracts will not be stamped or
otherwise marked to reflect their assignment from the depositor to the trustee.
Therefore, if through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the contracts without notice of the
assignment, the trustee's interest in the contracts could be defeated. In
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addition, if the depositor were to become insolvent or a debtor in a bankruptcy
case while in possession of the contracts, competing claims to the contracts
could arise. Even if unsuccessful, these claims could delay payments to the
trust and the securityholders. If successful, losses to the trust and the
securityholders also could result.
The contracts that are secured by the home improvements financed by
those contracts grant to the originator of the contracts a purchase money
security interest in the home improvements to secure all or part of the purchase
price of the home improvements and related services. A financing statement in
most cases is not required to be filed to perfect a purchase money security
interest in consumer goods. These purchase money security interests are
assignable. In most cases, a purchase money security interest grants to the
holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of the collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in the home improvement must in most cases be perfected by a timely fixture
filing. In most cases, under the UCC, a security interest does not exist under
the UCC in ordinary building material incorporated into an improvement on land.
Home improvement contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose this characterization,
upon incorporation of these materials into the related property, will not be
secured by a purchase money security interest in the home improvement being
financed.
Forms of notes and mortgages used by lenders may contain provisions
obligating the borrower to pay a late charge or additional interest if payments
are not timely made, and in some circumstances may provide for prepayment fees
or yield maintenance penalties if the obligation is paid prior to maturity. In
addition to limitations imposed by FHA Regulations relating to home improvement
contracts partially insured by the FHA under Title I, in some states, there are
or may be specific limitations on the late charges that a lender may collect
from a borrower for delinquent payments. Some states also limit the amounts that
a lender may collect from a borrower as an additional charge if the loan is
prepaid. In addition, the enforceability of provisions that provide for
prepayment fees or penalties on an involuntary prepayment is unclear under the
laws of many states. Most conventional single-family mortgage loans may be
prepaid in full or in part without penalty. The regulations of the Federal Home
Loan Bank Board, as succeeded by the Office of Thrift Supervision, or OTS,
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly relating to
loans and/or contracts having higher interest rates, may increase the likelihood
of refinancing or other early retirements of the home equity loans and/or home
improvement contracts.
ENFORCEMENT OF SECURITY INTEREST IN HOME IMPROVEMENTS
So long as the home improvement has not become subject to the real
estate law, a creditor can repossess a home improvement securing a contract by
voluntary surrender, "self-help" repossession that is "peaceful", that is,
without breach of the peace, or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, judicial process. The holder
of a contract must give the debtor a number of days' notice, which varies from
10 to 30 days or more depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states restrict
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting this type of sale. The law in most states
also requires that the debtor be given notice of any sale prior to resale of the
related property so that the debtor may redeem it at or before the resale.
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Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgments and in many cases the
defaulting borrower would have no assets with which to pay a judgment.
Some other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equity principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the accompanying prospectus supplement indicates otherwise, the
loans contain due-on-sale clauses. These clauses permit the lender to accelerate
the maturity of the loan if the borrower sells, transfers or conveys the
property. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses has been limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982, or Garn-St Germain Act, preempts state
constitutional, statutory and case law that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to limited exceptions. The Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which
a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, regardless of the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty on the acceleration of a loan under a
due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact on the average
life of the loans and the number of loans which may be outstanding until
maturity.
On foreclosure, courts have imposed general equitable principles. These
equitable principles are designed to relieve the borrower from the legal effect
of its defaults under the loan documents. Examples of judicial remedies that
have been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, including the borrower failing to adequately maintain the property.
Finally, some courts have been faced with the issue of whether or not federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust, deeds to secure debt or
mortgages receive notices in addition to the statutorily prescribed minimum. For
the most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust, or under a deed
to secure a debt or a mortgagee having a power of sale, does not involve
sufficient state action to afford constitutional protections to the borrower.
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CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws impose requirements
applicable to the origination of loans, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related loan.
If the transferor of a consumer credit contract is also the seller of
goods that give rise to the transaction, and, in certain cases, related lenders
and assignees, the "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor to transfer the contract
free of notice of claims by the debtor thereunder. The effect of this rule is to
subject the assignee of the contract to all claims and defenses that the debtor
could assert against the seller of goods. Liability under this rule is limited
to amounts paid under a contract; however, the borrower also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought against the borrower.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, or Title V, provides that state usury limitations shall not apply
to some types of residential first mortgage loans, including Cooperative Loans
originated by some lenders. Title V also provides that, subject to certain
conditions, state usury limitations shall not apply to any loan that is secured
by a first lien on certain kinds of manufactured housing. Title V also provides
that, subject to the following conditions, state usury limitations shall not
apply to any home improvement contract that is secured by a first lien on some
kinds of consumer goods. The contracts would be covered if they satisfy some
conditions, among other things, governing the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted this type of prior to the April 1, 1983 deadline. In addition, even
where Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Usury limits apply to junior mortgage loans in many states and Mexico
Loans. Any applicable usury limits in effect at origination will be reflected in
the maximum interest rates for the mortgage loans, as described in the
accompanying prospectus supplement.
In most cases, each seller of a loan will have represented that the loan
was originated in compliance with then applicable state laws, including usury
laws, in all material respects. However, the interest rates on the loans will be
subject to applicable usury laws as in effect from time to time.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, or CERCLA, and under state law in some
states, a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property may
become liable in some circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
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balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996, or Conservation Act amended, among other things, the provisions of CERCLA
for lender liability and the secured creditor exemption. The Conservation Act
offers substantial protection to lenders by defining the activities in which a
lender can engage and still have the benefit of the secured creditor exemption.
For a lender to be deemed to have participated in the management of a mortgaged
property, the lender must actually participate in the operational affairs of the
mortgaged property. The Conservation Act provides that "merely having the
capacity to influence, or unexercised right to control" operations does not
constitute participation in management. A lender will lose the protection of the
secured creditor exemption only if it exercises decision-making control over the
mortgagor's environmental compliance and hazardous substance handling and
disposal practices, or assumes day-to-day management of substantially all
operational functions of the mortgaged property. The Conservation Act also
provides that a lender will continue to have the benefit of the secured creditor
exemption even if it forecloses on a mortgaged property, purchases it at a
foreclosure sale or accepts a deed-in-lieu of foreclosure provided that the
lender seeks to sell the mortgaged property at the earliest practicable
commercially reasonable time on commercially reasonable terms.
Other federal and state laws in some circumstances may impose liability
on a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property on
which contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. These cleanup costs may be substantial. It is possible that
the cleanup costs could become a liability of a trust and reduce the amounts
otherwise distributable to the holders of the related series of securities.
Moreover, some federal statutes and some states by statute impose an
Environmental Lien. All subsequent liens on that property are usually
subordinated to an Environmental Lien and, in some states, even prior recorded
liens are subordinated to Environmental Liens. In the latter states, the
security interest of the trustee in a related parcel of real property that is
subject to an Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present for any mortgaged property prior to
the origination of the loan or prior to foreclosure or accepting a deed-in-lieu
of foreclosure. Neither the depositor nor any master servicer or servicer will
be required by any agreement to undertake any of these evaluations prior to
foreclosure or accepting a deed-in-lieu of foreclosure. The depositor does not
make any representations or warranties or assume any liability for the absence
or effect of contaminants on any mortgaged property or any casualty resulting
from the presence or effect of contaminants. However, the master servicer or the
servicer will not be obligated to foreclose on any mortgaged property or accept
a deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on the property. A failure so to foreclose may
reduce the amounts otherwise available to securityholders of the related series.
Except as otherwise specified in the applicable prospectus supplement,
at the time the loans were originated, no environmental assessment or a very
limited environment assessment of the mortgaged properties will have been
conducted.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Relief Act a borrower who enters military service
after the origination of the borrower's loan, including a borrower who was in
reserve status and is called to active duty after origination of the loan, may
not be charged interest, including fees and charges, above an annual rate of 6%
during the period of the borrower's active duty status, unless a court orders
otherwise on application of the lender. The Relief Act applies to borrowers who
are members of the Air Force, Army, Marines, Navy, National Guard, Reserves or
Coast Guard, and officers of the U.S. Public Health Service assigned to duty
with the military.
Because the Relief Act applies to borrowers who enter military service,
including reservists who are called to active duty, after origination of the
related loan, no information can be provided as to the number of loans that may
be affected by the Relief Act. For loans included in a trust, application of the
Relief Act would adversely affect, for an indeterminate period of time, the
ability of the servicer or the master servicer, as applicable, to collect full
amounts of interest on the loans. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation or
regulations, which would not be recoverable from the related loans, would result
in a reduction of the amounts distributable to the holders of the related
securities, and would not be covered by Advances or any form of credit
enhancement provided in connection with the related series of securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the servicer or the master servicer, as applicable, to foreclose on an affected
loan during the mortgagor's period of active duty status, and, under some
circumstances, during an additional three month period thereafter. Thus, if the
Relief Act or similar legislation or regulations applies to any loan which goes
into default, there may be delays in payment and losses on the related
securities in connection therewith. Any other interest shortfalls, deferrals or
forgiveness of payments on the loans resulting from similar legislation or
regulations may result in delays in payments or losses to securityholders of the
related series.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments on the borrower's payment of prepayment fees or yield
maintenance penalties. In some states, there are or may be specific limitations
on the late charges which a lender may collect from a borrower for delinquent
payments. Some states also limit the amounts that a lender may collect from a
borrower as an additional charge if the loan is prepaid. In addition, the
enforceability of provisions that provide for prepayment fees or penalties on an
involuntary prepayment is unclear under the laws of many states. Most
conventional single-family mortgage loans may be prepaid in full or in part
without penalty. The regulations of the Federal Home Loan Bank Board, as
succeeded by the OTS, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly for mortgage loans having higher loan rates, may
increase the likelihood of refinancing or other early retirements of the
mortgage loans.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations, or RICO statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
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government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime on which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
NEGATIVE AMORTIZATION LOANS
A recent case held that state restrictions on the compounding of
interest are not preempted by the provisions of the Depository Institutions
Deregulation and Monetary Control Act of 1980, or DIDMC, and as a result, a
mortgage loan that provided for negative amortization violated New Hampshire's
requirement that first mortgage loans provide for computation of interest on a
simple interest basis. The court did not address the applicability of the
Alternative Mortgage Transaction Parity Act of 1982, which authorizes a lender
to make residential mortgage loans that provide for negative amortization. As a
result, the enforceability of compound interest on mortgage loans that provide
for negative amortization is unclear. The case, which was decided by the First
Circuit Court of Appeals, is binding authority only on Federal District Courts
in Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a discussion of the material (and certain other)
federal income tax consequences of the purchase, ownership and disposition of
the securities. This discussion is directed solely to securityholders that hold
the securities as capital assets within the meaning of Section 1221 of the
Internal Revenue Code and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which, including banks, insurance companies and foreign investors) may be
subject to special rules. In addition, the authorities on which this discussion,
and the opinion referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. This discussion does not
purport to be as detailed and complete as the advice a securityholder may get
from its tax advisor and accordingly, taxpayers should consult their tax
advisors and tax return preparers regarding the consequences to them of
investing in the securities and the preparation of any item on a tax return,
even where the anticipated tax treatment has been discussed in this prospectus
or in a prospectus supplement. In addition to the federal income tax
consequences described in this prospectus, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the securities. See "State and Other Tax Consequences."
Securityholders should consult their tax advisors concerning the federal, state,
local or other tax consequences to them of the purchase, ownership and
disposition of the securities offered hereunder.
The following discussion addresses REMIC and FASIT certificates
representing interests in a trust for which the transaction documents require
the making of an election to have the trust (or a portion thereof) be treated as
one or more REMICs or FASITs. The prospectus supplement for each series of
securities will indicate whether a REMIC or FASIT election or elections will be
made for the related trust and, if that election is to be made, will identify
all "regular interests" and "residual interests" in the REMIC or the "regular
interests" and "high yield regular interests" in the FASIT, as the case may be.
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If interests in a FASIT ownership interest are offered for sale the federal
income consequences of the purchase, ownership and disposition of those
interests will be described in the accompanying prospectus supplement. For
purposes of this tax discussion, references to a "securityholder" or a "holder"
are to the beneficial owner of a security.
If neither a REMIC nor FASIT election is to be made for a particular
series because, for example, a grantor trust structure is being used, the tax
consequences of that structure will be discussed in the prospectus supplement
for that series.
Regulations specifically addressing certain of the issues discussed in
this prospectus have not been issued and this discussion is based in part on
regulations that do not adequately address some issues relevant to, and in some
instances provide that they are not applicable to, securities similar to the
securities.
CLASSIFICATION OF REMICS AND FASITS
Upon the issuance of each series of REMIC or FASIT certificates, one of
Thacher Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP or Stroock & Stroock
& Lavan LLP, counsel to the depositor, will deliver its opinion to the effect
that, assuming compliance with all provisions of the related pooling and
servicing agreement, indenture or trust agreement, the related trust, or each
applicable portion of the trust, will qualify as a REMIC or FASIT, as the case
may be, and the certificates offered with respect thereto will be considered to
be (or evidence the ownership of) "regular interests," in the related REMIC or
FASIT or, solely in the case of REMICs, "residual interests," in that REMIC.
Opinions of counsel only represent the views of that counsel and are not binding
on the Internal Revenue Service, known as the IRS, or the courts. Accordingly,
there can be no assurance that the IRS and the courts will not take a differing
position.
No Treasury regulations supplementing the FASIT provisions of the
Internal Revenue Code have been issued and many issues remain unresolved.
Further, any future Treasury regulations may be applied retroactively, and the
Internal Revenue Code authorizes the Treasury to issue "anti-abuse" regulations
to prevent the abuse of the purposes of the FASIT provisions through
transactions that are not primarily related to securitization of debt
instruments by a FASIT. Although it is unclear what form of transactions such
regulations may prohibit, it is expected that any transactions described in this
prospectus would fall outside the scope of such regulations. Since the FASIT
Provisions will ultimately be interpreted by their own regulations (which, as
indicated above, have not yet been issued), investors should be cautious in
purchasing any of the Certificates and should consult with their tax advisors in
determining the federal, state, local and other tax consequences to them for the
purchase, holding and disposition of the Certificates.
In addition, certain FASIT regular interests or FASIT Regular
Certificates may be treated as "high-yield regular interests." Special rules,
discussed below apply to those securities. Although the accompanying prospectus
supplement will indicate which FASIT securities are expected to be treated as
"high-yield regular interests," in many cases it will not be clear as of the
date of the prospectus supplement (and possibly not even after the issuance of
the securities) whether any particular class will actually be so treated.
If an entity electing to be treated as a REMIC or FASIT fails to comply
with one or more of the ongoing requirements of the Internal Revenue Code for
that status during any taxable year, the Internal Revenue Code provides that the
entity will not be treated as a REMIC or FASIT for that year and thereafter. In
that event, the entity may be taxable as a separate corporation under Treasury
regulations, and the related certificates may not be accorded the status or
given the tax treatment described in this prospectus under "Material Federal
Income Tax Consequences". The IRS may, but is not compelled to provide relief
but any relief may be accompanied by sanctions, including the imposition of a
corporate tax on all or a portion of the trust's income for the period in which
the requirements for that status are not satisfied. The pooling and servicing
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agreement, indenture or trust agreement for each REMIC or FASIT will include
provisions designed to maintain the trust's status as a REMIC or FASIT. It is
not anticipated that the status of any trust as a REMIC or FASIT will be
terminated.
TAXATION OF OWNERS OF REMIC AND FASIT REGULAR CERTIFICATES
GENERAL
In general, REMIC and FASIT Regular Certificates will be treated for
federal income tax purposes as debt instruments and not as ownership interests
in the REMIC or FASIT or its assets. Moreover, holders of Regular Certificates
that otherwise report income under a cash method of accounting will be required
to report income for Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT
Some REMIC or FASIT Regular Certificates may be issued with "original
issue discount" within the meaning of Section 1273(a) of the Internal Revenue
Code. Any holders of Regular Certificates issued with original issue discount
typically will be required to include original issue discount in income as it
accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to that income. In addition, Section 1272(a)(6)
of the Internal Revenue Code provides special rules applicable to Regular
Certificates and certain other debt instruments issued with original issue
discount.
Regulations have not been issued under that section.
The Internal Revenue Code requires that a prepayment assumption be used
for loans held by a REMIC or FASIT in computing the accrual of original issue
discount on Regular Certificates issued by that issuer, and that adjustments be
made in the amount and rate of accrual of the discount to reflect differences
between the actual prepayment rate and the prepayment assumption. The prepayment
assumption is to be determined in a manner prescribed in Treasury regulations;
as noted above, those regulations have not been issued. The conference committee
report accompanying the Tax Reform Act of 1986 indicates that the regulations
will provide that the prepayment assumption used for a Regular Certificate must
be the same as that used in pricing the initial offering of the Regular
Certificate. The prepayment assumption used by the master servicer, the
servicer, or the REMIC or FASIT administrator, as applicable, in reporting
original issue discount for each series of Regular Certificates will be
consistent with this standard and will be disclosed in the accompanying
prospectus supplement. However, none of the depositor, the REMIC or FASIT
administrator, as applicable, or the master servicer or the servicer will make
any representation that the loans will in fact prepay at a rate conforming to
the prepayment assumption or at any other rate.
The original issue discount, if any, on a REMIC or FASIT Regular
Certificate will be the excess of its stated redemption price at maturity over
its issue price. The issue price of a particular class of Regular Certificates
will be the first cash price at which a substantial amount of Regular
Certificates of that class is sold, excluding sales to bond houses, brokers and
underwriters. If less than a substantial amount of a particular class of Regular
Certificates is sold for cash on or prior to the date of their initial issuance,
or the closing date, the issue price for that class will be treated as the fair
market value of the class on the closing date. Under the OID regulations, the
stated redemption price of a REMIC or FASIT Regular Certificate is equal to the
total of all payments to be made on that certificate other than "qualified
stated interest." Qualified stated interest includes interest that is
unconditionally payable at least annually at a single fixed rate, or in the case
of a variable rate debt instrument, at a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that in most cases does not operate in
a manner that accelerates or defers interest payments on a Regular Certificate.
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In the case of Regular Certificates bearing adjustable interest rates,
the determination of the total amount of original issue discount and the timing
of the inclusion of the original issue discount will vary according to the
characteristics of the Regular Certificates. If the original issue discount
rules apply to the certificates, the accompanying prospectus supplement will
describe the manner in which the rules will be applied by the master servicer,
the servicer, or REMIC or FASIT administrator, as applicable, for those
certificates in preparing information returns to the certificateholders and the
Internal Revenue Service, or IRS.
Some classes of the Regular Certificates may provide for the first
interest payment with respect to their certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that begins or
ends on a distribution date, in some cases, as a consequence of this "long first
accrual period," some or all interest payments may be required to be included in
the stated redemption price of the Regular Certificate and accounted for as
original issue discount. Because interest on Regular Certificates must in any
event be accounted for under an accrual method, applying this analysis would
result in only a slight difference in the timing of the inclusion in income of
the yield on the Regular Certificates.
In addition, if the accrued interest to be paid on the first
distribution date is computed for a period that begins prior to the closing
date, a portion of the purchase price paid for a Regular Certificate will
reflect the accrued interest. In these cases, information returns to the
certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued for periods prior to the
closing date is treated as part of the overall cost of the Regular Certificate,
and not as a separate asset the cost of which is recovered entirely out of
interest received on the next distribution date, and that portion of the
interest paid on the first distribution date in excess of interest accrued for a
number of days corresponding to the number of days from the closing date to the
first distribution date should be included in the stated redemption price of the
Regular Certificate. However, the OID regulations state that all or some portion
of the accrued interest may be treated as a separate asset the cost of which is
recovered entirely out of interest paid on the first distribution date. It is
unclear how an election to do so would be made under the OID regulations and
whether that election could be made unilaterally by a certificateholder.
Regardless of the general definition of original issue discount,
original issue discount on a Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the Regular
Certificate multiplied by its weighted average life. For this purpose, the
weighted average life of the Regular Certificate is computed as the sum of the
amounts determined, as to each payment included in the stated redemption price
of the Regular Certificate, by multiplying (i) the number of complete years,
rounding down for partial years, from the issue date until the payment is
expected to be made, presumably taking into account the prepayment assumption,
by (ii) a fraction, the numerator of which is the amount of the payment, and the
denominator of which is the stated redemption price at maturity of the Regular
Certificate. Under the OID regulations, original ISSUE DISCOUNT OF ONLY A DE
MINIMIS AMOUNT, OTHER THAN DE MINIMIS original issue discount attributable to a
so-called "teaser" interest rate or an initial interest holiday, will be
included in income as each payment of stated principal is made, based on the
product of the TOTAL AMOUNT OF THE DE MINIMIS original issue discount and a
fraction, the numerator of which is the amount of the principal payment and the
denominator of which is the outstanding stated principal amount of the Regular
Certificate. The OID regulations also would permit a CERTIFICATEHOLDER TO ELECT
TO ACCRUE DE MINIMIS original issue discount into income currently based on a
constant yield method. See "--Market Discount" for a description of that
election under the OID regulations.
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IF ORIGINAL ISSUE DISCOUNT ON A REGULAR CERTIFICATE IS IN EXCESS OF A DE
MINIMIS amount, the holder of the certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held the Regular Certificate, including the
purchase date but excluding the disposition date. In the case of an original
holder of a Regular Certificate, the daily portions of original issue discount
will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
accompanying prospectus supplement, each period that begins or ends on a date
that corresponds to a distribution date and begins on the first day following
the immediately preceding accrual period, or in the case of the first accrual
period, begins on the closing date, a calculation will be made of the portion of
the original issue discount that accrued during that accrual period. The portion
of original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (A) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the Regular
Certificate, if any, in future periods and (B) the distributions made on the
Regular Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of the Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (1)
assuming that distributions on the Regular Certificate will be received in
future periods based on the loans being prepaid at a rate equal to the
prepayment assumption and (2) using a discount rate equal to the original yield
to maturity of the certificate. For these purposes, the original yield to
maturity of the certificate will be calculated based on its issue price and
assuming that distributions on the certificate will be made in all accrual
periods based on the loans being prepaid at a rate equal to the prepayment
assumption. The adjusted issue price of a Regular Certificate at the beginning
of any accrual period will equal the issue price of the certificate, increased
by the aggregate amount of original issue discount that accrued for that
certificate in prior accrual periods, and reduced by the amount of any
distributions made on that Regular Certificate in prior accrual periods of
amounts included in its stated redemption price. The original issue discount
accruing during any accrual period, computed as described above, will be
allocated ratably to each day during the accrual period to determine the daily
portion of original issue discount for that day.
The OID regulations suggest that original issue discount for securities
that represent multiple uncertificated regular interests, in which ownership
interests will be issued simultaneously to the same buyer and which may be
required under the related pooling and servicing agreement to be transferred
together, should be computed on an aggregate method. In the absence of further
guidance from the IRS, original issue discount for securities that represent the
ownership of multiple uncertificated regular interests will be reported to the
IRS and the certificateholders on an aggregate method based on a single overall
constant yield and the prepayment assumption stated in the accompanying
prospectus supplement, treating all uncertificated regular interests as a single
debt instrument as set forth in the OID regulations, so long as the pooling and
servicing agreement requires that the uncertificated regular interests be
transferred together.
A subsequent purchaser of a Regular Certificate that purchases the
certificate at a cost, excluding any portion of that cost attributable to
accrued qualified stated interest, less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount for that certificate. However, each daily portion will
be reduced, if the cost is in excess of its "adjusted issue price," in
proportion to the ratio that excess bears to the aggregate original issue
discount remaining to be accrued on the Regular Certificate. The adjusted issue
price of a Regular Certificate on any given day equals (i) the adjusted issue
price or, in the case of the first accrual period, the issue price, of the
certificate at the beginning of the accrual period which includes that day, plus
(ii) the daily portions of original issue discount for all days during the
accrual period prior to that day minus (iii) any principal payments made during
the accrual period prior to that day for the certificate.
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MARKET DISCOUNT
A certificateholder that purchases a Regular Certificate at a market
discount, that is, in the case of a Regular Certificate issued without original
issue discount, at a purchase price less than its remaining stated principal
amount, or in the case of a Regular Certificate issued with original issue
discount, at a purchase price less than its adjusted issue price will recognize
income on receipt of each distribution representing stated redemption price. In
particular, under Section 1276 of the Internal Revenue Code such a
certificateholder in most cases will be required to allocate the portion of each
distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent.
A certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, the election will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the election applies. In addition, the OID
regulations permit a certificateholder to elect to accrue all interest,
DISCOUNT, INCLUDING DE MINIMIS market or original issue discount, and premium in
income as interest, based on a constant yield method. If the election were made
for a Regular Certificate with market discount, the certificateholder would be
deemed to have made an election to include currently market discount in income
for all other debt instruments having market discount that the certificateholder
acquires during the taxable year of the election or thereafter. Similarly, a
certificateholder that made this election for a certificate that is acquired at
a premium would be deemed to have made an election to amortize bond premium for
all debt instruments having amortizable bond premium that the certificateholder
owns or acquires. See "--Premium." Each of these elections to accrue interest,
discount and premium for a certificate on a constant yield method or as interest
may not be revoked without the consent of the IRS.
However, market discount for a Regular Certificate will be considered to
be de minimis for purposes of Section 1276 of the Internal Revenue Code if the
market discount is less than 0.25% of the remaining stated redemption price of
the Regular Certificate multiplied by the number of complete years to maturity
remaining after the date of its purchase. In interpreting a similar rule for
original issue discount on obligations payable in installments, the OID
regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied for market discount, presumably taking
INTO ACCOUNT THE PREPAYMENT ASSUMPTION. IF MARKET DISCOUNT IS TREATED AS DE
MINIMIS under this rule, it appears that the actual discount would be treated in
a manner similar to ORIGINAL ISSUE DISCOUNT OF A DE MINIMIS amount. See "--
Original Issue Discount." This treatment may result in discount being included
in income at a slower rate than discount would be required to be included in
income using the method described above.
Section 1276(b)(3) of the Internal Revenue Code specifically authorizes
the Treasury Department to issue regulations providing for the method for
accruing market discount on debt instruments, the principal of which is payable
in more than one installment. Until regulations are issued by the Treasury
Department, certain rules described in the Committee Report apply. The Committee
Report indicates that in each accrual period market discount on Regular
Certificates should accrue, at the certificateholder's option:
o on the basis of a constant yield method,
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o in the case of a Regular Certificate issued without original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the stated interest paid in the accrual
period bears to the total amount of stated interest remaining to be
paid on the Regular Certificate as of the beginning of the accrual
period, or
o in the case of a Regular Certificate issued with original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount accrued in
the accrual period bears to the total original issue discount
remaining on the Regular Certificate at the beginning of the accrual
period.
Moreover, the prepayment assumption used in calculating the accrual of
original issue discount is to be used in calculating the accrual of market
discount. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect those regulations might have
on the tax treatment of a Regular Certificate purchased at a discount in the
secondary market.
To the extent that Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which the discount would accrue if it were
original issue discount. Moreover, in any event a holder of a Regular
Certificate in most cases will be required to treat a portion of any gain on the
sale or exchange of that Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
In addition, under Section 1277 of the Internal Revenue Code, a holder
of a Regular Certificate may be required to defer a portion of its interest
deductions for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry a Regular CERTIFICATE PURCHASED WITH MARKET
DISCOUNT. FOR THESE PURPOSES, THE DE MINIMIS rule referred to above applies. Any
deferred interest expense would not exceed the market discount that accrues
during that taxable year and is, in general, allowed as a deduction not later
than the year in which the market discount is includible in income. If the
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by that holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM
A Regular Certificate purchased at a cost, excluding any portion of that
cost attributable to accrued qualified stated interest, greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of a Regular Certificate may elect under Section 171 of the
Internal Revenue Code to amortize that premium under the constant yield method
over the life of the certificate. If made, this election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related Regular Certificate, rather than as a separate interest deduction.
The OID regulations also permit certificateholders to elect to include all
interest, discount and premium in income based on a constant yield method,
further treating the certificateholder as having made the election to amortize
premium generally. See "--Market Discount." The conference committee report
states that the same rules that apply to accrual of market discount, which rules
will require use of a prepayment assumption in accruing market discount for
Regular Certificates without regard to whether those certificates have original
issue discount, will also apply in amortizing bond premium under Section 171 of
the Internal Revenue Code.
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REALIZED LOSSES
Under Section 166 of the Internal Revenue Code, both corporate holders
of the Regular Certificates and noncorporate holders of the Regular Certificates
that acquire those certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their certificates become wholly or partially worthless as the
result of one or more Realized Losses on the loans. However, it appears that a
noncorporate holder that does not acquire a Regular Certificate in connection
with a trade or business will not be entitled to deduct a loss under Section 166
of the Internal Revenue Code until the holder's certificate becomes wholly
worthless--until its outstanding principal balance has been reduced to zero--and
that the loss will be characterized as a short-term capital loss.
Each holder of a Regular Certificate will be required to accrue interest
and original issue discount for that certificate, without giving effect to any
reductions in distributions attributable to defaults or delinquencies on the
loans or the underlying certificates until it can be established that any
reduction ultimately will not be recoverable. As a result, the amount of taxable
income reported in any period by the holder of a Regular Certificate could
exceed the amount of economic income actually realized by the holder in that
period. Although the holder of a Regular Certificate eventually will recognize a
loss or reduction in income attributable to previously accrued and included
income that, as the result of a Realized Loss, ultimately will not be realized,
the law is unclear with respect to the timing and character of the loss or
reduction in income.
SPECIAL RULES FOR FASIT HIGH-YIELD REGULAR INTERESTS
GENERAL. A high-yield interest in a FASIT is a subcategory of a FASIT
regular interest. A FASIT high-yield regular interest is a FASIT regular
interest that either (i) has an issue price that exceeds 125% of its stated
principal amount, (ii) has a yield to maturity equal to or greater than a
specified amount (generally 500 basis points above the appropriate applicable
federal rate), or (iii) is an interest-only obligation whose interest payments
consist of a non-varying specified portion of the interest payments on permitted
assets. A holder of a FASIT high-yield regular interest is subject to treatment,
described above, applicable to FASIT Regular Interests, generally.
LIMITATIONS ON UTILIZATION OF LOSSES. The holder of a FASIT high-yield
regular interest may not offset its income derived thereon by any unrelated
losses. Thus, the taxable income of such holder will be at least equal to the
taxable income derived from such interest (which includes gain or loss from the
sale of such interests), any FASIT ownership interests and any excess inclusion
income derived from REMIC Residual Interests. Thus, income from such interests
generally cannot be offset by current net operating losses or net operating loss
carryovers. Similarly, the alternative minimum taxable income of the holder of a
high-yield regular interest cannot be less than such holder's taxable income
determined solely for such interests. For purposes of these provisions, all
members of an affiliated group filing a consolidated return are treated as one
taxpayer. Accordingly, the consolidated taxable income of the group cannot be
less than the group's "tainted" income (thereby preventing losses of one member
from offsetting the tainted income of another member). However, to avoid doubly
penalizing income, net operating loss carryovers are determined without regard
to such income for both regular tax and alternative minimum tax purposes.
TRANSFER RESTRICTIONS. Transfers of FASIT high-yield Regular
Certificates to certain "disqualified holders" will (absent the satisfaction of
certain conditions) be disregarded for federal income tax purposes. In such
event, the most recent eligible holder (generally the transferring holder) will
continue to be taxed as if it were the holder of the certificate (although the
disqualified holder (and not the most recent eligible holder) would be taxable
on any gain recognized by such holder for such interest). Although not free from
doubt, the tax ownership of a FASIT high-yield Regular Certificate may (absent
the satisfaction of certain conditions) revert to a prior holder even if the
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transferee becomes a disqualified holder after the relevant transfer. Each
applicable pooling and servicing agreement, trust agreement or indenture
requires, as a prerequisite to any transfer of a FASIT high-yield Regular
Certificate, the delivery to the trustee of an affidavit of the transferee to
the effect that it is not a disqualified holder and contains certain other
provisions designed to preclude the automatic reversion of the tax ownership of
such Certificate. For these purposes, a "disqualified holder' is any person
other than a (i) FASIT or (ii) domestic C corporation (other than a corporation
that is exempt from (or not subject to) federal income tax); provided, however,
that all (a) regulated investment companies subject to the provisions of Part I
of subchapter M of the Internal Revenue Code, (b) real estate investment trusts
subject to the provisions of Part II of subchapter M of the Internal Revenue
Code, (c) REMICs, and (d) cooperatives described in Section 1381(a) of the
Internal Revenue Code are also "disqualified holders."
PASS-THROUGH ENTITIES HOLDING FASIT REGULAR CERTIFICATES
If a Pass-Through Entity issues a high-yielding debt or equity interest
that is supported by any FASIT Regular Interest, such entity will be subject to
an excise tax unless no principal purpose of such resecuritization was the
avoidance of the rules relating to FASIT High-yield Interests (pertaining to
eligible holders of such interests). See "Taxation of Owners of REMIC and FASIT
Regular Certificates-Taxation of Holders of FASIT High-yield Regular Interests -
Transfer Restrictions". The tax will apply if the original yield to maturity of
the debt or equity interest in the Pass-Through Entity exceeds the greater of
(i) the sum of (a) the applicable federal rate in effect for the calendar month
in which the debt or equity interest is issued) and (b) five percentage points
or (ii) the yield to maturity to such entity on the FASIT Regular Interest
(determined as of the date that such entity acquired such interest). The
Internal Revenue Code provides that Treasury regulations will be issued to
provide the manner in which to determine the yield to maturity of any equity
interest. No such regulations have yet been issued. If such tax did apply, the
tax would equal the product of (i) the highest corporate tax rate and (ii) the
income of the holder of the debt or equity interest that is properly
attributable to the FASIT Regular Interest supporting such interest.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL
As residual interests, the REMIC Residual Certificates will be subject
to tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the loans or as debt instruments issued by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, in accordance with the
limitations noted in this discussion, the net loss of the REMIC for each day
during a calendar quarter that the holder owned the REMIC Residual Certificate.
For this purpose, the taxable income or net loss of the REMIC will be allocated
to each day in the calendar quarter ratably using a "30 days per month/90 days
per quarter/360 days per year" convention unless otherwise disclosed in the
accompanying prospectus supplement. The daily amounts will then be allocated
among the REMIC residual certificateholders in proportion to their respective
ownership interests on that day. Any amount included in the gross income or
allowed as a loss of any REMIC residual certificateholder by virtue of this
allocation will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described in this prospectus in
"--Taxable Income of the REMIC" and will be taxable to the REMIC residual
certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers in accordance with
limitations under Section 469 of the Internal Revenue Code on the deductibility
of "passive losses."
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A holder of a REMIC Residual Certificate that purchased the certificate
from a prior holder of that certificate also will be required to report on its
federal income tax return amounts representing its daily portion of the taxable
income or net loss of the REMIC for each day that it holds the REMIC Residual
Certificate. These daily portions generally will equal the amounts of taxable
income or net loss determined as described above. The committee report indicates
that modifications of the general rules may be made, by regulations, legislation
or otherwise, to reduce, or increase, the income or loss of a REMIC residual
certificateholder that purchased the REMIC Residual Certificate from a prior
holder of such certificate at a price greater than, or less than, the adjusted
basis (as defined below) that REMIC Residual Certificate would have had in the
hands of an original holder of that Certificate. The REMIC regulations, however,
do not provide for any such modifications.
Any payments received by a REMIC residual certificateholder in
connection with the acquisition of that REMIC Residual Certificate will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that any payment would be includible in
income immediately on its receipt, the IRS might assert that the payment should
be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of these payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of these payments for income
tax purposes.
The amount of income REMIC residual certificateholders will be required
to report, or the tax liability associated with that income, may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC residual certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess inclusions"
and "noneconomic" residual interests discussed below. The fact that the tax
liability associated with the income allocated to REMIC residual
certificateholders may exceed the cash distributions received by the REMIC
residual certificateholders for the corresponding period may significantly
adversely affect the REMIC residual certificateholders after-tax rate of return.
TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the loans and
other assets of the REMIC plus any cancellation of indebtedness income due to
the allocation of Realized Losses to Regular Certificates, less the deductions
allowed to the REMIC for interest, including original issue discount and reduced
by the amortization of any premium received on issuance, on the Regular
Certificates, and any other class of REMIC certificates constituting "regular
interests" in the REMIC not offered hereby, amortization of any premium on the
loans, bad debt deductions for the loans and, except as described below, for
servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the master
servicer, the servicer, or REMIC administrator, as applicable, intends to treat
the fair market value of the loans as being equal to the aggregate issue prices
of the Regular Certificates and REMIC Residual Certificates. The aggregate basis
will be allocated among the loans collectively and the other assets of the REMIC
in proportion to their respective fair market values. The issue price of any
REMIC certificates offered hereby will be determined in the manner described
above under "-- Taxation of Owners of REMIC and FASIT Regular
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Certificates--Original Issue Discount." Accordingly, if one or more classes of
REMIC certificates are retained initially rather than sold, the master servicer,
the servicer, or REMIC administrator, as applicable, may be required to estimate
the fair market value of those interests in order to determine the basis of the
REMIC in the loans and other property held by the REMIC.
SUBJECT TO THE POSSIBLE APPLICATION OF THE DE MINIMIS rules, the method
of accrual by the REMIC of original issue discount income and market discount
income for loans that it holds will be equivalent to the method of accruing
original issue discount income for Regular Certificateholders--under the
constant yield method taking into account the prepayment assumption. However, a
REMIC that acquires collateral at a market discount must include the discount in
income currently, as it accrues, on a constant interest basis. See "-- Taxation
of Owners of REMIC and FASIT Regular Certificates" above, which describes a
method of accruing discount income that is analogous to that required to be used
by a REMIC as to loans with market discount that it holds.
A loan will be deemed to have been acquired with discount or premium to
the extent that the REMIC's basis therein, determined as described in the
preceding paragraph, is less than or greater than its stated redemption price.
Any discount will be includible in the income of the REMIC as it accrues, in
advance of receipt of the cash attributable to that income, under a method
similar to the method described above for accruing original issue discount on
the Regular Certificates. It is anticipated that each REMIC will elect under
Section 171 of the Internal Revenue Code to amortize any premium on the loans.
Premium on any loan to which the election applies may be amortized under a
constant yield method, presumably taking into account a prepayment assumption.
A REMIC will be allowed deductions for interest, including original
issue discount, on the Regular Certificates, including any other class of REMIC
certificates constituting "regular interests" in the REMIC not offered hereby,
equal to the deductions that would be allowed if the Regular Certificates,
including any other class of REMIC certificates constituting "regular interests"
in the REMIC not offered hereby, were indebtedness of the REMIC. Original issue
discount will be considered to accrue for this purpose as described above under
"-- Taxation of Owners of REMIC and FASIT Regular Certificates--Original Issue
DISCOUNT," EXCEPT THAT THE DE MINIMIS rule and the adjustments for subsequent
holders of Regular Certificates, including any other class of certificates
constituting "regular interests" in the REMIC not offered hereby, described
therein will not apply.
If a class of Regular Certificates is issued at an Issue Premium, the
net amount of interest deductions that are allowed the REMIC in each taxable
year for the Regular Certificates of that class will be reduced by an amount
equal to the portion of the Issue Premium that is considered to be amortized or
repaid in that year. Although the matter is not entirely certain, it is likely
that Issue Premium would be amortized under a constant yield method in a manner
analogous to the method of accruing original issue discount described above
under "--Taxation of Owners of REMIC and FASIT Regular Certificates--Original
Issue Discount."
As a general rule, the taxable income of the REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Internal Revenue Code, which allows those
deductions only to the extent they exceed in the aggregate two percent of the
taxpayer's adjusted gross income, will not be applied at the REMIC level so that
the REMIC will be allowed deductions for servicing, administrative and other
non-interest expenses in determining its taxable income. All of these expenses
will be allocated as a separate item to the holders of REMIC Residual
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Certificates, subject to the limitation of Section 67 of the Internal Revenue
Code. See "--Possible Pass-Through of Miscellaneous Itemized Deductions." If the
deductions allowed to the REMIC exceed its gross income for a calendar quarter,
the excess will be the net loss for the REMIC for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for that REMIC Residual Certificate, increased by amounts included
in the income of the related certificateholder and decreased, but not below
zero, by distributions made, and by net losses allocated, to the related
certificateholder.
A REMIC residual certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent the net loss exceeds the
REMIC residual certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of that calendar quarter, determined without regard
to the net loss. Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
in accordance with the same limitation, may be used only to offset income from
the REMIC Residual Certificate. The ability of REMIC residual certificateholders
to deduct net losses in accordance with additional limitations under the
Internal Revenue Code, as to which the certificateholders should consult their
tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds the adjusted basis, it will be treated
as gain from the sale of the REMIC Residual Certificate. holders of REMIC
Residual Certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC Residual
Certificates will not be sufficiently large that distributions will be treated
as nontaxable returns of capital. Their bases in the REMIC Residual Certificates
will initially equal the amount paid for such REMIC Residual Certificates and
will be increased by their allocable shares of taxable income of the trust.
However, their basis increases may not occur until the end of the calendar
quarter, or perhaps the end of the calendar year, for which the REMIC taxable
income is allocated to the REMIC residual certificateholders. To the extent the
REMIC residual certificateholders initial bases are less than the distributions
to the REMIC residual certificateholders, and increases in the initial bases
either occur after distributions or, together with their initial bases, are less
than the amount of the distributions, gain will be recognized to the REMIC
residual certificateholders on those distributions and will be treated as gain
from the sale of their REMIC Residual Certificates.
The effect of these rules is that a certificateholder may not amortize
its basis in a REMIC Residual Certificate, but may only recover its basis
through distributions, through the deduction of its share of any net losses of
the REMIC or on the sale of its REMIC Residual Certificate. See "-- Sales of
REMIC Certificates." For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of the REMIC Residual Certificate to its holder and the
adjusted basis the REMIC Residual Certificate would have had in the hands of the
original holder, see "--General."
EXCESS INCLUSIONS
Any "excess inclusions" for a REMIC Residual Certificate will be subject
to federal income tax in all events.
In general, the "excess inclusions" for a REMIC Residual Certificate for
any calendar quarter will be the excess, if any, of (i) the sum of the daily
portions of REMIC taxable income allocable to the REMIC Residual Certificate
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over (ii) the sum of the "daily accruals" (as defined below) for each day during
that quarter that the REMIC Residual Certificate was held by the REMIC residual
certificateholder. The daily accruals of a REMIC residual certificateholder will
be determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Certificate at the beginning of the calendar quarter and 120% of the "long-term
Federal rate" in effect on the closing date. For this purpose, the adjusted
issue price of a REMIC Residual Certificate as of the beginning of any calendar
quarter will be equal to the issue price of the REMIC Residual Certificate,
increased by the sum of the daily accruals for all prior quarters and decreased,
but not below zero, by any distributions made on the REMIC Residual Certificate
before the beginning of that quarter. The issue price of a REMIC Residual
Certificate is the initial offering price to the public, excluding bond houses,
brokers and underwriters, at which a substantial amount of the REMIC Residual
Certificates were sold. If less than a substantial amount of a particular class
of REMIC Residual Certificates is sold for cash on or prior to the closing date,
the issue price of that class will be treated as the fair market value of that
class on the closing date. The "long-term Federal rate" is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
For REMIC residual certificateholders, an excess inclusion:
o will not be permitted to be offset by deductions, losses or loss carryovers
from other activities,
o will be treated as "unrelated business taxable income" to an otherwise
tax-exempt organization and
o will not be eligible for any rate reduction or exemption under any
applicable tax treaty for the 30% United States withholding tax
imposed on distributions to REMIC residual certificateholders that
are foreign investors.
See, however, "--Foreign Investors in Regular Certificates."
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions; provided, however, that for purposes
of (ii), alternative minimum taxable income is determined without regard to the
special rule that taxable income cannot be less than excess inclusions. The
latter rule has the effect of preventing nonrefundable tax credits from reducing
the taxpayer's income tax to an amount lower than the alternative minimum tax on
excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions allocated to the REMIC
Residual Certificates, reduced, but not below zero, by the real estate
investment trust taxable income, within the meaning of Section 857(b)(2) of the
Internal Revenue Code, excluding any net capital gain, will be allocated among
the shareholders of the trust in proportion to the dividends received by the
shareholders from the trust, and any amount so allocated will be treated as an
excess inclusion from a REMIC Residual Certificate as if held directly by the
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and some cooperatives; the
REMIC regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES
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Under the REMIC regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If the transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on the "noneconomic" REMIC Residual Certificate. The REMIC regulations
provide that a REMIC Residual Certificate is noneconomic unless, based on the
prepayment assumption and on any required or permitted clean up calls, or
required qualified liquidation provided for in the REMIC's organizational
documents, (1) the present value of the expected future distributions
(discounted using the "applicable Federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue on the REMIC Residual Certificate, which rate is computed and published
monthly by the IRS) on the REMIC Residual Certificate equals at least the
present value of the expected tax on the anticipated excess inclusions, and (2)
the transferor reasonably expects that the transferee will receive distributions
on the REMIC Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. Accordingly, all transfers of REMIC Residual Certificates that may
constitute noneconomic residual interests will be subject to restrictions under
the terms of the related pooling and servicing agreement or trust agreement that
are intended to reduce the possibility of any transfer being disregarded. The
restrictions will require each party to a transfer to provide an affidavit that
no purpose of the transfer is to impede the assessment or collection of tax,
including representations as to the financial condition of the prospective
transferee, as to which the transferor also is required to make a reasonable
investigation to determine the transferee's historic payment of its debts and
ability to continue to pay its debts as they come due in the future. Prior to
purchasing a REMIC Residual Certificate, prospective purchasers should consider
the possibility that a purported transfer of the REMIC Residual Certificate by
such a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by that purchaser.
The accompanying prospectus supplement will disclose whether offered
REMIC Residual Certificates may be considered "noneconomic" residual interests
under the REMIC regulations. Any disclosure that a REMIC Residual Certificate
will not be considered "noneconomic" will be based on some assumptions, and the
depositor will make no representation that a REMIC Residual Certificate will not
be considered "noneconomic" for purposes of the above-described rules. See
"--Foreign Investors in Regular Certificates" for additional restrictions
applicable to transfers of certain REMIC Residual Certificates to foreign
persons.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders
of the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of those fees and expenses should be allocated
to the holders of the related Regular Certificates. Unless otherwise stated in
the accompanying prospectus supplement, fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related Regular Certificates.
For REMIC Residual Certificates or Regular Certificates the holders of
which receive an allocation of fees and expenses in accordance with the
preceding discussion, if any holder thereof is an individual, estate or trust,
or a Pass-Through Entity beneficially owned by one or more individuals, estates
or trusts, (i) an amount equal to the individual's, estate's or trust's share of
fees and expenses will be added to the gross income of that holder and (ii) the
individual's, estate's or trust's share of fees and expenses will be treated as
a miscellaneous itemized deduction allowable in accordance with the limitation
of Section 67 of the Internal Revenue Code, which permits those deductions only
to the extent they exceed in the aggregate two percent of a taxpayer's adjusted
gross income. In addition, Section 68 of the Internal Revenue Code provides that
the amount of itemized deductions otherwise allowable for an individual whose
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adjusted gross income exceeds a specified amount will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over that
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
the taxable year. The amount of additional taxable income reportable by REMIC
certificateholders that are in accordance with the limitations of either Section
67 or Section 68 of the Internal Revenue Code may be substantial. Furthermore,
in determining the alternative minimum taxable income of such a holder of a
REMIC Certificate that is an individual, estate or trust, or a Pass-Through
Entity beneficially owned by one or more individuals, estates or trusts, no
deduction will be allowed for such holder's allocable portion of servicing fees
and other miscellaneous itemized deductions of the REMIC, even though an amount
equal to the amount of such fees and other deductions will be included in the
holder's gross income. Accordingly, the REMIC certificates may not be
appropriate investments for individuals, estates, or trusts, or Pass-Through
Entities beneficially owned by one or more individuals, estates or trusts. Any
prospective investors should consult with their tax advisors prior to making an
investment in these certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a Disqualified
Organization, a tax would be imposed in an amount, determined under the REMIC
regulations, equal to: the product of
(1) the present value, discounted using the "applicable Federal rate"
for obligations whose term ends on the close of the last quarter
in which excess inclusions are expected to accrue on the
certificate, which rate is computed and published monthly by the
IRS, of the total anticipated excess inclusions on the REMIC
Residual Certificate for periods after the transfer; and
(2) the highest marginal federal income tax rate applicable to corporations.
The anticipated excess inclusions must be determined as of the date that
the REMIC Residual Certificate is transferred and must be based on events that
have occurred up to the time of transfer, the prepayment assumption and any
required or permitted clean up calls or required liquidation provided for in the
REMIC's organizational documents. This tax generally would be imposed on the
transferor of the REMIC Residual Certificate, except that where the transfer is
through an agent for a Disqualified Organization, the tax would instead be
imposed on that agent. However, a transferor of a REMIC Residual Certificate
would in no event be liable for the tax on a transfer if the transferee
furnishes to the transferor an affidavit that the transferee is not a
Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that the affidavit is false. Moreover, an entity
will not qualify as a REMIC unless there are reasonable arrangements designed to
ensure that:
o residual interests in the entity are not held by Disqualified
Organizations; and
o information necessary for the application of the tax described in this
prospectus will be made available.
Restrictions on the transfer of REMIC Residual Certificates and other
provisions that are intended to meet this requirement will be included in the
pooling and servicing agreement, including provisions:
(1) requiring any transferee of a REMIC Residual Certificate to
provide an affidavit representing that it is not a Disqualified
Organization and is not acquiring the REMIC Residual Certificate
on behalf of a Disqualified Organization, undertaking to maintain
that status and agreeing to obtain a similar affidavit from any
person to whom it shall transfer the REMIC Residual Certificate;
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(2) providing that any transfer of a REMIC Residual Certificate to a
Disqualified Organization shall be null and void; and
(3) granting to the master servicer or the servicer the right,
without notice to the holder or any prior holder, to sell to a
purchaser of its choice any REMIC Residual Certificate that shall
become owned by a Disqualified Organization despite (1) and (2)
above.
In addition, if a Pass-Through Entity includes in income excess
inclusions on a REMIC Residual Certificate, and a Disqualified Organization is
the record holder of an interest in that entity, then a tax will be imposed on
the entity equal to the product of (i) the amount of excess inclusions on the
REMIC Residual Certificate that are allocable to the interest in the
Pass-Through Entity held by the Disqualified Organization and (ii) the highest
marginal federal income tax rate imposed on corporations. A Pass-Through Entity
will not be subject to this tax for any period, however, if each record holder
of an interest in the Pass-Through Entity furnishes to that Pass-Through Entity
(i) the holder's social security number and a statement under penalties of
perjury that the social security number is that of the record holder or (ii) a
statement under penalties of perjury that the record holder is not a
Disqualified Organization. For taxable years beginning after December 31, 1997,
regardless of the preceding two sentences, in the case of a REMIC Residual
Certificate held by an "electing large partnership," all interests in such
partnership shall be treated as held by Disqualified Organizations, without
regard to whether the record holders of the partnership furnish statements
described in the preceding sentence, and the amount that is subject to tax under
the second preceding sentence is excluded from the gross income of the
partnership allocated to the partners, in lieu of allocating to the partners a
deduction for the tax paid by the partners.
SALES OF CERTIFICATES
If a certificate is sold, the selling certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its adjusted basis in the Certificate. The adjusted basis of a Regular
Certificate generally will equal the cost of that Regular Certificate to that
certificateholder, increased by income reported by the certificateholder with
respect to that Regular Certificate, including original issue discount and
market discount income, and reduced, but not below zero, by distributions on the
Regular Certificate received by the certificateholder and by any amortized
premium. The adjusted basis of a REMIC Residual Certificate will be determined
as described under "--Taxation of Owners of REMIC Residual Certificates--Basis
Rules, Net Losses and Distributions." Except as described below, any gain or
loss generally will be capital gain or loss.
Gain from the sale of a REMIC Regular Certificate (but not a FASIT
regular interest) that might otherwise be capital gain will be treated as
ordinary income to the extent the gain does not exceed the excess, if any, of
(i) the amount that would have been includible in the seller's income for the
Regular Certificate had income accrued thereon at a rate equal to 110% of the
"applicable federal rate", which is typically a rate based on an average of
current yields on Treasury securities having a maturity comparable to that of
the certificate, which rate is computed and published monthly by the IRS,
determined as of the date of purchase of the Regular Certificate, over (ii) the
amount of ordinary income actually includible in the seller's income prior to
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the sale. In addition, gain recognized on the sale of a Regular Certificate by a
seller who purchased the Regular Certificate at a market discount will be
taxable as ordinary income to the extent of any accrued and previously
unrecognized market discount that accrued during the period the certificate was
held. See "--Taxation of Owners of REMIC and FASIT Regular Certificates--Market
Discount."
A portion of any gain from the sale of a Regular Certificate that might
otherwise be capital gain may be treated as ordinary income to the extent that
the certificate is held as part of a "conversion transaction" within the meaning
of Section 1258 of the Internal Revenue Code. A conversion transaction generally
is one in which the taxpayer has taken two or more positions in certificates or
similar property that reduce or eliminate market risk, if substantially all of
the taxpayer's return is attributable to the time value of the taxpayer's net
investment in the transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate", which rate is computed and
published monthly by the IRS, at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include any net capital
gain in total net investment income for the taxable year, for purposes of the
limitation on the deduction of interest on indebtedness incurred to purchase or
carry property held for investment to a taxpayer's net investment income.
If the seller of a REMIC Residual Certificate reacquires the
certificate, any other residual interest in a REMIC or any similar interest in a
"taxable mortgage pool" (as defined in Section 7701(i) of the Internal Revenue
Code) within six months of the date of the sale, the sale will be subject to the
"wash sale" rules of Section 1091 of the Internal Revenue Code. In that event,
any loss realized by the REMIC residual certificateholders on the sale will not
be deductible, but instead will be added to the REMIC residual
certificateholders adjusted basis in the newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The Internal Revenue Code imposes a prohibited transactions tax, which
is a tax on REMICs equal to 100% of the net income derived from prohibited
transactions. In general, subject to specified exceptions a prohibited
transaction means the disposition of a loan, the receipt of income from a source
other than any loan or other Permitted Investments, the receipt of compensation
for services, or gain from the disposition of an asset purchased with the
payments on the loans for temporary investment pending distribution on the REMIC
certificates. It is not anticipated that any REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income. In
addition, some contributions to a REMIC made after the day on which the REMIC
issues all of its interests could result in the imposition of a contributions
tax, which is a tax on the REMIC equal to 100% of the value of the contributed
property. Each pooling and servicing agreement or trust agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to the tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the accompanying prospectus supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
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Unless otherwise disclosed in the accompanying prospectus supplement, it
is not anticipated that any material state or local income or franchise tax will
be imposed on any REMIC.
Unless otherwise stated in the accompanying prospectus supplement, and
to the extent permitted by then applicable laws, any prohibited transactions
tax, contributions tax, tax on "net income from foreclosure property" or state
or local income or franchise tax that may be imposed on the REMIC will be borne
by the related master servicer, the servicer, the REMIC administrator or the
trustee in either case out of its own funds, provided that the master servicer,
the servicer, the REMIC administrator or the trustee, as the case may be, has
sufficient assets to do so, and provided further that the tax arises out of a
breach of the master servicer's, the servicer's, the REMIC administrator's or
the trustee's obligations, as the case may be, under the related pooling and
servicing agreement or trust agreement and relating to compliance with
applicable laws and regulations. Any tax not borne by the master servicer, the
servicer or the trustee will be payable out of the related trust resulting in a
reduction in amounts payable to holders of the related REMIC certificates.
In the case of a FASIT, the holder of the ownership interest and not the
FASIT itself will be subject to any prohibited transaction taxes.
TERMINATION
A REMIC will terminate immediately after the distribution date following
receipt by the REMIC of the final payment from the loans or on a sale of the
REMIC's assets following the adoption by the REMIC of a plan of complete
liquidation. The last distribution on a Regular Certificate will be treated as a
payment in retirement of a debt instrument. In the case of a REMIC Residual
Certificate, if the last distribution on the REMIC Residual Certificate is less
than the certificateholder's adjusted basis in the certificate, the
certificateholder should be treated as realizing a loss equal to the amount of
the difference, and the loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Internal
Revenue Code, a REMIC will be treated as a partnership and REMIC residual
certificateholders will be treated as partners. Unless otherwise stated in the
accompanying prospectus supplement, the master servicer, the servicer, or the
REMIC administrator, as applicable, will file REMIC federal income tax returns
on behalf of the related REMIC and will act as the "tax matters person" for the
REMIC in all respects, and may hold a nominal amount of REMIC Residual
Certificates.
As the tax matters person, the master servicer, the servicer, or the
REMIC administrator, as applicable, will have the authority to act on behalf of
the REMIC and the REMIC residual certificateholders in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC, as well as the REMIC's classification. REMIC residual
certificateholders will be required to report the REMIC items consistently with
their treatment on the related REMIC's tax return and may in some circumstances
be bound by a settlement agreement between the master servicer, the servicer, or
the REMIC administrator, as applicable, as tax matters person, and the IRS
concerning any REMIC item.
Adjustments made to the REMIC tax return may require a REMIC residual
certificateholders to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from an audit, could
result in an audit of the certificateholder's return. No REMIC will be
registered as a tax shelter under Section 6111 of the Internal Revenue Code
because it is not anticipated that any REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of that person and other information.
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Reporting of interest income, including any original issue discount, on
Regular Certificates is required annually, and may be required more frequently
under Treasury regulations. These information reports are required to be sent to
individual holders of regular Interests and the IRS; holders of Regular
Certificates that are corporations, trusts, securities dealers and other
non-individuals will be provided interest and original issue discount income
information and the information in the following paragraph on request in
accordance with the requirements of the applicable regulations. The information
must be provided by the later of 30 days after the end of the quarter for which
the information was requested, or two weeks after the receipt of the request.
The REMIC must also comply with rules requiring a Regular Certificate issued
with original issue discount to disclose on its face information including the
amount of original issue discount and the issue date, and requiring such
information to be reported to the IRS. Reporting for the REMIC Residual
Certificates, including income, excess inclusions, investment expenses and
relevant information regarding qualification of the REMIC's assets will be made
as required under the Treasury regulations, typically on a quarterly basis.
As applicable, the Regular Certificate information reports will include
a statement of the adjusted issue price of the Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information required by regulations for computing the accrual of any market
discount. Because exact computation of the accrual of market discount on a
constant yield method requires information relating to the holder's purchase
price that the master servicer or the servicer will not have, the regulations
only require that information pertaining to the appropriate proportionate method
of accruing market discount be provided. See "--Taxation of Owners of REMIC and
FASIT Regular Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules will
be borne by the master servicer or the servicer. Certificateholders may request
any information with respect to the returns described in Section 1.6049-7(e)(2)
of the Treasury regulations. Any request should be directed to the master
servicer or the servicer at Residential Funding Corporation, 8400 Normandale
Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437.
BACKUP WITHHOLDING WITH RESPECT TO SECURITIES
Payments of interest and principal, as well as payments of proceeds from
the sale of securities, may be subject to the "backup withholding tax" under
Section 3406 of the Internal Revenue Code at a rate of 31% if recipients of
payments fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from the tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against the recipient's federal income
tax. Furthermore, penalties may be imposed by the IRS on a recipient of payments
that is required to supply information but that does not do so in the proper
manner.
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FOREIGN INVESTORS IN REGULAR CERTIFICATES
A regular certificateholder (other than a holder of a FASIT high-yield
regular interest) that is not a United States person and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a Regular Certificate will not be
subject to United States federal income or withholding tax on a distribution on
a Regular Certificate, provided that the holder complies to the extent necessary
with certain identification requirements, including delivery of a statement,
signed by the certificateholder under penalties of perjury, certifying that the
certificateholder is not a United States person and providing the name and
address of the certificateholder. For these purposes, United States person means
a citizen or resident of the United States, a corporation, partnership or other
entity created or organized in, or under the laws of, the United States, any
state thereof or the District of Columbia, except, in the case of a partnership,
to the extent provided in regulations, or an estate whose income is subject to
United States federal income tax regardless of its source, or a trust if a court
within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. To the extent
prescribed in regulations by the Secretary of the Treasury, which regulations
have not yet been issued, a trust which was in existence on August 20, 1996
(other than a trust treated as owned by the grantor under subpart E of part I of
subchapter J of chapter 1 of the Internal Revenue Code), and which was treated
as a United States person on August 19, 1996, may elect to continue to be
treated as a United States person regardless of the previous sentence. It is
possible that the IRS may assert that the foregoing tax exemption should not
apply to a REMIC Regular Certificate held by a REMIC residual certificateholder
that owns directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates or a FASIT Regular Certificate held by a person that owns directly
or indirectly a 10% or greater interest in the holder of the ownership interest
in the FASIT. If the holder does not qualify for exemption, distributions of
interest, including distributions of accrued original issue discount, to the
holder may be subject to a tax rate of 30%, subject to reduction under any
applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on the
United States shareholder's allocable portion of the interest income received by
the controlled foreign corporation.
Further, it appears that a Regular Certificate would not be included in
the estate of a non-resident alien individual and would not be subject to United
States estate taxes. However, certificateholders who are non-resident alien
individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the accompanying prospectus supplement,
transfers of REMIC Residual Certificates and FASIT high-yield regular interests
to investors that are not United States persons will be prohibited under the
related pooling and servicing agreement or trust agreement.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations which make some
modifications to the withholding, backup withholding and information reporting
rules described above. The new regulations attempt to unify certification
requirements and modify reliance standards. The new regulations will be
effective for most payments made after December 31, 2000. The new regulations
contain transaction rules applicable to some payments made after December 31,
2000. Prospective investors are urged to consult their tax advisors regarding
the New Regulations.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences," potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the certificates offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax advisors
with respect to the various tax consequences of investments in the certificates
offered hereby.
ERISA CONSIDERATIONS
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Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, or ERISA, impose fiduciary and prohibited transaction restrictions on
employee pension and welfare benefit plans and certain other retirement plans
and arrangements, including individual retirement accounts and annuities and
Keogh plans, subject to ERISA, or Plans, and on bank collective investment funds
and insurance company general and separate accounts in which those Plans are
invested. Section 4975 of the Internal Revenue Code imposes essentially the same
prohibited transaction restrictions on Tax-Favored Plans.
Some employee benefit plans, including governmental plans (as defined in
Section 3(32) of ERISA) and, if no election has been made under Section 410(d)
of the Internal Revenue Code, church plans (as defined in Section 3(33) of
ERISA), are not subject to the ERISA requirements discussed in this prospectus.
Accordingly, assets of these plans may be invested in securities without regard
to the ERISA considerations described below, subject to the provisions of
applicable federal and state law. Any plan that is a tax-qualified plan and
exempt from taxation under Sections 401(a) and 501(a) of the Internal Revenue
Code, however, is subject to the prohibited transaction rules in Section 503 of
the Internal Revenue Code.
In addition to ERISA rules imposing general fiduciary requirements,
including those of investment prudence and diversification and the requirement
that a Plan's investment be made in accordance with the documents governing the
Plan, Section 406 of ERISA and Section 4975 of the Internal Revenue Code
prohibit a broad range of transactions involving "plan assets" of Plans and
Tax-Favored Plans, or ERISA plans, and Parties in Interest, unless a statutory
or administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to a penalty (or an
excise tax) imposed under Section 502(i) of ERISA or Section 4975 of the
Internal Revenue Code, unless a statutory or administrative exemption is
available for any transaction of this sort.
ERISA PLAN ASSET REGULATIONS
An investment of ERISA plan assets in securities may cause the
underlying loans, private securities or any other assets held in a trust to be
deemed "plan assets" of the Plan. The U.S. Department of Labor, or DOL, has
promulgated regulations at 29 C.F.R. Section 2510.3-101, or the DOL Regulations,
concerning whether or not an ERISA plan's assets would be deemed to include an
interest in the underlying assets of an entity, including a trust, for purposes
of applying the general fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code, when ERISA plan assets are used to acquire an "equity interest,"
such as a certificate, in that entity. Exceptions contained in the DOL
Regulations provide that an ERISA plan's assets will not include an undivided
interest in each asset of an entity in which it makes an equity investment if:
(i) the entity is an operating company;
(ii) the equity investment made by the ERISA plan is either a
"publicly-offered security" that is "widely held," both as
defined in the DOL Regulations, or a security issued by an
investment company registered under the Investment Company Act of
1940, as amended; or
(iii) Benefit Plan Investors do not own 25% or more in value of any
class of equity interests issued by the entity.
For this purpose, the term "Benefit Plan Investors" include ERISA plans, as
well as any "employee benefit plan," as defined in Section 3(3) or ERISA, which
is not subject to Title I of ERISA, such as governmental plans, as defined in
Section 3(32) of ERISA, church plans, as defined in Section 3(33) of ERISA,
which have not made an election under Section 410(d) of the Internal Revenue
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Code, foreign plans and any entity whose underlying assets include ERISA plan
assets by reason of an ERISA plan's investment in the entity. The DOL
Regulations provide that the term "equity interest" means any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no "substantial equity features."
Because of the factual nature of some of the rules in the DOL
Regulations, ERISA plan assets may be deemed to include either an interest in
the assets of an entity, including a trust, or merely an ERISA plan's interest
in the instrument evidencing such equity interest, such as a certificate.
Therefore, neither ERISA plans nor entities deemed to hold ERISA plan assets
should acquire or hold securities, in reliance on the availability of any
exception under the DOL Regulations, either (i) certificates or (ii) notes which
may be deemed (if so stated) in the accompanying prospectus supplement to have
"substantial equity features." For purposes of this section, the term "ERISA
plan assets" or "assets of an ERISA plan" has the meaning specified in the DOL
Regulations and includes an undivided interest in the underlying assets of some
entities in which a ERISA plan invests.
The prohibited transaction provisions of Section 406 of ERISA and
Section 4975 of the Internal Revenue Code may apply to a trust and cause the
depositor, the master servicer, any Administrator, any servicer, any
subservicer, any trustee, the obligor under any credit enhancement mechanism or
some affiliates of those entities to be considered or become Parties in Interest
for an investing ERISA plan or of an ERISA plan holding an interest in an
ERISA-subject investment entity. If so, the acquisition or holding of securities
by or on behalf of the investing ERISA plan could also give rise to a prohibited
transaction under ERISA and/or Section 4975 of the Internal Revenue Code, unless
some statutory or administrative exemption is available. Securities acquired by
an ERISA plan would be assets of that plan. Under the DOL Regulations, a trust,
including the mortgage loans, private securities or any other assets held in the
trust, may also be deemed to be assets of each ERISA plan that acquires
certificates or notes deemed to have "substantial equity features." Special
caution should be exercised before ERISA plan assets are used to acquire a
security in those circumstances, especially if, for the ERISA plan assets, the
depositor, the master servicer, any Administrator, any servicer, any
subservicer, any trustee, the obligor under any credit enhancement mechanism or
an affiliate thereof either (i) has investment discretion for the investment of
the ERISA plan assets; or (ii) has authority or responsibility to give, or
regularly gives, investment advice for ERISA plan assets for a fee under an
agreement or understanding that any advice will serve as a primary basis for
investment decisions for the ERISA plan assets.
Any person who has discretionary authority or control respecting the
management or disposition of ERISA plan assets, and any person who provides
investment advice for the ERISA plan assets for a fee (in the manner described
above), is a fiduciary of the investing ERISA plan. If the mortgage loans,
private securities or any other assets held in a trust were to constitute ERISA
plan assets, then any party exercising management or discretionary control for
those ERISA plan assets may be deemed to be a "fiduciary," and thus subject to
the fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Internal Revenue Code, for any investing ERISA
plan. In addition, if the mortgage loans, private securities or any other assets
held in a trust were to constitute ERISA plan assets, then the acquisition or
holding of securities by, on behalf of a ERISA plan assets or with ERISA plan
assets, as well as the operation of the trust, may constitute or result in a
prohibited transaction under ERISA and the Internal Revenue Code.
PROHIBITED TRANSACTION EXEMPTIONS
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CERTIFICATES. The DOL has issued an individual exemption, prohibited
transaction exemption, or PTE, 94-29, 59 Fed. Reg. 14674 (March 29, 1994), as
amended by PTE 97-34, 62 Fed. Reg. 39021 (July 21, 1997), to Residential Funding
Corporation and certain of its affiliates, the RFC exemption, which generally
exempts, from the application of the prohibited transaction provisions of
Section 406 of ERISA and Section 4975 of the Internal Revenue Code, various
transactions, among others, relating to the servicing and operation of pools of
secured obligations of some types, including mortgage loans and private
securities, which are held in a trust and the purchase, sale and holding of
pass-through certificates issued by that trust as to which
(i) the depositor or any of its affiliates is the sponsor if any
entity which has received from the DOL an individual prohibited
transaction exemption which is similar to the RFC exemption is
the sole underwriter, a manager or co-manager of the underwriting
syndicate or a seller or placement agent, or
(ii) the depositor or an affiliate is the underwriter or placement
agent, provided that the conditions of the exemption are
satisfied.
For purposes of this section, the term underwriter includes
(a) the depositor and certain of its affiliates,
(b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common
control with the depositor and certain of its affiliates,
(c) any member of the underwriting syndicate or selling group of
which a person described in (a) or (b) is a manager or co-manager
for a class of certificates, or
(d) any entity which has received an exemption from the DOL relating
to certificates which is substantially similar to the RFC
exemption.
The RFC exemption sets forth six general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of
certificates to be eligible for exemptive relief under the exemption.
o First, the acquisition of certificates by an ERISA plan or with ERISA
plan assets must be on terms that are at least as favorable to the
ERISA plan as they would be in an arm's-length transaction with an
unrelated party.
o Second, the RFC exemption only applies to certificates evidencing
rights and interests that are not subordinated to the rights and
interests evidenced by the other certificates of the same trust.
o Third, at the time of acquisition by an ERISA plan or with ERISA plan
assets, the certificates must be rated in one of the three highest
generic rating categories by Standard & Poor's, a division of McGraw
Hill Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps
Credit Rating Co. or Fitch IBCA, Inc., called the exemption rating
agencies.
o Fourth, the trustee cannot be an affiliate of any other member of the
restricted group which consists of any underwriter, the depositor,
the master servicer, the REMIC administrator, any servicer, any
subservicer, any trustee and any borrower for assets of a trust
constituting more than 5% of the aggregate unamortized principal
balance of the assets in the related trust as of the date of initial
issuance of the certificates.
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o Fifth, the sum of all payments made to and retained by the underwriters
must represent not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the depositor
under the assignment of the assets to the related trust must represent not
more than the fair market value of those obligations; and the sum of all
payments made to and retained by the master servicer, the REMIC
administrator, any servicer and any subservicer must represent not more
than reasonable compensation for that person's services under the related
pooling and servicing agreement or trust agreement and reimbursement of
that person's reasonable expenses in connection therewith.
o Sixth, the RFC exemption states that the investing ERISA plan or
ERISA plan assets investor 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 of 1933, as amended.
In addition, except as otherwise specified in the accompanying prospectus
supplement, the exemptive relief afforded by the RFC exemption may not apply to
any certificates where the related trust contains a swap or Mexico Loans.
The RFC exemption also requires that each trust meet the following
requirements:
o the trust must consist solely of assets of the type that have been included
in other investment pools;
o certificates evidencing interests in those other investment pools
must have been rated in one of the three highest categories of one of
the exemption rating agencies for at least one year prior to the
acquisition of certificates by or on behalf of an ERISA plan or with
ERISA plan assets in reliance on the RFC exemption; and
o certificates in the other investment pools must have been purchased
by investors other than ERISA plans for at least one year prior to
any acquisition of certificates by or on behalf of an ERISA plan or
with ERISA plan assets in reliance on the RFC exemption.
A fiduciary of or other investor of ERISA plan assets contemplating
purchasing a certificate must make its own determination that the general
conditions described above will be satisfied for that certificate.
If the general conditions of the RFC exemption are satisfied, the RFC
exemption may provide an exemption, from the application of the prohibited
transaction provisions of Sections 406(a) and 407(a) of ERISA and Sections
4975(c)(1)(A) through (D) of the Internal Revenue Code, in connection with the
direct or indirect sale, exchange, transfer, holding or the direct or indirect
acquisition or disposition in the secondary market of certificates by or with
ERISA plan assets. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E) and 406(a)(2) of ERISA for the acquisition or holding of a
certificate by or with ERISA plan assets of an excluded plan by any person who
has discretionary authority or renders investment advice for ERISA plan assets
of the excluded plan. For purposes of the certificates, an excluded plan is a
ERISA plan sponsored by any member of the restricted group.
If specific conditions of the RFC exemption are also satisfied, the RFC
exemption may provide an exemption, from the application of the prohibited
transaction provisions of Sections 406(b)(1) and (b)(2) of ERISA and Section
4975(c)(1)(E) of the Internal Revenue Code, in connection with the following:
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(1) the direct or indirect sale, exchange or transfer of certificates
in the initial issuance of certificates between the depositor or
an underwriter and an ERISA plan when the person who has
discretionary authority or renders investment advice for the
investment of the relevant ERISA plan assets in the certificates
is:
(a) a borrower with respect to 5% or less of the fair market
value of the assets of a trust; or
(b) an affiliate of such a person,
provided that, if the certificates are acquired in connection
with their initial issuance, the quantitative restrictions
described in the RFC exemption are met.
(2) the direct or indirect acquisition or disposition in the
secondary market of certificates by an ERISA plan or with ERISA
plan assets; and
(3) the holding of certificates by an ERISA plan or with ERISA plan assets.
Additionally, if specific conditions of the RFC exemption are satisfied,
the RFC exemption may provide an exemption, from the application of the
prohibited transaction provisions of Sections 406(a), 406(b) and 407(a) of ERISA
and Section 4975 of the Internal Revenue Code, for transactions in connection
with the servicing, management and operation of the pools. The depositor expects
that the specific conditions of the RFC exemption required for this purpose will
be satisfied for the certificates so that the RFC exemption would provide an
exemption, from the application of the prohibited transaction provisions of
Sections 406(a) and (b) of ERISA and Section 4975 of the Internal Revenue Code,
for transactions in connection with the servicing, management and operation of
the pools, provided that the general conditions of the RFC exemption are
satisfied.
The RFC exemption also may provide an exemption from, the application of
the prohibited transaction provisions of Sections 406(a) and 407(a) of ERISA and
Sections 4975(c)(1)(A) through (D) of the Internal Revenue Code, if those
restrictions are deemed to otherwise apply merely because a person is deemed to
be a Party in Interest for an investing ERISA plan, or an ERISA plan holding
interests in an ERISA-subject investment entity, by virtue of providing services
to the ERISA plan or the investment entity, or by virtue of having specified
relationships to such a person, solely as a result of the ERISA plan's ownership
of certificates.
Before purchasing a certificate, a fiduciary or other investor of ERISA
plan assets should itself confirm that (a) the certificates constitute
"certificates" for purposes of the RFC exemption and (b) the specific and
general conditions described in the RFC exemption and the other requirements in
the RFC exemption would be satisfied. In addition to making its own
determination as to the availability of the exemptive relief provided in the RFC
exemption, the fiduciary or other ERISA plan assets investor should consider its
general fiduciary obligations under ERISA in determining whether to purchase any
securities with ERISA plan assets.
Any fiduciary or other ERISA plan assets investor that proposes to
purchase certificates on behalf of an ERISA plan or with ERISA plan assets
should consult with its counsel for the potential applicability of ERISA and the
Internal Revenue Code to that investment and the availability of the RFC
exemption or any other DOL prohibited transaction class exemption, or PTCE, in
connection therewith. In particular, in connection with a contemplated purchase
of certificates representing a beneficial ownership interest in a pool of
single-family residential first or second mortgage loans or Agency Securities,
the fiduciary or other ERISA plan assets investor should consider the
availability of the RFC exemption or PTCE 83-1 for some transactions involving
mortgage pool investment trusts. However, PTCE 83-1 does not provide exemptive
relief for certificates evidencing interests in trusts which include loans
secured by third or more junior liens or Cooperative Loans or some types of
private securities, or which contain a swap or Mexico Loans. In addition, the
fiduciary or other ERISA plan assets investor should consider the availability
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of other class exemptions granted by the DOL, which provide relief from certain
of the prohibited transaction provisions of ERISA and the related excise tax
provisions of Section 4975 of the Internal Revenue Code, including Sections I
and III of PTCE 95-60, regarding transactions by insurance company general
accounts. The accompanying prospectus supplement may contain additional
information regarding the application of the RFC exemption, PTCE 83-1, PTCE
95-60 or other DOL class exemptions for the certificates offered thereby. There
can be no assurance that any of these exemptions will apply for any particular
ERISA plan's or other ERISA plan assets investor's investment in the
certificates or, even if an exemption were deemed to apply, that any exemption
would apply to all prohibited transactions that may occur in connection with
this form of investment.
NOTES. With respect to the purchase and holding of notes, an ERISA plan
fiduciary or other ERISA plan assets investor should consider the availability
of some class exemptions granted by the DOL, which provide relief from some of
the prohibited transaction provisions of ERISA and the related excise tax
provisions of the Internal Revenue Code, including PTCE 96-23, regarding
transactions effected by an "in-house asset manager"; PTCE 95-60, regarding
transactions by insurance company general accounts; PTCE 91-38, regarding
investments by bank collective investment funds; PTCE 90-1, regarding
transactions by insurance company pooled separate accounts; and PTCE 84-14,
regarding transactions effected by a "qualified professional asset manager." The
accompanying prospectus supplement may contain additional information regarding
the application of these class exemptions for the notes offered by this
prospectus.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemptive relief that may be available under PTCE
95-60 for the purchase and holding of the certificates by an insurance company
general account, the Small Business Job Protection Act of 1996 added a new
Section 401(c) to ERISA, which provides exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Internal Revenue Code,
including the prohibited transaction restrictions imposed by ERISA and the
related excise taxes imposed by Section 4975 of the Internal Revenue Code, for
transactions involving an insurance company general account.
The 401(c) Regulations are to provide guidance for the purpose of
determining, in cases where insurance policies or annuity contracts supported by
an insurer's general account are issued to or for the benefit of a ERISA plan on
or before December 31, 1998, which general account assets constitute ERISA plan
assets. Section 401(c) of ERISA generally provides that, until the date which is
18 months after the 401(c) Regulations become final, no person shall be subject
to liability under Part 4 of Title I of ERISA or Section 4975 of the Internal
Revenue Code on the basis of a claim that the assets of an insurance company
general account constitute ERISA plan assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account that
support insurance policies or annuity contracts issued to a ERISA plan after
December 31, 1998 or issued to ERISA plans on or before December 31, 1998 for
which the insurance company does not comply with the 401(c) Regulations may be
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treated as ERISA plan assets. In addition, because Section 401(c) does not
relate to insurance company separate accounts, separate account assets are still
treated as ERISA plan assets of any ERISA plan invested in a separate account.
Insurance companies contemplating the investment of general account assets in
the certificates should consult with their legal counsel with respect to the
applicability of Sections I and III of PTCE 95-60 and Section 401(c) of ERISA,
including the general account's ability to continue to hold the certificates
after the date which is 18 months after the date the 401(c) Regulations become
final.
REPRESENTATIONS FROM INVESTING PLANS
CERTIFICATES. It is not clear whether certificates backed by revolving
credit loans, unsecured loans or loans with LTVs in excess of 100% would
constitute "certificates" for purposes of the RFC exemption. In promulgating the
RFC exemption, the DOL did not have under consideration interests in pools of
the exact nature described in this paragraph and accordingly, unless otherwise
provided in the accompanying prospectus supplement, certificates backed by loans
mentioned in this paragraph should not be purchased by or on behalf of an ERISA
plan or with ERISA plan assets based solely on the RFC exemption. In addition,
the exemptive relief afforded by the RFC exemption will not apply to the
purchase, sale or holding of any class of subordinate certificates and may not
apply, unless certain additional conditions set forth in the accompanying
prospectus supplement are satisfied, to any certificates where the related trust
contains a Funding Account during the period in which additional mortgage loans
are permitted to be transferred to the trust.
The exemptive relief afforded by the exemption will not apply to the
purchase, sale or holding of any class of subordinate certificates or REMIC
Residual Certificates. If certificates are backed by loans mentioned in the
paragraph next above or are subordinate certificates, or if the related trust
contains a swap or Mexico Loan, except as otherwise specified in the
accompanying prospectus supplement, transfers of those certificates to an ERISA
plan, to a trustee or other person acting on behalf of any ERISA plan, or to any
other person using ERISA plan assets to effect the acquisition, will not be
registered by the trustee unless the transferee provides the depositor, the
trustee and the master servicer with an opinion of counsel satisfactory to the
depositor, the trustee and the master servicer which opinion will not be at the
expense of the depositor, the trustee or the master servicer that the purchase
of the certificates by or on behalf of the ERISA plan or with ERISA plan assets
is permissible under applicable law, will not constitute or result in any
non-exempt prohibited transaction under ERISA or Section 4975 of the Internal
Revenue Code, and will not subject the depositor, the trustee or the master
servicer to any obligation in addition to those undertaken in the pooling and
servicing agreement.
In lieu of an opinion of counsel, except as otherwise specified in the
accompanying prospectus supplement, the transferee may provide a certification
of facts substantially to the effect that the purchase of the certificates by or
on behalf of the ERISA plan or with ERISA plan assets is permissible under
applicable law, will not constitute or result in a non-exempt prohibited
transaction under ERISA or Section 4975 of the Internal Revenue Code, will not
subject the depositor, the trustee or the master servicer to any obligation in
addition to those undertaken in the pooling and servicing agreement, and the
following conditions are met: (a) the source of funds used to purchase the
certificates is an "insurance company general account" (as that term is defined
in PTCE 95-60), and (b) the conditions in Sections I and III of PTCE 95-60 have
been satisfied as of the date of the acquisition of the certificates.
NOTES. If the accompanying prospectus supplement states that any of the
notes being issued have "substantial equity features" within the meaning of the
DOL Regulations, transfers of the notes to an ERISA plan, to a trustee or other
person acting on behalf of any ERISA plan, or to any other person using the
assets of any ERISA plan to effect the acquisition will not be registered by the
indenture trustee unless the transferee provides the depositor, the indenture
trustee and the master servicer or the servicer with an opinion of counsel
satisfactory to the depositor, the indenture trustee and the master servicer or
the servicer, which opinion will not be at the expense of the depositor, the
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indenture trustee or the master or the servicer, that the purchase of the notes
by or on behalf of the ERISA plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Internal Revenue Code and will not subject the depositor,
the indenture trustee or the master servicer or the servicer to any obligation
in addition to those undertaken in the trust agreement. In lieu of the opinion
of counsel, the transferee may provide a certification of facts substantially to
the effect that (i) the purchase of notes by or on behalf of the ERISA plan is
permissible under applicable law, will not constitute or result in any
non-exempt prohibited transaction under ERISA or Section 4975 of the Internal
Revenue Code and will not subject the depositor, the indenture trustee or the
master servicer or the servicer to any obligation in addition to those
undertaken in the trust agreement, and (ii) the following statements are
correct: (a) the transferee is an insurance company, (b) the source of funds
used to purchase the notes is an "insurance company general account," as the
term is defined in PTCE 95-60, and (c) the conditions described in Section I and
Section III of PTCE 95-60 have been satisfied as of the date of the acquisition
of the notes.
TAX-EXEMPT INVESTORS
A Tax-Exempt Investor nonetheless will be subject to federal income
taxation to the extent that its income is "unrelated business taxable income,"
or UBTI, within the meaning of Section 512 of the Internal Revenue Code. All
"excess inclusions" of a REMIC allocated to a REMIC Residual Certificate held by
a Tax-Exempt Investor will be considered UBTI and thus will be subject to
federal income tax. See "Material Federal Income Tax Consequences--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions."
CONSULTATION WITH COUNSEL
There can be no assurance that the RFC exemption or any other DOL
exemption will apply for any particular ERISA plan that acquires the
certificates or, even if all of the conditions specified therein were satisfied,
that the exemption would apply to all transactions involving a trust.
Prospective ERISA plan investors should consult with their legal counsel
concerning the impact of ERISA and the Internal Revenue Code and the potential
consequences to their specific circumstances prior to making an investment in
the certificates.
Before purchasing a security in reliance on any exemption, a fiduciary
of an ERISA plan should itself confirm that all of the specific and general
conditions described in the exemption would be satisfied. In addition to making
its own determination as to the availability of the exemptive relief provided in
the exemption, an ERISA plan fiduciary should consider its general fiduciary
obligations under ERISA in determining whether to purchase a security on behalf
of an ERISA plan.
Any fiduciary or other investor of ERISA plan assets that proposes to
acquire or hold certificates on behalf of an ERISA plan or with ERISA plan
assets should consult with its counsel for the potential applicability of the
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Internal Revenue Code to the
proposed investment and the exemption and the availability of exemptive relief
under PTCE 83-1, Sections I and III of PTCE 95-60 or any other DOL class
exemption.
LEGAL INVESTMENT MATTERS
Each class of securities offered hereby and by the accompanying
prospectus supplement will be rated at the date of issuance in one of the four
highest rating categories by at least one rating agency. If stated in the
accompanying prospectus supplement, classes that are, and continue to be, rated
in one of the two highest rating categories by at least one nationally
recognized statistical rating organization will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended, or SMMEA, and, as such, will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, life insurance companies and
pension funds) created under or existing under the laws of the United States or
of any State whose authorized investments are subject to state regulation to the
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same extent that, under applicable law, obligations issued by or guaranteed as
to principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for those entities. Under SMMEA, if a State
enacted legislation on or prior to October 3, 1991 specifically limiting the
legal investment authority of any of these entities for "mortgage related
securities," these securities will constitute legal investments for entities
subject to the legislation only to the extent provided therein. Certain States
enacted legislation which overrides the preemption provisions of SMMEA. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest in
"mortgage related securities," or require the sale or other disposition of the
securities, so long as the contractual commitment was made or the securities
acquired prior to the enactment of the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in these securities, and
national banks may purchase these securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. SS24 (Seventh), subject in each case to any regulations that
the applicable federal regulatory authority may prescribe.
The 1998 Policy Statement was adopted by the Federal Reserve Board, the
Office of the Comptroller of the Currency, the FDIC, the National Credit Union
Administration, or NCUA and the OTS with an effective date of May 26, 1998. The
1998 Policy Statement rescinded a 1992 policy statement that had required, prior
to purchase, a depository institution to determine whether a mortgage derivative
product that it was considering acquiring was high-risk, and, if so, required
that the proposed acquisition would reduce the institution's overall interest
rate risk. The 1998 Policy Statement eliminates constraints on investing in
certain "high-risk" mortgage derivative products and substitutes broader
guidelines for evaluating and monitoring investment risk.
The OTS has issued Thrift Bulletin 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 13a is to require thrift
institutions, prior to taking any investment position to conduct (i) a
pre-purchase portfolio sensitivity analysis for any "significant transaction"
involving securities or financial derivatives, and (ii) a pre-purchase price
sensitivity analysis of any "complex security" or financial derivative. For the
purposes of TB 13a, "complex security" includes, among other things, any
collateralized mortgage obligation or REMIC 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). One or more classes of securities offered hereby and
by the accompanying prospectus supplement may be viewed as "complex securities".
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.
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Prospective investors in the securities, including in particular the
classes of securities that do not constitute "mortgage related securities" for
purposes of SMMEA, should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of some investors either
to purchase some classes of securities or to purchase any class of securities
representing more than a specified percentage of the investors' assets. The
depositor will make no representations as to the proper characterization of any
class of securities for legal investment or other purposes, or as to the ability
of particular investors to purchase any class of securities under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of any class of securities. Accordingly, all investors whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the securities of any class constitute legal investments or are subject to
investment, capital or other restrictions, and, if applicable, whether SMMEA has
been overridden in any jurisdiction relevant to the investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
securities will be applied by the depositor to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the loans underlying
the securities or will be used by the depositor for general corporate purposes.
The depositor expects that it will make additional sales of securities similar
to the securities from time to time, but the timing and amount of any additional
offerings will be dependent on a number of factors, including the volume of
loans purchased by the depositor, prevailing interest rates, availability of
funds and general market conditions.
METHODS OF DISTRIBUTION
The securities offered hereby and by the accompanying prospectus
supplements will be offered in series through one or more of the methods
described below. The prospectus supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the depositor from that sale.
The depositor intends that securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of securities may be made through a combination of two or more of the
following methods:
o by negotiated firm commitment or best efforts underwriting and public
re-offering by
underwriters
o by placements by the depositor with institutional investors through
dealers; and
o by direct placements by the depositor with institutional investors.
In addition, if specified in the accompanying prospectus supplement, a
series of securities may be offered in whole or in part in exchange for the
loans, and other assets, if applicable, that would comprise the trust securing
the securities.
If underwriters are used in a sale of any securities, other than in
connection with an underwriting on a best efforts basis, the securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at fixed
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public offering prices or at varying prices to be determined at the time of sale
or at the time of commitment therefor. These underwriters may be broker-dealers
affiliated with the depositor whose identities and relationships to the
depositor will be as described in the accompanying prospectus supplement. The
managing underwriter or underwriters for the offer and sale of a particular
series of securities will be set forth on the cover of the prospectus supplement
relating to that series and the members of the underwriting syndicate, if any,
will be named in the accompanying prospectus supplement.
In connection with the sale of the securities, underwriters may receive
compensation from the depositor or from purchasers of the securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the securities may be deemed to be underwriters in
connection with the securities, and any discounts or commissions received by
them from the depositor and any profit on the resale of securities by them may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale
of any series of securities will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all of the securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the depositor will indemnify the
several underwriters and the underwriters will indemnify the depositor against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The prospectus supplement for any series offered by placements through
dealers will contain information regarding the nature of the offering and any
agreements to be entered into between the depositor and purchasers of securities
of that series.
The depositor anticipates that the securities offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of securities, including dealers, may, depending on the
facts and circumstances of the purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection with
reoffers and sales by them of securities. Holders of securities should consult
with their legal advisors in this regard prior to any reoffer or sale.
LEGAL MATTERS
Certain legal matters, including certain federal income tax matters,
will be passed on for the depositor by Thacher Proffitt & Wood, New York, New
York, Orrick, Herrington & Sutcliffe LLP, New York, New York or Stroock &
Stroock & Lavan LLP, as specified in the prospectus supplement.
FINANCIAL INFORMATION
The depositor has determined that its financial statements are not
material to the offering made hereby. The securities do not represent an
interest in or an obligation of the depositor. The depositor's only obligations
for a series of securities will be to repurchase certain loans on any breach of
limited representations and warranties made by the depositor, or as otherwise
provided in the applicable prospectus supplement.
ADDITIONAL INFORMATION
The depositor has filed the registration statement with the Securities
and Exchange Commission. The depositor is also subject to some of the
information requirements of the Securities Exchange Act of 1934, as amended, or
Exchange Act, and, accordingly, will file reports thereunder with the Securities
and Exchange Commission. The registration statement and the exhibits thereto,
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and reports and other information filed by the depositor under the Exchange Act
can be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at certain of its Regional Offices located as follows: Chicago
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048 and electronically through the Securities and
Exchange Commission's Electronic Data Gathering, Analysis and Retrieval System
at the Securities and Exchange Commission's Web Site (http://www.sec.gov).
Copies of Ginnie Mae's information statement and annual report can be
obtained by writing or calling the United States Department of Housing and Urban
Development, 451-7th Street S.W., Room 6210, Washington, D.C. 20410-9000
(202-708-3649). Copies of Freddie Mac's most recent offering circular for
Freddie Mac Certificates, Freddie Mac's information statement and most recent
supplement to such information statement and any quarterly report made available
by Freddie Mac can be obtained by writing or calling the Investor Relations
Department of Freddie Mac at Post Office Box 4112, Reston, Virginia 22090
(outside the Washington, D.C. metropolitan area, telephone 800-424-5401, ext.
8160; within the Washington, D.C. metropolitan area, telephone 703-759-8160).
Copies of Fannie Mae's most recent prospectus for Fannie Mae Certificates and
Fannie Mae's annual report and quarterly financial statements, as well as other
financial information, are available from the Director of Investor Relations of
Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-537-7115).
The depositor does not, and will not, participate in the preparation of Ginnie
Mae's information statements or annual reports, Freddie Mac's offering
circulars, information statements or any supplements thereto or any of its
quarterly reports or Fannie Mae's prospectuses or any of its reports, financial
statements or other information and, accordingly, makes no representations as to
the accuracy or completeness of the information set forth therein.
REPORTS TO SECURITYHOLDERS
Monthly reports which contain information concerning the trust fund for
a series of securities will be sent by or on behalf of the master servicer, the
servicer or the trustee to each holder of record of the securities of the
related series. See "Description of the Securities--Reports to Securityholders."
Reports forwarded to holders will contain financial information that has not
been examined or reported on by an independent certified public accountant. The
depositor will file with the Securities and Exchange Commission those periodic
reports relating to the trust for a series of securities as are required under
the Exchange Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the depositor to "incorporate by reference" the
information filed with the SEC by the depositor, under Section 13(a), 13(c), 14
or 15(d) of the Exchange Act, that relates to the trust fund for the securities.
This means that the depositor can disclose important information to any investor
by referring the investor to these documents. The information incorporated by
reference is an important part of this prospectus, and information filed by the
depositor with the SEC that relates to the trust fund for the securities will
automatically update and supersede this information. Documents that may be
incorporated by reference for a particular series of securities include an
insurer's financials, a certificate policy, mortgage pool policy, computational
materials, collateral term sheets, the related pooling and servicing agreement
and amendments thereto, other documents on Form 8-K and Section 13(a), 13(c), 14
or 15(d) of Exchange Act as may be required in connection with the related trust
fund.
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The depositor will provide or cause to be provided without charge to
each person to whom this prospectus and accompanying prospectus supplement is
delivered in connection with the offering of one or more classes of the related
series of securities, on written or oral request of that person, a copy of any
or all reports incorporated in this prospectus by reference, in each case to the
extent the reports relate to one or more of the classes of the related series of
securities, other than the exhibits to those documents, unless the exhibits are
specifically incorporated by reference in the documents. Requests should be
directed in writing to Residential Asset Mortgage Products, Inc., 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437, or by
telephone at (612) 832-7000.
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GLOSSARY
1998 POLICY STATEMENT--The revised supervisory statement listing the
guidelines for investments in "high risk mortgage securities", and adopted by
the Federal Reserve Board, the Office of the Comptroller of the Currency, the
FDIC, the National Credit Union Administration, or NCUA and the OTS with an
effective date of May 26, 1998.
401(C) REGULATIONS--The regulations the DOL is required to issue under
Section 401(c) of ERISA, which were published in proposed form on December 22,
1997.
ADDITIONAL BALANCE --An additional principal balance in a revolving
credit loan created by a Draw.
ADDITIONAL COLLATERAL--For an Additional Collateral Loan, (1) financial
assets owned by the borrower, which will consist of securities, insurance
policies, annuities, certificates of deposit, cash, accounts or similar assets
and/or (2) a third party guarantee, usually by a relative of the borrower, which
in turn is secured by a security interest in financial assets.
ADDITIONAL COLLATERAL LOANS--A mortgage loan with an LTV ratio at
origination in excess of 80%, but not greater than 100%, and secured by
Additional Collateral in addition to the related Mortgaged Property and in lieu
of any primary mortgage insurance.
ADDITIONAL COLLATERAL REQUIREMENT--The amount of Additional Collateral
required for any Additional Collateral Loan, which in most cases will not exceed
30% of the principal amount of that mortgage loan.
ADMINISTRATOR--In addition to or in lieu of the master servicer or
servicer for a series of notes, if specified in the accompanying prospectus
supplement, an administrator for the trust. The Administrator may be an
affiliate of the depositor, the master servicer or the servicer.
ADVANCE--As to a particular loan and any distribution date, an amount
equal to the scheduled payments of principal (other than any Balloon Amount in
the case of a Balloon Loan) and interest at the applicable pass-through rate
which were delinquent as of the close of business on the business day preceding
the determination date on the loans.
AGENCY SECURITIES--Any securities issued by Freddie Mac, Fannie Mae or
Ginnie Mae. Such Agency Securities may represent whole or partial interests in
pools of (1) loans or (2) Agency Securities. Unless otherwise set forth in the
accompanying prospectus supplement, all Ginnie Mae securities will be backed by
the full faith and credit of the United States. None of the Freddie Mac
securities or Fannie Mae securities will be backed, directly or indirectly, by
the full faith and credit of the United States. Agency Securities may be backed
by fixed or adjustable rate mortgage loans or other types of loans specified in
the accompanying prospectus supplement.
BALLOON AMOUNT--The full outstanding principal balance on a Balloon Loan
due and payable on the maturity date.
BALLOON LOANS--Loans with level monthly payments of principal and
interest based on a 30 year amortization schedule, or such other amortization
schedule as specified in the accompanying prospectus supplement, and having
original or modified terms to maturity shorter than the term of the related
amortization schedule.
BANKRUPTCY AMOUNT--The amount of Bankruptcy Losses that may be borne
solely by the subordinate securities of the related series.
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BANKRUPTCY LOSSES--A Realized Loss attributable to certain actions which
may be taken by a bankruptcy court in connection with a mortgage loan, including
a reduction by a bankruptcy court of the principal balance of or the loan rate
on a mortgage loan or an extension of its maturity.
BUY-DOWN ACCOUNT--As to a Buydown Loan, the custodial account where
Buydown Funds are deposited.
BUY-DOWN FUNDS--As to a Buydown Loan, the amount contributed by the
seller of the Mortgaged Property or another source and placed in the Buydown
Account.
BUY-DOWN LOAN--A mortgage loan, other than a closed-end home equity
loan, subject to a temporary buydown plan.
BUY-DOWN PERIOD--The early years of the term of or Buy-Down Loan when
payments will be less than the scheduled monthly payments on the mortgage loan,
the resulting difference to be made up from the Buy-Down Funds.
CALL CLASS--A class of securities under which the holder will have the
right, at its sole discretion, to terminate the related trust, resulting in
early retirement of the securities of the series.
CALL PRICE--In the case of a call with respect to a Call Class, a price
equal to 100% of the principal balance of the related securities as of the day
of that purchase plus accrued interest at the applicable pass-through rate.
CALL SECURITY--Any security evidencing an interest in a Call Class.
COMPENSATING INTEREST--For any loan that prepaid in full and, if stated
in the accompanying prospectus supplement, in part, during the related
prepayment period an additional payment made by the master servicer or the
servicer, to the extent funds are available from the servicing fee, equal to the
amount of interest at the loan rate, less the servicing fee and Excluded Spread,
if any, for that loan from the date of the prepayment to the related due date.
CONVERTIBLE MORTGAGE LOAN--ARM loans which allow the borrowers to
convert the adjustable rates on those mortgage loans to a fixed rate at one or
more specified periods during the life of the mortgage loans, in most cases not
later than ten years subsequent to the date of origination.
COOPERATIVE--For a Cooperative Loan, the corporation that owns the
related apartment building.
COOPERATIVE LOANS--Cooperative apartment loans evidenced by Cooperative
Notes secured by security interests in shares issued by Cooperatives and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the related buildings.
COOPERATIVE NOTES--A promissory note with respect to a Cooperative Loan.
CREDIT SCORES--A measurement of the relative degree of risk a borrower
represents to a lender obtained from credit reports utilizing, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience.
CREDIT UTILIZATION RATE--For any revolving credit loan, the cut-off date
principal balance of the revolving credit loan divided by the credit limit of
the related credit line agreement.
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CUSTODIAL ACCOUNT--The custodial account or accounts created and
maintained under the pooling and servicing agreement in the name of a depository
institution, as custodian for the holders of the securities, for the holders of
certain other interests in loans serviced or sold by the master servicer or the
servicer and for the master servicer or the servicer, into which the amounts
shall be deposited directly. Any such account shall be an Eligible Account.
DEBT SERVICE REDUCTION--Modifications of the terms of a loan resulting
from a bankruptcy proceeding, including a reduction in the amount of the monthly
payment on the related loan, but not any permanent forgiveness of principal.
DEFAULTED MORTGAGE LOSSES--A Realized Loss attributable to the
borrower's failure to make any payment of principal or interest as required
under the mortgage note, but not including Special Hazard Losses, Extraordinary
Losses or other losses resulting from damage to a mortgaged property, Bankruptcy
Losses or Fraud Losses.
DEFICIENT VALUATION--In connection with the personal bankruptcy of a
borrower, the difference between the outstanding principal balance of the first
and junior lien loans and a lower value established by the bankruptcy court.
DESIGNATED SELLER TRANSACTION--A transaction in which the loans are
provided by an unaffiliated or affiliated seller described in the prospectus
supplement.
DIRECT PUERTO RICO MORTGAGE--For any loan secured by mortgaged property
located in Puerto Rico, a Mortgage to secure a specific obligation for the
benefit of a specified person.
DISQUALIFIED ORGANIZATION--As used in this prospectus means:
o the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of the foregoing (but does not include
instrumentalities described in Section 168(h)(2)(D) of the Internal
Revenue Code the Federal Home Loan Mortgage Corporation),
o any organization (other than a cooperative described in Section 521
of the Internal Revenue Code) that is exempt from federal income tax,
unless it is subject to the tax imposed by Section 511 of the
Internal Revenue Code, or
o any organization described in Section 1381(a)(2)(C) of the Internal Revenue
Code.
DISTRIBUTION AMOUNT--As to a class of securities for any distribution
date will be the portion, if any, of the amount to be distributed to that class
for that distribution date of principal, plus, if the class is entitled to
payments of interest on that distribution date, interest accrued during the
related interest accrual period at the applicable pass-through rate on the
principal balance or notional amount of that class specified in the applicable
prospectus supplement, less certain interest shortfalls, which will include:
o any deferred interest added to the principal balance of the mortgage loans
and/or the outstanding balance of one or more classes of securities on the
related due date;
o any other interest shortfalls, including, without limitation,
shortfalls resulting from application of the Relief Act or similar
legislation or regulations as in effect from time to time, allocable
to securityholders which are not covered by advances or the
applicable credit enhancement; and
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o Prepayment Interest Shortfalls not covered by Compensating Interest,
in each case in an amount that is allocated to that class on the
basis set forth in the prospectus supplement.
DRAW--Money drawn by the borrower in most cases with either checks or
credit cards, subject to applicable law, on a revolving credit loan under the
related credit line agreement at any time during the Draw Period.
DRAW PERIOD--The period specified in the related credit line agreement
when a borrower on a revolving credit loan may make a Draw.
DUE PERIOD--As to any distribution date, the period starting on the
second day of the month prior to such distribution date, and ending on the first
day of the month of such distribution date or such other period as specified in
the accompanying prospectus supplement.
ELIGIBLE ACCOUNT--An account acceptable to the applicable rating agency.
ENDORSABLE PUERTO RICO MORTGAGE--As to any loan secured by mortgaged
property located in Puerto Rico, a mortgage to secure an instrument transferable
by endorsement.
ENVIRONMENTAL LIEN--A lien imposed by federal or state statute, for any
cleanup costs incurred by a state on the property that is the subject of the
cleanup costs.
EXCESS SPREAD--A portion of interest due on the loans or securities
transferred as part of the assets of the related trust as specified in the
accompanying prospectus supplement.
EXCLUDED BALANCE--That portion of the principal balance of a revolving
credit loan, if any, not included in the Trust Balance at any time, which will
include balances attributable to Draws after the cut-off date and may include a
portion of the principal balance outstanding as of the cut-off date.
EXCLUDED SPREAD--A portion of interest due on the loans or securities,
excluded from the assets transferred to the related trust.
EXTRAORDINARY LOSSES--Realized Losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
FASIT--A financial asset securitization trust as described in section
860L of the Internal Revenue Code.
FASIT REGULAR CERTIFICATES--Certificates or notes representing ownership
of one or more regular interests in a FASIT.
FUNDING ACCOUNT--An account established for the purpose of funding the
transfer of additional loans into the related trust.
FRAUD LOSS AMOUNT--The amount of Fraud Losses that may be borne solely
by the subordinate securities of the related series.
FRAUD LOSSES--A Realized Loss incurred on defaulted loans as to which
there was fraud in the origination of the loans.
GEM LOAN--A mortgage loan with monthly payments of principal and
interest based on a 30 year amortization schedule, or such other amortization
schedule as specified in the accompanying prospectus supplement, and that
provide a specified time period during which the monthly payments by the
borrower are increased and the full amount of the increase is applied to reduce
the outstanding principal balance of the related mortgage loan.
4
<PAGE>
GPM LOAN--A mortgage loan under which the monthly payments by the
borrower during the early years of the mortgage are less than the amount of
interest that would otherwise be payable thereon, with the interest not so paid
added to the outstanding principal balance of such mortgage loan.
GROSS MARGIN--For an ARM loan, the fixed percentage set forth in the
related mortgage note, which when added to the related index, provides the loan
rate for the ARM loan.
HIGH COST LOANS--Loans that are subject to the special rules, disclosure
requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994,
which were originated on or after October 1, 1995, are not loans made to finance
the purchase of the mortgaged property and have interest rates or origination
costs in excess of prescribed levels.
HOME LOANS--One- to four- family first or junior lien mortgage loans
with LTV ratios or combined LTV ratios in most cases between 100% and 125%, and
classified by the depositor as Home Loans.
INSURANCE PROCEEDS--Proceeds of any special hazard insurance policy,
bankruptcy bond, mortgage pool insurance policy, primary insurance policy and
any title, hazard or other insurance policy or guaranty covering any loan in the
pool together with any payments under any letter of credit.
ISSUE PREMIUM--As to a class of REMIC Regular Certificates, the issue
price in excess of the stated redemption price of that class.
LIQUIDATED LOAN--A defaulted loan for which the related mortgaged
property has been sold by the related trust and all recoverable Liquidation
Proceeds and Insurance Proceeds have been received.
LIQUIDATION PROCEEDS--Amounts collected by the servicer or subservicer
in connection with the liquidation of a loan, by foreclosure or otherwise.
MEXICO LOAN-- A mortgage loan secured by a beneficial interest in a
trust, the principal asset of which is residential real property located in
Mexico.
NET LOAN RATE--As to any loan, the loan rate net of servicing fees,
other administrative fees and any Excess Spread or Excluded Spread.
NONRECOVERABLE ADVANCE--Any Advance previously made which the master
servicer or the servicer has determined to not be ultimately recoverable from
Liquidation Proceeds, Insurance Proceeds or otherwise.
NOTE MARGIN--Amounts advanced by the master servicer or servicer to
cover taxes, insurance premiums or similar expenses as to any mortgaged
property. For an ARM loan, the fixed percentage set forth in the related
mortgage note, which when added to the related index, provides the loan rate for
the ARM loan.
5
<PAGE>
PARTIES IN INTEREST--For an ERISA plan, persons who are either "parties
in interest" within the meaning of ERISA or "disqualified persons" within the
meaning of the Internal Revenue Code, because they have specified relationships
to the ERISA plan.
PASS-THROUGH ENTITY--Any regulated investment company, real estate
investment trust, trust, partnership or other entities described in Section
860E(e)(6) of the Internal Revenue Code. In addition, a person holding an
interest in a pass-through entity as a nominee for another person will, for that
interest, be treated as a pass-through entity.
PAYMENT ACCOUNT--An account established and maintained by the master
servicer or the servicer in the name of the trustee for the benefit of the
holders of each series of securities, for the disbursement of payments on the
loans evidenced by each series of securities.
PERMITTED INVESTMENTS--United States government securities and other
investment grade obligations specified in the related pooling and servicing
agreement.
PLEDGED ASSET MORTGAGE LOANS--Mortgage loans that have LTV ratios at
origination of up to 100% and are secured, in addition to the related mortgaged
property, by Pledged Assets.
PLEDGED ASSETS--As to a Pledged Asset Mortgage Loan, (1) financial
assets owned by the borrower, which will consist of securities, insurance
policies, annuities, certificates of deposit, cash, accounts or similar assets
and/or (2) a third party guarantee, usually by a relative of the borrower, which
in turn is secured by a security interest in financial assets or residential
property owned by the guarantor.
PREPAYMENT INTEREST SHORTFALL--For a loan that is subject to a borrower
prepayment or liquidation, the amount that equals the difference between a full
month's interest due for that mortgage loan and the amount of interest paid or
recovered with respect thereto.
PRINCIPAL PREPAYMENTS--Any principal payments received for a loan, in
advance of the scheduled due date and not accompanied by a payment of interest
for any period following the date of payment.
QUALIFIED INSURER--As to a mortgage pool insurance policy, special
hazard insurance policy, bankruptcy policy, financial guaranty insurance policy
or surety bond, an insurer qualified under applicable law to transact the
insurance business or coverage as applicable.
REALIZED LOSS--As to any defaulted loan that is finally liquidated, the
amount of loss realized, if any, will equal the portion of the Stated Principal
Balance remaining after application of all amounts recovered, net of amounts
reimbursable to the master servicer or the servicer for related Advances and
expenses, towards interest and principal owing on the loan. For a loan the
principal balance of which has been reduced in connection with bankruptcy
proceedings, the amount of the reduction will be treated as a Realized Loss.
REGULAR CERTIFICATES--FASIT Regular Certificates or REMIC Regular Certificates.
REMIC--A real estate mortgage investment conduit as described in section
860D of the Internal Revenue Code.
REMIC REGULAR CERTIFICATES--Certificates or notes representing ownership
of one or more regular interests in a REMIC.
6
<PAGE>
REMIC RESIDUAL CERTIFICATE--A Certificate representing an ownership
interest in a residual interest in a REMIC within the meaning of section 860D of
the Internal Revenue Code.
REO LOAN--A loan where title to the related mortgaged property has been
obtained by the trustee or its nominee on behalf of securityholders of the
related series.
REPAYMENT PERIOD--For a revolving credit loan, the period from the end
of the related Draw Period to the related maturity date.
SENIOR PERCENTAGE--At any given time, the percentage of the outstanding
principal balances of all of the securities evidenced by the senior securities,
determined in the manner described in the accompanying prospectus supplement.
SERVICING ADVANCES--Amounts advanced on any loan to cover taxes,
insurance premiums or similar expenses.
SPECIAL HAZARD AMOUNT--The amount of Special Hazard Losses that may be
allocated to the subordinate securities of the related series.
SPECIAL HAZARD LOSSES--A Realized Loss incurred, to the extent that the
loss was attributable to (i) direct physical damage to a mortgaged property
other than any loss of a type covered by a hazard insurance policy or a flood
insurance policy, if applicable, and (ii) any shortfall in insurance proceeds
for partial damage due to the application of the co-insurance clauses contained
in hazard insurance policies. The amount of the Special Hazard Loss is limited
to he lesser of the cost of repair or replacement of the mortgaged property; any
loss above that amount would be a Defaulted Mortgage Loss or other applicable
type of loss. Special Hazard Losses does not include losses occasioned by war,
civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
chemical contamination or waste by the borrower.
SPECIAL SERVICER--A special servicer named under the pooling and
servicing agreement for a series of securities, which will be responsible for
the servicing of delinquent loans.
STATED PRINCIPAL BALANCE--As to any loan as of any date of
determination, its principal balance as of the cut-off date, after application
of all scheduled principal payments due on or before the cut-off date, whether
received or not, reduced by all amounts allocable to principal that are
distributed to securityholders on or before the date of determination, and as
further reduced to the extent that any Realized Loss has been allocated to any
securities on or before that date.
SUBORDINATE AMOUNT--A specified portion of subordinated distributions
with respect to the loans, allocated to the holders of the subordinate
securities as set forth in the accompanying prospectus supplement.
SUBSERVICING ACCOUNT--An account established and maintained by a
subservicer which is acceptable to the master servicer or the servicer.
TAX-EXEMPT INVESTOR--Tax-qualified retirement plans described in Section
401(a) of the Internal Revenue Code and on individual retirement accounts
described in Section 408 of the Internal Revenue Code.
TAX-FAVORED PLANS--An ERISA plan which is exempt from federal income
taxation under Section 501(a) of the Internal Revenue Code or is an individual
retirement plan or annuity described in Section 408 of the Internal Revenue
Code.
7
<PAGE>
TITLE I--Title I of the National Housing Act.
TRUST BALANCE--A specified portion of the total principal balance of
each revolving credit loan outstanding at any time, which will consist of all or
a portion of the principal balance thereof as of the cut-off date minus the
portion of all payments and losses thereafter that are allocated to the Trust
Balance, and will not include any portion of the principal balance attributable
to Draws made after the cut-off date.
8
<PAGE>
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED ________________, 1999
PROSPECTUS SUPPLEMENT DATED _____________, ___ (TO PROSPECTUS DATED ________,___
)
$___________
RAMP SERIES 200_-GMACM TRUST
ISSUER
[GMAC MORTGAGE CORPORATION]
SELLER AND SERVICER
RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
DEPOSITOR
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES,
SERIES 200_-GMACM_
THE TRUST
The trust will hold a pool of one- to four-family residential first mortgage
loans and junior mortgage loans.
OFFERED CERTIFICATES
The trust will issue these classes of certificates that are offered under this
prospectus supplement:
o [3] classes of Class A Certificates
CREDIT ENHANCEMENT
Credit enhancement for all of these certificates will be provided by
subordinated certificates, overcollateralization represented by the excess of
the balance of the mortgage loans over the balance of the Class A Certificates,
[and a financial guaranty insurance policy issued by _______________].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS 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.
__________ will offer the Class A Certificates to the public at varying
prices to be determined at the time of sale. The proceeds to the depositor from
the sale of the underwritten certificates will be APPROXIMATELY ___% of the
principal balance of the underwritten certificates plus accrued interest, before
deducting expenses.
[NAME OF UNDERWRITER]
UNDERWRITER
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS
We provide information to you about the offered certificates in two separate
documents that provide progressively more detail:
o the prospectus, which provides general information, some of which may not
apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your
series of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THIS PROSPECTUS SUPPLEMENT DIFFERS
FROM THE RELATED DESCRIPTION IN THE PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
The depositor's principal offices are located at 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437 and its telephone number is (612)
832-7000.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<PAGE>
SUMMARY 4
<S> <C>
RISK FACTORS.............................11
Risk of Loss...........................11
Loss Mitigation Practices..............14
Limited Obligations....................14
Liquidity Risks........................14
Special Yield and Prepayment
Considerations......................15
INTRODUCTION.............................18
DESCRIPTION OF THE MORTGAGE POOL.........18
General................................18
Mortgage Pool Characteristics..........19
Underwriting Standards.................31
[Primary Mortgage Insurance and Primary
Hazard Insurance....................33
Additional Information.................34
THE SELLER AND SERVICER..................34
General................................34
Delinquency and Loss Experience of the
Servicer's Portfolio................35
DESCRIPTION OF THE CERTIFICATES..........36
General................................36
Book-Entry Registration of Certain of
the Offered Certificates............38
Glossary of Terms......................39
Distributions..........................43
Interest Distributions.................43
Determination of LIBOR.................44
Principal Distributions on the Class
A Certificates......................45
Overcollateralization Provisions.......47
Financial Guaranty Insurance Policy....48
Allocation of Losses; Subordination....50
Advances...............................53
YEAR 2000 CONSIDERATIONS.................53
Overview of the Year 2000 Issue........53
Risks related to Y2K...................53
THE FINANCIAL GUARANTY INSURER...........54
CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS......................54
General................................54
POOLING AND SERVICING AGREEMENT..........61
General................................61
Servicing and Other Compensation and
Payment of Expenses.................61
[Refinancing of Senior Lien............62
Collection and Liquidation Practices;
Loss Mitigation.....................62
Voting Rights..........................62
Termination............................62
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.63
METHOD OF DISTRIBUTION...................65
LEGAL OPINIONS...........................66
EXPERTS 66
RATINGS 67
LEGAL INVESTMENT.........................67
ERISA CONSIDERATIONS.....................68
</TABLE>
<PAGE>
SUMMARY
The following summary is a very general overview of the offered
certificates and does not contain all of the information that you should
consider in making your investment decision. To understand all of the terms of
the offered certificates, you should read carefully this entire document and the
prospectus.
<TABLE>
<S> <C>
Issuer RAMP Series 200_- GMACM_ Trust
Title of securities RAMP Mortgage Asset-Backed Pass-Through Certificates, Series 200_-GMACM_.
Depositor Residential Asset Mortgage Products, Inc., an affiliate of Residential
Funding Corporation.
Servicer and Seller [GMAC Mortgage Corporation, a Pennsylvania corporation]
TRUSTEE ___________________________________.
FINANCIAL GUARANTY INSURER ___________________________________.
MORTGAGE POOL _______ adjustable rate mortgage loans with an
aggregate principal BALANCE OF APPROXIMATELY
$____ as of the cut-off date, secured by first
liens and junior liens on one- to
four-family residential properties.
CUT-OFF DATE ________ 1,__ .
CLOSING DATE ON OR ABOUT , .
DISTRIBUTION DATES BEGINNING ON___________ 25, _____________ and thereafter on the
25th of each month or, if the 25th is not a business day, on the
next business day.
Scheduled final distribution date Class A-1 Certificates:________ 25, ____.
Class A-2 Certificates:________ 25, ____.
Class A-3 Certificates:________ 25, ____.
The actual final distribution date could be
substantially earlier.
Form of certificates Book-entry.
SEE "DESCRIPTION OF THE
CERTIFICATES--BOOK-ENTRY REGISTRATION OF
CERTAIN OF THE OFFERED CERTIFICATES" IN THIS
PROSPECTUS SUPPLEMENT.
S-4
<PAGE>
Minimum denominations $25,000.
Legal investment When issued, the Class A
Certificates will not be "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984.
SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS
SUPPLEMENT AND "LEGAL INVESTMENT MATTERS" IN
THE PROSPECTUS.
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
OFFERED CERTIFICATES
- -------------------------------------------------------------------------------------------------
- -------------------- ---------------- ------------------- ---------------- ----------------------
INITIAL INITIAL RATING
PASS-THROUGH CERTIFICATE (___/____)
CLASS RATE PRINCIPAL BALANCE DESIGNATIONS
- -------------------------------------------------------------------------------------------------
CLASS A CERTIFICATES:
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
[A-1 ADJUSTABLE RATE $ AAA/AAA Senior/Adjustable
Rate]
- -------------------- ---------------- ------------------- ---------------- ----------------------
[A-2 % $ AAA/AAA Senior/Fixed Rate]
-------- -----------
- -------------------- ---------------- ------------------- ---------------- ----------------------
[A-3 % $ AAA/AAA Senior Lockout/Fixed
-------- -----------
Rate]
- -------------------------------------------------------------------------------------------------
Total Class A Certificates: $
- -------------------------------------------------------------------------------------------------
NON-OFFERED CERTIFICATES
- -------------------------------------------------------------------------------------------------
CLASS SB AND CLASS R CERTIFICATES:
- --------------------- --------------- ------------------- ---------------- ----------------------
SB NA $ NA Subordinate
-----------
- --------------------- --------------- ------------------- ---------------- ----------------------
R NA $ 0 NA Subordinate
- -------------------------------------------------------------------------------------------------
Total Class SB and Class R Certificates: $______________
- -------------------------------------------------------------------------------------------------
Total offered and
non-offered certificates: $______________
OTHER INFORMATION:
CLASS A-1:
ADJUSTABLE RATE: INITIAL FORMULA MAXIMUM
________________________________________________________________________________________
CLASS A-1: % One-Month LIBOR + weighted average net
_______ % mortgage rate on the
mortgage loans
</TABLE>
S-6
<PAGE>
THE TRUST
The depositor will establish a trust with respect to the Series 200_-GMACM_
Certificates under a pooling and servicing agreement. On the closing date, the
depositor will deposit the pool of mortgage loans described in this prospectus
supplement into the trust. Each certificate will represent a partial ownership
interest in the trust.
The trust will also include credit enhancement for the Class A Certificates in
the form of a financial guaranty insurance policy provided by _____________.
THE MORTGAGE POOL
The mortgage loans to be deposited into the trust have the following
characteristics as of the cut-off date:
[insert table]
[The interest rate on the mortgage loans will adjust on each adjustment date to
equal the sum of Six-Month LIBOR and the note margin on the mortgage, subject to
a maximum and minimum interest rate.
The mortgage loans were originated using less restrictive underwriting standards
than the underwriting standards applied by some other first and junior mortgage
loan purchase programs, including the programs of Fannie Mac, Freddie Mac or the
depositor's affiliate, Residential Funding Mortgage Securities I, Inc.]
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE POOL SEE "DESCRIPTION OF THE
MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
DISTRIBUTIONS ON THE OFFERED CERTIFICATES
AMOUNT AVAILABLE FOR MONTHLY DISTRIBUTION. On each monthly distribution date,
the trustee will make distributions to investors. The amount available for
distribution will include:
o collections of monthly payments on the mortgage loans, including
prepayments and other unscheduled COLLECTIONS PLUS
O ADVANCES FOR DELINQUENT PAYMENTS MINUS
o the fees and expenses of the subservicers and the servicer, including
reimbursement for advances [MINUS]
O [THE PREMIUM PAID TO THE FINANCIAL GUARANTY INSURER].
SEE "DESCRIPTION OF THE CERTIFICATES--GLOSSARY OF TERMS--AVAILABLE DISTRIBUTION
AMOUNT" IN THIS PROSPECTUS SUPPLEMENT.
PRIORITY OF DISTRIBUTIONS. Distributions on the offered certificates will be
made from available amounts as follows:
o Distribution of interest to the Class A Certificates
o Distributions of principal to the Class A Certificates
o Payment to servicer for certain unreimbursed advances
o [Reimbursement to the financial guaranty insurer for payments made by the
financial guaranty insurer to the Class A Certificates]
o Payments of excess interest payments on the mortgage loans to make principal
payments on the Class A Certificates, until the amount of
overcollateralization reaches the required amount
o Distributions of interest in respect of prepayment interest shortfalls on
the Class A Certificates
o Distribution of remaining funds to the Class SB and Class R Certificates
INTEREST DISTRIBUTIONS. The amount of interest owed to each class of Class A
Certificates on each distribution date will equal:
S-7
<PAGE>
O THE PASS-THROUGH RATE FOR THAT CLASS OF CERTIFICATES MULTIPLIED BY
o the principal balance of that class of certificates as of the day
immediately prior to the related DISTRIBUTION DATE MULTIPLIED BY
o 1/12, in the case of the fixed-rate certificates or the actual number of
days in the interest accrual PERIOD DIVIDED BY 360, IN THE CASE OF THE
ADJUSTABLE RATE CERTIFICATES MINUS
o the share of some types of interest shortfalls allocated to that class.
SEE "DESCRIPTION OF THE CERTIFICATES--INTEREST DISTRIBUTIONS" IN THIS PROSPECTUS
SUPPLEMENT.
ALLOCATIONS OF PRINCIPAL. Principal distributions on the certificates will be
allocated among the various classes of offered certificates as described in this
prospectus supplement. Until the required amount of OVERCOLLATERALIZATION IS
REACHED, ALL principal payments on the mortgage loans will be distributed among
the Class A Certificates, unless the Class A Certificates are no longer
outstanding. Not all outstanding Class A Certificates will receive principal on
each distribution date.
In addition, the Class A Certificates will receive a distribution in respect of
principal, to the extent of any excess interest payments on the mortgage loans
available to cover losses and then to increase the amount of
overcollateralization until the required amount of overcollateralization is
reached. In addition, the Class A Certificates will receive a distribution of
principal from the financial guaranty insurance policy to cover losses on the
mortgage loans allocated to the Class A Certificates.
SEE "DESCRIPTION OF THE CERTIFICATES--PRINCIPAL DISTRIBUTIONS ON THE CLASS A
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
CREDIT ENHANCEMENT
The credit enhancement for the benefit of the certificates consists of:
EXCESS INTEREST. Because more interest is paid by the mortgagors than is
necessary to pay the interest on the certificates each month, there will be
excess interest. Some of this excess interest may be used to protect the
certificates against some losses, by making an additional payment of principal
up to the amount of the losses.
OVERCOLLATERALIZATION. Any excess interest not used to cover interest shortfalls
or current period losses will be paid as principal on the Class A Certificates
to reduce the principal balance of the Class A Certificates below the aggregate
principal balance of the mortgage loans. The excess amount of the balance of the
mortgage loans represents overcollateralization, which may absorb some losses on
the mortgage loans, if not covered by excess interest. If the level of
overcollateralization falls below what is required, the excess interest
described above will also be paid to the certificates as principal. This will
reduce the principal balance of the certificates faster than the principal
balance of the mortgage loans so that the required level of
overcollateralization is reached.
SEE "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF LOSSES; SUBORDINATION" IN
THIS PROSPECTUS SUPPLEMENT.
[THE FINANCIAL GUARANTY INSURANCE POLICY
_____________ will issue a financial guaranty insurance policy as a means of
providing additional credit enhancement for the Class A Certificates. Under the
policy, the financial guaranty insurer will pay an amount that will cover any
shortfalls in amounts available to pay the interest distribution amount for the
Class A Certificates on any distribution date, the principal portion of any
losses on the mortgage loans allocated to the Class A Certificates and any
unpaid certificate principal balance of the Class A Certificates on the final
distribution date. The financial guaranty insurance policy will not provide
coverage for prepayment interest shortfalls.]
[SEE "DESCRIPTION OF THE CERTIFICATES--FINANCIAL GUARANTY INSURANCE POLICY" AND
"THE FINANCIAL GUARANTY INSURER" IN THIS PROSPECTUS SUPPLEMENT.]
S-8
<PAGE>
ADVANCES
For any month, if the servicer does not receive the full scheduled payment on a
mortgage loan, the servicer will advance funds to cover the amount of the
scheduled payment that was not made. However, the servicer will advance funds
only if it determines that the advance will be recoverable from future payments
or collections on that mortgage loan.
SEE "DESCRIPTION OF THE CERTIFICATES--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT.
OPTIONAL TERMINATION
On any distribution date on which the principal balances of the mortgage loans
is less than 10% of their principal balances as of the cut-off date, the
servicer or the depositor will have the option to:
o purchase from the trust all remaining mortgage loans, causing an early
retirement of the certificates;
OR
o purchase all the certificates.
Under either type of optional purchase, holders of the outstanding certificates
will receive the outstanding principal balance of the certificates in full with
accrued interest. However, no purchase of the mortgage loans or certificates
will be permitted if it would result in a draw under the policy unless the
financial guaranty insurer consents to the termination. In either case, there
will be no reimbursement of principal reductions or related interest that
resulted from losses allocated to the certificates.
SEE "POOLING AND SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT
AND "THE AGREEMENTS--TERMINATION; RETIREMENT OF SECURITIES" IN THE PROSPECTUS.
RATINGS
When issued, the offered certificates will receive ratings which are not lower
than those listed in the table ON PAGE S- of this prospectus supplement. The
ratings on the offered certificates address the likelihood that holders of the
offered certificates will receive all distributions on the underlying mortgage
loans to which they are entitled. A security rating is not a recommendation to
buy, sell or hold a security and may be changed or withdrawn at any time by the
assigning rating agency. The ratings also do not address the rate of principal
prepayments on the mortgage loans. For example, the rate of prepayments, if
different than originally anticipated, could adversely affect the yield realized
by holders of the offered certificates.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
LEGAL INVESTMENT
When issued, the Class A Certificates will not be "mortgage related securities"
for purposes of SMMEA. You should consult your legal advisors in determining
whether and to what extent the offered certificates constitute legal investments
for you.
SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT FOR IMPORTANT INFORMATION
CONCERNING POSSIBLE RESTRICTIONS ON OWNERSHIP OF THE OFFERED CERTIFICATES BY
REGULATED INSTITUTIONS.
ERISA CONSIDERATIONS
The Class A Certificates may be considered eligible for purchase by persons
investing assets of employee benefit plans or individual retirement accounts.
Persons investing assets of such plans or accounts should consult with their
counsel before purchasing the notes.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
TAX STATUS
S-9
<PAGE>
For federal income tax purposes, the depositor will elect to treat the trust as
two real estate mortgage investment conduits. The certificates, other than the
Class R Certificates, will represent ownership of regular interests in the trust
and will be treated as representing ownership of debt for federal income tax
purposes. You will be required to include in income all interest and original
issue discount, if any, on such certificates in accordance with the accrual
method of accounting regardless of your usual methods of accounting. For federal
income tax purposes, each of the Class R Certificates will be the sole residual
interest in one of the two real estate mortgage investment conduits.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
INVESTING IN THE OFFERED CERTIFICATES, INCLUDING IMPORTANT INFORMATION REGARDING
THE TAX TREATMENT OF THE CLASS R CERTIFICATES, SEE "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
S-10
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all investors.
In particular, you should not purchase any class of offered certificates unless
you understand the prepayment, credit, liquidity and market risks associated
with that class.
The offered certificates are complex securities. You should possess,
either alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
prospectus in the context of your financial situation and tolerance for risk.
You should carefully consider, among other things, the following factors
in connection with the purchase of the offered certificates:
RISK OF LOSS
<TABLE>
<S> <C>
THE RETURN ON YOUR Losses on the mortgage loans may occur due to a wide variety of
CERTIFICATES MAY BE causes, including a decline in real estate values, and adverse
AFFECTED BY LOSSES ON THE changes in the borrower's financial condition. A decline in real
MORTGAGE LOANS, WHICH COULD estate values or economic conditions nationally or in the regions
OCCUR DUE TO A VARIETY OF where the mortgaged properties are located may increase the risk
CAUSES, AND ARE MORE LIKELY of losses on the mortgage loans. [Special risks for specific
BECAUSE A SIGNIFICANT loan types, such as negative amortization or escalating payments,
NUMBER OF MORTGAGE LOANS will be disclosed if material to an individual offering.]
ARE SECURED BY JUNIOR LIENS
ON THE MORTGAGED PROPERTY. [______% of the mortgage loans included in the mortgage loan pool
are secured by second mortgages or deeds of trust.
Proceeds from liquidation of the property will be
available to satisfy the mortgage loans only if
the claims of any senior mortgages have been
satisfied in full. When it is uneconomical to
foreclose on the mortgaged property or engage in
other loss mitigation procedures, the servicer may
write off the entire outstanding balance of the
mortgage loan as a bad debt. The foregoing risks
are particularly applicable to mortgage loans
secured by second liens that have high combined
loan-to-value ratios or low junior ratios because
it is comparatively more likely that the servicer
would determine foreclosure to be uneconomical. As
of the cut-off date, the weighted average combined
loan-to-value ratio of the mortgage loans is
______%, and approximately ______% of the mortgage
loans will have combined loan-to-value ratios in
excess of ______%.]
[THE UNDERWRITING STANDARDS [The underwriting standards under which the junior mortgage loans
FOR THE JUNIOR MORTGAGE were underwritten are analogous to credit lending, rather than
LOANS CREATE GREATER RISKS mortgage lending, since underwriting decisions were based
TO YOU, COMPARED TO THOSE primarily on the borrower's credit history and capacity to repay
FOR FIRST LIEN LOANS.] rather than on the value of the collateral upon foreclosure. The
S-11
<PAGE>
underwriting standards allow loans to be approved
with combined LOAN-TO-VALUE RATIOS OF UP TO 125%.
SEE "DESCRIPTION OF THE MORTGAGE
POOL--UNDERWRITING STANDARDS" IN THIS PROSPECTUS
SUPPLEMENT. Because of the relatively high
combined loan-to-value ratios of the mortgage
loans and the fact that a significant number of
the mortgage loans are secured by junior liens,
losses on the mortgage loans will likely be higher
than on traditional first lien mortgage loans.]
SOME OF THE MORTGAGE LOANS INCLUDED IN THE TRUST ARE EITHER CURRENTLY DELINQUENT
OR HAVE BEEN DELINQUENT IN THE PAST, WHICH MAY INCREASE THE RISK OF LOSS ON THE
MORTAGE LOANS.
As of the cut-off date, ___% of the mortgage loans are 30 to
59 days delinquent in payment of principal and interest.
Other mortgage loans may have been delinquent in the past.
Mortgage OR loans with a history of delinquencies are more
likely to experience delinquencies in the future, even if
the mortgage loans are current as of the cut-off date.
SEE "DESCRIPTION OF THE MORTGAGE POOL--MORTGAGE
POOL CHARACTERISTICS" AND --UNDERWRITING
STANDARDS" IN THIS PROSPECTUS SUPPLEMENT. FOR A
DESCRIPTION OF THE METHODOLOGY USED TO CATEGORIZE
MORTGAGE LOANS AS DELINQUENT, SEE " THE SELLER AND
SERVICER--DELINQUENCY AND LOSS EXPERIENCE OF THE
SERVICER'S PORTFOLIO" IN THIS PROSPECTUS
SUPPLEMENT.
[ORIGINATION DISCLOSURE [[ ]% of the mortgage loans included in the mortgage pool
PRACTICES FOR THE MORTGAGE are subject to special rules, disclosure requirements and other
LOANS COULD CREATE regulatory provisions because they are high cost loans.
LIABILITIES THAT MAY AFFECT Purchasers or assignees of these high cost loans, could be
THE RETURN ON YOUR exposed to all claims and defenses that the mortgagors could
CERTIFICATES.] assert against the originators of the mortgage loans. Remedies
available to the mortgagor include monetary penalties, as well as
recission rights if the appropriate disclosures were not given as
REQUIRED. SEE "CERTAIN LEGAL ASPECTS OF LOANS--THE MORTGAGE
LOANS--ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON
LENDERS" IN THE PROSPECTUS].
THE RETURN ON YOUR One risk of investing in mortgage-backed securities is created by
CERTIFICATES MAY BE any concentration of the related properties in one or more
PARTICULARLY SENSITIVE TO GEOGRAPHIC REGIONS. APPROXIMATELY % of the cut-off date
CHANGES IN REAL ESTATE principal balance of the mortgage loans are located in
MARKETS IN SPECIFIC AREAS. [California]. If the regional economy or housing market weakens
in [California], or in any other region having a
significant concentration of properties underlying
the mortgage loans, the mortgage loans in that
region may experience high rates of loss and
delinquency, resulting in losses to Class A
Certificateholders. A region's economic condition
and housing market may be adversely affected by a
variety of events, including natural disasters
such as earthquakes, hurricanes, floods and
eruptions, and civil disturbances, including
riots. [Concentrations material to an individual
offering will be disclosed.]
S-12
<PAGE>
SOME OF THE MORTGAGE LOANS PROVIDE FOR LARGE PAYMENTS AT MATURITY.
Approximately ___% of the mortgage loans (based on principal
balances) are not fully amortizing over their terms to
maturity and, thus, will require substantial principal
payments (i.e., a balloon amount) at their stated maturity.
Mortgage loans which require payment of a balloon amount
involve a greater degree of risk because the ability of a
mortgagor to pay a balloon amount typically will depend upon
the mortgagor's ability either to timely refinance the loan
or to sell the related mortgaged property.
SEE "DESCRIPTION OF THE MORTGAGE POOL" IN THIS PROSPECTUS
SUPPLEMENT.
THE RETURN ON YOUR The only credit enhancement for the Class A Certificates will be:
CERTIFICATES WILL BE o the excess interest payments on the mortgage loans;
REDUCED IF LOSSES EXCEED o overcollateralization represented by the excess of the
THE CREDIT ENHANCEMENT balance of the mortgage loans over the balance of the Class A
AVAILABLE TO YOUR Certificates; and
CERTIFICATES. [o a financial guaranty insurance policy issued by
_____________.]
THE RETURN ON YOUR Mortgage loans similar to those included in the mortgage loan
CERTIFICATES MAY BE REDUCED pool have been originated for a limited period of
time. During IN AN ECONOMIC DOWNTURN. this time, economic conditions nationally
and in most regions of
the country have been generally favorable.
However, a deterioration in economic conditions
could adversely affect the ability and willingness
of mortgagors to repay their loans. No prediction
can be Made as to the effect of an economic
downturn on the rate of delinquencies and losses
on the mortgage loans.
[THE RELOADING OF DEBT [With respect to mortgage loans which were used for debt
COULD INCREASE YOUR RISK.] consolidation, there can be no assurance that the
borrower will
not incur further debt. This reloading of debt
could impair the ability of borrowers to service
their debts, which in turn could result in higher
rates of delinquency and loss on the mortgage
loans.]
THE VALUE OF YOUR CERTIFICATES MAY BE REDUCED IF LOSSES ARE HIGHER THAN EXPECTED.
If the performance of the mortgage loans is substantially
worse Cthan assumed by the rating agencies, the ratings of
any class of the certificates may be lowered in the future.
This would probably reduce the value of those certificates.
Neither the depositor, the servicer nor any other entity
will have any obligation to supplement any credit
enhancement, or to take any other action to maintain any
rating of the certificates.
SEE "SUMMARY--CREDIT ENHANCEMENT" AND "DESCRIPTION
OF THE CERTIFICATES--ALLOCATION OF LOSSES;
SUBORDINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-13
<PAGE>
LOSS MITIGATION PRACTICES
THE RELEASE OF A LIEN MAY
INCREASE YOUR RISK. [The servicer may use a wide variety of practices to limit losses
on the mortgage loans. The pooling and servicing agreement
permits the servicer to release the lien on a limited number of
mortgaged properties securing the mortgage loans, if the mortgage
loan is current in payment. See "Pooling and Servicing
Agreement--Refinancing of Senior Lien" and "--Collection and
Liquidation Practices; Loss Mitigation" in this prospectus
supplement.]
LIMITED OBLIGATIONS
PAYMENTS ON THE MORTGAGE The certificates represent interests only in the RAMP Series
LOANS, TOGETHER WITH THE 200_-GMACM_ Trust. Credit enhancement includes subordinated
FINANCIAL GUARANTY certificates, overcollateralization, [and a financial guaranty
INSURANCE POLICY, ARE THE insurance policy]. The certificates do not represent an interest
PRIMARY SOURCE OF PAYMENTS in or obligation of the depositor, the servicer or any of their
ON YOUR CERTIFICATES. affiliates. None of the depositor, the servicer or any of their
affiliates will have any obligation to replace or
supplement the credit enhancement, or to take any
other action to maintain any rating of the
certificates. If proceeds from the assets of the
RAMP Series 200_-GMACM_ Trust are not sufficient
to make all payments provided for under the
pooling and servicing agreement, investors will
have no recourse to the depositor, the servicer or
any of its affiliates.
LIQUIDITY RISKS
YOU MAY HAVE TO HOLD YOUR A secondary market for your certificates may not develop. Even
CERTIFICATES TO MATURITY IF if a secondary market does develop, it may not continue or it may
THEIR MARKETABILITY IS be illiquid. Neither the underwriter nor any other person will
LIMITED. have any obligation to make a secondary market in your
certificates. Illiquidity means you may not be
able to find a buyer to buy your securities
readily or at prices that will enable you to
realize a desired yield. Illiquidity can have a
severe adverse effect on the market value of your
certificates.
Any class of offered certificates may experience
illiquidity, although typically illiquidity is
more likely for classes that are especially
sensitive to prepayment, credit or interest rate
risk, or that have been structured to meet the
investment requirements of limited categories of
investors.
S-14
<PAGE>
SPECIAL YIELD AND
PREPAYMENT CONSIDERATIONS
THE YIELD TO MATURITY ON The yield to maturity on each class of offered certificates will
YOUR CERTIFICATES WILL VARY depend on a variety of factors, including:
DEPENDING ON THE RATE OF
PREPAYMENTS. - the rate and timing of principal payments on the mortgage
loans, including prepayments, defaults and liquidations, and
repurchases due to breaches of representations or warranties;
- the pass-through rate for that class;
- interest shortfalls due to mortgagor prepayments; and
- the purchase price of that class.
The rate of prepayments is one of the most
important and least predictable of these factors.
In general, if you purchase a certificate at a
price higher than its outstanding principal
balance and principal distributions on your
certificate occur faster than you assumed at the
time of purchase, your yield will be lower than
you anticipated. Conversely, if you purchase a
certificate at a price lower than its outstanding
principal balance and principal distributions on
that class occur more slowly than you assumed at
the time of purchase, your yield will be lower
than you anticipated.
THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS WILL VARY DEPENDING ON FUTURE
MARKET CONDITIONS, AND OTHER FACTORS.
Because mortgagors can typically prepay their mortgage loans
at any time, the rate and timing of principal distributions
on the offered certificates are highly uncertain. Typically,
when market interest rates increase, borrowers are less
likely to prepay their mortgage loans. This could result in
a slower return of principal to you at a time when you might
have been able to reinvest your funds at a higher rate of
interest than the pass-through rate on your class of
certificates. On the other hand, when market interest rates
decrease, borrowers are typically more likely to prepay
their mortgage loans. This could result in a faster return
of principal to you at a time when you might not be able to
reinvest your funds at an interest rate as high as the
pass-through rate on your class of certificates.
S-15
<PAGE>
[Approximately ___% of the mortgage loans permit
the mortgagor to convert the adjustable rate on
the mortgage loan to a fixed rate. Upon the
conversion, the subservicer or the servicer will
repurchase the mortgage loan, which will have the
same effect as a prepayment in full. Mortgagors
may be more likely to exercise their conversion
options when interest rates are rising. As a
result, the certificates may receive greater
prepayments at a time when prepayments would not
normally be expected.]
Refinancing programs, which may involve soliciting
all or some of the mortgagors to refinance their
mortgage loans, may increase the rate of
prepayments on the mortgage loans . These
refinancing programs may be offered by the
servicer or its affiliates, and may include
streamlined documentation programs as well as
programs under which a mortgage loan is modified
to reduce the interest rate.
SEE "MATURITY AND PREPAYMENT CONSIDERATIONS" IN
THE PROSPECTUS.
[______% of the mortgage loans provide for payment
of a prepayment charge. Prepayment charges may
reduce the rate of prepayment on the mortgage
loans until the end of the period DURING WHICH
SUCH PREPAYMENT CHARGES APPLY. SEE "DESCRIPTION OF
THE MORTGAGE POOL--MORTGAGE POOL CHARACTERISTICS"
IN THIS PROSPECTUS SUPPLEMENT AND "MATURITY AND
PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS.]
THE YIELD ON YOUR CERTIFICATES WILL BE AFFECTED BY THE SPECIFIC CHARACTERISTICS
THAT APPLY TO THAT CLASS, DISCUSSED BELOW.
The offered certificates of each class have different yield
considerations and different sensitivities to the rate and timing
of principal distributions. The following is a general discussion
of yield considerations and prepayment sensitivities of each
class.
SEE "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" IN THIS
PROSPECTUS SUPPLEMENT.
CLASS A CERTIFICATES The Class A Certificates are subject to various priorities for
payment of principal. Distributions of principal on the Class A
Certificates with an earlier priority of payment will be affected
by the rates of prepayment of the mortgage loans early in the
life of the mortgage pool. Those classes of Class A Certificates
with a later priority of payment will be affected by the rates of
prepayment of the mortgage loans experienced both before and
after the commencement of principal distributions on those
classes.
SEE "DESCRIPTION OF THE CERTIFICATES--PRINCIPAL
DISTRIBUTIONS ON THE CLASS A CERTIFICATES" IN THIS
PROSPECTUS SUPPLEMENT.
S-17
<PAGE>
[CLASS A-1 CERTIFICATES The interest rate on the Class
A-1 certificates will vary with One-Month LIBOR.
Therefore, the yield to investors on the Class A-1
certificates will be sensitive to fluctuations in
the level of LIBOR. Investors should consider
whether this volatility is suitable to their
investment needs.]
The Class A-1 certificates may not always receive
interest at a rate equal to One-Month LIBOR plus
the applicable margin. If the weighted average of
the net mortgage rates on the mortgage loans is
less than One-Month LIBOR plus the applicable
margin, the interest rate on the Class A-1
certificates will be reduced to that weighted
average rate. Thus, the yield to investors in the
Class A-1 certificates will be sensitive to
fluctuations in the level of One-Month LIBOR and
may be adversely affected by the application of
the weighted average net mortgage rate on the
related mortgage loans . The prepayment of the
mortgage loans with higher net mortgage rates may
result in a lower weighted average net mortgage
rate. If on any distribution date the application
of the weighted average net mortgage rate results
in an interest payment lower than One-Month LIBOR
plus the applicable margin on the Class A-1
certificates during the related interest accrual
period, the value of those certificates may be
temporarily or permanently reduced. In a rising
interest rate environment, the Class A-1
certificates may receive interest at the weighted
average net mortgage rate for a protracted period
of time. In addition, in such a situation, there
would be less excess interest payments on the
mortgage loans to cover losses and to create
additional overcollateralization.
[CLASS A-3 CERTIFICATES It is not expected that the Class
A-3 certificates will receive any distributions of
principal until the distribution date in _________.
Until the distribution date in ______________, the
Class A-3 certificates may receive
A PORTION OF PRINCIPAL PREPAYMENTS THAT IS SMALLER
THAN ITS PRO RATA share of principal prepayments.]
</TABLE>
S-17
<PAGE>
INTRODUCTION
THE DEPOSITOR WILL ESTABLISH A TRUST WITH RESPECT TO SERIES -__ on the
closing date, under a pooling and servicing agreement among the depositor, the
servicer and the trustee, dated as of the cut-off date. On the closing date, the
depositor will deposit into the trust a pool of mortgage loans that, in the
aggregate, will constitute a mortgage pool, and that will be secured by first or
junior liens on one-to four-family residential properties.
Some capitalized terms used in this prospectus supplement have the
meanings given below under "DESCRIPTION OF THE CERTIFICATES--Glossary of Terms"
or in the prospectus under "Glossary."
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
THE MORTGAGE POOL WILL CONSIST OF mortgage loans with an aggregate
principal balance outstanding as of the cut-off date, after deducting payments
of principal due on or before the cut-off date, OF $ . The mortgage loans are
secured by [first] [and junior liens] on fee simple or leasehold interests in
one- to four-family residential real properties [and, in the case of ____
mortgage loans, an interest in shares issued by a cooperative apartment
corporation and the related proprietary lease]. [___% of the mortgage loans have
a due date other than the first day of each month]. In each case, the property
securing the mortgage loan is referred to as the mortgaged property. [The
mortgage pool will consist of adjustable-rate mortgage loans with terms to
maturity of not more than 30 years from the date of origination or modification,
or, in the case of approximately __% of the mortgage loans, not more than 15
years.] With respect to mortgage loans which have been modified, references in
this prospectus supplement to the date of origination shall be deemed to be the
date of the most recent modification. [Approximately __% of the mortgage loans
are secured by second liens on the mortgaged properties, and __% of the mortgage
loans are secured by third or more junior liens on the mortgaged properties. __%
of the mortgage loans are Balloon Loans.] With respect to mortgage loans which
have been modified, references in this prospectus supplement to the date of
origination shall be deemed to be the date of the most recent modification. All
percentages of the mortgage loans described in this prospectus supplement are
approximate percentages by aggregate principal balance as of the cut-off date
unless otherwise indicated.
All of the mortgage loans were purchased by the depositor from, and will
be serviced by, [GMAC Mortgage Corporation]. See "The Seller and Servicer"
below.
Under the terms of the pooling and servicing agreement, the Seller will
make representations and warranties with respect to the mortgage loans to the
trustee for the benefit of the certificateholders.
To the extent that the Seller does not repurchase a mortgage loan in the
event of a breach of its representations and warranties with respect to that
mortgage loan, neither the Depositor nor any other person will be required to
repurchase the mortgage loan.
S-18
MORTGAGE POOL CHARACTERISTICS
NONE OF THE MORTGAGE LOANS WILL HAVE BEEN ORIGINATED PRIOR TO , or WILL
HAVE A MATURITY DATE LATER THAN 1, 20 . No mortgage loan will have a remaining
TERM TO MATURITY AS OF THE CUT-OFF DATE OF LESS THAN months. The weighted
average remaining term to MATURITY OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
WILL BE APPROXIMATELY months. The weighted AVERAGE ORIGINAL TERM TO MATURITY OF
THE MORTGAGE LOANS AS OF THE CUT-OFF DATE WILL BE APPROXIMATELY months. __% of
the mortgage loans are fully amortizing and have original terms to maturity of
approximately fifteen years, with a weighted average remaining term to stated
maturity of these mortgage loans of __ months. __% of the mortgage loans are
fully amortizing and have original terms to maturity of approximately thirty
years, with a weighted average remaining term to stated maturity of these
mortgage loans of __ months. As used in this prospectus supplement the remaining
term to maturity means, as of any date of determination and with respect to any
mortgage loan, the number of months equaling the number of scheduled monthly
payments necessary to reduce the then-current Stated Principal Balance of that
mortgage loan to zero, assuming the related mortgagor will make all scheduled
monthly payments but no prepayments, on the mortgage loan thereafter.
As of the cut-off date, ____% of the mortgage loans are 30 to 59 days
delinquent in payment of principal and interest. As of the cut-off date, none of
the mortgage loans will be 60 or more days delinquent in payment of principal
and interest. For a description of the methodology used to categorize mortgage
loans as delinquent, see "The Seller and the Servicer--Delinquency and Loss
Experience of the Servicer's Portfolio" in this prospectus supplement.
[APPROXIMATELY % of the mortgage loans will be Buy-Down Loans.]
None of the mortgage loans provide for deferred interest or negative
amortization.
[AS OF THE CUT-OFF DATE, APPROXIMATELY % of the mortgage loans will be
High Cost Loans. Purchasers or assignees of any High Cost Loan, including the
trust, could be liable for all claims and subject to all defenses that the
borrower could assert against the originator of the High Cost Loan. Remedies
available to the borrower include monetary penalties, as well as recission
rights if appropriate disclosures were not given as required. See "Risk Factors"
in this prospectus supplement and "Certain Legal Aspects of the Loans--The
Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on Lenders" in
the prospectus.]
[___% of the mortgage loans are secured by second liens.]
[Approximately ____% of the mortgage loans are Balloon Loans, which
require monthly payments of principal based on 30 year amortization schedules
and have scheduled maturity dates of approximately 15 years from the due date of
the first monthly payment, leaving a substantial portion of the original
principal amount, the Balloon Amount, due and payable on the respective
scheduled maturity date. The existence of a Balloon Amount typically will
require the related mortgagor to refinance the mortgage loan or to sell the
mortgaged property on or prior to the scheduled maturity date. The ability of a
mortgagor to accomplish either of these goals will be affected by a number of
factors, including the level of available mortgage rates at the time of
S-19
<PAGE>
sale or refinancing, the mortgagor's equity in the related mortgaged property,
the financial condition of the mortgagor, tax laws and prevailing general
economic conditions. None of the depositor, the servicer or the trustee is
obligated to refinance any Balloon Loan. Subject to the terms thereof, the
financial guaranty insurance policy will provide coverage for any losses
incurred upon liquidation of a Balloon Loan arising out of or in connection with
the failure of a mortgagor to pay its Balloon Amount. See "Description of the
Certificates--Financial Guaranty Insurance Policy" in this prospectus
supplement.]
[APPROXIMATELY ___% OF THE MORTGAGE LOANS are Convertible Mortgage
Loans, which provide that, at the option of the related mortgagor, the
adjustable interest rate on a mortgage loan may be converted to a fixed interest
rate. Upon conversion, the mortgage rate will be converted to a fixed interest
rate determined in accordance with the formula set forth in the related mortgage
note which formula is intended to result in a mortgage rate which is not less
than the then current market interest rates, subject to applicable usury laws.
After the conversion, the monthly payments of principal and interest will be
adjusted to provide for full amortization over the remaining term to scheduled
maturity.]
[The servicer will be obligated to repurchase any Convertible Mortgage
Loan following the conversion thereof at a price equal to the unpaid principal
balance thereof plus accrued interest to the first day of the month in which the
purchase price is to be distributed to the Class A Certificates. If the servicer
fails to repurchase a Convertible Mortgage Loan following the conversion
thereof, it will not constitute an Event of Default under the Pooling and
Servicing Agreement and the mortgage loan will remain in the trust fund as a
fixed-rate loan.]
Approximately ___% of the mortgage loans will have mortgage rates
calculated on the basis of the simple interest method. See "The
Trusts--Characteristics of Loans--Simple Interest Loans" in the prospectus.
[MORTGAGE RATE ADJUSTMENT: The mortgage rate on the mortgage loans will
adjust semi-annually commencing approximately six months after origination, on
the adjustment date specified in the related mortgage note, to a rate equal to
the sum, rounded as specified in the related mortgage notes, of Six-Month LIBOR
and the note margin set forth in the related mortgage note, subject to the
limitations described in this prospectus supplement.]
[The amount of the monthly payment on each mortgage loan will be
adjusted semi-annually on the due date of the month following the month in which
the adjustment date occurs to equal the amount necessary to pay interest at the
then-applicable mortgage rate and to fully amortize the outstanding principal
balance of each mortgage loan over its remaining term to stated maturity. As of
the cut-off date, ___% of the mortgage loans will have reached their first
adjustment date. The mortgage loans will have various adjustment dates, note
margins and limitations on the mortgage rate adjustments, as described below.]
[The mortgage rate on each loan may not increase or decrease on any
adjustment date by more than a specified percentage per annum. This periodic
rate cap is not more than ___%, except that the mortgage rate on some of the
mortgage loans may adjust up to ___% on the initial adjustment date.]
S-20
<PAGE>
[The mortgage rate on a mortgage loan may not exceed the maximum
mortgage rate or be less than the minimum mortgage rate specified for such
mortgage loan in the related mortgage note. The minimum mortgage rate for each
mortgage loan will be equal to the note margin, except in the case of ____% of
the mortgage loans, which have a minimum mortgage rate greater than the note
margin. The minimum mortgage rates on the mortgage loans will range from ____%
to ____%, with a weighted average minimum mortgage rate as of the cut-off date
of _____%. The maximum mortgage rates on the mortgage loans will range from
____% to ______%, with a weighted average maximum mortgage rate as of the
cut-off date of ____%. No mortgage loan provides for payment caps on any
adjustment date that would result in deferred interest or negative
amortization.]
[SIX-MONTH LIBOR. The reference date with respect to each mortgage loan
is the date as of which SIX-MONTH LIBOR, AS PUBLISHED BY THE WALL STREET
JOURNAL, is determined. The reference date with respect to each mortgage loan
is:
o the first business day of the month immediately preceding the month in
which the adjustment date occurs,
o the date forty-five days prior to the adjustment date,
o the date fifteen days prior to the adjustment date, or
o the 20th day of the month preceding the month in which the adjustment date
occurs;
except that the reference date with respect to ___ mortgage loans, representing
approximately ___% of the aggregate principal balance of the mortgage loans,
will adjust with respect to Six-Month LIBOR as published by Fannie Mae and as
most recently available as of the date forty-five days prior to the adjustment
date.]
[LISTED BELOW ARE LEVELS OF SIX-MONTH LIBOR AS PUBLISHED BY THE WALL
STREET JOURNAL that are or would have been applicable to mortgage loans with a
reference date of the first business day of the preceding month, and having the
following adjustment dates for the indicated years. There can be no assurance
that LEVELS OF SIX-MONTH LIBOR PUBLISHED BY FANNIE MAE, OR PUBLISHED IN THE WALL
STREET JOURNAL on a different reference date would have been at the same levels
as those set forth below. The following does not purport TO BE REPRESENTATIVE OF
FUTURE LEVELS OF SIX-MONTH LIBOR, AS PUBLISHED BY FANNIE MAE OR THE WALL STREET
JOURNAL. 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 based on Six-Month
LIBOR.]
S-21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
[Adjustment Date 1996 1997 1998 1999
January 1...........................5.718% 5.562% 5.914% 5.148%
- ------------------------------
February 1..........................5.531 5.625 5.843 5.066
- ------------------------------
March 1.............................5.281 5.687 5.625 4.971
- ------------------------------
April 1.............................5.312 5.718 5.695 5.127
- ------------------------------
May 1...............................5.531 5.968 5.750 5.060
- ------------------------------
June 1..............................5.562 6.000 5.812 5.043
- ------------------------------
July 1..............................5.656 6.000 5.750 5.245
- ------------------------------
August 1............................5.812 5.937 5.781 5.650
- ------------------------------
September 1.........................5.906 5.812 5.750 5.705
- ------------------------------
October 1...........................5.843 5.843 5.593 5.917
- ------------------------------
November 1..........................5.750 5.843 5.246
- ------------------------------
December 1..........................5.562 5.812 4.978
</TABLE>
The initial mortgage rate in effect on a mortgage loan typically will be
lower, and may be significantly lower, than the mortgage rate that would have
been in effect based on Six-Month LIBOR and the related note margin. Therefore,
unless Six-Month LIBOR declines after origination of a mortgage loan, the
related mortgage rate will typically increase on the first adjustment date
following origination of such mortgage loan, subject to the periodic rate cap.
The repayment of the mortgage loans will be dependent on the ability of the
mortgagors to make larger monthly payments following adjustments of the mortgage
rate. Mortgage loans that have the same initial mortgage rate may not always
bear interest at the same mortgage rate because such mortgage loans may have
different adjustment dates (and the mortgage rates therefore may reflect
different related Index values), note margins, maximum mortgage rates and
minimum mortgage rates. The net mortgage rate with respect to each mortgage loan
as of the cut-off date will be set forth in the mortgage loan schedule attached
to the Pooling and Servicing Agreement. The net mortgage rate on each mortgage
loan will be adjusted on each adjustment date to equal the servicing fee rate,
which the mortgage rate on the mortgage loan minus the sum of (i) the rate per
annum at which the servicing fee accrues on the mortgage loan and (ii) the
policy premium rate, which is the amount of the premium payable to the financial
guaranty insurer with respect to the financial guaranty insurance policy,
subject to any periodic rate cap, but may not exceed the maximum net mortgage
rate, or be less than the minimum net mortgage rate for such mortgage loan. See
"Description of the Mortgage Pool--Mortgage Pool Characteristics" in this
prospectus supplement.]
MORTGAGE LOAN CHARACTERISTICS. The mortgage loans will have the following
characteristics as of the cut-off date:
Number of mortgage loans
Weighted Average of Net Mortgage Rates........................ %
Range of Net Mortgage Rates................................... %
S-22
<PAGE>
Mortgage Rates:
Weighted Average.......................................... %
Range..................................................... %
Note Margins:
Weighted Average.......................................... %
Range..................................................... %
Minimum Mortgage Rates:
Weighted Average.......................................... %
Range..................................................... %
Minimum Net Mortgage Rates:
Weighted Average.......................................... %
Range..................................................... %
Maximum Mortgage Rates:
Weighted Average.......................................... %
Range..................................................... %
Maximum Net Mortgage Rates:
Weighted Average.......................................... %
Range..................................................... %
Weighted Average Months to next Adjustment Date after __________,_______
The mortgage loans are assumable pursuant to the terms of the related
mortgage note. See "Maturity and Prepayment Considerations" in the prospectus.
[Included below is a table showing the Credit Scores for some
mortgagors. Credit Scores are obtained by many mortgage lenders in connection
with mortgage loan applications to help assess a borrower's credit-worthiness.
Credit Scores are obtained from credit reports provided by various credit
reporting organizations, each of which may employ differing computer models and
methodologies. The Credit Score is designed to assess a borrower's credit
history at a single point in time, using objective information currently on file
for the borrower at a particular credit reporting organization. Information
utilized to create a Credit Score may include, among other things, payment
history, delinquencies on accounts, levels of outstanding indebtedness, length
of credit history, types of credit, and bankruptcy experience. Credit Scores
range from approximately 350 to approximately 840, with higher scores indicating
an individual with a more favorable credit history compared to an individual
with a lower score. However, a Credit Score purports only to be a measurement of
the relative degree of risk a borrower represents to a lender, i.e., a borrower
with a higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, investors should be
aware that Credit Scores were developed to indicate a level of default
probability over a two-year period, which
S-23
<PAGE>
does not correspond to the life of a mortgage loan. Furthermore, Credit Scores
were not developed specifically for use in connection with mortgage loans, but
for consumer loans in general, and assess only the borrower's past credit
history. Therefore, a Credit Score does not take into consideration the
differences between mortgage loans and consumer loans generally, or the specific
characteristics of the related mortgage loan, for example, the loan-to-value
ratio, LTV ratio, the collateral for the mortgage loan, or the debt to income
ratio. There can be no assurance that the Credit Scores of the mortgagors will
be an accurate predictor of the likelihood of repayment of the related mortgage
loans or that any mortgagor's Credit Score would not be lower if obtained as of
the date of this prospectus supplement.]
[The following tables describe information as to the Credit Scores of
the related mortgagors as used in the origination of the mortgage loans.
<TABLE>
<CAPTION>
CREDIT SCORE DISTRIBUTION
NUMBER OF MORTGAGE CUT-OFF DATE PERCENT OF MORTGAGE
CREDIT SCORE RANGE LOANS PRINCIPAL BALANCE POOL
<S> <C> <C>
$ %
- -------------------------
Not Available (1)
Subtotal with Credit
Score
Total Pool
- ----------------
(1) Mortgage loans indicated as having a Credit Score that is not available
include some mortgage loans where the Credit Score was not provided by
the related seller and mortgage loans where no credit history can be
obtained from the related mortgagor.]
Set forth below is a description of some additional characteristics of
the mortgage loans as of the cut-off date unless otherwise indicated. All
percentages of the mortgage loans are approximate percentages by aggregate
principal balance as of the cut-off date unless otherwise indicated. Unless
otherwise specified, all principal balances of the mortgage loans are as of the
cut-off date and are rounded to the nearest dollar.
MORTGAGE RATES
Number of Mortgage Cut-off Date Percent of Mortgage
Mortgage Rates (%) Loans Principal Balance Pool
- -------------------------
$ %
- -------------------------
S-24
<PAGE>
- -------------------------
- -------------------------
- -------------------------
- -------------------------
- -------------------------
- -------------------------
- -------------------------
Total $ %
As of the cut-off date, the weighted average mortgage rate of the
mortgage loans will be APPROXIMATELY % per annum.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
Original Mortgage Number of Cut-off Date Percentage of
Loan Balance Mortgage Loans Principal Balance Mortgage Pool
- -------------------------
$ $ %
- -------------------------
- -------------------------
- -------------------------
- -------------------------
- -------------------------
- -------------------------
Total $ %
As of the cut-off date, the average unpaid principal balance of the
mortgage loans will be APPROXIMATELY $ ___________.
S-25
<PAGE>
NET MORTGAGE RATES OF THE MORTGAGE LOANS
Number of Cut-off Date Percent of
Mortgage Loans Principal Mortgage Loans
Net Mortgage Rates (%) Balance
6.000-6.499.......................... $ %
- ---------------------------------------------
6.500-6.999..........................
- ---------------------------------------------
7.000-7.499..........................
- ---------------------------------------------
7.500-7.999..........................
- ---------------------------------------------
8.000-8.499..........................
- ---------------------------------------------
8.500-8.999..........................
- ---------------------------------------------
9.000-9.499..........................
- ---------------------------------------------
9.500-9.999..........................
- ---------------------------------------------
10.000-10.499.........................
- ---------------------------------------------
11.000-11.499.........................
- ---------------------------------------------
11.500-11.999.........................
- ---------------------------------------------
12.000-12.499.........................
- ---------------------------------------------
12.500-12.999.........................
- ---------------------------------------------
13.000-13.499.........................
- ---------------------------------------------
Total........................... $ %
- ---------------------------------------------
===============================================================================================================
As of the cut-off date, the weighted average net mortgage rate of the
mortgage loans will be approximately _______% per annum.
[COMBINED LOAN-TO-VALUE RATIOS
Combined Loan Number of Cut-off date Percentage of
to Value Ratio (%) Mortgage Loans Principal Balance Mortgage Pool
$ %
- -------------------------
- -------------------------
- -------------------------
- -------------------------
- -------------------------
- -------------------------
- -------------------------
- -------------------------
Total $ %
THE WEIGHTED AVERAGE COMBINED LTV ratio at origination of the mortgage
loans will be approximately ____%.]
[THE METHOD FOR CALCULATING THE COMBINED LTV ratio is described below under the caption "Underwriting
Standards."]
S-26
<PAGE>
[JUNIOR RATIOS OF THE MORTGAGE LOANS
Number of
Mortgage Cut-off Date Percent of
JUNIOR RATIO(%) LOANS PRINCIPAL BALANCE MORTGAGE LOANS
- $ %
-
-
-
-
-
-
-
-
-
TOTAL $ %
- ------------------
Excludes mortgage loans secured by first liens on the related
mortgaged property. With respect to each mortgage loan secured by
a second lien on the related mortgaged property, the Junior Ratio
is the ratio of the original principal balance of the mortgage
loan to the sum of (i) the original principal balance of that
mortgage loan, and (ii) the unpaid principal balance of any
senior lien at the time of the origination of that mortgage loan.
The weighted average Junior Ratio as of the cut-off date was approximately __%.]
GEOGRAPHIC DISTRIBUTIONS OF MORTGAGED PROPERTIES
Number of Cut-off Date Percentage of
State Mortgage Loans Principal Balance Mortgage Pool
- -------------------------
[California $ %
- -------------------------
Connecticut
- -------------------------
Illinois
- -------------------------
New Jersey
- -------------------------
New York]
- -------------------------
Other (1)
- -------------------------
S-27
<PAGE>
Total $ %
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
NO MORE THAN ____% of the mortgage loans will be secured by mortgaged
properties located in any ONE ZIP CODE AREA IN CALIFORNIA AND NO MORE THAN ____%
of the mortgage loans will be secured by mortgaged properties located in any one
zip code area outside California.
MORTGAGE LOAN PURPOSE
Number of Cut-off Date Percentage of
Loan Purpose Mortgage Loans Principal Balance Mortgage Pool
Purchase $ %
Rate/Term Refinance
Equity Refinance
Total $ %
The weighted average combined LTV ratio at origination of rate and term
refinance mortgage loans will BE ___%. The weighted average combined LTV ratio
at origination of equity refinance mortgage loans will BE ___ %.
MORTGAGE LOAN DOCUMENTATION TYPES
Number of Cut-off Date Percentage of
Documentation Type Mortgage Loans Principal Balance Mortgage Pool
- -------------------------
Full $ %
- -------------------------
Reduced
- -------------------------
Total $ %
o For purposes of the above table, Reduced Documentation Type includes mortgage loans which were
underwritten under a no stated income program.
[The weighted average LTV ratio at origination of the mortgage loans
which were underwritten under a REDUCED LOAN DOCUMENTATION PROGRAM WILL BE %. NO
MORE THAN % of the reduced loan documentation mortgage loans will be secured by
mortgaged properties located in California.]
S-28
<PAGE>
OCCUPANCY TYPES
Number of Cut-off Date Percentage of
Occupancy Mortgage Loans Principal Balance Mortgage Pool
Primary Residence $ %
Second/Vacation
Non Owner-occupied
Total $ %
MORTGAGED PROPERTY TYPES
Number of Cut-off Date Percentage of
Property Type Mortgage Loans Principal Balance Mortgage Pool
Single-family detached $ %
Planned Unit
Developments (detached)
Two- to four-family
units
Condo Low-Rise (less
than 5 stories)
Condo Mid-Rise (5 to 8
stories)
Condo High-Rise (9
stories or more)
Townhouse
Planned Unit
Developments (attached)
Cooperative Units
Leasehold
- -------------------------
Total $ %
S-29
<PAGE>
[LIEN PRIORITY OF THE MORTGAGE LOANS
Number of Cut-off Date Percent of
Lien Property Mortgage Loans Principal Balance Mortgage Loans
- -------------------------------------
- -------------------------------------
- -------------------------------------
SECOND LIEN $ %
- -------------------------------------
TOTAL $ %]
REMAINING TERM OF SCHEDULED MATURITY OF THE MORTGAGE LOANS
Number of Cut-off Date Percent of
Months Remaining to Scheduled Maturity Mortgage Loans Principal Balance Mortgage Loans
-------------------------------------------
$ %
-------------------------------------------
%
-------------------------------------------
%
-------------------------------------------
%
-------------------------------------------
%
-------------------------------------------
%
-------------------------------------------
%
-------------------------------------------
-------------------------------------------
Total $ %
%
</TABLE>
The weighted average remaining term to maturity of the mortgage loans as
of the cut-off date was approximately ___ months.
[In connection with each mortgage loan that is secured by a leasehold
interest, the related seller shall have represented to the depositor that, among
other things:
o the use of leasehold estates for residential properties is an accepted
practice in the area where the related mortgaged property is located;
o residential property in the area consisting of leasehold estates is readily
marketable;
o the lease is recorded and no party is in any way in breach of any provision
of the lease;
o the leasehold is in full force and effect and is not subject to any prior
lien or encumbrance by which the leasehold could be terminated or subject
to any charge or penalty; and
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<PAGE>
o the remaining term of the lease does not terminate less than ten years
after the maturity date of each such mortgage loan.
Some of the aspects of the Cooperative Loans included in the mortgage
pool differ from those of other types of mortgage loans. See "Certain Legal
Aspects of Loans--The Mortgage Loans --Cooperative Loans" in the prospectus.]
[A portion of the mortgage loans provide for payment of a prepayment
charge. In most cases, the prepayment provisions provide for payment of a
prepayment charge for partial prepayments and full prepayments, other than a
prepayment:
o occurring upon the sale of property securing a mortgage loan,
o made within five years following the origination of the mortgage loan, and
o In an amount equal to six months' advance interest on the amount of the
prepayment that, when added to all other amounts prepaid during the
twelve-month period immediately preceding the date of prepayment, exceeds
twenty percent (20%) of the original principal amount of the mortgage loan.
Prepayment charges received on the mortgage loans will not be available for
distribution on the certificates. See "Certain Legal Aspects of the
Loans--Default Interest and Limitations on Prepayments" in the prospectus.]
UNDERWRITING STANDARDS
All of the mortgage loans included in the mortgage pool will be acquired
by the Depositor from the Seller. The following is a brief description of the
various underwriting standards and the procedures applicable to the mortgage
loans.
GMACM's underwriting standards with respect to the Mortgage Loans
generally will conform to those published in the GMACM Underwriting Guide. The
underwriting standards as set forth in the GMACM Underwriting Guide are
continually revised based on prevailing conditions in the residential mortgage
market and the market for mortgage securities.
The underwriting standards set forth in the GMACM Underwriting Guide
with respect to mortgage loans originated or acquired by GMACM provide for
varying levels of documentation. For the full documentation loan program, a
prospective borrower is required to complete a detailed application providing
pertinent credit information. The application contains a description of
borrower's assets and liabilities and a statement of income and expenses, as
well as an authorization to apply for a credit report which summarizes the
borrower's credit history with merchants and lenders and any record of
bankruptcy. In addition, employment verification is obtained which reports the
borrower's current salary and may contain the length of employment and an
indication as to whether it is expected that the borrower will continue such
employment in the future. If a prospective borrower is self-employed or if
income is received from dividends and interest, rental properties or other
income which can be verified via tax returns, the borrower may also be required
to submit copies of signed tax returns. The borrower
s-31
<PAGE>
may also be required to authorize verification of deposits at financial
institutions where the borrower has accounts.
An appraisal may be made of the mortgaged property securing each
mortgage loan. Such appraisals may be either a full appraisal, a drive-by
appraisal or a statistical property evaluation. Such appraisals may be performed
by appraisers independent from or affiliated with the GMAC Mortgage or their
affiliates. Such appraisals, however, will not establish that the mortgaged
properties provide assurance of repayment of the mortgage loans. If a full
appraisal is required, the appraiser may be required to inspect the property and
verify that it is in good condition and that construction, if new, has been
completed. If a drive-by appraisal is required, the appraiser is only required
to perform an exterior inspection of the property. The appraisal is based on
various factors, including the market value of comparable homes and the cost of
replacing the improvements. In certain circumstances, a statistical property
evaluation may have been completed in lieu of a drive-by appraisal by a
third-party who performs an electronic comparison of the stated value of the
mortgaged properties with comparable properties in the area. Each appraisal is
required to be dated no more than 180 days prior to the date of approval of the
mortgage loan; provided, that depending on the credit limit an earlier appraisal
may be utilized if such appraisal was made not earlier than one year prior to
the date of origination of the mortgage loan and the related appraiser certifies
that the value of the related mortgaged property has not declined since the date
of the original appraisal or if a field review or statistical property
evaluation is obtained. To the extent that the appraised value of a mortgaged
property declines over time, the actual loan-to-value or combined loan-to-value
with respect to such mortgage loan will be higher than the loan-to-value or
combined loan-to-value derived at the time of origination of such mortgage loan.
Once all applicable employment, credit and property information is
received, a determination is made as to whether the prospective borrower has
sufficient monthly income available to meet the borrower's monthly obligations
on the proposed mortgage loan and other expenses related to the home (such as
property taxes and hazard insurance) and other financial obligations and monthly
living expenses.
Under the GMACM Underwriting Guide, loans may also be originated under
the "Alternative," "Relo," or "Relo-VIP" documentation programs. Under these
programs, certain items described above are verified using alternative sources.
For example, the borrower's income may be verified in via a paystub or a W-2
form for "Alternative" documentation. In addition, the "Alternative"
documentation program allows a borrower's verification of employment to be
conducted telephonically or a borrower's verification of assets to be in the
form of a minimum number of sequential monthly bank statements. In the case of
"Relo" documentation, a signed employer relocation verification form is
acceptable in lieu of a paystub. The "Relo-VIP" program does not require income
verification, however, eligible borrowers must have a minimum annual base salary
of $75,000.
Loans may also be originated under the GMACM Underwriting Guide under
the "Quick Program," a no income verification for self-employed borrowers. For
such loans, a credit check, an appraisal, and verification of sufficient assets
is required. Such loans generally will not exceed a 75% LTV ratio/CLTV ratio on
primary residences and a 70% LTV ratio/CLTV ratio on second homes.
S-32
<PAGE>
The GMACM Underwriting Guide also provides for loans under its "Select"
program to employees and retirees of General Motors Corporation ("GM"). Such
loans are made to executives of GM or affiliates of GM, dealer principals and
general managers with a minimum annual base salary of $75,000 or to GM or GM
affiliate retirees with a minimum base retirement annual income of $60,000. In
addition, "Super Select" processed loans are made to executives of GM or
affiliates of GM, dealer principals and general managers with a minimum annual
base salary of $200,000. For both "Select" and "Super Select" loan programs, no
income, no asset and, at times, no appraisal is required. Underwriting for both
"Select" and "Super Select" is subject to a maximum LTV ratio of 80% for primary
residences. For the "Select" program, a maximum LTV ratio of 70% is permitted
for second homes and for the "Super Select" program the maximum LTV ratio
allowed is 80% for second homes. The LTV ratio for the "Super Select" program is
based on the borrower's stated value and generally no appraisal is required for
LTV ratios of 80% or less. On the "Select" program, the borrower must supply
evidence of value in some instances only. For example, if the combined loan
amount exceeds $650,000 or if the loan is an equity refinance, an appraisal of
the property is required. In addition to the LTV ratio and salary requirements
above, generally, borrower eligibility under the "Select" or "Super Select"
documentation program may be determined by use of a credit scoring model.
The GMACM Underwriting Guide also allows for streamlined documentation
on portfolio refinance transactions under its "Express" and "Super Express"
programs. The "Express" option requires a current paystub for income
verification and one month's bank statement for asset verification. An appraisal
is not required under the "Express" refinance option. The only documentation
required under the "Super Express" refinance option is a mortgage history with
no more than one 30-day late in the last 12 months. No income verification, no
asset verification and no appraisal are required under the "Super Express"
program.
The underwriting standards set forth in the GMACM Underwriting Guide
with respect to mortgage loans originated or acquired by GMACM may be varied in
appropriate cases. There can be no assurance that every mortgage loan was
originated in conformity with the applicable underwriting standards in all
material respects, or that the quality or performance of the mortgage loans will
be equivalent under all circumstances.
GMACM's underwriting standards include a set of specific criteria
pursuant to which the underwriting evaluation is made. However, the application
of such underwriting standards does not imply that each specific criterion was
satisfied individually. Rather, a mortgage loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
such underwriting standards. For example, a mortgage loan may be considered to
comply with a set of underwriting standards, even if one or more specific
criteria included in such underwriting standards were not satisfied, if other
factors compensated for the criteria that were not satisfied or if the mortgage
loan is considered to be in substantial compliance with the underwriting
standards.
[PRIMARY MORTGAGE INSURANCE AND PRIMARY HAZARD INSURANCE
Each mortgage loan is required to be covered by a standard hazard
insurance policy, which is referred to as a primary hazard insurance policy. In
addition, to the best of
S-33
<PAGE>
the depositor's knowledge, each MORTGAGE LOAN WITH AN
LTV RATIO AT ORIGINATION IN EXCESS OF % will be insured by a primary mortgage
guaranty insurance policy, which is referred to as a primary insurance policy,
covering at least
% OF THE PRINCIPAL BALANCE OF THE MORTGAGE LOAN AT ORIGINATION IF THE LTV
RATIO IS BETWEEN % AND %, AND AT LEAST % of the principal balance of the
mortgage loan at origination if the LTV RATIO IS BETWEEN % AND %. An additional
___% of the mortgage loans are mortgage loans with a LTV ratio, or combined LTV
ratio in the case of the junior loans, at origination in excess of 80% that are
not insured by a primary insurance policy.
Substantially all of the primary insurance policies were issued by
General Electric Mortgage Insurance Corporation, Mortgage Guaranty Insurance
Corporation, United Guaranty Residential Insurance Company, PMI Mortgage
Insurance Company, Commonwealth Mortgage Assurance Company, Republic Mortgage
Insurance Company or Amerin Guaranty Corporation, which collectively are the
primary insurers. Each primary insurer has a claims paying ability currently
acceptable to the rating agencies that have been requested to rate the
certificates; however, there is no assurance as to the actual ability of any
primary insurer to pay claims. See "Insurance Policies on Loans" in the
prospectus.]
ADDITIONAL INFORMATION
The description in this prospectus supplement of the mortgage pool and
the mortgaged properties is based upon the mortgage pool as constituted at the
close of business on the cut-off date, as adjusted for the scheduled principal
payments due on or before the cut-off date. Prior to the issuance of the offered
certificates, mortgage loans may be removed from the mortgage pool as a result
of incomplete documentation or otherwise, if the depositor deems that removal
necessary or appropriate. A limited number of other mortgage loans may be added
to the mortgage pool prior to the issuance of the offered certificates. The
depositor believes that the information in this prospectus supplement will be
substantially representative of the characteristics of the mortgage pool as it
will be constituted at the time the offered certificates are issued although the
range of mortgage rates and maturities and some other characteristics of the
mortgage loans in the mortgage pool may vary.
A current report on Form 8-K will be available to purchasers of the
offered certificates and will be filed, together with the pooling and servicing
agreement, with the commission within fifteen days after the initial issuance of
the offered certificates. In the event mortgage loans are removed from or added
to the mortgage pool as described in the preceding paragraph, that removal or
addition will be noted in the current report.
THE SELLER AND SERVICER
GENERAL
[GMAC Mortgage Corporation] is the Seller and Servicer for all of the
mortgage loans in the mortgage pool. The Seller is an indirect wholly-owned
subsidiary of [General Motors Acceptance Corporation]. The Seller is engaged in
the mortgage banking business, including the origination, purchase, sale and
servicing of residential mortgage loans.
S-34
<PAGE>
The certificates do not represent an interest in or an obligation of the
Seller or the Servicer. The Seller's only obligations with respect to the
certificates will be pursuant to certain limited representations and warranties
made by the Seller or as otherwise provided herein.
The Seller maintains its executive and principal offices at 100 Witmer
Road, Horsham, Pennsylvania 19044. Its telephone number is (215) 682-1000.
The Servicer will be responsible for servicing the Mortgage Loans in
accordance with the its program guide and the terms of the Servicing Agreement.
The Custodian will be [________].
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience [for
all closed-end home equity loans] originated by the Servicer. The data presented
in the following tables are for illustrative purposes only, and there is no
assurance that the delinquency and loss experience of the mortgage loans in the
mortgage pool will be similar to that described below.
As used in this prospectus supplement, a loan is considered to be "30 to
59 days" or "30 or more days" delinquent when a payment due on any due date
remains unpaid as of the close of business on the next following monthly due
date. However, since the determination as to whether a loan falls into this
category is made as of the close of business on the last business day of each
month, a loan with a payment due on July 1 that remained unpaid as of the close
of business on July 31 would still be considered current as of July 31. If that
payment remained unpaid as of the close of business on August 31, the loan would
then be considered to be 30 to 59 days delinquent. Delinquency information
presented in this prospectus supplement as of the cut-off date is determined and
prepared as of the close of business on the last business day immediately prior
to the cut-off date.
There can be no assurance that the delinquency experience described
below will be representative of the results that may be experienced with respect
to the mortgage loans in the mortgage pool.
S-35
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCY AND LOSS EXPERIENCE
MORTGAGE LOAN PORTFOLIO DELINQUENCY EXPERIENCE (1)
=========================================================================================================
AT _____, 1999 AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C> <C> <C>
$ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $
------- ------ ------- ------ ------- ------ ------- ------
Number of Loans
Total Portfolio
Period of
Delinquency
30-59 Days
60-89 Days
90+ Days
Total Loans
Foreclosure
Foreclosed
Total Loans in
Foreclosure
Total Delinquent
Loans
=========== ======== =========== ======== =========== ======== =========== ========
- ---------------------------------------------------------------------------------------------------------
=========================================================================================================
MORTGAGE LOAN PORTFOLIO LOSS AND FORECLOSURE EXPERIENCE (1)
=========================================================================================================
AT _______, 1999 AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
1998 1997 1996
$ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $
------- ------ ------- ------ ------- ------ ------- ------
Number of Loans
Total Portfolio
Total Loans in
Foreclosure
Net Chargeoffs for
Period
=========== ======== =========== ======== =========== ======== =========== ========
(1) Performing loans in bankruptcy are not included in delinquency statistics.
</TABLE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
THE SERIES -__ Mortgage Asset-Backed Pass-Through Certificates will
include the following three classes of Class A Certificates:
o Class A-1 Certificates, or the Adjustable Rate Certificates
o Class A-2 Certificates; and
o Class A-3 Certificates, or the Lockout Certificates; and together with the
Class A-2 Certificates, the Fixed Rate Certificates
In addition to the Class A Certificates, the Series -__ Mortgage
Asset-Backed Pass-Through Certificates will also include two classes of
certificates which are designated as the Class SB Certificates and Class R
Certificates. Only the Class A Certificates are offered by this prospectus
supplement. See "Glossary" in the prospectus for the meanings of capitalized
terms and acronyms not otherwise defined in this prospectus supplement.
The certificates will evidence the entire beneficial ownership interest
in the trust fund. The trust fund will consist of:
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<PAGE>
o the mortgage loans
o the assets as from time to time that are identified as deposited in respect
of the mortgage loans in the Custodial Account and in the Payment Account
and belonging to the trust fund
o property acquired by foreclosure of the mortgage loans or deed in lieu of
foreclosure
o any applicable primary insurance policies and primary hazard insurance
policies
o the financial guaranty insurance policy; and
o all proceeds of any of the foregoing.
The Class A Certificates will be available only in book-entry form
through facilities of The Depository Trust Company. The Class A Certificates
will be issued, maintained and transferred on the BOOK-ENTRY RECORDS OF DTC AND
ITS PARTICIPANTS. The Class A Certificates will be issued in minimum
denominations of $25,000 and integral multiples of $1 in excess thereof.
The Class A Certificates will be represented by one or more certificates
registered in the name of the nominee of DTC. The depositor has been informed by
DTC that DTC's nominee will be Cede & Co. No beneficial owner will be entitled
to receive a certificate of any class in fully registered form, a definitive
certificate, except as described in this prospectus supplement under
"--Book-Entry Registration of Certain of the Offered Certificates--Definitive
Certificates." Unless and until definitive certificates are issued for the Class
A Certificates under the limited circumstances described in this prospectus
supplement:
o all references to actions by certificateholders with respect to
the Class A Certificates shall refer to actions taken by DTC upon
instructions from its participants, and
o all references in this prospectus supplement to distributions,
notices, reports and statements to certificateholders with
respect to the Class A Certificates shall refer to distributions,
notices, reports and statements to DTC or Cede, as the registered
holder of the Class A Certificates, for distribution to
beneficial owners by DTC in accordance with DTC procedures.
DTC has advised the depositor that management of DTC is aware that some
computer applications, systems and the like for processing data that are
dependent upon calendar dates, including dates before, on and after January 1,
2000, may encounter Y2K problems. DTC has informed its participants and other
members of the financial community, that it has developed and is implementing a
program so that its systems, as they relate to DTC services like the timely
payment of distributions, including principal and income payments, to
securityholders, book-entry deliveries and settlement of trades with DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete.
S-37
<PAGE>
Additionally, DTC's plan includes a testing phase, which, DTC has advised its
participants, is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as DTC's participants and third party vendors from whom DTC
licenses software and hardware, and third party vendors on whom DTC relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed its
participants that it is contacting and will continue to contact third party
vendors from whom DTC acquires services to:
o impress upon them the importance of those services being Y2K compliant; and
o determine the extent of their efforts for Y2K remediation and, as
appropriate, testing of their
services.
In addition, DTC is in the process of developing any contingency plans
as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided for informational purposes only and is not intended to serve as a
representation, warranty or contract modification of any kind.
BOOK-ENTRY REGISTRATION OF CERTAIN OF THE OFFERED CERTIFICATES
GENERAL. Beneficial owners that are not participants or indirect
participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, the Class A Certificates may do so only through participants
and indirect participants. In addition, beneficial owners will receive all
distributions of principal of and interest on the Class A Certificates from the
paying agent through DTC and participants. Accordingly, beneficial owners may
experience delays in their receipt of payments. Unless and until definitive
certificates are issued for the Class A Certificates, it is anticipated that the
only registered certificateholder of the Class A Certificates will be Cede, as
nominee of DTC. Beneficial owners will not be recognized by the trustee or the
servicer as certificateholders, as the term is used in the pooling and servicing
agreement, and beneficial owners will be permitted to receive information
furnished to certificateholders and to exercise the rights of certificateholders
only indirectly through DTC, its participants and indirect participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers of the Class A
Certificates among participants and to receive and transmit distributions of
principal of, and interest on, the Class A Certificates. Participants and
indirect participants with which beneficial owners have accounts with respect to
the Class A Certificates similarly are required to make book-entry transfers and
receive and transmit distributions on behalf of their respective beneficial
owners. Accordingly, although beneficial owners will not possess physical
certificates evidencing their interests in the Class A Certificates, DTC's rules
provide a mechanism by which beneficial owners, through their participants and
indirect participants, will receive distributions and will be able to transfer
their interests in the Class A Certificates.
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None of the depositor, the servicer or the trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the Class A Certificates held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES. Definitive certificates will be issued to
beneficial owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions described in the prospectus under
"Description of the Securities--Form of Securities."
Upon the occurrence of an event described in the prospectus in the third
paragraph under "Description of the Securities--Form of Securities," the trustee
is required to notify, through DTC, participants who have ownership of Class A
Certificates as indicated on the records of DTC of the availability of
definitive certificates for their Class A Certificates. Upon surrender by DTC of
the definitive certificates representing the Class A Certificates and upon
receipt of instructions from DTC for re-registration, the trustee will reissue
the Class A Certificates as definitive certificates issued in the respective
principal amounts owned by individual beneficial owners, and thereafter the
trustee and the servicer will recognize the holders of the definitive
certificates as certificateholders under the pooling and servicing agreement.
For additional information regarding DTC and the DTC registered
certificates, see "Description of the Securities--Form of Securities" in the
prospectus.
GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe
the cash flows on the certificates:
ACCRUED CERTIFICATE INTEREST - For any distribution date and class of
Class A Certificates, an amount equal to interest accrued during the related
Interest Accrual Period on the Certificate Principal Balance of the certificates
of that class immediately prior to that distribution date at the related
pass-through rate less interest shortfalls, if any, allocated thereto for that
distribution date, to the extent not covered with respect to the Class A
Certificates by the subordination provided by the Class SB Certificates
including:
(i) any Prepayment Interest Shortfall to the extent not covered
by the servicer as described in this prospectus supplement under
"Description of the Certificates--Interest Distributions";
(ii) the interest portions of Realized Losses, including Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses,
and Extraordinary Losses not allocated through subordination;
(iii) the interest portion of any Advances that were made with
respect to delinquencies that were ultimately determined to be Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses; and
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(iv) any other interest shortfalls not covered by subordination,
including interest shortfalls relating to the Soldiers' and Sailors'
Civil Relief Act of 1940, or Relief Act, or similar legislation or
regulations, all allocated as described below.
Any reductions will be allocated among the holders of all classes of
certificates in proportion to the respective amounts of Accrued Certificate
Interest that would have been payable on that distribution date absent these
reductions. In the event that any shortfall described in the immediately
preceding four clauses above is allocated to the offered certificates, or the
Available Distribution Amount on any distribution date is less than the Interest
Distribution Amount due on any distribution date, the amount of any shortfall
will be drawn under the financial guaranty insurance policy and distributed to
the holders of the Class A Certificates. Notwithstanding the foregoing, if
payments are not made as required under the financial guaranty insurance policy,
any interest shortfalls may be allocated to the Class A Certificates as
described above. See "--Financial Guaranty Insurance Policy" below. Accrued
Certificate Interest on each class of Class A Certificates will be distributed
on a pro rata basis. Accrued Certificate Interest on the Class A-2 and Class A-3
Certificates is calculated on the basis of a 360-day year consisting of twelve
30-day months. Accrued Certificate Interest on the Class A-1 Certificates will
be calculated on the basis of the actual number of days in the Interest Accrual
Period and a 360-day year.
AVAILABLE DISTRIBUTION AMOUNT - For any distribution date, an amount equal to:
o the aggregate amount of scheduled payments on the mortgage loans due on the
related due date and received on or prior to the related determination
date, after deduction of the related servicing fees and any subservicing
fees, which are collectively referred to as the servicing fees, and the
premium payable on the financial guaranty insurance policy;
o all unscheduled payments, including mortgagor prepayments on the
mortgage loans, Insurance Proceeds, Liquidation Proceeds and
proceeds from repurchases of and substitutions for the mortgage
loans occurring during the preceding calendar month; and
o all Advances made for that distribution date, in each case net of
amounts reimbursable therefrom to the servicer and any
subservicer.
In addition to the foregoing amounts, with respect to unscheduled
collections, not including mortgagor prepayments, the servicer may elect to
treat such amounts as included in the Available Distribution Amount for the
distribution date in the month of receipt, but is not obligated to do so. As
described in this prospectus supplement under "--Principal Distributions on the
Class A Certificates," any amount with respect to which such election is so made
shall be treated as having been received on the last day of the preceding
calendar month for the purposes of calculating the amount of principal and
interest distributions to any class of certificates. With respect to any
distribution date, the due date is the first day of the month in which that
distribution date occurs and the determination date is the 20th day of the month
in which that distribution date occurs or, if that day is not a business day,
the immediately succeeding business day.
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On any distribution date, the policy premium rate is equal to
one-twelfth of the product of the percentage specified in the Insurance and
Indemnity Agreement, dated as of ______, ____ among the financial guaranty
insurer, the depositor, the trustee, the seller and the servicer, and the
aggregate Certificate Principal Balance of the Class A Certificates immediately
prior to such distribution date.
CERTIFICATE PRINCIPAL BALANCE - For any Class A Certificate as of any
date of determination, an amount equal to the initial Certificate Principal
Balance of that certificate, reduced by the aggregate of (a) all amounts
allocable to principal previously distributed with respect to that certificate,
including amounts paid pursuant to the financial guaranty insurance policy, and
(b) any reductions in the Certificate Principal Balance of that certificate
deemed to have occurred in connection with allocations of Realized Losses in the
manner described in this prospectus supplement, other than any amounts that have
been paid pursuant to the financial guaranty insurance policy.
CUMULATIVE INSURANCE PAYMENTS - The aggregate of any payments made with
respect to the Class A Certificates by the financial guaranty insurer under the
financial guaranty insurance policy.
EXCESS BANKRUPTCY LOSSES - Bankruptcy Losses in excess of the Bankruptcy
Amount.
EXCESS CASH FLOW-On any distribution date, the excess of the Available
Distribution Amount over the sum of (a) the Interest Distribution Amount and (b)
the sum of the amounts described in clauses [ ] of the definition of Principal
Distribution Amount.
EXCESS FRAUD LOSSES - Fraud Losses in excess of the Fraud Loss Amount.
EXCESS SPECIAL HAZARD LOSSES - Special Hazard Losses in excess of the
Special Hazard Amount.
EXCESS SUBORDINATED AMOUNT - On any distribution date, the excess, if
any, of (a) the Subordinated Amount on such distribution date over (b) the
Targeted Subordinated Amount.
FINAL DISPOSITION - A Final Disposition is deemed to have occurred upon
a determination by the servicer that it has received all Insurance Proceeds,
Liquidation Proceeds and other payments or cash recoveries which the servicer
reasonably and in good faith expects to be finally recoverable with respect to a
defaulted mortgage loan.
INTEREST ACCRUAL PERIOD - For the Class A-2 and Class A-3 Certificates,
the calendar month preceding the month in which the distribution date occurs.
For the Class A-1 Certificates, (a) for the distribution date in __________,
___, the period commencing on the closing date and ending on the day preceding
the distribution date in ________ ___, and (b) with respect to any distribution
date after the distribution date in _________ ___, the period commencing on the
distribution date in the month immediately preceding the month in which the
distribution date occurs and ending on the day preceding the distribution date.
INTEREST DISTRIBUTION AMOUNT - The aggregate amount of Accrued
Certificate Interest to be distributed to the holders of the Class A
Certificates for that distribution date.
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LOCKOUT PREPAYMENT PERCENTAGE - For any distribution date occurring prior
to the distribution date in , 0%. For any distribution date occurring after the
first five years following the
closing date, a percentage determined as follows:
o for any distribution date during the sixth year after the closing date,
30%;
o for any distribution date during the seventh year after the closing date,
40%;
o for any distribution date during the eighth year after the closing date,
60%;
o for any distribution date during the ninth year after the closing date,
80%; and
o for any distribution date thereafter, 100%.
LOCKOUT SCHEDULED PERCENTAGE - For any distribution date occurring
prior to the distribution date in , 0% and for any
distribution date thereafter, 100%.
PRINCIPAL DISTRIBUTION AMOUNT -On any distribution date, the lesser of
(a) the balance of the Available Distribution Amount remaining after the
Interest Distribution Amount has been distributed and (b) the sum of:
(1) the principal portion of all scheduled monthly payments on
the mortgage loans received or advanced with respect to the related due
period;
(2) the principal portion of all proceeds of the repurchase of
mortgage loans or, in the case of a substitution, amounts representing a
principal adjustment as required by the pooling and servicing agreement
during the preceding calendar month;
(3) the principal portion of all other unscheduled collections
received on the mortgage loans during the preceding calendar month or
deemed to be received during the preceding calendar month including,
without limitation, full and partial prepayments made by the respective
mortgagors, to the extent not distributed in the preceding month;
(4) the principal portion of any Realized Losses incurred on the
mortgage loans for the preceding calendar month to the extent payable
from Excess Cash Flow on such distribution date; and
(5) the Subordination Increase Amount for such distribution date.
SUBORDINATED AMOUNT - On any distribution date, the excess, if any, of
(a) the aggregate Stated Principal Balances of the mortgage loans after giving
effect to distributions of principal to be made on such distribution date over
(b) the Certificate Principal Balance of the Class A Certificates as of such
date, after taking into account the payment to the Class A Certificates of the
amounts described in clauses [ ] of the definition of Principal Distribution
Amount on such distribution date.
SUBORDINATION INCREASE AMOUNT - On any distribution date, any amount of
Excess Cash Flow actually applied as an accelerated payment of principal on the
Class A Certificates.
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SUBORDINATION REDUCTION AMOUNT - On any distribution date, the lesser of
(a) the Excess Subordinated Amount and (b) the amount available for distribution
specified in clauses [ ] of the definition of Principal Distribution Amount.
TARGETED SUBORDINATED AMOUNT - On any distribution date, the required
level of the Subordinated Amount, as set forth in the Pooling and Servicing
Agreement.
DISTRIBUTIONS
Distributions on the Class A Certificates will be made by the trustee on
the 25th day of each month or, if that day is not a business day, then the next
succeeding business day, commencing in _______ 1999. Distributions on the
certificates will be made to the persons in whose names the certificates are
registered at the close of business on the day prior to each distribution date
or, if the certificates are no longer DTC registered certificates, on the record
date. See "Description of the Securities--Distributions" in the prospectus.
Distributions will be made by check or money order mailed, or upon the request
of a certificateholder owning Class A Certificates having denominations,
aggregating at least $1,000,000, by wire transfer or otherwise, to the address
of the person entitled to the distribution, which, in the case of DTC registered
certificates, will be DTC or its nominee, as it appears on the trustee's
register in amounts calculated as described in this prospectus supplement on the
determination date. However, the final distribution relating to the certificates
will be made only upon presentation and surrender thereof at the office or the
agency of the trustee specified in the notice to certificateholders of the final
distribution.
A business day is any day other than:
a Saturday or Sunday or
a day on which banking institutions in the State of California,
Minnesota, New York, Pennsylvania, Illinois or Delaware are required or
authorized by law to be closed.
INTEREST DISTRIBUTIONS
Holders of each class of Class A Certificates will be entitled to
receive interest distributions in an amount equal to the Accrued Certificate
Interest on that class on each distribution date, to the extent of the Available
Distribution Amount for that distribution date, commencing on the first
distribution date in the case of all classes of Class A Certificates entitled to
interest distributions.
Prepayment Interest Shortfalls will result because interest on
prepayments in full is distributed only to the date of prepayment, and because
no interest is distributed on prepayments in part, as these prepayments in part
are applied to reduce the outstanding principal balance of the related mortgage
loans as of the due date in the month of prepayment.
However, on any distribution date, any Prepayment Interest Shortfalls
resulting from prepayments in full during the preceding calendar month will be
offset by the servicer, but only to the extent those Prepayment Interest
Shortfalls do not exceed the amount of the servicing fee due on such
distribution date. Prepayment Interest Shortfalls resulting from partial
prepayments will not be offset by the servicer from servicing compensation or
otherwise. No assurance can be given that the servicing compensation available
to cover Prepayment Interest Shortfalls will be sufficient therefor. See
"Pooling and Servicing Agreement--Servicing and Other Compensation and Payment
of Expenses" in this prospectus supplement.
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[If on any distribution date the Available Distribution Amount is less
than Accrued Certificate Interest on the Class A Certificates for that
distribution date, the shortfall will be allocated among the holders of all
classes of Class A Certificates in proportion to the respective amounts of
Accrued Certificate Interest for that distribution date. In addition, the amount
of any such interest shortfalls that are covered by subordination, specifically,
interest shortfalls not described in the definition of Available Distribution
Amount preceding paragraph, will be unpaid Accrued Certificate Interest and will
be distributable to holders of the certificates of those classes entitled to
those amounts on subsequent distribution dates, in each case to the extent of
available funds after interest distributions as required in this prospectus
supplement.
These shortfalls could occur, for example, if delinquencies on the
mortgage loans were exceptionally high and were concentrated in a particular
month and Advances by the servicer did not cover the shortfall. Any amounts so
carried forward will not bear interest. Any interest shortfalls will not be
offset by a reduction in the servicing compensation of the servicer or
otherwise, except to the limited extent described in the preceding paragraph
with respect to Prepayment Interest Shortfalls resulting from prepayments in
full.
The pass-through rates on all classes of Class A Certificates, other
than the Class A-1 Certificates, ARE FIXED AND ARE LISTED ON PAGE S- of this
prospectus supplement.
The pass-through rates on the Class A-1 Certificates are calculated as
follows:
The pass-through rate on the Class A-1 Certificates with respect to the
initial Interest Accrual PERIOD IS % per annum, and as to any Interest Accrual
Period thereafter, will be a per annum rate EQUAL TO % plus the arithmetic mean
of the London interbank offered rate quotations for one-month Eurodollar
deposits, determined monthly as described in this prospectus supplement, with a
maximum rate of
% PER ANNUM AND A MINIMUM RATE OF % per annum.
The pass-through rates on the Class A-1 Certificates for the current and
immediately preceding Interest Accrual Period may be obtained by telephoning the
trustee at __________.]
[The pass-through rates on all classes of the Class A Certificates will
increase by __% per annum for each distribution date after the first
distribution date on which the servicer and the depositor are permitted to
exercise their option to purchase the mortgage loans from the trust as described
under "Pooling and Servicing Agreement--Termination," in this prospectus
supplement. Notwithstanding the foregoing, the pass-through rates on the Class A
Certificates will not increase as described above if proceeds for optional
termination are available for payment to the certificateholders on or prior to
any distribution date.]
As described in this prospectus supplement, the Accrued Certificate
Interest allocable to each class of certificates is based on the Certificate
Principal Balance of that class.
DETERMINATION OF LIBOR
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LIBOR for any Interest Accrual Period after the initial Interest Accrual
Period will be determined as described in the three succeeding paragraphs.
On each distribution date, LIBOR shall be established by the trustee and
as to any Interest Accrual Period, LIBOR will equal the rate for United States
dollar deposits for one month which appears on the Dow Jones Telerate Screen
Page 3750 as of 11:00 A.M., London time, on the second LIBOR Business Day prior
to the first day of that Interest Accrual Period--the LIBOR rate adjustment
date. Telerate Screen Page 3750 means the display designated as page 3750 on the
Telerate Service or any other page as may replace page 3750 on that service for
the purpose of displaying London interbank offered rates of major banks. If the
rate does not appear on that page or any other page as may replace that page on
that service, or if the service is no longer offered, any other service for
displaying LIBOR or comparable rates as may be selected by the trustee after
consultation with the servicer, the rate will be the reference bank rate.
The reference bank rate will be determined on the basis of the rates at
which deposits in the U.S. Dollars are offered by the reference banks, which
shall be three major banks that are engaged in transactions in the London
interbank market, selected by the trustee after consultation with the servicer.
The reference bank rate will be determined as of 11:00 A.M., London time, on the
day that is one LIBOR business day prior to the immediately preceding
distribution date to prime banks in the London interbank market for a period of
one month in amounts approximately equal to the aggregate Certificate Principal
Balance of the Class A-1 Certificates then outstanding. The trustee will request
the principal London office of each of the reference banks to provide a
quotation of its rate. If at least two quotations are provided, the rate will be
the arithmetic mean of the quotations. If on that date fewer than two quotations
are provided as requested, the rate will be the arithmetic mean of the rates
quoted by one or more major banks in New York City, selected by the trustee
after consultation with the servicer, as of 11:00 A.M., New York City time, on
that date for loans in U.S. Dollars to leading European banks for a period of
one month in amounts approximately equal to the aggregate Certificate Principal
Balance of the Class A-1 Certificates then outstanding. If no quotations can be
obtained, the rate will be LIBOR for the prior distribution date, or in the case
of the first LIBOR RATE ADJUSTMENT DATE, % with respect to the Class A-1
Certificates; provided however, if, under the priorities listed previously in
this paragraph, LIBOR for a distribution date would be based on LIBOR for the
previous distribution date for the third consecutive distribution date, the
trustee shall select an alternative comparable index over which the trustee has
no control, used for determining one-month Eurodollar lending rates that is
calculated and published or otherwise made available by an independent party.
LIBOR business day means any day other than (i) a Saturday or a Sunday or (ii) a
day on which banking institutions in the city of London, England are required or
authorized by law to be closed.
The establishment of LIBOR by the trustee and the trustee's subsequent
calculation of the pass-through rates applicable to the Class A-1 Certificates
for the relevant Interest Accrual Period, in the absence of manifest error, will
be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Except as provided below, holders of the Class A Certificates will be
entitled to receive on each distribution date, in the priority described in this
prospectus supplement and to the extent
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of the portion of the Available Distribution Amount remaining after the
distribution of the Interest Distribution Amount is distributed, a distribution
allocable to principal equal to the Principal Distribution Amount.
Distributions of principal on the Class A Certificates on each
distribution date will be made, after distribution of the Interest Distribution
Amount, as follows:
(i) the Principal Distribution Amount to the Class A-3
Certificates in reduction of its Certificate Principal Balance, until
its Certificate Principal Balance has been reduced to zero, an amount
equal to the sum of the following:
(A) the Lockout Scheduled Percentage of the Class A-3
Certificates' pro rata share, based on its Certificate Principal
Balance relative to the aggregate Certificate Principal Balance
of all classes of Certificates, of the aggregate of the amounts
described in clauses [ ] of the definition of Principal
Distribution Amount; and
(B) the Lockout Prepayment Percentage of the Class A-3
Certificates' pro rata share, based on its Certificate Principal
Balance relative to the aggregate Certificate Principal Balance
of all classes of Class A Certificates, of the aggregate of the
amounts described in clause [ ] of the definition of Principal
Distribution Amount;
PROVIDED THAT if the aggregate of the amounts set forth in the definition of
Principal Distribution Amount is more than the balance of the Available
Distribution Amount remaining after the Interest Distribution Amount has been
distributed, the amount paid to the Class A-3 Certificates under this clause (i)
shall be reduced by an amount equal to the Class A-3 Certificates' pro rata
share, based on its aggregate Certificate Principal Balance relative to the
aggregate Certificate Principal Balance of the Class A Certificates of that
difference; and
(ii) the balance of the Principal Distribution Amount remaining
after the distributions, if any, described in clause (i) above shall be
distributed in the following order of priority:
(A) FIRST, concurrently, Class A-1 and Class A-2
Certificates, on a pro rata basis, until their Certificate
Principal Balances have been reduced to zero; and
(B) SECOND, to the Class A-3 Certificates until its
Certificate Principal Balance has been reduced to zero.]
On each distribution date, the financial guaranty insurer shall be
entitled to receive, after payment to the Class A Certificateholders of the
Interest Distribution Amount and the Principal Distribution Amount for such
distribution date, but before application of any Subordination Increase Amount,
from the Excess Cash Flow to the extent available therefor, the aggregate of any
payments made with respect to the Class A Certificates by the financial guaranty
insurer under the financial guaranty insurance policy to the extent not
previously reimbursed, plus interest thereon.
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OVERCOLLATERALIZATION PROVISIONS
The Pooling and Servicing Agreement requires that, on each distribution
date, Excess Cash Flow, if any, be applied on such distribution date as an
accelerated payment of principal on the Class A Certificates, but only as
follows: The Excess Cash Flow for any distribution date will derive primarily
from the amount of interest accrued on the mortgage loans in excess of the sum
of (a) interest at the related pass-through rates on the Certificate Principal
Balances of the Class A Certificates, (b) the premium payable on the financial
guaranty insurance policy in respect of the mortgage loans and (c) accrued
servicing fees in respect of the mortgage loans, in each case in respect of such
distribution date. Excess Cash Flow will be applied on any distribution date as
follows:
O FIRST, to pay to the holders of the Class A Certificates the principal
portion of Realized Losses incurred on the mortgage loans for the preceding
calendar month;
O SECOND, to pay to the financial guaranty insurer any Cumulative Insurance
Payments;
O THIRD, to pay any Subordination Increase Amount;
O FOURTH, to pay the holders of the Class A Certificates the amount of
any Prepayment Interest Shortfalls allocated thereto, to the extent
not covered by the Servicing Fee payable on such distribution date;
O FIFTH, to pay the holders of the Class A Certificates any Prepayment
Interest Shortfalls remaining unpaid from prior distribution dates
together with interest thereon; and
O SIXTH, to pay to the holders of the Class SB Certificates and Class
R Certificates any balance remaining, in accordance with the terms
of the Pooling and Servicing Agreement.
The application of Excess Cash Flow to the payment of principal on the Class A
Certificates has the effect of accelerating the amortization of the Class A
Certificates relative to the amortization of the mortgage loans.
The Pooling and Servicing Agreement requires that the Excess Cash Flow,
to the extent available as described above, will be applied as an accelerated
payment of principal on the Class A Certificates to the extent that the Targeted
Subordinated Amount exceeds the Subordinated Amount as of such distribution
date.
SUBORDINATION REDUCTION AMOUNT: In the event that the Targeted
Subordinated Amount is permitted to decrease or "step down" on a distribution
date in the future, a portion of the principal that would otherwise be
distributed to the holders of the Class A Certificates on such distribution date
shall not be distributed to the holders of the Class A Certificates on such
distribution date. This has the effect of decelerating principal distributions
to the Class A Certificates relative to the amortization of the mortgage loans,
and of reducing the Subordinated
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Amount. If, on any distribution date, the
Excess Subordinated Amount is, or, after taking into account all other
distributions to be made on such distribution date would be, greater than ZERO
(I.E., the Subordinated Amount is or would be greater than the Targeted
Subordinated Amount), then any amounts relating to principal which would
otherwise be distributed to the holders of the Class A Certificates on such
distribution date shall instead be distributed to the holders of the Class SB
Certificates in an amount equal to the Subordination Reduction Amount for such
distribution date.
FINANCIAL GUARANTY INSURANCE POLICY
The following summary of the terms of the financial guaranty insurance
policy does not purport to be complete and is qualified in its entirety by
reference to the financial guaranty insurance policy. The following information
regarding the financial guaranty insurance policy has been supplied by the
financial guaranty insurer for inclusion in this prospectus supplement.
GLOSSARY OF TERMS: As used in this section and in the financial guaranty
insurance policy, the following terms shall have the following meanings:
O AGREEMENT - The Pooling and Servicing Agreement, dated as of
_________, _____, among the depositor, the Seller, the Servicer and
the trustee, without regard to any amendment or supplement thereto
unless such amendment or supplement has been approved in writing by
the financial guaranty insurer.
O BUSINESS DAY - Any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which
the corporate trust office of the trustee under the Agreement or the
financial guaranty insurer is located are authorized or obligated by
law or executive order to close.
O DEFICIENCY AMOUNT - For the related Class A Certificates as of any
distribution date, (i) any shortfall in amounts available in the Payment
Account to pay interest accrued during the Interest Accrual Period on the
Certificate Principal Balance of the Class A Certificates at the applicable
Pass-Through Rate, net of any interest shortfalls relating to the Relief
Act and any Prepayment Interest Shortfalls allocated to the Class A
Certificates, (ii) the principal portion of any Realized Loss allocated to
the Class A Certificates and (iii) the Certificate Principal Balance of the
Class A Certificates to the extent unpaid on the final distribution date or
earlier termination of the trust fund pursuant to the terms of the
Agreement. For purposes of determining the Deficiency Amount, the final
distribution date will be the distribution date in ____________.
O HOLDER - Any person who is the registered or beneficial owner of any
Class A Certificate and who, on the applicable distribution date, is
entitled under the terms of the Class A Certificates to payment
thereunder.
O INSURED AMOUNT - As of any distribution date, any Deficiency Amount.
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O NOTICE - The telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached
to the financial guaranty insurance policy, the original of which is
subsequently delivered by registered or certified mail from the
trustee specifying the Insured Amount which shall be due and owing on
the applicable distribution date.
Capitalized terms used in the financial guaranty insurance policy and
not otherwise defined in the financial guaranty insurance policy shall have the
meanings set forth in the Agreement as of the date of execution of the financial
guaranty insurance policy, without giving effect to any subsequent amendment to
or modification of the Agreement unless the amendment or modification has been
approved in writing by the financial guaranty insurer.
The financial guaranty insurer, in consideration of the payment of the
premium and subject to the terms of the related financial guaranty insurance
policy, thereby unconditionally and irrevocably guarantees to any Holder that an
amount equal to each full and complete Insured Amount will be paid to the
trustee or its successor, as trustee for the Holders. The financial guaranty
insurer's obligations under each financial guaranty insurance policy for a
particular Insured Amount shall be discharged to the extent funds equal to the
applicable Insured Amount are received by the trustee, whether or not such funds
are properly applied by the trustee. Insured Amounts shall be paid only at the
time set forth in each financial guaranty insurance policy, and no accelerated
Insured Amounts shall be paid regardless of any acceleration of the Class A
Certificates, unless such acceleration is at the sole option of the financial
guaranty insurer. The financial guaranty insurance policy does not cover any
interest shortfalls relating to the Relief Act or Prepayment Interest
Shortfalls.
Notwithstanding the foregoing paragraph, the financial guaranty
insurance policy does not cover shortfalls, if any, attributable to the
liability of the trust fund, any REMIC or the trustee for withholding taxes, if
any, including interest and penalties in respect of any such liability.
The financial guaranty insurer will pay any amounts payable under the
financial guaranty insurance policy no later than 12:00 noon, New York City
time, on the later of the distribution date on which the related Deficiency
Amount, as defined below, is due or the Business Day following receipt in New
York, New York on a Business Day of a Notice; provided that if such Notice is
received after 12:00 noon, New York City time, on such Business Day, it will be
deemed to be received on the following Business Day. If any such Notice received
is not in proper form or is otherwise insufficient for the purpose of making a
claim under the financial guaranty insurance policy it shall be deemed not to
have been received for purposes of this paragraph, and the financial guaranty
insurer shall promptly so advise the trustee and the trustee may submit an
amended Notice.
Insured Amounts due under the financial guaranty insurance policy,
unless otherwise stated in the financial guaranty insurance policy, are to be
disbursed by the financial guaranty insurer to the trustee on behalf of the
Holders by wire transfer of immediately available funds in the amount of the
Insured Amount.
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The financial guaranty insurance policy is being issued under and
pursuant to and shall be construed under, the laws of the State of New York,
without giving effect to the conflict of laws principles thereof.
The financial guaranty insurance policy is not cancelable for any
reason. The premium on the financial guaranty insurance policy is not refundable
for any reason including payment, or provision being made for payment, prior to
maturity of the related Class A Certificates.
ALLOCATION OF LOSSES; SUBORDINATION
Subject to the terms thereof, the financial guaranty insurance policy
will cover all Realized Losses allocated to the Class A Certificates. If
payments are not made as required under the financial guaranty insurance policy,
Realized Losses will be allocable to the Class A Certificates based on the
following priorities.
The subordination provided to the Class A Certificates by the Class SB
Certificates will cover Realized Losses on the mortgage loans that are Defaulted
Mortgage Losses, Fraud Losses, Bankruptcy Losses and Special Hazard Losses. Any
Realized Losses which are not Excess Special Hazard Losses, Excess Fraud Losses,
Excess Bankruptcy Losses or Extraordinary Losses will be allocated as follows:
o first, to the Excess Cash Flow for the related distribution date; and
o second, to the Class SB Certificates
and the remainder of the Realized Losses among all the remaining classes of
Class A Certificates on a pro rata basis.
Any allocation of a Realized Loss, other than a Debt Service Reduction,
to a certificate will be made by reducing:
o its Certificate Principal Balance, in the case of the principal
portion of the Realized Loss, in each case until the Certificate
Principal Balance of that class has been reduced to zero, and
o the Accrued Certificate Interest thereon, in the case of the
interest portion of the Realized Loss, by the amount so allocated
as of the distribution date occurring in the month following the
calendar month in which the Realized Loss was incurred.
In addition, any allocation of a Realized Loss to a Class A Certificate may also
be made by operation of the payment priority to the Class A Certificates
described under "--Principal Distributions on the Class A Certificates" in this
prospectus supplement.
As used in this prospectus supplement, subordination refers to the
provisions discussed above for the sequential allocation of Realized Losses
among the various classes, as well as all provisions effecting those allocations
including the priorities for distribution of cash flows in the amounts described
in this prospectus supplement.
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As described in the prospectus, in some circumstances the servicer may
permit a servicing modification--the modification of a defaulted mortgage loan
to reduce the applicable mortgage rate or to reduce its outstanding principal
amount. Any principal reduction of this type shall constitute a Realized Loss at
the time of the reduction, and the amount by which each monthly payment is
reduced by any mortgage rate reduction shall constitute a Realized Loss in the
month in which each such reduced monthly payment is due.
Servicing modification reductions shall be allocated when incurred, as
provided above, in the same manner as other Realized Losses as described in this
prospectus supplement. Any Advances made on any mortgage loan will be reduced to
reflect any related servicing modifications previously made. The mortgage rate
and Net Loan Rate as to any mortgage loan will be deemed not reduced by any
servicing modification, so that the calculation of Accrued Certificate Interest
payable on the Class A Certificates will not be affected by the servicing
modification.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses, Extraordinary Losses or other losses of a type not covered by
subordination will be allocated on a pro rata basis among the Class A
Certificates and in an aggregate amount equal to the percentage of that loss
equal to the then aggregate Certificate Principal Balance of the Class A
Certificates divided by the then aggregate Stated Principal Balance of the
mortgage loans, in each case subject to the limitations set forth in the Pooling
and Servicing Agreement, and the remainder of the Realized Losses will be
allocated to the Class SB Certificates.
An allocation of a Realized Loss on a "pro rata basis" among two or more
classes of certificates means an allocation to each of those classes of
certificates on the basis of its then outstanding Certificate Principal Balance
prior to giving effect to distributions to be made on that distribution date in
the case of an allocation of the principal portion of a Realized Loss, or based
on the Accrued Certificate Interest thereon in respect of that distribution date
in the case of an allocation of the interest portion of a Realized Loss.
In order to maximize the likelihood of distribution in full of the
Interest Distribution Amount and Principal Distribution Amount, on each
distribution date, holders of Class A Certificates have a right to distributions
of the Available Distribution Amount that is prior to the rights of the holders
of the Class SB Certificates and Class R Certificates, to the extent necessary
to satisfy the Interest Distribution Amount and Principal Distribution Amount.
THE SPECIAL HAZARD AMOUNT SHALL INITIALLY BE EQUAL TO $ . As of any date
of DETERMINATION FOLLOWING THE CUT-OFF DATE, THE SPECIAL HAZARD AMOUNT SHALL
EQUAL $ less the sum of (A) any amounts allocated through subordination relating
to Special Hazard Losses and (B) the Adjustment Amount. The Adjustment Amount
will be equal to an amount calculated under the terms of the pooling and
servicing agreement.
THE FRAUD LOSS AMOUNT SHALL INITIALLY BE EQUAL TO $_____ . As of any date
of determination after the cut-off date, the Fraud Loss Amount shall equal (X)
prior to the third anniversary of the cut-off date an amount equal to ____% of
the aggregate principal balance of all of the mortgage loans as of the cut-off
date minus the aggregate amounts allocated through Subordination for Fraud
Losses up to that date of determination and (Y) from the third to the
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fifth anniversary of the cut-off date, an amount equal to (1) the lesser of (a)
the Fraud Loss Amount as of the most recent anniversary of the cut-off date and
(b) ____% of the aggregate principal balance of all of the mortgage loans as of
the most recent anniversary of the cut-off date minus (2) the aggregate amounts
allocated through subordination for Fraud Losses since the most recent
anniversary of the cut-off date up to that date of determination. On and after
the fifth anniversary of the cut-off date, the Fraud Loss Amount shall be zero
and Fraud Losses shall not be allocated through subordination.
THE BANKRUPTCY AMOUNT WILL INITIALLY BE EQUAL TO $ . As of any date of
determination on or after the first anniversary of the cut-off date, the
Bankruptcy Amount will equal the excess, if any, of (1) the lesser of (a) the
Bankruptcy Amount as of the business day next preceding the most recent
anniversary of the cut-off date and (b) an amount calculated under the terms of
the pooling and servicing agreement, which amount as calculated will provide for
a reduction in the Bankruptcy Amount, over (2) the aggregate amount of
Bankruptcy Losses allocated solely to the Class SB Certificates through
subordination since that anniversary.
Realized Losses allocated to the Class A Certificates will be covered by
the financial guaranty insurance policy. In the event payments are not made as
required under such policy, these losses will be borne by the holders of the
Class A Certificates.
With respect to any defaulted mortgage loan that is finally liquidated,
through foreclosure sale, disposition of the related mortgaged property if
acquired on behalf of the certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus its interest through the last
day of the month in which that mortgage loan was finally liquidated, after
application of all amounts recovered, net of amounts reimbursable to the
servicer or the subservicer for expenses, including attorneys' fees, towards
interest and principal owing on the mortgage loan.
Notwithstanding the foregoing, the provisions relating to subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
servicer has notified the trustee in writing that:
o the servicer is diligently pursuing any remedies that may exist in
connection with the representations and warranties made regarding the
related mortgage loan and
o either:
o the related mortgage loan is not in default with regard to payments due
thereunder or
o delinquent payments of principal and interest under the related mortgage
loan and any premiums on any applicable primary hazard insurance policy and
any related escrow payments relating to that mortgage loan are being
advanced on a current basis by the servicer or a subservicer.
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The Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount may
be further reduced as described in the prospectus under "Description of Credit
Enhancement--Subordination."
ADVANCES
Prior to each distribution date, the servicer is required to make
Advances which were due on the mortgage loans on the immediately preceding due
date and delinquent on the business day next preceding the related determination
date.
These Advances are required to be made only to the extent they are
deemed by the servicer to be recoverable from related late collections,
Insurance Proceeds or Liquidation Proceeds. The purpose of making these Advances
is to maintain a regular cash flow to the certificateholders, rather than to
guarantee or insure against losses. The servicer will not be required to make
any Advances for reductions in the amount of the monthly payments on the
mortgage loans due to Debt Service Reductions or the application of the Relief
Act or similar legislation or regulations. Any failure by the servicer to make
an Advance as required under the pooling and servicing agreement will constitute
an event of default thereunder, in which case the trustee, as successor
servicer, will be obligated to make any Advance, in accordance with the terms of
the pooling and servicing agreement.
All Advances will be reimbursable to the servicer on a first priority
basis from either (a) late collections, Insurance Proceeds and Liquidation
Proceeds from the mortgage loan as to which such unreimbursed Advance was made
or (b) as to any Advance that remains unreimbursed in whole or in part following
the final liquidation of the related mortgage loan, from any amounts otherwise
distributable on any of the Class A Certificates.
YEAR 2000 CONSIDERATIONS
OVERVIEW OF THE YEAR 2000 ISSUE
The Y2K issue is the term generally used to describe the potential
failure of information technology components on or after January 1, 2000 because
existing computer programs, applications and microprocessors frequently use only
two digits to identify a year. Since the Year 2000 is also a leap year, there
could be additional business disruptions as a result of the inability of many
computer systems to recognize February 29, 2000.
The failure to correct or replace computer programs, applications and
microprocessors with Y2K-ready alternatives may adversely impact the operations
of GMAC Mortgage Corporation on or after January 1, 2000. The responsibilities
of GMAC Mortgage Corporation as the servicer include collecting payments from
the subservicers in respect of the mortgage loans, calculating the Available
Distribution Amount for each distribution date, remitting such amount to the
trustee prior to each distribution date, calculating the amount of principal and
interest payments to be made to the certificateholders on each distribution
date, and preparing the monthly statement to be sent to certificateholders on
each distribution date.
RISKS RELATED TO Y2K
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Although GMAC Mortgage Corporation's remediation efforts are directed at
eliminating its Y2K exposure, there can be no assurance that these efforts will
fully mitigate the effect of all Y2K problems. If GMAC Mortgage Corporation
fails to identify or correct any material Y2K problem, including any problems
related to its mission critical servicing applications, there could be
significant disruptions in its normal business operations. These disruptions
could have a material adverse effect on GMAC Mortgage Corporation's ability to
(i) collect (and monitor any subservicer's collection of) payments on the
mortgage loans, (ii) distribute these collections to the trustee and (iii)
provide reports to certificateholders as described in this prospectus
supplement. Furthermore, if any subservicer, the trustee or any other business
partner or any of their respective vendors or third party service providers are
not Y2K-ready, the ability to (a) service the mortgage loans, in the case of any
subservicer or any of their respective vendors or third party service providers,
and (b) make distributions to certificateholders, in the case of the trustee or
any of its vendors or third party service providers, may be materially and
adversely affected.
This section entitled "Year 2000 Considerations" contains
forward-looking statements within the meaning of Section 27A of the Securities
Act. All statements in this section that are not statements of historical fact
are forward-looking statements. Forward-looking statements made in this Y2K
discussion are subject to some risks and uncertainties. Important factors that
could cause results to differ materially from such forward-looking statements
include, among other things, the ability of GMAC Mortgage Corporation to
successfully identify components that may pose Y2K problems, the nature and
amount of programming required to fix the affected components, the costs of
labor and consultants related to these efforts, the continued availability of
resources, both personnel and technology, and the ability of business partners
that interface with GMAC Mortgage Corporation to successfully address their Y2K
issues.
THE FINANCIAL GUARANTY INSURER
The following information has been supplied by the financial guaranty
insurer for inclusion in this Prospectus Supplement. No representation is made
by the depositor, the underwriters or any of their affiliates as to the accuracy
or completeness of such information.
[ ]
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and the aggregate amount of distributions on the
Class A Certificates will be affected by the rate and timing of principal
payments on the mortgage loans, the amount and timing of mortgagor defaults
resulting in Realized Losses and by adjustments to the mortgage rates. The rate
of default of mortgage loans secured by second liens may be greater than that of
mortgage loans secured by first liens. The yields may be adversely affected by a
higher or lower than anticipated rate of principal payments on the mortgage
loans in the trust fund. The rate of principal payments on the mortgage loans
will in turn be affected by the
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amortization schedules of the mortgage loans, the rate and timing of mortgagor
prepayments on the mortgage loans by the mortgagors, liquidations of defaulted
mortgage loans and repurchases of mortgage loans due to breaches of some
representations and warranties.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the mortgage loans may, and the timing of Realized Losses will,
significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. In addition, the rate of prepayments of the mortgage loans and the
yield to investors on the certificates may be affected by refinancing programs,
which may include general or targeted solicitations, as described under
"Maturity and Prepayment Considerations" in the prospectus. Since the rate and
timing of principal payments on the mortgage loans will depend on future events
and on a variety of factors, as described in this prospectus supplement and in
the prospectus under "Yield Considerations" and "Maturity and Prepayment
Considerations," no assurance can be given as to the rate or the timing of
principal payments on the Class A Certificates.
The amount of Excess Cash Flow may be adversely affected by the
prepayment of mortgage loans with higher mortgage rates. Any reduction of this
type will reduce the amount of Excess Cash Flow that is available to cover
Realized Losses, increase overcollateralization on the related classes of Class
A Certificates and cover Prepayment Interest Shortfalls, to the extent and in
the manner described in this prospectus supplement. See "Description of the
Mortgage Pool--General," "Description of the Certificates--Overcollateralization
Provisions" and "--Allocation of Losses; Subordination" in this prospectus
supplement.
The Class A Certificates are subject to various priorities for payment
of principal as described in this prospectus supplement. Distributions of
principal on classes of Class A Certificates having an earlier priority of
payment will be affected by the rates of prepayment of the mortgage loans early
in the life of the mortgage pool. The timing of commencement of principal
distributions and the weighted average lives of classes of Class A Certificates
with a later priority of payment will be affected by the rates of prepayment of
the mortgage loans both before and after the commencement of principal
distributions on those classes. In addition, the yield to maturity of the Class
A Certificates will depend on whether, to what extent, and the timing with
respect to which, Excess Cash Flow is used to accelerate payments of principal
on the Class A Certificates or any Subordination Reduction Amount is released.
See "Description of the Certificates--Overcollateralization Provisions" in this
prospectus supplement.
[A subservicer may allow the refinancing of a mortgage loan by accepting
prepayments on the mortgage loan and permitting a new loan secured by a mortgage
on the same property, which may be originated by the subservicer or the Servicer
or any of their respective affiliates or by an unrelated entity. In the event of
such a refinancing, the new loan would not be included in the trust and,
therefore, the refinancing would have the same effect as a prepayment in full of
the related mortgage loan. A subservicer or the Servicer may, from time to time,
implement refinancing or modification programs designed to encourage
refinancing. The 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, subservicers or the Servicer
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may encourage assumptions of mortgage loans, including defaulted mortgage loans,
under which creditworthy borrowers assume the outstanding indebtedness of those
mortgage loans which may be removed from the trust. As a result of these
programs, the rate of principal prepayments of the mortgage loans 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 trust may decline.]
The mortgage loans in most cases may be prepaid by the mortgagors at any
time without payment of any prepayment fee or penalty, although a portion of the
mortgage loans provide for payment of a prepayment charge, which may have a
substantial effect on the rate of prepayment of those mortgage loans. See
"Description of the Mortgage Pool--Mortgage Pool Characteristics" in this
prospectus supplement.
Most of the mortgage loans contain due-on-sale clauses. As described
under "Description of the Certificates--Principal Distributions on the Class A
Certificates" in this prospectus supplement, during specified periods all or a
disproportionately large percentage of principal prepayments on the mortgage
loans will be allocated among the Class A Certificates, other than the Lockout
Certificates, and during specified periods no principal prepayments on the
mortgage loans will be distributed to the Lockout Certificates. Furthermore, if
the Certificate Principal Balances of the Class A Certificates, other than the
Lockout Certificates, have been reduced to zero, the Lockout Certificates may,
under some circumstances, receive all mortgagor prepayments made during the
preceding calendar month.
Prepayments, liquidations and purchases of the mortgage loans will
result in distributions to holders of the Class A Certificates of principal
amounts which would otherwise be distributed over the remaining terms of the
mortgage loans. Factors affecting prepayment, including defaults and
liquidations, of mortgage loans include changes in mortgagors' housing needs,
job transfers, unemployment, mortgagors' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest
rates, solicitations and servicing decisions. In addition, if prevailing
mortgage rates fell significantly below the mortgage rates on the mortgage
loans, the rate of prepayments, including refinancings, would be expected to
increase. Conversely, if prevailing mortgage rates rose significantly above the
mortgage rates on the mortgage loans, the rate of prepayments on the mortgage
loans would be expected to decrease. Furthermore, since mortgage loans secured
by second liens are not generally viewed by borrowers as permanent financing and
generally carry a high rate of interest, the mortgage loans secured by second
liens may experience a higher rate of prepayment than traditional first lien
mortgage loans. Prepayment of the related first lien may also affect the rate of
prepayments in the mortgage loans.
The rate of defaults on the mortgage loans will also affect the rate and
timing of principal payments on the mortgage loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default of mortgage loans secured by second liens is likely
to be greater than that of mortgage loans secured by traditional first lien
mortgage loans, particularly in the case of mortgage loans with high combined
LTV ratios or low junior ratios. The rate of default on mortgage loans which are
refinance or reduced documentation mortgage loans, and on mortgage loans with
high LTV ratios, may be higher than for other types of mortgage loans.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the mortgage loans will be affected by the general economic condition of the
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region of the country in which the related mortgaged properties are located. The
risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values. See
"Maturity and Prepayment Considerations" in the prospectus. In addition, because
borrowers of Balloon Loans are required to make a relatively large single
payment upon maturity, it is possible that the default risk associated with
Balloon Loans is greater than that associated with fully-amortizing mortgage
loans. See "Risk Factors" in this prospectus supplement.
To the extent that any losses are incurred on any of the mortgage loans
that are not covered by the Excess Cash Flow, a reduction in the Subordinated
Amount or the financial guaranty insurance policy, holders of the Class A
Certificates will bear the risk of losses resulting from default by mortgagors.
See "Risk Factors--The return on your certificates will be reduced if losses
exceed the credit enhancement available to your certificates" in this prospectus
supplement. Even where the financial guaranty insurance policy covers all losses
incurred on the mortgage loans, this coverage may accelerate principal payments
on the Class A Certificates, thus reducing the weighted average life of the
Class A Certificates.
The periodic increase in interest paid by the mortgagor of a Buy-Down
Loan may increase the risk of default with respect to the related mortgage loan.
See "Yield Considerations" in the prospectus.
The amount of interest otherwise payable to holders of the Class A
Certificates will be reduced by any interest shortfalls to the extent not
covered by subordination or the servicer, including Prepayment Interest
Shortfalls. These shortfalls will not be offset by a reduction in the servicing
fees payable to the servicer or otherwise, except as described in this
prospectus supplement with respect to some Prepayment Interest Shortfalls. See
"Yield Considerations" in the prospectus and "Description of the
Certificates--Interest Distributions" in this prospectus supplement for a
discussion of the effect of principal prepayments on the mortgage loans on the
yield to maturity of the Class A Certificates and possible shortfalls in the
collection of interest.
In addition, the yield to maturity on each class of the Class A
Certificates will depend on, among other things, the price paid by the holders
of the Class A Certificates and the related pass-through rate. The extent to
which the yield to maturity of any Class A Certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium. In general, if a class of Class A Certificates is purchased
at a premium and principal distributions thereon occur at a rate faster than
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than anticipated at the time of purchase. Conversely, if a class of Class
A Certificates is purchased at a discount and principal distributions thereon
occur at a rate slower than assumed at the time of purchase, the investor's
actual yield to maturity will be lower than anticipated at the time of purchase.
For additional considerations relating to the yield on the certificates, see
"Yield Considerations" and "Maturity and Prepayment Considerations" in the
prospectus.
Because the mortgage rates on the mortgage loans and the pass-through
rates on the Class A Certificates (other than the Class A-1 Certificates) are
fixed, the rates will not change in response to changes in market interest
rates. Accordingly, if market interest rates or market yields for securities
similar to the offered certificates were to rise, the market value of the
offered certificates may decline.
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The yield to investors on the Class A-1 Certificates will be sensitive
to fluctuations in the level of LIBOR and the pass-through rate will be capped.
See "Risk Factors--The yield on your certificates will be affected by the
specific characteristics that apply to that class, discussed below - Class A-1
Certificates". A number of factors affect the performance of any index, such as
LIBOR, and may cause such index to move in a manner different from other
indices. To the extent that any index may reflect changes in the general level
of interest rates less quickly than other indices, in a period of rising
interest rates, increases in the yield to the Class A-1 Certificateholders due
to such rising interest rates may occur later than that which would be produced
by other indices. Moreover, an increase in the level of LIBOR will increase the
likelihood that the pass-through rate on the Class A-1 Certificates will be
limited by the weighted average Net Loan Rate on the mortgage loans in
accordance with such index, than of mortgage loans which adjust in accordance
with other indices.
CLASS A CERTIFICATES: The rate and timing of principal payments on and
the weighted average lives of the Class A Certificates will be affected
primarily by the rate and timing of principal payments, including prepayments,
defaults, liquidations and purchases, on the mortgage loans.
LOCKOUT CERTIFICATES: Investors in the Lockout Certificates should be
aware that because the Lockout Certificates do not receive any distributions of
payments of principal prior to the distribution date OCCURRING IN , and may
receive a disproportionately small percentage of principal prepayments until the
distribution date occurring in ______, unless the Certificate Principal Balances
of the Class A Certificates, other than the Lockout Certificates, have been
reduced to zero, the weighted average life of the Lockout Certificates will be
longer than would otherwise be the case. The effect on the market value of the
Lockout Certificates of changes in market interest rates or market yields for
similar securities will be greater than for other classes of Class A
Certificates entitled to principal distributions.
ASSUMED FINAL DISTRIBUTION DATE: The assumed final distribution date
with respect to each class of THE CLASS A CERTIFICATES IS 25, , which is the
distribution date immediately following the latest scheduled maturity date for
any mortgage loan. No event of default, change in the priorities for
distribution among the various classes or other provisions under the pooling and
servicing agreement will arise or become applicable solely by reason of the
failure to retire the entire Certificate Principal Balance of any class of
certificates on or before its assumed final distribution date.
The actual final distribution date with respect to each class of Class A
Certificates could occur significantly earlier than the assumed final
distribution date for that class because:
o Excess Cash Flow will be used to make accelerated payments of principal,
i.e. Subordination Increase Amounts, to the holders of the Class A
Certificates, which payments will have the effect of shortening the
weighted average lives of the Class A Certificates of each class,
o prepayments are likely to occur, which will also have the effect of
shortening the weighted average lives of the Class A Certificates, and
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o the servicer may cause a termination of the trust when the aggregate Stated
Principal Balance of the mortgage loans in the trust is less than 10% of
the aggregate cut-off date balance.
WEIGHTED AVERAGE LIFE: Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security to the
date of distribution to the investor of each dollar distributed in reduction of
principal of the security assuming no losses. The weighted average life of the
Class A Certificates will be influenced by, among other things, the rate at
which principal of the mortgage loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement, the
prepayment speed assumption, represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of new mortgage
loans. A prepayment assumption of 100% PSA assumes constant prepayment rates of
0.20% per annum of the then outstanding principal balance of the mortgage loans
in the first month of the life of the mortgage loans and an additional 0.20% per
annum in each month thereafter until the 30th month. Beginning in the 30th month
and in each month thereafter during the life of the mortgage loans , 100% PSA
assumes a constant prepayment rate of 6% per annum each month. As used in the
table below, "0% PSA" assumes prepayment rates equal to 0% of PSA--NO
PREPAYMENTS. CORRESPONDINGLY, "100% PSA" AND " % PSA" assumes prepayment rates
equal to 100% of PSA AND % of PSA, respectively, and so forth. PSA does not
purport to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of mortgage loans , including
the mortgage loans .
The table captioned "Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of PSA" has been prepared on the basis
of assumptions as listed in this paragraph regarding the weighted average
characteristics of the Mortgage loans that are expected to be included in the
trust fund as described under "Description of the Mortgage Pool" in this
prospectus supplement and their performance. The table assumes, among other
things, that: (i) as of the date of issuance of the Class A Certificates, the
mortgage loans have the following characteristics:
Aggregate principal balance $ $
Weighted average mortgage rate % %
Weighted average servicing fee % %
rate
Weighted average original term
to maturity (months)
Weighted average remaining term
to maturity (months)
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(ii) except with respect to the Balloon Loans the scheduled monthly
payment for each mortgage loan has been based on its outstanding balance,
mortgage rate and remaining term to maturity, so that the mortgage loan will
amortize in amounts sufficient for its repayment over its remaining term to
maturity; (iii) none of the unaffiliated sellers, the servicer or the depositor
will repurchase any mortgage loan, as described under "The Trusts--The Mortgage
Loans" and "Description of the Securities--Assignment of Loans and Certain
Insolvency and Bankruptcy Issues" in the prospectus, and neither the servicer
nor the depositor exercises any option to purchase the mortgage loans and
thereby cause a termination of the trust fund; (iv) there are no delinquencies
or Realized Losses on the mortgage loans , and principal payments on the
mortgage loans will be timely received together with prepayments, if any, at the
respective constant percentages of PSA set forth in the table; (v) there is no
Prepayment Interest Shortfall or any other interest shortfall in any month; (vi)
payments on the certificates will be received on the 25th day of each month,
commencing in _________; (vii) payments on the mortgage loans earn no
reinvestment return; (viii) there are no additional ongoing trust fund expenses
payable out of the trust fund; and (ix) the certificates will be purchased on
_______________, _______. Clauses (i) through (ix) above are collectively
referred to as the structuring assumptions.
The actual characteristics and performance of the mortgage loans will
differ from the assumptions used in constructing the table below, which is
hypothetical in nature and is provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. For
example, it is very unlikely that the mortgage loans will prepay at a constant
level of PSA until maturity or that all of the mortgage loans will prepay at the
same level of PSA. Moreover, the diverse remaining terms to maturity and
mortgage rates of the mortgage loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
PSA specified, even if the weighted average remaining term to maturity and
weighted average mortgage rate of the mortgage loans are as assumed. Any
difference between the assumptions and the actual characteristics and
performance of the mortgage loans, or actual prepayment or loss experience, will
affect the percentages of initial Certificate Principal Balances outstanding
over time and the weighted average lives of the classes of Class A Certificates.
In accordance with the foregoing discussion and assumptions, the
following table indicates the weighted average life of each class of Class A
Certificates, and sets forth the percentages of the initial Certificate
Principal Balance of each class of Class A Certificates that would be
outstanding after each of the distribution dates at the various percentages of
PSA shown.
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PSA
Class A-1 Class A-2 Class A-3
<S> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE % % % % % % % % %
- -----------------------------
</TABLE>
S-60
<PAGE>
Initial Percentage
- -----------------------------
Weighted Average Life in
Years (**)
- -----------------------------
- ------------
o Indicates a number that is greater than zero but less than 0.5%.
O (TABLE CONTINUED ON NEXT PAGE.)
** The weighted average life of a certificate of any class is determined by
(i) multiplying the net reduction, if any, of the Certificate Principal
Balance by the number of years from the date of issuance of the
certificate to the related distribution date, (ii) adding the results,
and (iii) dividing the sum by the aggregate of the net reduction of the
Certificate Principal Balance described in (i) above.
This table has been prepared based on the structuring assumptions,
including the assumptions relating to the characteristics and performance of the
mortgage loans, which differ from their actual characteristics, and should be
read in conjunction therewith.
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued under a pooling and servicing agreement
dated as of __________, ____, among the depositor, the seller, the servicer, and
__________, as trustee. Reference is made to the prospectus for important
information in addition to that described in this prospectus supplement
regarding the terms and conditions of the pooling and servicing agreement and
the Class A Certificates. The trustee will appoint ____________________to serve
as custodian in connection with the certificates. The Class A Certificates will
be transferable and exchangeable at the corporate trust office of the trustee,
which will serve as certificate registrar and paying agent. The depositor will
provide a prospective or actual certificateholder without charge, on written
request, a copy, without exhibits, of the pooling and servicing agreement.
Requests should be addressed to the President, Residential Asset Mortgage
Products, Inc., 8400 Normandale Lake Boulevard, Suite 600, Minneapolis,
Minnesota 55437.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicing fees for each mortgage loan are payable out of the
interest payments on that mortgage LOAN. THE SERVICING FEES RELATING TO EACH
MORTGAGE LOAN WILL BE AT LEAST % per annum and not more THAN % per annum of the
outstanding principal balance of that mortgage loan, with a weighted average
SERVICING FEE OF APPROXIMATELY % per annum.
The servicer is obligated to pay some ongoing expenses associated with
the trust fund and incurred by the servicer in connection with its
responsibilities under the pooling and servicing agreement. See "The Agreements"
in the prospectus for information regarding other possible compensation to the
servicer and subservicers and for information regarding expenses payable by the
servicer.
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<PAGE>
[REFINANCING OF SENIOR LIEN
The servicer may permit the refinancing of any existing lien senior to a
mortgage loan, provided that some conditions described in the pooling and
servicing agreement are satisfied and the resulting combined LTV ratio does not
exceed 100%.
COLLECTION AND LIQUIDATION PRACTICES; LOSS MITIGATION
The servicer will make reasonable efforts to collect all payments called
for under the mortgage loans and will, consistent with the pooling and servicing
agreement, follow such collection procedures which shall be normal and usual in
its general mortgage servicing activities with respect to mortgage loans
comparable to the mortgage loans. The servicer is authorized to engage in a wide
variety of loss mitigation practices to the mortgage loans, including waivers,
modifications, payment forbearances, partial forgiveness, entering into
repayment schedule arrangements, and capitalization of arrearages; provided in
any case that the servicer determines that the action is not materially adverse
to the interests of the certificateholders and is generally consistent with the
servicer's policies with respect to similar loans; and provided further that
some modifications, including reductions in the loan rate, partial forgiveness
or a maturity extension, may only be taken if the mortgage loan is in default or
if default is reasonably foreseeable. For mortgage loans that come into and
continue in default, the servicer may take a variety of actions including
foreclosure upon the mortgaged property, writing off the balance of the mortgage
loan as bad debt, taking a deed in lieu of foreclosure, accepting a short sale,
permitting a short refinancing, arranging for a repayment plan, modifications as
described above, or taking an unsecured note. See "Description of the Securities
Servicing and Administration of Loans" in the prospectus.]
VOTING RIGHTS
There are actions specified in the prospectus that may be taken by
holders of certificates evidencing a specified percentage of all undivided
interests in the trust fund and may be taken by holders of certificates entitled
in the aggregate to that percentage of the voting rights. ___% of all voting
rights will be allocated among all holders of the Class A Certificates, ___% of
all voting rights will be allocated among all holders of the Class R
Certificates and ___% of all voting rights will be allocated among all holders
of the Class SB Certificates, respectively, in each case in proportion to the
percentage interests evidenced by their respective certificates. The pooling and
servicing agreement may be amended without the consent of the holders of the
Class R Certificates in specified circumstances.
TERMINATION
The circumstances under which the obligations created by the pooling and
servicing agreement will terminate relating to the Class A Certificates are
described in "The Agreements--Termination; Retirement of Securities" in the
prospectus. The servicer will have the option, on any distribution date on which
the aggregate Stated Principal Balance of the mortgage loans is
S-62
<PAGE>
less than 10% of the aggregate principal balance of the mortgage loans as of the
cut-off date, either to purchase all remaining mortgage loans and other assets
in the trust fund, except for the policy, thereby effecting early retirement of
the Class A Certificates or to purchase, in whole but not in part, the
certificates. Any such purchase of mortgage loans and other assets of the trust
fund shall be made at a price equal to the sum of (a) 100% of the unpaid
principal balance of each mortgage loan or the fair market value of the related
underlying mortgaged properties with respect to defaulted mortgage loans as to
which title to such mortgaged properties has been acquired if such fair market
value is less than such unpaid principal balance, net of any unreimbursed
Advance attributable to principal, as of the date of repurchase plus (b) accrued
interest thereon at the Net Loan Rate to, but not including, the first day of
the month in which the repurchase price is distributed plus (c) any amounts due
to the financial guaranty insurer under the insurance and indemnity agreement.
Distributions on the certificates relating to any optional termination
will be paid, first, to the Class A Certificates and second, to the Class SB
Certificates in the order of their payment priority. The proceeds of any such
distribution may not be sufficient to distribute the full amount to each class
of certificates if the purchase price is based in part on the fair market value
of the underlying mortgaged property and the fair market value is less than 100%
of the unpaid principal balance of the related mortgage loan. Any purchase of
mortgage loans and termination of the trust requires the consent of the
financial guaranty insurer if it would result in a draw on the policy. Any such
purchase of the certificates will be made at a price equal to 100% of their
Certificate Principal Balance plus the sum of interest thereon for the
immediately preceding Interest Accrual Period at the then-applicable
pass-through rate and any previously unpaid Accrued Certificate Interest. Upon
the purchase of such certificates or at any time thereafter, at the option of
the servicer, the mortgage loans may be sold, thereby effecting a retirement of
the certificates and the termination of the trust fund, or the certificates so
purchased may be held or resold by the servicer or the depositor.
Upon presentation and surrender of the Class A Certificates in
connection with the termination of the trust fund or a purchase of certificates
under the circumstances described in the two preceding paragraphs, the holders
of the Class A Certificates will receive an amount equal to the Certificate
Principal Balance of that class plus interest thereon for the immediately
preceding Interest Accrual Period at the then-applicable pass-through rate, plus
any previously unpaid Accrued Certificate Interest. However, distributions to
the holders of the most subordinate class of certificates outstanding will be
reduced, as described in the preceding paragraph, in the case of the termination
of the trust fund resulting from a purchase of all the assets of the trust fund.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
__________________, counsel to the depositor, has filed with the
depositor's registration statement an opinion to the effect that, assuming
compliance with all provisions of the pooling and servicing agreement, for
federal income tax purposes, the trust fund will qualify as a REMIC under the
Internal Revenue Code.
For federal income tax purposes:
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<PAGE>
o the Class R Certificates will constitute the sole class of "residual
interests" in the REMIC and
o each class of Class A Certificates and the Class SB Certificates will
represent ownership of "regular interests" in the REMIC and will be treated
as debt instruments of the REMIC
See "Material Federal Income Tax Consequences--Classification of REMICs
and FASITs" in the prospectus.
FOR FEDERAL INCOME TAX PURPOSES, THE CLASS Certificates will,
[the Class Certificates may] [and all other Classes of Class
A Certificates will not] be treated as
having been issued with original issue discount. The prepayment assumption that
will be used in determining the rate of accrual of original issue discount,
market discount and premium, if any, for federal income tax purposes will be
based on the assumption that, subsequent to the date of any determination the
mortgage loans WILL PREPAY AT A RATE EQUAL TO % PSA. No representation is made
that the mortgage loans will prepay at that rate or at any other rate. See
"Material Federal Income Tax Consequences--General" and "--Taxation of Owners of
REMIC and FASIT Regular Certificates--Original Issue Discount" in the
prospectus.
If the method for computing original issue discount described in the
prospectus results in a negative amount for any period with respect to a
certificateholder, the amount of original issue discount allocable to that
period would be zero and the certificateholder will be permitted to offset that
negative amount only against future original issue discount, if any,
attributable to those certificates.
In some 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 issuer. Accordingly, it is possible that the holder of a
certificate may be able to select a method for recognizing original issue
discount that differs from that used by the servicer in preparing reports to the
certificateholders and the IRS.
Some of the classes of Class A Certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
one of those classes of certificates will be treated as holding a certificate
with amortizable bond premium will depend on the certificateholder's purchase
price and the distributions remaining to be made on the certificate at the time
of its acquisition by the certificateholder. Holders of those classes of
certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Material Federal Income Tax
Consequences--Taxation of Owners of REMIC and FASIT Regular Certificates" and
"--Premium" in the prospectus.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue Code and "real estate assets" under
Section 856(c)(4)(A) of the Internal Revenue Code in the same proportion that
the assets of the trust fund would be so treated. In addition, interest on the
Class A Certificates will be treated as "interest on obligations secured by
mortgages on real property" under Section 856(c)(3)(B) of the Internal Revenue
Code to the extent that the Class A Certificates are treated as "real estate
assets" under Section 856(c)(4)(A)
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<PAGE>
of the Internal Revenue Code. Moreover, the Class A Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3) of the Internal
Revenue Code if transferred to another REMIC on its startup day in exchange for
a regular or residual interest therein. However, prospective investors in Class
A Certificates that will be treated as assets described in Section 860G(a)(3) of
the Internal Revenue Code should note that, notwithstanding that treatment, any
repurchase of a certificate pursuant to the right of the servicer or the
depositor to repurchase the Class A Certificates may adversely affect any REMIC
that holds the Class A Certificates if the repurchase is made under
circumstances giving rise to a Prohibited Transaction Tax. See "The Pooling and
Servicing Agreement--Termination" in this prospectus supplement and "Material
Federal Income Tax Consequences--Taxation of Owners of REMIC Residual
Certificates--Prohibited Transaction and Other Taxes" in the prospectus.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations which make some
modifications to the withholding, backup withholding and information reporting
rules described above. The new regulations attempt to unify certification
requirements and modify reliance standards. The new regulations will generally
be effective for payments made after December 31, 1999, subject to some
transition rules. Prospective investors are urged to consult their own tax
advisors regarding the new regulations.
For further information regarding federal income tax consequences of
investing in the Class A Certificates, see "Material Federal Income Tax
Consequences--Taxation of Owners of REMIC and FASIT Regular Certificates" in the
prospectus.
METHOD OF DISTRIBUTION
In accordance with the terms and conditions of an underwriting agreement,
dated_____________, _____________will serve as underwriter and has agreed to
purchase and the depositor has agreed to sell the Class A Certificates. The
certificates being sold to the underwriter are referred to as the underwritten
certificates. It is expected that delivery of the underwritten certificates will
be made only in book-entry form through the Same Day Funds Settlement System of
DTC on or about _____________, against payment therefor in immediately available
funds.
In connection with the underwritten certificates, the underwriter has
agreed, in accordance with the terms and conditions of the underwriting
agreement, to purchase all of the underwritten certificates if any of its
underwritten certificates are purchased thereby.
The underwriting agreement provides that the obligations of the
underwriter to pay for and accept delivery of the underwritten certificates are
subject to, among other things, the receipt of legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
depositor's registration statement shall be in effect, and that no proceedings
for that purpose shall be pending before or threatened by the Commission.
The distribution of the underwritten certificates by the underwriter may
be effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the depositor from the sale of the underwritten
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<PAGE>
certificates, before deducting expenses payable BY THE DEPOSITOR, WILL BE
APPROXIMATELY ____% of the aggregate Certificate Principal Balance of the
underwritten certificates plus accrued interest thereon from the cut-off date.
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 underwriter in the
distribution of the 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 of 1933, as amended.
The underwriting agreement provides that the depositor will indemnify
the underwriter, and that under limited circumstances the underwriter will
indemnify the depositor, against some liabilities under the Securities Act, or
contribute to payments required to be made in respect thereof.
There is currently no secondary market for the Class A Certificates. The
underwriter intends to make a secondary market in the underwritten certificates
but is not obligated to do so. There can be no assurance that a secondary market
for the Class A Certificates will develop or, if it does develop, that it will
continue. The Class A Certificates will not be listed on any securities
exchange.
The primary source of information available to investors concerning the
Class A Certificates will be the monthly statements discussed in the prospectus
under "Description of the Securities--Reports to Securityholders," which will
include information as to the outstanding principal balance of the Class A
Certificates. There can be no assurance that any additional information
regarding the Class A Certificates will be available through any other source.
In addition, the depositor is not aware of any source through which price
information about the Class A Certificates will be available on an ongoing
basis. The limited nature of this information regarding the Class A Certificates
may adversely affect the liquidity of the Class A Certificates, even if a
secondary market for the Class A Certificates becomes available.
LEGAL OPINIONS
[Certain legal matters with respect to the servicer and the seller will be
passed upon by the servicer and the seller by the General Counsel to GMAC
Mortgage Corporation.] Certain legal matters relating to the CERTIFICATES WILL
BE PASSED UPON FOR THE DEPOSITOR BY _____________ , and _____________ FOR THE
UNDERWRITER BY________________,___________ .
EXPERTS
The consolidated financial statements of [financial guaranty insurer]
____________ [and subsidiaries], as of December 31, 199_ and 199_ and for each
of the years in the three-year period ended December 31, 199_ are incorporated
by reference in this prospectus supplement and in the registration statement in
reliance upon the report of _________, independent certified public accountants,
incorporated by reference in this prospectus supplement, and upon the authority
of __________ as experts in accounting and auditing.
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<PAGE>
RATINGS
It is a condition of the issuance of the Class A Certificates that they be
rated "AAA" by ___________AND __________________.
[ _____________'s ratings on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of payments required under the
pooling and servicing agreement.
______________'s ratings take into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the certificates,
and the extent to which the payment stream in the mortgage pool is adequate to
make payments required under the certificates.
_______________'s rating on the certificates does not, however, constitute a
statement regarding frequency of prepayments on the mortgage s. See "Certain
Yield and Prepayment Considerations" in this prospectus supplement. In addition,
the ratings do not address the likelihood of the receipt of any amounts in
respect of Prepayment Interest Shortfalls.
THE RATINGS ASSIGNED BY ___________ to mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all distributions
to which they are entitled UNDER THE TRANSACTION STRUCTURE. __________'s ratings
reflect its analysis of the riskiness of the underlying mortgage loans and the
structure of the transaction as described in the operative DOCUMENTS.
___________'s ratings do not address the effect on the certificates' yield
attributable to prepayments or recoveries on the underlying mortgage loans . In
addition, the ratings do not address the likelihood of the receipt of any
amounts in respect of Prepayment Interest Shortfalls.
The depositor has not requested a rating on the Class A Certificates by any
rating agency other than ___________ AND _____________. However, there can be no
assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any other rating
agency. A rating on the Certificates by another rating agency, if assigned at
all, may be lower than the ratings assigned to the Class A Certificates by
__________ AND ___________.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Class A Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional support or
credit enhancement with respect to the Class A Certificates.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related
securities" for purposes of SMMEA because the mortgage pool includes mortgage
loans that are secured by subordinate liens on the related mortgage properties.
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<PAGE>
One or more classes of the Class A Certificates may be viewed as
"complex securities" under TB13a, which applies to thrift institutions regulated
by the OTS.
The depositor makes no representations as to the proper characterization
of any class of the Class A Certificates for legal investment or other purposes,
or as to the ability of particular investors to purchase any class of the Class
A Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Class A
Certificates. Accordingly, all investors whose investment activities are subject
to legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent any class of the Class A Certificates
constitutes a legal investment or is subject to investment, capital or other
restrictions.
See "Legal Investment Matters" in the prospectus.
ERISA CONSIDERATIONS
A fiduciary of any ERISA plan, any insurance company, whether through
its general or separate accounts, or any other person investing ERISA plan
assets, as defined under "ERISA Considerations--ERISA Plan Asset Regulations" in
the prospectus, should carefully review with its legal advisors whether the
purchase or holding of Class A Certificates could give rise to a transaction
prohibited or not otherwise permissible under ERISA or Section 4975 of the
Internal Revenue Code. The purchase or holding of the Class A Certificates by or
on behalf of an ERISA plan or with ERISA plan assets may qualify for exemptive
relief under the RFC exemption, as described under "ERISA
Considerations--Prohibited Transaction Exemptions" in the prospectus. However,
the RFC exemption contains a number of conditions which must be met for the
exemption to apply, including the requirement that any ERISA plan must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act.
Insurance companies contemplating the investment of general account
assets in the Class A Certificates should consult with their legal advisors with
respect to the applicability of Section 401(c) of ERISA, as described under
"ERISA Considerations--Insurance Company General Accounts" in the prospectus.
[The DOL issued proposed regulations under Section 401(c) on December 22, 1997,
but the required final regulations have not been issued as of the date of this
prospectus supplement.]
Any fiduciary or other investor of ERISA plan assets that proposes to
acquire or hold the Class A Certificates on behalf of an ERISA plan or with
ERISA plan assets should consult with its counsel with respect to: (i) whether
the specific and general conditions and the other requirements of the RFC
exemption would be satisfied, or whether any other prohibited transaction
exemption would apply, and (ii) the potential applicability of the general
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Internal Revenue Code to the
proposed investment. See "ERISA Considerations" in the prospectus.
The sale of any of the Class A Certificates to an ERISA plan is in no
respect a representation by the depositor or the underwriter that such an
investment meets all relevant legal requirements relating to investments by
ERISA plans generally or any particular ERISA plan, or that such an investment
is appropriate for ERISA plans generally or any particular ERISA plan.
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<PAGE>
RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
$
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES
SERIES 200_ - GMACM_
PROSPECTUS SUPPLEMENT
[NAME OF UNDERWRITER]
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE
TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES OFFERED HEREBY IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
offered certificates, whether or not participating in this offering, may be
required to DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL _______, _____.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED__________, 1999
Prospectus supplement dated ____________, ____ (to prospectus
dated ____________, ____)
$ ____________________
RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
DEPOSITOR
RAMP SERIES ___-__ TRUST
ISSUER
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
HOME LOAN ASSET-BACKED NOTES, SERIES ______
OFFERED NOTES The trust will issue notes backed by a pool of
closed-end, primarily second lien fixed rate home
loans
CREDIT ENHANCEMENT Credit enhancement for the notes consists of:
o excess interest and overcollateralization; and
o a financial guaranty insurance policy issued by ______________.
[Insurer's logo]
- -------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-_ IN THIS
PROSPECTUS SUPPLEMENT.
- -------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED NOTES OR DETERMINED THAT
THIS PROSPECTUS 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.
_________ will offer the notes to the public, at varying prices to be
determined at the time of sale. The proceeds to the depositor from the sale of
the notes will be approximately _____% of the principal balance of the notes
plus accrued interest, before deducting expenses.
[NAME OF UNDERWRITER]
UNDERWRITER
<PAGE>
S-2
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the notes in two separate documents that
provide progressively more detail:
o the prospectus, which provides general information, some of which may
not apply to your series of
notes; and
o this prospectus supplement, which describes the specific terms of your
series of notes.
IF THE DESCRIPTION OF YOUR NOTES IN THIS PROSPECTUS SUPPLEMENT DIFFERS FROM THE
RELATED DESCRIPTION IN THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
The Depositor's principal offices are located at 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437 and its phone number is (612) 832-7000.
TABLE OF CONTENTS
PAGE
Summary ..................................4
Risk Factors..............................9
Risks Associated with the Home Loans....9
Servicing Practices....................10
Limited Obligations....................11
Liquidity Risks........................11
Special Yield and Prepayment
Considerations.........................11
Introduction.............................13
Description of the Home Loan Pool........13
General................................13
Payments on the Simple Interest Home
Loans..................................14
Balloon Home Loans.....................14
Home Loan Pool Characteristics.........15
Credit Scores..........................21
Underwriting Standards.................21
The Initial Subservicers...............22
Additional Information.................22
The Issuer...............................23
The Owner Trustee........................23
The Indenture Trustee....................23
The Financial Guaranty Insurer...........23
Year 2000 Considerations.................25
Overview of the Year 2000 Issue........25
Overview of Residential Funding's Y2K
Project................................25
Y2K Project Status.....................26
Risks related to Y2K...................28
Description of the Securities............28
General................................28
Book-Entry Notes.......................28
Payments............... ...............30
Glossary of Terms......................31
Interest Payments on the Notes.........33
Principal Payments on the Notes........33
Allocation of Payments on the Home Loans33
The Paying Agent.......................34
Maturity and Optional Redemption.......34
Description of the Financial Guaranty
Insurance Policy.......................34
Certain Yield and Prepayment
Considerations.................. ......35
General .................................35
Description of the Home Loan Purchase
Agreement..............................38
Purchase of Home Loans.................39
Representations and Warranties.........39
Description of the Servicing Agreement...40
The Master Servicer....................40
Residential Funding Corporation........40
Servicing and Other Compensation and
Payment of Expenses....................41
Principal and Interest Collections.....41
Release of Lien; Refinancing of
Senior Lien............................42
Collection and Liquidation Practices;
Loss Mitigation........................42
Optional Repurchase of Defaulted
Home Loans.............................43
Description of the Trust Agreement
and Indenture..........................43
The Trust Fund.........................43
Reports To Holders.....................43
Certain Covenants......................43
Modification of Indenture..............44
Certain Matters Regarding the Indenture
Trustee and the Issuer.................45
Material Federal Income Tax Consequences.45
State and Other Tax Consequences.........49
ERISA Considerations.....................49
Legal Investment.........................50
Method of Distribution...................50
Experts .................................51
Legal Matters............................51
Ratings ................................51
ANNEX I ..................................1
<PAGE>
SUMMARY
The following summary is a very general overview of the offered notes and
does not contain all of the information that you should consider in making your
investment decision. To understand the terms of the notes, you should read
carefully this entire document and the prospectus.
<TABLE>
<S> <C>
Issuer or Trust............................. RAMP Series ____-__ Trust.
Title of the offered securities............. Home Loan Asset-Backed Notes, Series ________.
Initial principal balance................... $__________.
Note interest rate.......................... ____% per annum.
Ratings..................................... When issued, the notes will be rated "____" by ____________
and "____" by ______________.
Depositor................................... Residential Asset Mortgage Products, Inc., an affiliate of
Residential Funding Corporation.
Master servicer............................. Residential Funding Corporation.
Owner trustee............................... ______________.
Indenture trustee........................... ______________.
Financial Guaranty Insurer.................. ______________.
Home loan pool.............................. _____ fixed rate home loans with an aggregate principal
balance of approximately ______________ as of the close of
business on the day prior to the cut-off date, secured
primarily by second liens on one- to four-family residential
properties.
Cut-off date................................ ______________.
Closing date................................ On or about ______________.
Payment dates............................... Beginning in ______________ on the ___ of each month or, if
the ___ is not a business day, on the next business day.
Scheduled final payment date................ ______________. The actual final payment date could be
substantially earlier.
S-3
<PAGE>
Form of notes............................... Book-entry.
SEE "DESCRIPTION OF THE SECURITIES--BOOK-ENTRY NOTES" IN THIS
PROSPECTUS SUPPLEMENT.
Minimum denominations....................... $______________.
Legal investment............................ The notes will not be "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of
1984.
SEE "LEGAL INVESTMENT" IN THIS
PROSPECTUS SUPPLEMENT AND "LEGAL
INVESTMENT MATTERS" IN THE
PROSPECTUS.
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
NOTES
- -------------------------------------------------------------------------------------------------
INITIAL RATING
INITIAL NOTE (____/____)
CLASS NOTE RATE BALANCE DESIGNATIONS
- -------------------------------------------------------------------------------------------------
CLASS A CERTIFICATES:
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
[A-I-1 ADJUSTABLE RATE $ Aaa/AAA Senior/Adjustable
-----------
Rate/Sequential]
- -------------------- ---------------- ------------------- ---------------- ----------------------
[A-I-2 % $ Aaa/AAA Senior/Fixed
-------- -----------
Rate/Sequential]
- -------------------- ---------------- ------------------- ---------------- ----------------------
[A-I-3 % $ Aaa/AAA Senior Fixed
-------- -----------
Rate/Pass-Through]
- -------------------------------------------------------------------------------------------------
Total Class A-I Notes: ________% $______________
- -------------------------------------------------------------------------------------------------
[A-II __% $ Aaa/AAA Senior/Fixed-Rate/Pass-Through]
-----------
- -------------------------------------------------------------------------------------------------
Total Class A Notes:
- -------------------------------------------------------------------------------------------------
Total Notes: $_____________
- -------------------------------------------------------------------------------------------------
</TABLE>
OTHER INFORMATION:
CLASS A-I-1:
The note rate on the Class A-I-1 Notes on any payment date will equal the lesser
of:
o [_____] plus ____%; and
o ___% per annum.
CLASS A-I-3 AND CLASS A-II NOTES:
The note rate on the Class A-I-3 and Class A-II Notes will increase by ___% per
annum on the first payment date after the optional terminate date.
S-5
<PAGE>
THE TRUST
The depositor will establish RAMP Series ____-__ Trust, a Delaware business
trust, to issue the Home Loan Asset-Backed Notes, Series _____. The trust will
be established under a trust agreement. The trust will issue the notes under an
indenture. The assets of the trust will consist of the home loans and related
assets.
THE HOME LOAN POOL
______% of the home loans are secured by second mortgages or deeds of trust and
the remainder are secured by first mortgages or deeds of trust. In addition, the
home loans have the following characteristics as of the cut-off date:
- --------------------------------------------
Minimum principal $_____
balance
Maximum principal $_____
balance
Average principal _____
balance
Range of loan rates _____% to _____%
Weighted Average loan _____%
rate
Range of original _____ to _____
terms to maturity months
Weighted average _____ months
original term to
maturity
Range of remaining _____ to _____
terms to maturity months
Weighted average _____ months
remaining term to maturity
Range of combined _____% to _____%
loan-to-value ratios
Weighted average _____%
combined loan-to-value ratios
- --------------------------------------------
SEE "DESCRIPTION OF THE HOME LOAN POOL" IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES
The trust will also issue Home Loan Asset-Backed Certificates, Series _____,
which are not offered by this prospectus supplement.
PAYMENTS ON THE NOTES
AMOUNT AVAILABLE FOR MONTHLY DISTRIBUTION. On each monthly payment date, the
trustee will make distributions to investors. The amounts available for
distribution include:
o collections of monthly payments on the home loans, including prepayments and
other unscheduled collections
MINUS
o fees and expenses of the subservicers and the master servicer.
SEE "DESCRIPTION OF THE SERVICING AGREEMENT--PRINCIPAL AND INTEREST COLLECTIONS"
IN THIS PROSPECTUS SUPPLEMENT.
PAYMENTS. Payments to noteholders will be made from principal and interest
collections as follows:
o Distribution of interest to the notes
o Distribution of principal to the notes
o Distribution of principal to the notes to cover some losses
o Payment to the financial guaranty insurer its premium for the financial
guaranty insurance policy
o Reimbursement to the financial guaranty insurer for some prior draws made on
the financial guaranty insurance policy
o Distribution of additional principal to the notes if the level of
overcollateralization falls below what is required
o Payment to the financial guaranty insurer for any other amounts owed
o Distribution of any remaining funds to the certificates
PRINCIPAL PAYMENTS ON THE NOTES WILL BE AS DESCRIBED UNDER "DESCRIPTION OF THE
SECURITIES--PRINCIPAL PAYMENTS ON THE NOTES" IN THIS PROSPECTUS SUPPLEMENT.
In addition, payments on the notes will be made on each payment date from draws
on the financial guaranty insurance policy, if necessary. Draws will cover
shortfalls in amounts available to pay interest on the
S-6
<PAGE>
notes at the note rate plus any unpaid losses allocated to the notes.
CREDIT ENHANCEMENT
The credit enhancement for the benefit of the notes consists of:
EXCESS INTEREST. Because more interest is paid by the mortgagors than is
necessary to pay the interest on the notes each month, there will be excess
interest. Some of this excess interest may be used to protect the notes against
some losses, by making an additional payment of principal up to the amount of
the losses.
OVERCOLLATERALIZATION. Although the aggregate principal balance of the home
loans is $__________, the trust is issuing only $__________ aggregate principal
amount of notes. The excess amount of the balance of the home loans represents
overcollateralization, which may absorb some losses on the home loans, if not
covered by excess interest. If the level of overcollateralization falls below
what is required, the excess interest described above will also be paid to the
notes as principal. This will reduce the principal balance of the notes faster
than the principal balance of the home loans so that the required level of
overcollateralization is reached.
POLICY. On the closing date, the financial guaranty insurer will issue the
financial guaranty insurance policy in favor of the indenture trustee. The
financial guaranty insurance policy will unconditionally and irrevocably
guarantee interest on the notes at the note rate and will cover any losses
allocated to the notes if not covered by excess interest or
overcollateralizations.
OPTIONAL TERMINATION
On any payment date on which the principal balance of the home loans is less
than __% of the principal balance as of the cut-off date, the master servicer
will have the option to purchase the remaining home loans.
Under an optional purchase, the outstanding principal balance of the notes will
be paid in full with accrued interest.
RATINGS
When issued, the notes will receive the ratings listed on page S-__ of this
prospectus supplement. A security rating is not a recommendation to buy, sell or
hold a security and may be changed or withdrawn at any time by the assigning
rating agency. The ratings also do not address the rate of principal prepayments
on the home loans. The rate of prepayments, if different than originally
anticipated, could adversely affect the yield realized by holders of the notes.
LEGAL INVESTMENT
The notes will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984. You should consult your legal
advisors in determining whether and to what extent the notes constitute legal
investments for you.
ERISA CONSIDERATIONS
The notes may be eligible for purchase by persons investing assets of employee
benefit plans or individual retirement accounts. Persons investing assets of
such plans or accounts should consult with their counsel before purchasing the
notes.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING
PROSPECTUS.
TAX STATUS
For federal income tax purposes, the notes will be treated as debt. The trust
itself will not be subject to tax.
SEE "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT AND
IN THE ACCOMPANYING PROSPECTUS.
S-7
<PAGE>
RISK FACTORS
The notes are not suitable investments for all investors. In particular, you
should not purchase the notes unless you understand the prepayment, credit,
liquidity and market risks associated with the notes.
The notes are complex securities. You should possess, either alone or
together with an investment advisor, the expertise necessary to evaluate the
information contained in this prospectus supplement and the accompanying
prospectus in the context of your financial situation and tolerance for risk.
You should carefully consider, among other things, the following factors in
connection with the purchase of the notes:
RISKS ASSOCIATED WITH THE HOME LOANS
The return on your notes may be reduced by losses on the home loans, which are
more likely because a significant number of the home loans are secured by junior
liens on the mortgaged property.
______% of the home loans included in the home loan pool are
secured by second mortgages or deeds of trust. Proceeds from
liquidation of the property will be available to satisfy the home
loans, only if the claims of any senior mortgages have been
satisfied in full. When it is uneconomical to foreclose on the
mortgaged property or engage in other loss mitigation procedures,
the master servicer may write off the entire outstanding balance
of the home loan as a bad debt. The foregoing risks are
particularly applicable to home loans secured by second liens
that have high combined loan-to-value ratios or low junior ratios
because it is comparatively more likely that the master servicer
would determine foreclosure to be uneconomical. As of the cut-off
date, the weighted average combined loan-to-value ratio of the
home loans is ______%, and approximately ______% of the home
loans will have combined loan-to-value ratios in excess of
______%.
Delays in payment on your notes may result because the master servicer is not
required to advance delinquent monthly payments on the home loans.
The Master Servicer is not obligated to advance scheduled monthly
payments of principal and interest on home loans that are
delinquent or in default. The rate of delinquency and default of
second mortgage loans may be greater than that of mortgage loans
secured by first liens on comparable properties.
The return on your notes may be reduced in an economic downturn.
Mortgage loans similar to those included in the home loan pool
have been originated for a limited period of time. During this
time, economic conditions nationally and in most regions of the
country have been generally favorable. However, a deterioration
in economic conditions could adversely affect the ability and
willingness of mortgagors to repay their loans. No prediction can
be made as to the effect of an economic downturn on the rate of
delinquencies and losses on the home loans.
S-8
<PAGE>
The origination disclosure practices for the home loans could create liabilities
that may affect your notes.
______% of the home loans included in the home loan pool are
subject to special rules, disclosure requirements and other
regulatory provisions because they are high cost loans:
Purchasers or assignees of these home loans, including the trust,
could be exposed to all claims and defenses that the mortgagors
could assert against the originators of the home loans. Remedies
available to a mortgagor include monetary penalties, as well as
rescission rights if the appropriate disclosures were not given
as REQUIRED. SEE "CERTAIN LEGAL ASPECTS OF THE LOANS" IN THE
PROSPECTUS.
The underwriting standards for the home loans create greater risks to you,
compared to those for first lien loans.
The underwriting standards under which the home loans were home
underwritten are analogous to credit lending, rather than
mortgage lending, since underwriting decisions were based
primarily on the borrower's credit history and capacity to repay
rather than on the value of the collateral upon foreclosure. The
underwriting standards allow loans to be approved with combined
loan-to-value RATIOS OF UP TO 125%. See "description of the home
loan pool--underwriting standards" in this prospectus supplement.
Because of the relatively high combined loan-to-value ratios of
the home loans and the fact that the home loans are secured by
junior liens, losses on the home loans will likely be higher than
on first lien mortgage loans.
The return on your notes may be particularly sensitive to changes in real estate
markets in specific areas.
One risk of investing in the notes is created by concentration of
the related mortgaged properties in one or more geographic
regions. Approximately ____% of the cut-off date principal
balance of the home loans are located in [California]. If the
regional economy or housing market weakens in [California], or in
any other region having a significant concentration of the
properties underlying the home loans, the home loans related to
properties in that region may experience high rates of loss and
delinquency, resulting in losses to noteholders. A region's
economic condition and housing market may be adversely affected
by a variety of events, including natural disasters such as
earthquakes, hurricanes, floods and eruptions, and civil
disturbances such as riots.
Debt incurred by the borrowers in addition to the home loan could increase your
risk.
With respect to home loans which were used for debt
consolidation, there can be no assurance that the borrower will
not incur furtherdebt. This additional debt could impair the
ability of borrowers to service their debts, which in turn could
result in higher rates of delinquency and loss on the home loans.
SERVICING PRACTICES
The release of a lien may increase your risk.
The master servicer may use a wide variety of practices to limit
losses on the home loans. The servicing agreement permits the
master servicer to release the lien on a limited number of
mortgaged properties securing the home loans, if the home loan is
CURRENT IN PAYMENT. SEE "DESCRIPTION OF THE SERVICING AGREEMENT
RELEASE OF LIEN; REFINANCING OF SENIOR LIEN" AND "- COLLECTION
AND LIQUIDATION PRACTICES; LOSS MITIGATION" IN THIS PROSPECTUS
SUPPLEMENT.
S-9
<PAGE>
LIMITED OBLIGATIONS
Payments on the home loans, together with the financial guaranty insurance
policy, are the sole source of payments on your notes.
Credit enhancement includes excess interest,
overcollateralization and the financial guaranty insurance
policy. None of the depositor,the master servicer or any of their
affiliates will have any obligation to replace or supplement the
credit enhancement, or to take any other action to maintain any
rating of the notes. If any losses are incurred on the home loans
that are not covered by the credit enhancement, the holders of
the notes will bear the risk of these losses.
LIQUIDITY RISKS
You may have to hold your notes to maturity if their marketability is limited.
A secondary market for your notes may not develop. Even if a
secondary market does develop, it may not continue, or it may be
illiquid. Illiquidity means you may not be able to find a buyer
to buy your securities readily or at prices that will enable you
to realize a desired yield. Illiquidity can have an adverse
effect on the market value of the notes.
SPECIAL YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity on your notes will vary depending on the rate of
prepayments.
The yield to maturity of your notes will depend on a variety of
factors, Including:
o the rate and timing of principal payments on the home
loans, including prepayments, defaults and
liquidations, and repurchases due to breaches of
representations or warranties; o the note rate; and o
the purchase price you paid for your notes. The rates
of prepayments and defaults are two of the most
important and least predictable of these factors. In
general, if you purchase a note at a price higher than
its outstanding principal balance and principal
payments occur faster than you assumed at the time of
purchase, your yield will be lower than anticipated.
Conversely, if you purchase a note at a price lower
than its outstanding principal balance and principal
payments occur more slowly than you assumed at the time
of purchase, your yield will be lower than anticipated.
The rate of prepayments on the home loans will vary depending on future market
conditions, and other factors.
Since mortgagors can generally prepay their home loans at any
time, the rate and timing of principal payments on the notes are
highly uncertain. Generally, when market interest rates increase,
mortgagors are less likely to prepay their home loans. This could
result in a slower return of principal to you at a time when you
might have been able to reinvest those funds at a higher rate of
interest than the note rate. On the other hand, when market
interest rates decrease, borrowers are generally more likely to
prepay their home loans. This could result in a faster return of
principal to you at a time when you might not be able to reinvest
those funds at an interest rate as high as
S-10
<PAGE>
the note rate.
Refinancing programs, which may involve soliciting all or some of
the mortgagors to refinance their home loans, may increase the
rate of prepayments on the home loans. ______% of the home loans
provide for payment of a prepayment charge. Prepayment charges
may reduce the rate of prepayment on the home loans until the end
of the period during which such PREPAYMENT CHARGES APPLY. SEE
"DESCRIPTION OF THE HOME LOAN POOL--HOME LOAN POOL
CHARACTERISTICS" IN THIS PROSPECTUS SUPPLEMENT AND "MATURITY AND
PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS.
S-11
<PAGE>
INTRODUCTION
The trust will be formed under a trust agreement, as amended by the amended
and restated trust agreement, to be dated as of the closing date, between the
depositor and the owner trustee. The issuer will issue $___________ aggregate
principal amount of Home Loan Asset-Backed Notes, Series _________. These notes
will be issued under an indenture, to be dated as of the closing date between
the issuer and the indenture trustee. Under the trust agreement, the issuer will
issue ____ class[es] of Home Loan Asset-Backed Certificates, _____________. The
notes and the certificates are collectively referred to in this prospectus
supplement as the securities. Only the notes are offered by this prospectus
supplement. On the closing date, the depositor will transfer to the issuer a
pool of home loans that will be secured by first or junior liens on one- to
four-family residential properties.
You can find a listing of definitions for capitalized terms used both in the
prospectus and this prospectus supplement under the caption "Glossary" beginning
on page __ in the prospectus and under the caption "Description of the
Securities--Glossary of Terms" in this prospectus supplement.
DESCRIPTION OF THE HOME LOAN POOL
GENERAL
The home loan pool will consist of home loans with an aggregate unpaid
principal balance of $___________ as of the close of business on the business
day prior to the cut-off date. ___% of the home loans are secured by second
liens on fee simple or leasehold interests in one- to four-family residential
properties and the remainder are secured by first liens. The home loans will
consist of conventional, closed-end, fixed-rate, fully-amortizing home loans
with terms to maturity of approximately five, ten, fifteen, twenty or
twenty-five years with respect to __%, __%, __%, __% and __% of the home loans,
respectively, from the date of origination or modification. The proceeds of the
home loans generally were used by the related borrowers for:
o debt consolidation,
o home improvement,
o the partial refinancing of the related mortgaged property,
o to provide a limited amount of cash to the borrower, or
o a combination of the foregoing.
As to each home loan the mortgagor represented at the time of origination
that the related mortgaged property would be owner occupied as a primary home.
As to home loans which have been modified, references in this prospectus
supplement to the date of origination shall be deemed to be the date of the most
recent modification. All percentages of the home loans described in this
prospectus supplement are approximate percentages determined by cut-off date
balance, unless otherwise indicated.
All of the home loans were acquired by Residential Funding Corporation from
unaffiliated sellers as described in this prospectus supplement and in the
prospectus, except in the case of __% of the home loans which were purchased by
the seller through its affiliate HomeComings Financial Network, Inc. No
unaffiliated seller sold more than __% of the home loans to Residential Funding
Corporation. __% and __% of the home loans will be subserviced by GMAC Mortgage
Corporation, an affiliate of the depositor and the master servicer, and Master
Financial, Inc., a California corporation, respectively. See "--The Initial
Subservicers" in this prospectus supplement.
All of the home loans were, in most instances, underwritten as described
under "--Underwriting Standards."
The seller will make some representations and warranties regarding the home
loans sold by it as of the date of issuance of the notes. Further, the seller
will be required to repurchase or substitute for any home loan sold by it as to
which a breach of its representations and warranties relating to that home loan
occurs if the breach materially adversely affects the interests of the
securityholders or the financial guaranty insurer in the home loan. See
S-12
<PAGE>
"Description of the Home Loan Purchase Agreement" in this prospectus supplement
and "Description of the Securities--Representations with Respect to Loans" and
"--Repurchases of Loans" in the prospectus.
As to any date, the pool balance will be equal to the aggregate of the
Stated Principal Balances of all home loans as of that date owned by the trust.
The Stated Principal Balance of a home loan, other than a Liquidated Home Loan,
on any day is equal to the cut-off date balance of the home loan, minus all
collections credited against the Stated Principal Balance of the home loan in
accordance with the related mortgage note after the cut-off date and prior to
that day. The Stated Principal Balance of a Liquidated Home Loan after final
recovery of substantially all of the related Liquidation Proceeds which the
master servicer reasonably expects to receive shall be zero.
PAYMENTS ON THE SIMPLE INTEREST HOME LOANS
__% of the home loans provide for simple interest payments and are referred
to as the simple interest home loans which require that each monthly payment
consist of an installment of interest which is calculated according to the
simple interest method. This method calculates interest using the basis of the
outstanding principal balance of the home loan multiplied by the loan rate and
further multiplied by a fraction, the numerator of which is the number of days
in the period elapsed since the preceding payment of interest was made and the
denominator of which is the number of days in the annual period for which
interest accrues on the home loan. As payments are received on the home loans,
the amount received is applied first to interest accrued to the date of payment
and the balance is applied to reduce the unpaid principal balance. Accordingly,
if a mortgagor pays a fixed monthly installment before its scheduled due date,
the portion of the payment allocable to interest for the period since the
preceding payment was made will be less than it would have been had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly greater. However, the next
succeeding payment will result in a greater portion of the payment allocated to
interest if that payment is made on its scheduled due date.
On the other hand, if a mortgagor pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment is made on or prior to its
scheduled due date, the principal balance of the home loan will amortize in the
manner described in the preceding paragraph. However, if the mortgagor
consistently makes scheduled payments after the scheduled due date the home loan
will amortize more slowly than scheduled. Any remaining unpaid principal is
payable on the final maturity date of the home loan.
__% of the home loans are actuarial home loans, on which 30 days of interest
is owed each month irrespective of the day on which the payment is received.
BALLOON HOME LOANS
__% of the home loans are balloon home loans, which require monthly
payments of principal based on a 30-year amortization schedule and have
scheduled maturity dates of approximately fifteen years from the due date of the
first monthly payment, in each case leaving a balloon payment due and payable on
the respective scheduled maturity date. The existence of a balloon payment in
most cases requires the related mortgagor to refinance the mortgage loan or sell
the mortgage property on or prior to the scheduled maturity date. The ability of
a mortgagor to accomplish either of these goals will be affected by several
factors, including the level of available mortgage rates at the time of sale or
refinancing, the mortgagor's equity in the related mortgage property, the
financial condition of the mortgagor, tax laws, prevailing general economic
conditions and the terms of any related first lien mortgage loan. None of the
depositor, the master servicer, the indenture trustee or the owner trustee is
obligated to refinance any balloon home loan. The financial guaranty insurance
policy issued by the financial guaranty insurer will provide coverage on any
losses allocable to the notes incurred upon liquidation of a balloon loan
arising out of or in connection with the failure of a mortgagor to make is
balloon payment.
S-13
<PAGE>
HOME LOAN POOL CHARACTERISTICS
The home loans have the following characteristics:
o The home loans will bear interest at the loan rate stated in the related
mortgage note which will be at least __% per annum but no more than __%
per annum, with a weighted average loan rate of approximately __% per
annum as of the cut-off date.
o None of the home loans were originated prior to _______ or will have a
maturity date later than _______________.
o No home loan will have a remaining term from __________ to the stated
maturity of the home loan of less than __ months.
o The weighted average remaining term of the home loans as of the
cut-off date will be approximately __ months.
o The weighted average original term to stated maturity of the home loans
as of the cut-off date will be approximately __ months.
o __% of the home loans will have original terms to maturity of
approximately five years, with a weighted average remaining term of
approximately __ months.
o __% of the home loans will have original terms to maturity of
approximately ten years, with a weighted average remaining term of
approximately __ months.
o __% of the home loans will have original terms of maturity of
approximately fifteen years, with a weighted average remaining term of
approximately __ months.
o __% of the home loans will have original terms of maturity of
approximately twenty years, with a weighted average remaining term of
approximately __ months.
o __% of the home loans will have original terms to maturity of
approximately twenty-five years, with a weighted average remaining term
of approximately __ months.
o All of the home loans have principal and interest payable monthly on
each due date specified in the mortgage note.
o __% of the home loans will be secured by mortgages or deeds of trust on
property in which the borrower has little or no equity because the
related combined LTV ratio at the time of origination exceeds 100%.
As to each home loan, the combined LTV ratio, in most cases, will be the
ratio, expressed as a percentage, of (1) (A) the original principal balance of
the home loan, and (B) any outstanding principal balance, at origination of the
home loan, of all other mortgage loans, if any, secured by senior or subordinate
liens on the related mortgaged property, to (2) the appraised value, or, if
permitted by the applicable underwriting guidelines, the stated value. The
appraised value for any home loan will be the appraised value of the related
mortgaged property determined in the appraisal used in the origination of the
home loan, which may have been obtained at an earlier time. If the home loan was
originated simultaneously with or not more than 12 months after a senior lien on
the related mortgaged property, the appraised value shall be the lesser of the
appraised value at the origination of the senior lien and the sales price for
the mortgaged property. However, for not more than __% of the home loans, the
stated value will be the value of the property as stated by the related
mortgagor in his or her application. See "Description of the Home Loan
Pool--Underwriting Standards" in this prospectus supplement.
In connection with each home loan that is secured by a leasehold interest,
the seller will have represented that, among other things:
o the use of leasehold estates for residential properties is an accepted
practice in the area where the related mortgaged property is located;
o residential property in the area consisting of leasehold estates is
readily marketable;
S-14
<PAGE>
o the lease is recorded and no party is in any way in breach of any
provision of the lease;
o the leasehold is in full force and effect and is not subject to any prior
lien or encumbrance by which the leasehold could be terminated; and
o the remaining term of the lease does not terminate less than five years
after the maturity date of the home loan.
Approximately _____% of the home loans provide for payment of a prepayment
charge, if the loans prepay within a specified time period. The prepayment
charge, in most cases, is the maximum amount permitted under applicable state
law. Or, if no maximum prepayment charge is specified, the prepayment charge
generally is calculated in the following sentence. __%, __%, __% and __% of the
home loans, by cut-off date balance of the home loans, with a prepayment charge
provision provide for payment of a prepayment charge for full prepayments made
within approximately one year, two years, three years and five years,
respectively, of the origination of the home loan calculated in accordance with
the terms of the related mortgage note. As to the remainder of the home loans
with a prepayment charge provision, the prepayment charge is calculated in a
different manner. The initial subservicers will be entitled to all prepayment
charges and late payment charges received on the home loans and these amounts
will not be available for payment on the notes.
As of the cut-off date, no home loan will be 30 days or more delinquent in
payment of principal and interest. As used in this prospectus supplement, a home
loan is considered to be "30 to 59 days" or "30 or more days" delinquent when a
payment due on any due date remains unpaid as of the close of business on the
next following monthly due date. However, since the determination as to whether
a home loan falls into this category is made as of the close of business on the
last business day of each month, a home loan with a payment due on July 1 that
remained unpaid as of the close of business on July 31 would still be considered
current as of July 31. If that payment remained unpaid as of the close of
business on August 31, the home loan would then be considered to be 30 to 59
days delinquent. Delinquency information presented in this prospectus supplement
as of the cut-off date is determined and prepared as of the close of business on
the last business day immediately prior to the cut-off date.
As of the cut-off date, __% of the home loans were High Cost Loans.
Purchasers or assignees of any High Cost Loan, including the trust, could be
liable for all claims and subject to all defenses that the borrower could assert
against the originator of the High Cost Loan. Remedies available to the borrower
include monetary penalties, as well as recission rights if appropriate
disclosures were not given as required. See "Risk Factors--Risks Associated with
the Home Loans" in this prospectus supplement and "Certain Legal Aspects of the
Loans--The Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on
Lenders" in the prospectus.
As to __% of the home loans, during a temporary period the monthly payments
received on the home loans were applied in a manner that reduced the rate of
principal amortization. As a result, the home loan may have an unpaid principal
amount on its scheduled maturity date, assuming no prepayments, of greater than
1 time and not more than 6 times the related monthly payment. It is not clear
whether the related mortgagor will be legally obligated to pay the unpaid
principal amount.
All of the home loans were originated under full documentation programs.
No home loan provides for deferred interest, negative amortization or future
advances.
All of the mortgaged properties underlying the home loans were
owner-occupied.
Below is a description of some additional characteristics of the home loans
as of the cut-off date unless otherwise indicated. All percentages of the home
loans are approximate percentages unless otherwise indicated by the cut-off date
balance. Unless otherwise specified, all principal balances of the home loans
are as of the cut-off date and are rounded to the nearest dollar.
S-15
<PAGE>
<TABLE>
<CAPTION>
LOAN RATES
PERCENTAGE OF
NUMBER OF HOME LOAN POOL
RANGE OF HOME CUT-OFF DATE BY CUT-OFF DATE
LOAN RATES(%) LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C> <C>
$ %
Totals $ %
As of the cut-off date, the weighted average loan rate of the home loans
will be approximately __% per annum.
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL HOME LOAN STATED PRINCIPAL BALANCES
PERCENTAGE OF
NUMBER OF CUT-OFF DATE HOME LOAN POOL
RANGE OF ORIGINAL HOME PRINCIPAL BY CUT-OFF
STATED PRINCIPAL BALANCES LOANS BALANCE PRINCIPAL BALANCE
<S> <C>
$ %
Total $ %
As of the cut-off date, the average cut-off date balance of the home loans will be approximately
$__________________
.
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL COMBINED LTV RATIOS
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF BY CUT-OFF DATE
RANGE OF COMBINED HOME CUT-OFF DATE STATED PRINCIPAL
LTV RATIOS(%) LOANS PRINCIPAL BALANCE BALANCE
<S> <C>
$ %
S-16
<PAGE>
Total $ %
The weighted average combined LTV ratio, or LTV ratio, as to the home loans
secured by first liens on the related mortgaged properties, at origination of
the home loans will be approximately __%.
</TABLE>
<TABLE>
<CAPTION>
JUNIOR RATIOS
PERCENTAGE OF
HOME LOAN POOL
RANGE OF JUNIOR NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
MORTGAGE RATIOS(%) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C>
$ %
Total $ %
The preceding table excludes home loans secured by first liens. A Junior
ratio is the ratio of the original amount of the home loans secured by the
second lien to the sum of (1) the original amount of the home loan and (2) the
unpaid principal balance of any senior lien balance at the time of the home
loan.
The weighted average junior ratio by original loan balance will be
approximately __%.
</TABLE>
<TABLE>
<CAPTION>
REMAINING TERM TO SCHEDULED MATURITY
PERCENTAGE OF
NUMBER OF HOME LOAN POOL
RANGE OF MONTHS REMAINING HOME CUT-OFF DATE BY CUT-OFF DATE
TO SCHEDULED MATURITY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C>
$ %
S-17
<PAGE>
Total $ %
The weighted average remaining term to maturity as of the cut-off date will
be approximately __ months.
</TABLE>
<TABLE>
<CAPTION>
YEAR OF ORIGINATION
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
YEAR OF ORIGINATION HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C>
$ %
Total $ %
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
STATE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C>
$ %
Total $ %
The reference to "Other" in the preceding table includes states and the
District of Columbia that contain mortgaged properties for less than __% of the
home loan pool.
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
PROPERTY TYPE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- ---------- ----------------- -----------------
<S> <C>
Single Family Residence $ %
PUD Detached
Condominium
PUD Attached
Townhouse/Rowhouse Attached
Multifamily (2-4 Units)
S-18
<PAGE>
Townhouse/Rowhouse Detached
Manufactured Home
Total $ %
</TABLE>
<TABLE>
<CAPTION>
LOAN PURPOSE
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
PURPOSE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C>
Debt Consolidation $ %
Cash
Home Improvement/Debt
Consolidation
Other
Rate/Term Refinance
Home Improvement
Convenience
Education
Purchase Money
Medical
Total $ %
</TABLE>
<TABLE>
<CAPTION>
LIEN PRIORITY
PERCENTAGE OF
HOME LOAN POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
LIEN PROPERTY HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C>
First Lien $ %
Second Lien
Total $ %
</TABLE>
<TABLE>
<CAPTION>
DEBT-TO-INCOME RATIOS AS OF DATE OF ORIGINATION OF THE HOME LOAN
PERCENTAGE OF
HOME LOAN POOL
<S> <C> <C> <C>
RANGE OF DEBT-TO-INCOME CUT-OFF DATE BY CUT-OFF
RATIOS AS OF DATE OF NUMBER OF PRINCIPAL DATE PRINCIPAL
ORIGINATION OF THE HOME LOAN (%) HOME LOANS BALANCE BALANCE
$ %
Total $ %
As of the cut-off date, the weighted average debt-to-income ratio as of the
date of origination of the home loans will be approximately __%.
</TABLE>
S-19
<PAGE>
CREDIT SCORES
"Credit Scores" are obtained by many lenders in connection with home loan
applications to help assess a borrower's creditworthiness. Credit Scores are
obtained from credit reports provided by various credit reporting organizations,
each of which may employ differing computer models and methodologies. The Credit
Score is designed to assess a borrower's credit history at a single point in
time, using objective information currently on file for the borrower at a
particular credit reporting organization. Information used to create a Credit
Score may include, among other things, payment history, delinquencies on
accounts, levels of outstanding indebtedness, length of credit history, types of
credit, and bankruptcy experience. The Credit Scores of the home loans range
from approximately 350 to approximately 840, with higher scores indicating an
individual with a more favorable credit history compared to an individual with a
lower score. However, a Credit Score purports only to be a measurement of the
relative degree of risk a borrower represents to a lender, that is, a borrower
with a higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, investors should be
aware that Credit Scores were developed to indicate a level of default
probability over a two-year period, which does not correspond to the life of a
mortgage loan. Furthermore, Credit Scores were not developed specifically for
use in connection with home loans, but for consumer loans in general, and assess
only the borrower's past credit history. Therefore, a Credit Score does not take
into consideration the differences between home loans and consumer loans
generally or the specific characteristics of the related home loan for example,
the combined LTV ratio, the collateral for the home loan, or the debt to income
ratio. There can be no assurance that the Credit Scores of the mortgagors will
be an accurate predictor of the likelihood of repayment of the related home
loans.
The following table provides information as to the Credit Scores of the
related mortgagors as used in the origination of the home loans.
<TABLE>
<CAPTION>
CREDIT SCORES AS OF THE DATE OF ORIGINATION OF THE HOME LOANS
PERCENTAGE OF
RANGE OF CREDIT SCORES HOME LOAN POOL
AS OF THE DATE OF NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION OF THE HOME LOANS HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
<S> <C>
$ %
Totals $ %
</TABLE>
UNDERWRITING STANDARDS
The following is a brief description of the various underwriting standards
and procedures applicable to the home loans.
In most cases, the underwriting standards of Residential Funding Corporation
as to the home loans originated or purchased by it place a greater emphasis on
the creditworthiness and debt service capacity of the borrower than on the
underlying collateral in evaluating the likelihood that a borrower will be able
to repay the related home loan.
Residential Funding Corporation relies on a number of guidelines to assist
underwriters in the credit review and decision process. The underwriting
criteria provide for the evaluation of a loan applicant's creditworthiness
through the use of a consumer credit report, verification of employment and a
review of the debt-to-income ratio of the applicant. Income is verified through
various means, including without limitation applicant interviews, written
verifications with employers, review of pay stubs or tax returns. The borrower
must demonstrate sufficient levels of disposable income to satisfy debt
repayment requirements.
The underwriting standards require the home loans originated or purchased by
Residential Funding Corporation to have been fully documented. A prospective
borrower is required to complete a detailed application providing pertinent
credit information.
S-20
<PAGE>
In determining the adequacy of the mortgaged property as collateral for home
loans included in the home loan pool, an appraisal is made of each property
considered for financing or, if permitted by the underwriting standards, the
value of the related mortgaged property will be the stated value. The home loans
purchased by Residential Funding Corporation and included in the home loan pool
generally were originated subject to a maximum combined LTV ratio of 125%, and
the related borrowers may have been permitted to retain a limited amount of the
proceeds of the home loans. In addition, the home loans were generally subject
to a maximum loan amount of $75,000 and a maximum total monthly debt-to-income
ratio of 55%. There can be no assurance that the combined LTV ratio or the
debt-to-income ratio for any home loan will not increase from the levels
established at origination.
The underwriting standards of Residential Funding Corporation may be varied
in appropriate cases. There can be no assurance that every home loan in the home
loan pool was originated in conformity with the applicable underwriting
standards in all material respects, or that the quality or performance of the
home loans will be equivalent under all circumstances.
THE INITIAL SUBSERVICERS
Primary servicing for __% of the home loans will be provided by GMAC
Mortgage Corporation under a subservicing agreement with the master servicer.
GMAC Mortgage Corporation is an indirect wholly-owned subsidiary of General
Motors Acceptance Corporation. GMAC Mortgage Corporation is engaged in the
mortgage banking business, including the origination, purchase, sale and
servicing of residential loans.
GMAC Mortgage Corporation's executive offices are located at 100 Witmer
Road, Horsham, Pennsylvania 19044-0963.
Primary servicing for __% of the home loans will be provided by __________
under a subservicing agreement with the __________. __________ is a __________
corporation that is a mortgage lender engaged in the business of originating,
purchasing, selling and servicing home loans generally secured by one- to
four-family residential properties, with an emphasis on non-conforming junior
lien loans.
__________ has its principal offices at __________.
Although _________ is not an affiliate of Residential Funding Corporation,
_________ has a lending arrangement with Residential Funding Corporation, and in
connection with that arrangement, Residential Funding Corporation has the right
to acquire an equity interest in _________________ in accordance with specified
terms and conditions.
The initial subservicers have not had sufficient experience in servicing the
types of mortgage loans comprising the home loan pool to provide meaningful
disclosure of its delinquency and loss experience relating to the mortgage
loans.
ADDITIONAL INFORMATION
The description in this prospectus supplement of the home loan pool and the
mortgaged properties is based upon the home loan pool as constituted at the
close of business on the cut-off date, except as otherwise noted. Prior to the
issuance of the notes, home loans may be removed from the home loan pool as a
result of incomplete documentation or otherwise, if the depositor deems that
removal necessary or appropriate. A limited number of other home loans may be
added to the home loan pool prior to the issuance of the notes. The depositor
believes that the information in this prospectus supplement will be
substantially representative of the characteristics of the home loan pool as it
will be constituted at the time the notes are issued although the range of loan
rates and maturities and some other characteristics of the home loans in the
home loan pool may vary.
A Current Report on Form 8-K will be available to purchasers of the notes
and will be filed, together with the servicing agreement, the indenture, the
trust agreement and the home loan purchase agreement, with the Commission within
fifteen days after the initial issuance of the notes. In the event home loans
are removed from or added to the home loan pool as described in the preceding
paragraph, that removal or addition will be noted in the Current Report on Form
8-K.
S-21
<PAGE>
THE ISSUER
The RAMP Series ____-__ Trust is a business trust formed under the laws of
the State of Delaware under the trust agreement for the purposes described in
this prospectus supplement. The trust agreement constitutes the "governing
instrument" under the laws of the State of Delaware relating to business trusts.
After its formation, the issuer will not engage in any activity other than:
o acquiring and holding the home loans and the other assets of the
issuer and related proceeds,
o issuing the notes and the certificates,
o making payments on the notes and the certificates, and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing.
The issuer's principal offices are in _________, in care of ____________,
as owner trustee, at ______________________.
THE OWNER TRUSTEE
____________ is the owner trustee under the trust agreement. The owner
trustee is a _________ banking corporation and its principal offices are located
at _________________.
Neither the owner trustee nor any director, officer or employee of the owner
trustee will be under any liability to the issuer or the securityholders for any
action taken or for refraining from the taking of any action in good faith under
the trust agreement or for errors in judgment. However, that none of the owner
trustee and any director, officer or employee of the owner trustee will be
protected against any liability which would otherwise be imposed by reason of
willful malfeasance, bad faith or negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the trust
agreement. All persons into which the owner trustee may be merged or with which
it may be consolidated or any person resulting from the merger or consolidation
shall be the successor of the owner trustee under the trust agreement.
THE INDENTURE TRUSTEE
_________________, is the indenture trustee under the indenture. The
principal offices of the indenture trustee are located in _______________.
THE FINANCIAL GUARANTY INSURER
The following information has been supplied by _____________, the financial
guaranty insurer, for inclusion in this prospectus supplement. No representation
is made by the depositor, the master servicer, the underwriter or any of their
affiliates as to the accuracy or completeness of the information.
[The financial guaranty insurer is a __________-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of _________ and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and Guam. The financial guaranty
insurer primarily insures newly issued municipal and structured finance
obligations. The financial guaranty insurer is a wholly owned subsidiary of
__________ (formerly, _________) a 100% publicly-held company.
_______________________________ have each assigned a triple-A claims-paying
ability rating to the financial guaranty insurer.
The consolidated financial statements of the financial guaranty insurer and
its subsidiaries as of ______________ and ______________, and for the three
years ended ______________, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of
______________ (which was filed with the Commission on ______________;
Commission File Number ______________) and the consolidated financial statements
of the financial guaranty insurer and its subsidiaries as of ______________ and
for the periods ending ______________ and ______________ included in the
Quarterly Report on Form 10-Q of ______________ for the period ended
______________ (which was filed with the Commission on
S-22
<PAGE>
______________), are hereby incorporated by reference into this prospectus
supplement and shall be deemed to be a part of this prospectus supplement. Any
statement contained in a document incorporated in this prospectus supplement by
reference shall be modified or superseded for the purposes of this prospectus
supplement to the extent that a statement contained in this prospectus
supplement by reference in this prospectus supplement also modifies or
supersedes the statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus supplement.
All financial statements of the financial guaranty insurer and its
subsidiaries included in documents filed by ______________ with the Commission
under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, subsequent to the
date of this prospectus supplement and prior to the termination of the offering
of the notes shall be deemed to be incorporated by reference into this
prospectus supplement and to be a part hereof from the respective dates of
filing the documents.
The following table sets forth the financial guaranty insurer's
capitalization as of ______________, ______________, ______________ and
______________, respectively, in conformity with generally accepted accounting
principles.
<TABLE>
<CAPTION>
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
[DATE] [DATE] [DATE] [DATE]
(UNAUDITED)
<S> <C>
Unearned premiums........................
Other liabilities........................
Total liabilities.....................
Stockholder's equity:
Common Stock..........................
Additional paid-in capital............
Accumulated other comprehensive
income.............................
Retained earnings.....................
Total stockholder's equity............
Total liabilities and
stockholder's equity...............
</TABLE>
For additional financial information concerning the financial guaranty
insurer, see the audited and unaudited financial statements of the financial
guaranty insurer incorporated by reference in this prospectus supplement. Copies
of the financial statements of the financial guaranty insurer incorporated in
this prospectus supplement by reference and copies of the financial guaranty
insurer's annual statement for the year ended ___________ prepared in accordance
with statutory accounting standards are available, without charge, from the
financial guaranty insurer. The address of the financial guaranty insurer's
administrative offices and its telephone number are ____________.
The financial guaranty insurer makes no representation regarding the notes
or the advisability of investing in the notes and makes no representation
regarding, nor has it participated in the preparation of, this prospectus
supplement other than the information supplied by the financial guaranty insurer
and presented under the headings "The Financial Guaranty Insurer" and
"Description of the Financial Guaranty Insurance Policy" and in the financial
statements incorporated in this prospectus supplement by reference.]
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
S-23
<PAGE>
YEAR 2000 CONSIDERATIONS
OVERVIEW OF THE YEAR 2000 ISSUE
The Y2K issue is the term generally used to describe the potential failure
of information technology components on or after January 1, 2000 because
existing computer programs, applications and microprocessors frequently use only
two digits to identify a year. Since the Year 2000 is also a leap year, there
could be additional business disruptions as a result of the inability of many
computer systems to recognize February 29, 2000.
The failure to correct or replace computer programs, applications and
microprocessors with Y2K-ready alternatives may adversely impact the operations
of Residential Funding on or after January 1, 2000. The responsibilities of
Residential Funding as the master servicer include collecting payments from the
subservicers in respect of the mortgage loans, calculating the Available
Distribution Amount for each distribution date, remitting such amount to the
trustee prior to each distribution date, calculating the amount of principal and
interest payments to be made to the certificateholders on each distribution
date, and preparing the monthly statement to be sent to certificateholders on
each distribution date.
OVERVIEW OF RESIDENTIAL FUNDING'S Y2K PROJECT
In January 1997, Residential Funding commenced activities to determine the
impact of Y2K on its critical computer systems. In April 1998, Residential
Funding established a formal Y2K project team to address Y2K issues. The Y2K
project team remains in place and continues to work on solving problems related
to the Year 2000. In addition, the Y2K project team coordinates its efforts with
the Y2K programs established by General Motors Acceptance Corporation and
General Motors Corporation.
Members of the Y2K project team, together with relevant personnel from
Residential Funding's business units, have developed and implemented a six-phase
management strategy (as discussed below), which has been, and will be, applied
to information technology and non-information technology components throughout
the organization. Residential Funding's components primarily consist of the
following:
- HARDWARE, including mainframe computers, desktop computers and network
devices;
- FACILITIES EQUIPMENT, including elevators, telephone systems, heating
systems and security systems;
- SOFTWARE APPLICATIONS, including vendor purchased applications, in-house
developed applications and end-user developed applications;
- BUSINESS PARTNER COMMUNICATION LINKS, which primarily provide data
transmissions to and from business partners; and
- BUSINESS PARTNERS DATA SYSTEMS, which primarily process data for
Residential Funding.
The six phases by which the Y2K project team has sought, and will seek, to
achieve Y2K readiness throughout Residential Funding are as follows:
S-24
<PAGE>
Phase Objective
Phase I - Awareness To promote Y2K awareness
throughout Residential Funding.
Emphasis has been placed on
ensuring that components recently
purchased (or to be purchased) by
business units are Y2K-ready
prior to the implementation of
such components.
Phase II - Inventory To (i) create an
inventory of all components and
(ii) assess the Y2K risks
associated with such
components.
Phase III - Assessment To (i)
determine which components are
not Y2K-ready and (ii) decide
whether such components should
be replaced, retired or
repaired.
Phase IV - Renovation To execute
component replacement,
retirement or repair to ensure
Y2K readiness.
Phase V - Validation To test components that have
been repaired to ensure Y2K
readiness and validate "mission
critical" components that were
assessed as Y2K-ready in Phase
III.
Phase VI - Implementation To deploy
repaired and validated
components.
In order to execute the six-phase plan, a combination of internal resources
and external contractors has been, and will be, employed by the Y2K project
team.
Y2K PROJECT STATUS
The Y2K project team has completed the six phases for its internal "mission
critical" components. Additionally, the Y2K project team has completed the
renovation and validation of any non-mission critical components that the Y2K
project team and related business units determined to be necessary. If
Residential Funding introduces or replaces, prior to January 1, 2000, any
"mission critical" components, the Y2K project team will ensure that such
components conform to the requirements of the above six-phase plan.
The potential impact on Residential Funding of problems related to Y2K,
however, will not depend solely on the corrective measures undertaken by the Y2K
project team. The manner in which Y2K issues are addressed by
S-25
<PAGE>
business partners, governmental agencies and other entities that provide data
to, or receive data from, Residential Funding, or whose financial condition or
operational capability is important to Residential Funding and its ability to
act as master servicer, will have a significant impact upon Residential Funding.
These entities include, among others, subservicers, the trustee, the custodian
and certain depositary institutions, as well as their respective suppliers and
vendors. Accordingly, Residential Funding has communicated, and will continue to
communicate, with certain of these parties to assess their Y2K readiness and
evaluate any potential impact on Residential Funding.
Due to the various dates by which Residential Funding's business partners
anticipate being Y2K-ready, it is expected that the Y2K project team will
continue to spend significant time assessing Y2K business partner issues
throughout 1999. Any business partner, including any subservicer, the trustee
and the custodian, that (i) has not provided Residential Funding appropriate
documentation supporting its Y2K efforts, (ii) has not responded in a timely
manner to Residential Funding's inquiries regarding their Y2K efforts or (iii)
did not expect to be Y2K-ready until after June 30, 1999, has been, and will be,
placed in an "at risk" category. Currently, only a very limited number of
subservicers have been placed in the "at risk" category. Residential Funding
will carefully monitor the efforts and progress of its "at risk" business
partners, and if additional steps are necessary Residential Funding will
reassess the risk and act accordingly.
During 1998, Residential Funding also commenced a formal business continuity
plan that is designed to address potential Y2K problems and other possible
disruptions. Residential Funding's business continuity plan has the following
four phases:
Phase Objective
Phase - Business Impact To assess the impact upon
Assessment Residential Funding business
units if "mission critical"
components were suddenly not
available or significantly
impaired as a result of a natural
disaster or other type of
disruption (including as a result
of Y2K).
Phase II - Strategic Development To
develop broad, strategic plans
regarding the manner in which
Residential Funding will
operate in the aftermath of a
natural disaster or other type
of disruption (including as a
result of Y2K).
Phase III - Business Continuity To develop detailed
Planning procedures on how Residential
Funding and individual business
units will continue to operate
in the aftermath of a natural
disaster or other type of
disruption (including as a
result of Y2K).
Phase IV - Validation To test the
plans developed in Phases II
and III above.
S-26
<PAGE>
As of March 31, 1999, Residential Funding had substantially completed Phases
I, II and III of its business continuity plan. As of June 30, 1999, Residential
Funding had substantially completed Phase IV of such plan.
RISKS RELATED TO Y2K
Although Residential Funding's remediation efforts are directed at
eliminating its Y2K exposure, there can be no assurance that these efforts will
fully mitigate the effect of all Y2K problems. If Residential Funding fails to
identify or correct any material Y2K problem, including any problems related to
its mission critical master servicing applications, there could be significant
disruptions in its normal business operations. These disruptions could have a
material adverse effect on Residential Funding's ability to (i) collect (and
monitor any subservicer's collection of) payments on the mortgage loans, (ii)
distribute these collections to the trustee and (iii) provide reports to
certificateholders as described in this prospectus supplement. Furthermore, if
any subservicer, the trustee or any other business partner or any of their
respective vendors or third party service providers are not Y2K-ready, the
ability to (a) service the mortgage loans, in the case of any subservicer or any
of their respective vendors or third party service providers, and (b) make
distributions to certificateholders, in the case of the trustee or any of its
vendors or third party service providers, may be materially and adversely
affected.
This section entitled "Year 2000 Considerations" contains forward-looking
statements within the meaning of Section 27A of the Securities Act. All
statements in this section that are not statements of historical fact are
forward-looking statements. Forward-looking statements made in this Y2K
discussion are subject to some risks and uncertainties. Important factors that
could cause results to differ materially from such forward-looking statements
include, among other things, the ability of Residential Funding to successfully
identify components that may pose Y2K problems, the nature and amount of
programming required to fix the affected components, the costs of labor and
consultants related to these efforts, the continued availability of resources,
both personnel and technology, and the ability of business partners that
interface with Residential Funding to successfully address their Y2K issues.
DESCRIPTION OF THE SECURITIES
GENERAL
The notes will be issued under to the Indenture. The certificates will be
issued under the trust agreement. The following summaries describe provisions of
the securities, the indenture and the trust agreement. The summaries do not
purport to be complete and are subject to, and qualified in their entirety by
reference to, the provisions of the applicable agreement.
The notes will be secured by the assets of the trust pledged by the issuer
to the indenture trustee under the indenture which will consist of:
o the home loans;
o all amounts on deposit in the Payment Account;
o the financial guaranty insurance policy; and
o proceeds of the foregoing.
BOOK-ENTRY NOTES
The notes will initially be issued as book-entry notes. Noteowners may elect
to hold their notes through DTC in the United States, or Cedelbank or Euroclear,
in Europe if they are participants of their systems, or indirectly through
organizations which are participants in their systems. The book-entry notes will
be issued in one or more securities which equal the aggregate principal balance
of the notes and will initially be registered in the name of Cede & Co., the
nominee of DTC. Cedelbank and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedelbank's and
Euroclear's names on the books of their respective depositaries which in turn
will hold the positions in customers' securities accounts in the depositaries'
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names on the books of DTC. Investors may hold the beneficial interests in the
book-entry notes in minimum denominations of $25,000 and in integral multiples
of $1 in excess of $25,000. Except as described below, no beneficial owner of
the notes will be entitled to receive a physical certificate, or definitive
note, representing the security. Unless and until definitive notes are issued,
it is anticipated that the only holder of the notes will be Cede & Co., as
nominee of DTC. Note owners will not be holders as that term is used in the
indenture.
The beneficial owner's ownership of a book-entry note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary that maintains the beneficial owner's account for that purpose. In
turn, the financial intermediary's ownership of the book-entry notes will be
recorded on the records of DTC, or of a participating firm that acts as agent
for the financial intermediary, whose interest will in turn be recorded on the
records of DTC, if the beneficial owner's financial intermediary is not a DTC
participant and on the records of Cedelbank or Euroclear, as appropriate.
Note owners will receive all payments of principal and interest on the notes
from the indenture trustee through DTC and DTC participants. While the notes are
outstanding, except under the circumstances described below, under the DTC
rules, regulations and procedures, DTC is required to make book-entry transfers
among participants on whose behalf it acts in connection with the notes and is
required to receive and transmit payments of principal and interest on the
notes.
Participants and indirect participants with whom note owners have accounts
for notes are similarly required to make book-entry transfers and receive and
transmit the payments on behalf of their respective note owners. Accordingly,
although note owners will not possess physical certificates, the DTC rules
provide a mechanism by which note owners will receive payments and will be able
to transfer their interest.
Note owners will not receive or be entitled to receive definitive notes
representing their respective interests in the notes, except under the limited
circumstances described below. Unless and until definitive notes are issued,
note owners who are not participants may transfer ownership of notes only
through participants and indirect participants by instructing the participants
and indirect participants to transfer the notes, by book-entry transfer, through
DTC for the account of the purchasers of the notes, which account is maintained
with their respective participants. Under the DTC rules and in accordance with
DTC's normal procedures, transfers of ownership of notes will be executed
through DTC and the accounts of the respective participants at DTC will be
debited and credited. Similarly, the participants and indirect participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing note owners.
Under a book-entry format, beneficial owners of the book-entry notes may
experience some delay in their receipt of payments, since the payments will be
forwarded by the indenture trustee to Cede & Co. Payments on notes held through
Cedelbank or Euroclear will be credited to the cash accounts of Cedelbank
participants or Euroclear participants in accordance with the relevant system's
rules and procedures, to the extent received by the relevant depositary. The
payments will be subject to tax reporting in accordance with relevant United
States tax laws and regulations. Because DTC can only act on behalf of financial
intermediaries, the ability of a beneficial owner to pledge book-entry notes to
persons or entities that do not participate in the depositary system, or
otherwise take actions relating to the book-entry notes, may be limited due to
the lack of physical certificates for the book-entry notes. In addition,
issuance of the book-entry notes in book-entry form may reduce the liquidity of
the notes in the secondary market since some potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
DTC has advised the indenture trustee that, unless and until definitive
notes are issued, DTC will take any action permitted to be taken by the holders
of the book-entry notes under the indenture only at the direction of one or more
financial intermediaries to whose DTC accounts the book-entry notes are
credited, to the extent that the actions are taken on behalf of financial
intermediaries whose holdings include the book-entry notes. Cedelbank or the
Euroclear operator, as the case may be, will take any other action permitted to
be taken by noteholders under the indenture on behalf of a Cedelbank participant
or Euroclear participant only in accordance with its relevant rules and
procedures and subject to the ability of the relevant depositary to effect the
actions on its behalf through DTC. DTC may take actions, at the direction of the
related participants, with respect to some notes which conflict with actions
taken relating to other notes.
Definitive notes will be issued to beneficial owners of the book-entry
notes, or their nominees, rather than to DTC, if (a) the indenture trustee
determines that the DTC is no longer willing, qualified or able to discharge
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properly its responsibilities as nominee and depository with respect to the
book-entry notes and the indenture trustee is unable to locate a qualified
successor, (b) the indenture trustee elects to terminate a book-entry system
through DTC or (c) after the occurrence of an event of default under the
indenture, beneficial owners having percentage interests aggregating at least a
majority of the note balance of the notes advise the DTC through the financial
intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC, or a successor to DTC, is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the indenture trustee will be required to notify all
beneficial owners of the occurrence of this event and the availability through
DTC of definitive notes. Upon surrender by DTC of the global certificate or
certificates representing the book-entry notes and instructions for
re-registration, the indenture trustee will issue and authenticate definitive
notes, and subsequently, the indenture trustee will recognize the holders of the
definitive notes as holders under the indenture.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of notes among participants of DTC,
Cedelbank and Euroclear, they are under no obligation to perform or continue to
perform the procedures and the procedures may be discontinued at any time. See
Annex I to this prospectus supplement.
DTC has advised the depositor that management of DTC is aware that some
computer applications, systems and the like for processing data that are
dependent upon calendar dates, including dates before, on and after January 1,
2000, may encounter Year 2000 problems. DTC has informed its participants and
other members of the financial community that it has developed and is
implementing a program so that its systems, as they relate to the timely payment
of distributions, including principal and income payments, to securityholders,
book-entry deliveries and settlement of trades with DTC continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which, DTC has advised its participants and other members of the
financial community, is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as DTC's participants and third party vendors from whom DTC licenses
software and hardware, and third party vendors on whom DTC relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed its
participants and other members of the financial community that it is contacting
and will continue to contact third party vendors from whom DTC acquires services
to:
o impress upon them the importance of those services being Year 2000
compliant; and
o determine the extent of their efforts for Year 2000 remediation and, as
appropriate, testing of their services.
In addition, DTC is in the process of developing any contingency plans as it
deems appropriate.
According to DTC, the foregoing information about DTC has been provided to
its participants and other members of the financial community for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
None of the depositor, the master servicer or the indenture trustee will
have any liability for any actions taken by DTC or its nominee, including,
without limitation, actions for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the notes held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interests.
For additional information regarding DTC, Cedelbank, Euroclear and the
notes, see "Description of the Securities--Form of Securities" in the
prospectus.
PAYMENTS
Payments on the notes will be made by the indenture trustee or the paying
agent on the 25th day of each month or, if not a business day, then the next
succeeding business day, commencing in _______________, each of which is
referred to as a payment date. Payments on the notes will be made to the persons
in whose names the notes are registered at the close of business on the day
prior to each payment date or, if the notes are no longer book-entry
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notes, on the record date. See "Description of the Securities--Payments on
Loans" in the prospectus. Payments will be made by check or money order, mailed,
or upon the request of a holder owning notes having denominations aggregating at
least $1,000,000, by wire transfer or otherwise, to the address of the person
which, in the case of book-entry notes, will be DTC or its nominee as it appears
on the security register in amounts calculated as described in this prospectus
supplement on the determination date. However, the final payment relating to the
notes will be made only upon presentation and surrender of the notes at the
office or the agency of the indenture trustee specified in the notice to holders
of the final payment. A business day is any day other than a Saturday or Sunday
or a day on which banking institutions in the State of California, Minnesota,
New York, Pennsylvania, Illinois or Delaware are required or authorized by law
to be closed.
GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe the
cash flows on the notes:
EXCESS LOSS AMOUNT--As of any payment date, an amount will be equal to the
sum of:
- ANY LIQUIDATION LOSS AMOUNTS, OTHER THAN AS DESCRIBED IN CLAUSES SECOND
THROUGH FOURTH below, for the related collection period which, when added
to the aggregate of the Liquidation Loss Amounts for all preceding
collection periods exceed $_________,
- any Special Hazard Losses in excess of the Special Hazard Amount,
- any Fraud Losses in excess of the Fraud Loss Amount, and
- some losses occasioned by war, civil insurrection, some governmental
actions, nuclear reaction and some other risks as described in the
indenture.
Excess Loss Amounts will not be covered by any Liquidation Loss Distribution
Amount or by a reduction in the Outstanding Reserve Amount. Any Excess Loss
Amounts however, will be covered by the financial guaranty insurance policy, and
in the event payments are not made as required under the financial guaranty
insurance policy, the losses will be allocated to the notes.
FRAUD LOSS AMOUNT--An amount equal to $_________. As of any date of
determination after the cut-off date, the Fraud Loss Amount shall equal:
o prior to the first anniversary of the cut-off date, an amount equal to 5%
of the aggregate of the Stated Principal Balances of the home loans as of
the cut-off date minus the aggregate of any Liquidation Loss Amounts on
the home loans due to Fraud Losses up to the date of determination;
o from the first to the second anniversary of the cut-off date, an amount
equal to (1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the cut-off date and (b) 3% of the aggregate of the Stated
Principal Balances of the home loans as of the most recent anniversary of
the cut-off date minus (2) the aggregate of any Liquidation Loss Amounts
on the home loans due to Fraud Losses since the most recent anniversary of
the cut-off date up to the date of determination; and
o from the second to the fifth anniversary of the cut-off date, an amount
equal to (1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the cut-off date and (b) 2% of the aggregate of the Stated
Principal Balances of the home loans as of the most recent anniversary of
the cut-off date minus (2) the aggregate of any Liquidation Loss Amounts
on the home loans due to Fraud Losses since the most recent anniversary of
the cut-off date up to the date of determination. On and after the fifth
anniversary of the cut-off date, the Fraud Loss Amount shall be zero.
LIQUIDATED HOME LOAN--As to any payment date, any home loan which the master
servicer has determined, based on the servicing procedures specified in the
servicing agreement, as of the end of the preceding collection period that all
liquidation proceeds which it expects to recover in connection with the
disposition of the related mortgaged property have been recovered. The master
servicer will treat any home loan that is 180 days or more delinquent as having
been finally liquidated.
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LIQUIDATION LOSS AMOUNT--As to any Liquidated Home Loan, the unrecovered
Stated Principal Balance of the Liquidated Home Loan and any of its unpaid
accrued interest at the end of the related collection period in which the home
loan became a Liquidated Home Loan, after giving effect to the Net Liquidation
Proceeds allocable to the Stated Principal Balance. Any Liquidation Loss Amount
shall not be required to be paid to the extent that a Liquidation Loss Amount
was paid on the notes by means of a draw on the financial guaranty insurance
policy or was reflected in the reduction of the Outstanding Reserve Amount.
LIQUIDATION LOSS DISTRIBUTION AMOUNT--As to any payment date, an amount
equal to the sum of (A) 100% of the Liquidation Loss Amounts, other than any
Excess Loss Amounts, on the payment date, plus (B) any Liquidation Loss Amounts,
other than any Excess Loss Amounts, remaining undistributed from any preceding
payment date, together with its interest from the date initially distributable
to the date paid.
NET LIQUIDATION PROCEEDS--As to a home loan, the proceeds, excluding amounts
drawn on the financial guaranty insurance policy, received in connection with
the liquidation of any home loan, whether through trustee's sale, foreclosure
sale or otherwise, reduced by related expenses, but not including the portion,
if any, of the amount that exceeds the Stated Principal Balance of the home loan
at the end of the collection period immediately preceding the collection period
in which the home loan became a Liquidated Home Loan.
OUTSTANDING RESERVE AMOUNT--an amount initially be approximately _____% of
the cut-off date balance. The Outstanding Reserve Amount will be increased by
distributions of the Reserve Increase Amount, if any, to the notes. On each
payment date, the Outstanding Reserve Amount, as in effect immediately prior to
the payment date, if any, shall be deemed to be reduced by an amount equal to
any Liquidation Loss Amounts, other than any Excess Loss Amounts, for the
payment date, except to the extent that Liquidation Loss Amounts were covered on
the payment date by a Liquidation Loss Distribution Amount, which amount would
be so distributed, if available, from any excess interest collections for that
payment date. Any Liquidation Loss Amounts not so covered will be covered by
draws on the financial guaranty insurance policy to the extent provided in this
prospectus supplement. However, any Excess Loss Amounts are required to be
covered by a draw on the financial guaranty insurance policy in all cases,
without regard to the availability of the Outstanding Reserve Amount, and the
Outstanding Reserve Amount will not be reduced by any Excess Loss Amount under
any circumstances. The Outstanding Reserve Amount available on any payment date
is the amount, if any, by which the pool balance, after applying payments
received in the related collection period, exceeds the aggregate note balance of
the notes on the payment date, after application of principal collections for
that date.
To the extent that the Outstanding Reserve Amount is insufficient or not
available to absorb Liquidation Loss Amounts that are not covered by the
Liquidation Loss Distribution Amount, and if payments are not made under the
financial guaranty insurance policy as required, a noteholder may incur a loss.
PRINCIPAL COLLECTION DISTRIBUTION AMOUNT--As to any payment date, an amount
equal to principal collections for that payment date; provided however, on any
payment date as to which the Outstanding Reserve Amount that would result
without regard to this proviso exceeds the Reserve Amount Target, the Principal
Collection Distribution Amount will be reduced by the amount of the excess until
the Outstanding Reserve Amount equals the Reserve Amount Target. To the extent
the Reserve Amount Target decreases on any payment date, the amount of the
Principal Collection Distribution Amount will be reduced on that payment date
and on each subsequent payment date to the extent the remaining Outstanding
Reserve Amount is in excess of the reduced Reserve Amount Target until the
Outstanding Reserve Amount equals the Reserve Amount Target.
RESERVE AMOUNT TARGET--As to any payment date prior to the Stepdown Date, an
amount equal to _____% of the cut-off date balance. On or after the Stepdown
Date, the Reserve Amount Target will be equal to the lesser of (a) the Reserve
Amount Target as of the cut-off date and (b) _____% of the pool balance before
applying payments received in the related collection period, but not lower than
$__________, which is _____% of the cut-off date balance. However, any scheduled
reduction to the Reserve Amount Target described in the preceding sentence shall
not be made as of any payment date unless:
o (a) the aggregate cumulative Liquidation Loss Amounts on the home loans
prior to any payment date occurring during the first year, the second year
or the third year, or any year thereafter, after the Stepdown Date are
less than ____%, ____% and ____% respectively, of the cut-off date pool
balance or (b) the average Liquidation Loss Amount on the home loans for
the current and five previous payment dates is less than half of the
amount remaining in the Payment Account on the payment date following
DISTRIBUTIONS UNDER CLAUSES
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FIRST THROUGH FIFTH of the second paragraph under "--Allocation of
Payments ON THE HOME LOANS" BELOW, OTHER THAN CLAUSE THIRD in that
section, and
o there has been no draw on the financial guaranty insurance policy on the
payment date that remains unreimbursed. In addition, the Reserve Amount
Target may be reduced with the prior written consent of the financial
guaranty insurer and the rating agencies.
RESERVE INCREASE AMOUNT--As to any payment date, the amount necessary to
bring the Outstanding Reserve Amount up to the Reserve Amount Target.
SPECIAL HAZARD AMOUNT--An amount equal to $________. As of any date of
determination following the cut-off date, the Special Hazard Amount shall equal
the initial Special Hazard Amount less the sum of (A) the aggregate of any
Liquidation Loss Amounts on the home loans due to Special Hazard Losses and (B)
the Adjustment Amount. The Adjustment Amount will be equal to an amount
calculated under the terms of the indenture.
STEPDOWN DATE--The later of:
o the payment date in ________________, and
o the payment date on which the pool balance before applying payments
received in the related collection period is less than 50% of the cut-off
date balance.
INTEREST PAYMENTS ON THE NOTES
Interest payments will be made on the notes on each payment date at the note
rate. The note rate for the notes will be _____% per annum.
Interest on the notes relating to any payment date will accrue for the
related accrual period on the note balance. The accrual period for any payment
date will be the calendar month preceding the month in which the related payment
date occurs, or in the case of the first payment date beginning on the closing
date and ending the last day of the month in which the closing date occurs.
Interest will be based on a 30-day month and a 360-day year. Interest payments
on the notes will be funded from payments on the home loans and, if necessary,
from draws on the financial guaranty insurance policy.
PRINCIPAL PAYMENTS ON THE NOTES
On each payment date, other than the payment date in _____________,
principal payments will be due and payable on the notes in an amount equal to
the aggregate of the Principal Collection Distribution Amount, together with any
Reserve Increase Amounts and Liquidation Loss Distribution Amounts for the
payment date, as and to the extent described below. On the payment date in
___________, principal will be due and payable on the notes in amounts equal to
the note balance, if any. In no event will principal payments on the notes on
any payment date exceed the note balance on that date.
ALLOCATION OF PAYMENTS ON THE HOME LOANS
The master servicer on behalf of the trust will establish a Payment Account
into which the master servicer will deposit principal and interest collections
for each payment date on the business day prior to that payment date. The
Payment Account will be an Eligible Account and amounts on deposit in the
Payment Account will be invested in permitted investments.
On each payment date, principal and interest collections will be allocated
from the Payment Account in the following order of priority:
O FIRST, to pay accrued interest due on the note balance of the notes;
O SECOND, to pay principal in an amount equal to the Principal Collection
Distribution Amount for that payment date on the notes;
O THIRD, to pay as principal on the notes, an amount equal to the
Liquidation Loss Distribution Amount;
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O FOURTH, to pay the financial guaranty insurer the premium for the
financial guaranty insurance policy and any previously unpaid premiums for
the financial guaranty insurance policy, with its interest;
O FIFTh, to reimburse the financial guaranty insurer for prior draws made on
the financial guaranty insurance policy, other than those attributable to
Excess Loss Amounts, with its interest;
O SIXTH, to pay principal on the notes, the Reserve Increase Amount;
O SEVENTH, to pay the financial guaranty insurer any other amounts owed
under the insurance agreement; and
O EIGHTH, any remaining amounts to the holders of the certificates.
THE PAYING AGENT
The paying agent shall initially be the indenture trustee, together with any
successor thereto. The paying agent shall have the revocable power to withdraw
funds from the Payment Account for the purpose of making payments to the
noteholders.
MATURITY AND OPTIONAL REDEMPTION
The notes will be payable in full on the payment date in __________, to the
extent of the outstanding note balance on that date, if any. In addition, a
principal payment may be made in partial or full redemption of the notes after
the aggregate Stated Principal Balance after applying payments received in the
related collection period is reduced to an amount less than or equal to
$_____________, which is 10% of the cut-off date balance, upon the exercise by
the master servicer of its option to purchase all or a portion of the home loans
and related assets. In the event that all of the home loans are purchased by the
master servicer, the purchase price will be equal to the sum of the outstanding
pool balance and its accrued and unpaid interest at the weighted average of the
loan rates through the day preceding the payment date on which the purchase
occurs together with all amounts due and owing to the financial guaranty
insurer.
In the event that a portion of the home loans are purchased by the master
servicer, the purchase price will be equal to the sum of the aggregate Stated
Principal Balances of the home loans so purchased and its accrued and unpaid
interest at the weighted average of the related loan rates on the home loans
through the day preceding the payment date on which the purchase occurs,
together with all amounts due and owing to the financial guaranty insurer in
connection with the home loans so purchased. Any purchase will be subject to
satisfaction of some conditions specified in the servicing agreement, including:
o the master servicer shall have delivered to the indenture trustee a home
loan schedule containing a list of all home loans remaining in the trust
after removal;
o the master servicer shall represent and warrant that no selection
procedures reasonably believed by the master servicer to be adverse to the
interests of the securityholders or the financial guaranty insurer were
used by the master servicer in selecting the home loans; and
o each rating agency shall have been notified of the proposed retransfer and
shall not have notified the master servicer that the retransfer would
result in a reduction or withdrawal of the ratings of the notes without
regard to the financial guaranty insurance policy.
DESCRIPTION OF THE FINANCIAL GUARANTY INSURANCE POLICY
On the closing date, the financial guaranty insurer will issue the financial
guaranty insurance policy in favor of the indenture trustee on behalf of the
issuer. The financial guaranty insurance policy will unconditionally and
irrevocably guarantee most payments on the notes. On each payment date, a draw
will be made on the financial guaranty insurance policy equal to the sum of:
o the amount by which accrued interest on the notes at the note rate on that
payment date exceeds the amount on deposit in the Payment Account
available for interest distributions on that payment date,
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o any Liquidation Loss Amount, other than any Excess Loss Amount, for that
payment date, to the extent not currently covered by a Liquidation Loss
Distribution Amount or a reduction in the Outstanding Reserve Amount and
o any Excess Loss Amount for that payment date.
For purposes of the foregoing, amounts in the Payment Account available for
interest distributions on any payment date shall be deemed to include all
amounts available in the Payment Account for that payment date, other than the
Principal Collection Distribution Amount and the Liquidation Loss Distribution
Amount, if any. Under the terms of the indenture, draws under the financial
guaranty insurance policy relating to any Liquidation Loss Amount will be paid
to the notes by the paying agent, as principal, to the extent the notes would
have been paid that amount. In addition, a draw will be made on the financial
guaranty insurance policy to cover some shortfalls in amounts allocable to the
noteholders following the sale, liquidation or other disposition of the assets
of the trust in connection with the liquidation of the trust fund as permitted
under the indenture following an event of default under the indenture. In
addition, the financial guaranty insurance policy will guarantee the payment of
the outstanding note balance of each note on the payment date in ___________. In
the absence of payments under the financial guaranty insurance policy,
noteholders will directly bear the credit risks associated with their investment
to the extent the risks are not covered by the Outstanding Reserve Amount or
otherwise.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and the aggregate amount of distributions on the
notes will be affected by the rate and timing of principal payments on the home
loans and the amount and timing of mortgagor defaults resulting in Liquidation
Loss Amounts. The rate of default of home loans secured by second liens may be
greater than that of home loans secured by first liens. In addition, yields may
be adversely affected by a higher or lower than anticipated rate of principal
payments on the home loans in the trust fund. The rate of principal payments on
the home loans will in turn be affected by the amortization schedules of the
home loans, the rate and timing of its principal prepayments by the mortgagors,
liquidations of defaulted home loans and repurchases of home loans due to
breaches of representations.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the home loans may, and the timing of Liquidation Loss Amounts
will, significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the home loans
will depend on future events and on a variety of factors, as described more
fully in this prospectus supplement and in the prospectus under "Yield
Considerations" and "Maturity and Prepayment Considerations" no assurance can be
given as to the rate or the timing of principal payments on the notes.
The home loans in most cases may be prepaid by the mortgagors at any time.
However, in some circumstances, some of the home loans will be subject to a
prepayment charge. See "Description of the Home Loan Pool" in this prospectus
supplement. In addition, as described under "Description of the Home Loan
Pool--Home Loan Pool Characteristics," some of the home loans may be assumable
under the terms of the mortgage note, and the remainder are subject to customary
due-on-sale provisions. The master servicer shall enforce any due-on-sale clause
contained in any mortgage note or mortgage, to the extent permitted under
applicable law and governmental regulations. However, if the master servicer
determines that it is reasonably likely that any mortgagor will bring, or if any
mortgagor does bring, legal action to declare invalid or otherwise avoid
enforcement of a due-on-sale clause contained in any mortgage note or mortgage,
the master servicer shall not be required to enforce the due-on-sale clause or
to contest the action. The extent to which some of the home loans are assumed by
purchasers of the mortgaged properties rather than prepaid by the related
mortgagors in connection with the sales of the mortgaged properties will affect
the weighted average life of the notes and may result in a prepayment experience
on the home loans that differs from that on other conventional home loans. See
"Yield Considerations" and "Maturity and Prepayment Considerations" in the
prospectus.
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Prepayments, liquidations and purchases of the home loans will result in
distributions to holders of the notes of principal amounts which would otherwise
be distributed over the remaining terms of the home loans. Factors affecting
prepayment, including defaults and liquidations, of home loans include changes
in mortgagors' housing needs, job transfers, unemployment, mortgagors' net
equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates, solicitations and servicing
decisions. In addition, if prevailing mortgage rates fell significantly below
the loan rates on the home loans, the rate of prepayments, including
refinancings, would be expected to increase. Conversely, if prevailing mortgage
rates rose significantly above the loan rates on the home loans, the rate of
prepayments on the home loans would be expected to decrease. Furthermore, since
home loans secured by second liens are not generally viewed by borrowers as
permanent financing and generally carry a high rate of interest, the home loans
secured by second liens may experience a higher rate of prepayment than
traditional first lien home loans. Prepayment of the related first lien may also
affect the rate of prepayments on the home loans.
The yield to maturity of the notes will depend, in part, on whether, to what
extent, and the timing with respect to which, any Reserve Amount Increase is
used to accelerate payments of principal on the notes or the Reserve Amount
Target is reduced. See "Description of the Securities--Allocation of Payments on
the Home Loans" in this prospectus supplement.
The rate of defaults on the home loans will also affect the rate and timing
of principal payments on the home loans. In general, defaults on home loans are
expected to occur with greater frequency in their early years. The rate of
default of home loans secured by second liens is likely to be greater than that
of home loans secured by first liens on comparable properties. The rate of
default on home loans which are refinance home loans, and on home loans with
high combined LTV ratios, may be higher than for other types of home loans.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the home loans will be affected by the general economic condition of the region
of the country in which the related mortgaged properties are located. The risk
of delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values. See "Yield
Considerations" and "Maturity and Prepayment Considerations" in the prospectus.
Because the loan rates on the home loans and the note rate on the notes are
fixed, the rate will not change in response to changes in market interest rates.
Accordingly, if market interest rates or market yields for securities similar to
the notes were to rise, the market value of the notes may decline.
In addition, the yield to maturity on the notes will depend on, among other
things, the price paid by the holders of the notes and the note rate. The extent
to which the yield to maturity of a note is sensitive to prepayments will
depend, in part, upon the degree to which it is purchased at a discount or
premium. In most cases, if notes are purchased at a premium and principal
distributions on the notes occur at a rate faster than assumed at the time of
purchase, the investor's actual yield to maturity will be lower than that
anticipated at the time of purchase. Conversely, if notes are purchased at a
discount and principal distributions on the notes occur at a rate slower than
that assumed at the time of purchase, the investor's actual yield to maturity
will be lower than that anticipated at the time of purchase. For additional
considerations relating to the yield on the notes, see "Yield Considerations"
and "Maturity and Prepayment Considerations" in the prospectus.
WEIGHTED AVERAGE LIFE: Weighted average life refers to the average amount of
time that will elapse from the date of issuance of a security to the date of
distribution to the investor of each dollar distributed in reduction of
principal of the security, assuming no losses. The weighted average life of the
notes will be influenced by, among other things, the rate at which principal of
the home loans is paid, which may be in the form of scheduled amortization,
prepayments or liquidations.
[The prepayment model used in this prospectus supplement, or prepayment
assumption, represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of home loans. A 100% prepayment
assumption assumes a constant prepayment rate of 2% per annum of the then
outstanding principal balance of the home loans in the first month of the life
of the home loans and an additional 0.9286% per annum in each month thereafter
until the fifteenth month. Beginning in the fifteenth month and in each month
thereafter during the life of the home loans, a 100% prepayment assumption
assumes a constant prepayment rate of 15% per annum each month.] As used in the
table below, a 50% prepayment assumption assumes prepayment rates equal to 50%
of the prepayment assumption. Correspondingly, a 150% prepayment assumption
assumes prepayment rates equal to 150% of the prepayment assumption, and so
forth. The prepayment assumption does not purport to be a
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historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of home loans, including the home
loans.
The table below has been prepared on the basis of assumptions as described
below in this paragraph regarding the weighted average characteristics of the
home loans that are expected to be included in the trust as described under
"Description of the Home Loan Pool" in this prospectus supplement and the
performance of the home loans. The table assumes, among other things, that:
o The home loan pool consists of ten groups of home loans, with the home
loans in each group having the following aggregate characteristics as of
the cut-off date:
AGGREGATE
STATED ORIGINAL TERM
PRINCIPAL NET LOAN TO REMAINING TERM
GROUP BALANCE LOAN RATE RATE MATURITY TO MATURITY
$ % %
o the tenth group above consists of balloon loans with a remaining term to
stated maturity of [179] months;
o the scheduled monthly payment for each home loan has been based on its
outstanding balance, interest rate and remaining term to maturity, so that
the home loan will amortize in amounts sufficient for its repayment over
its remaining term to maturity;
o none of the seller, the master servicer or the depositor will repurchase
any home loan, as described under "The Trusts--Representations Relating to
Trust Assets", "The Trusts--Repurchases of Loans" and "Description of the
Securities--Assignment of Loans and Certain Insolvency and Bankruptcy
Issues" in the prospectus, and the master servicer does not exercise its
option to purchase the home loans and, as a result, cause a termination of
the trust except as indicated in the table;
o there are no delinquencies or Liquidation Loss Amounts on the home loans,
and principal payments on the home loans will be timely received together
with prepayments, if any, on the last day of the month and at the
respective constant percentages of the prepayment assumption in the table;
o there is no prepayment interest shortfall or any other interest
shortfall in any month;
o the home loans, including the simple interest home loans, pay on the basis
on a 30-day month and a 360-day year;
o payments on the notes will be received on the 25th day of each month,
commencing in ______________;
o payments on the home loans earn no reinvestment return;
o there are no additional ongoing trust expenses payable out of the trust;
o the notes will be purchased on ______________; and
o the amount of interest collected on the home loans during the collection
period for the first payment date is $____________
The foregoing list of assumptions are referred to as the structuring
assumptions.
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The actual characteristics and performance of the home loans will differ
from the assumptions used in constructing the table below, which is hypothetical
in nature and is provided only to give a general sense of how the principal cash
flows might behave under varying prepayment scenarios. For example, it is very
unlikely that the home loans will prepay at a constant level of the prepayment
assumption until maturity or that all of the home loans will prepay at the same
level of the prepayment assumption. Moreover, the diverse remaining terms to
maturity of the home loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
the prepayment assumption specified, even if the weighted average remaining term
to maturity of the home loans is as assumed. Any difference between the
assumptions and the actual characteristics and performance of the home loans, or
actual prepayment or loss experience, will affect the percentage of initial note
balance outstanding over time and the weighted average lives of the notes.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the notes, and lists the percentage of
the initial note balance of the notes that would be outstanding after each of
the payment dates shown at various percentages of the prepayment assumption.
PERCENT OF INITIAL STATED PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
- ------------------------------------------------------------------------------
PAYMENT DATE 0% 50% 100% 150% 200%
Initial Percentage
==========
==========
==========
==========
==========
==========
==========
Weighted Average Life to Maturity in Years
Weighted Average Life Assuming
Optional Repurchase in Years
The weighted average life of a note is determined by:
o multiplying the net reduction, if any, of the note balance by the number
of years from the date of issuance of the note to the related payment
date,
o adding the results, and
o dividing the sum by the aggregate of the net reductions of the note
balance described in the first clause above.
This table has been prepared based on the assumptions described in the
fourth paragraph preceding this table, including the assumptions regarding the
characteristics and performance of the home loans, which differ from their
actual characteristics and performance, and should be read in conjunction
therewith.
DESCRIPTION OF THE HOME LOAN PURCHASE AGREEMENT
The home loans to be deposited in the trust by the depositor will be
purchased by the depositor from the seller under the home loan purchase
agreement dated as of ______________ between the seller and the depositor. The
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following summary describes some terms of the home loan purchase agreement and
is qualified in its entirety by reference to the home loan purchase agreement.
PURCHASE OF HOME LOANS
Under the home loan purchase agreement, the seller will transfer and assign
to the depositor all of its right, title and interest in and to the home loans
and the mortgage notes, mortgages and other related documents. The purchase
prices for the home loans are specified percentages of its face amounts as of
the time of transfer and are payable by the depositor as provided in the home
loan purchase agreement.
The home loan purchase agreement will require that, within the time period
specified in this prospectus supplement, the seller deliver to the indenture
trustee, or the custodian, the home loans sold by the seller and the related
documents described in the preceding paragraph for the home loans. In lieu of
delivery of original mortgages, the seller may deliver true and correct copies
of the mortgages which have been certified as to authenticity by the appropriate
county recording office where the mortgage is recorded.
REPRESENTATIONS AND WARRANTIES
The seller will also represent and warrant with respect to the home loans
that, among other things:
o the information with respect to the home loans in the schedule attached to
the home loan purchase agreement is true and correct in all material
respects, and
o immediately prior to the sale of the home loans to the depositor, the
seller was the sole owner and holder of the home loans free and clear of
any and all liens and security interests.
The seller will also represent and warrant that, among other things, as of
the closing date:
o the home loan purchase agreement constitutes a legal, valid and binding
obligation of the seller, and
o the home loan purchase agreement constitutes a valid transfer and
assignment of all right, title and interest of the seller in and to the
home loans and the proceeds of the home loans.
The benefit of the representations and warranties made by the seller will be
assigned by the depositor to the indenture trustee.
Within 90 days of the closing date, _________________ the custodian will
review or cause to be reviewed the home loans and the related documents, and if
any home loan or related document is found to be defective in any material
respect, which may materially and adversely affect the value of the related home
loan, or the interests of the indenture trustee, as pledgee of the home loans,
the securityholders or the financial guaranty insurer in the home loan and the
defect is not cured within 90 days following notification of the defect to the
seller and the trust by the custodian, the seller will be obligated under the
home loan purchase agreement to deposit the repurchase price into the Custodial
Account. In lieu of any deposit, the seller may substitute an eligible
substitute loan; provided that the substitution may be subject to the delivery
of an opinion of counsel regarding tax matters. Any purchase or substitution
will result in the removal of the home loan required to be removed from the
trust. The removed home loans are referred to as deleted loans. The obligation
of the seller to remove deleted loans sold by it from the trust is the sole
remedy regarding any defects in the home loans sold by the seller and related
documents for the home loans available against the seller.
As to any home loan, the repurchase price referred to in the preceding
paragraph is equal to the Stated Principal Balance of the home loan at the time
of any removal described in the preceding paragraph plus its accrued and unpaid
interest to the date of removal. In connection with the substitution of an
eligible substitute loan, the seller will be required to deposit in the
Custodial Account a substitution adjustment amount equal to the excess of the
Stated Principal Balance of the related deleted loan to be removed from the
trust over the Stated Principal Balance of the eligible substitute loan.
An eligible substitute loan is a home loan substituted by the seller for a
deleted loan which must, on the date of the substitution:
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o have an outstanding Stated Principal Balance, or in the case of a
substitution of more than one home loan for a deleted loan, an aggregate
Stated Principal Balance, not in excess of the Stated Principal Balance
relating to the deleted loan;
o have a mortgage and a Net Loan Rate not less than, and not more than one
percentage point greater than, the mortgage rate and Net Loan Rate,
respectively, of the deleted loan;
o have a combined LTV ratio at the time of substitution no higher than that
of the deleted loan at the time of substitution;
o have, at the time of substitution, a remaining term to maturity not
greater than, and not more than one year less than, that of the deleted
loan;
o be secured by mortgaged property located in the United States;
o comply with each representation and warranty as to the home loans in the
home loan purchase agreement, deemed to be made as of the date of
substitution;
o be ineligible for inclusion in a REMIC if the deleted loan was a REMIC
ineligible loan, generally, because (a) the value of the real property
securing the deleted loan was not at least equal to eighty percent of the
original principal balance of the deleted loan, calculated by subtracting
the amount of any liens that are senior to the loan and a proportionate
amount of any lien of equal priority from the value of the property when
the loan was originated and (b) substantially all of the proceeds of the
deleted loan were not used to acquire, improve or protect an interest in
the real property securing the loan; and
o satisfy some other conditions specified in the indenture.
In addition, the seller will be obligated to deposit the repurchase price or
substitute an eligible substitute loan for a home loan as to which there is a
breach of a representation or warranty in the home loan purchase agreement and
the breach is not cured by the seller within the time provided in the home loan
purchase agreement.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes terms of the servicing agreement, dated as
of _____________ among the Trust, the indenture trustee and the master servicer.
The summary does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the servicing agreement.
Whenever particular defined terms of the servicing agreement are referred to,
the defined terms are incorporated in this prospectus supplement by reference.
See "The Agreements" in the prospectus.
THE MASTER SERVICER
Residential Funding Corporation, an indirect wholly-owned subsidiary of GMAC
Mortgage Corporation and an affiliate of the depositor, will act as master
servicer for the home loans under the servicing agreement. For a general
description of Residential Funding Corporation and its activities, see "The Home
Loan Pool--Residential Funding Corporation" in this prospectus supplement and
"Residential Funding Corporation" in the prospectus.
RESIDENTIAL FUNDING CORPORATION
Residential Funding Corporation will be responsible for master servicing the
home loans. Responsibilities of Residential Funding Corporation will include the
receipt of funds from subservicers, the reconciliation of servicing activity,
investor reporting, remittances to the indenture trustee and the owner trustee
to accommodate payments to securityholders and consulting with subservicers of
home loans that are delinquent and as to the related servicing policies, notices
and other responsibilities. Management and liquidation of mortgaged properties
acquired by foreclosure or deed in lieu of foreclosure, as well as other loss
mitigation procedures conducted by any subservicer, will be reviewed by
Residential Funding Corporation. Neither the master servicer nor any subservicer
will be required to make advances relating to delinquent payments of principal
and interest on the home loans.
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For information regarding foreclosure procedures, see "Description of the
Securities--Servicing and Administration of Loans -- Realization Upon Defaulted
Loans" in the prospectus. Servicing and charge-off policies and collection
practices may change over time in accordance with Residential Funding
Corporation's business judgment, changes in Residential Funding Corporation's
portfolio of home loans of the types included in the home loan pool that it
services for its clients and applicable laws and regulations, and other
considerations.
[Delinquency and Loss Experience, as appropriate]
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fee for each home loan is payable out of the interest payments
on the home loan. The weighted average Servicing Fee as of the cut-off date for
each home loan will be approximately ____% per annum of the outstanding
principal balance of the home loan. The Servicing Fees consist of (a) servicing
compensation payable to the master servicer relating to its master servicing
activities, and (b) subservicing and other related compensation payable to the
Subservicer, including the compensation paid to the master servicer as the
direct servicer of a home loan for which there is no subservicer. The primary
compensation to be paid to the master servicer relating to its master servicing
activities will be _____% per annum of the outstanding principal balance of each
home loan. The master servicer is obligated to pay some ongoing expenses
associated with the trust and incurred by the master servicer in connection with
its responsibilities under the servicing agreement. See "Description of the
Securities--Servicing and Administration of Loans " in the prospectus for
information regarding other possible compensation to the master servicer and the
subservicer and for information regarding expenses payable by the master
servicer.
PRINCIPAL AND INTEREST COLLECTIONS
The master servicer shall establish and maintain a Custodial Account in
which the master servicer shall deposit or cause to be deposited any amounts
representing payments on and any collections received relating to the home loans
received by it subsequent to the cut-off date. The Custodial Account shall be an
Eligible Account. On the 20th day of each month or if that day is not a business
day, the next succeeding business day, which is referred to as the determination
date, the master servicer will notify the paying agent and the indenture trustee
of the amount of aggregate amounts required to be withdrawn from the Custodial
Account and deposited into the Payment Account prior to the close of business on
the business day next succeeding each determination date.
Permitted investments are specified in the servicing agreement and are
limited to investments which meet the criteria of the rating agencies from time
to time as being consistent with their then-current ratings of the securities.
The master servicer will make the following withdrawals from the Custodial
Account and deposit the amounts as follows:
o to the Payment Account, an amount equal to the principal and interest
collections on the business day prior to each payment date; and
o to pay to itself or the subservicer the Servicing Fee, various
reimbursement amounts and other amounts as provided in the servicing
agreement.
All collections on the home loans will generally be allocated in accordance
with the mortgage notes between amounts collected relating to interest and
amounts collected relating to principal. As to any payment date, interest
collections will be equal to the sum of:
o the portion allocable to interest of all scheduled monthly payments on the
home loans received during the related collection period, minus the
Servicing Fees and the fees payable to the owner trustee and the indenture
trustee, which are collectively referred to as the administrative fees,
o the interest portion of all Net Liquidation Proceeds allocated to interest
under the terms of the mortgage notes, reduced by the administrative fees
for that collection period, and
o the interest portion of the repurchase price for any deleted loans and the
cash purchase price paid in connection with any optional purchase of the
home loans by the master servicer.
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However, on the first payment date, an amount, referred to as the excluded
interest amount, will be excluded from the interest collections equal to the sum
of 70% of first and second listed item above. As to any payment date, principal
collections will be equal to the sum of:
o the principal portion of all scheduled monthly payments on the home loans
received in the related collection period; and
o some unscheduled collections, including full and partial mortgagor
prepayments on the home loans, Insurance Proceeds, Liquidation Proceeds
and proceeds from repurchases of, and some amounts received in connection
with any substitutions for, the home loans, received or deemed received
during the related collection period, to the extent the amounts are
allocable to principal.
As to unscheduled collections, the master servicer may elect to treat the
amounts as included in interest collections and principal collections for the
payment date in the month of receipt, but is not obligated to do so. As
described in this prospectus supplement under "Description of the
Securities--Principal Payments on the Notes," any amount for which the election
is so made shall be treated as having been received on the last day of the
related collection period for the purposes of calculating the amount of
principal and interest distributions to the notes.
As to any payment date other than the first payment date, the collection
period is the calendar month preceding the month of that payment date.
RELEASE OF LIEN; REFINANCING OF SENIOR LIEN
The servicing agreement permits the master servicer to release the lien on
the mortgaged property securing a home loan under some circumstances, if the
home loan is current in payment. A release may be made in any case where the
borrower simultaneously delivers a mortgage on a substitute mortgaged property,
if the combined LTV ratio is not increased. A release may also be made, in
connection with a simultaneous substitution of the mortgaged property, if the
combined LTV ratio would be increased to not more than the lesser of (a) 125%
and (b) 105% times the combined LTV ratio previously in effect, if the master
servicer determines that appropriate compensating factors are present.
Furthermore, a release may also be permitted in cases where no substitute
mortgaged property is provided, causing the home loan to become unsecured,
subject to some limitations in the servicing agreement. At the time of the
release, some terms of the home loan may be modified, including a loan rate
increase or a maturity extension, and the terms of the home loan may be further
modified in the event that the borrower subsequently delivers a mortgage on a
substitute mortgaged property.
The master servicer may permit the refinancing of any existing lien senior
to a home loan, provided that the resulting combined LTV ratio may not exceed
the greater of (a) the combined LTV ratio previously in effect, or (b) 70% or,
if the borrower satisfies credit score criteria, 80%.
COLLECTION AND LIQUIDATION PRACTICES; LOSS MITIGATION
The master servicer is authorized to engage in a wide variety of loss
mitigation practices with respect to the home loans, including waivers,
modifications, payment forbearances, partial forgiveness, entering into
repayment schedule arrangements, and capitalization of arrearages; provided in
any case that the master servicer determines that the action is not materially
adverse to the interests of the indenture trustee as pledgee of the mortgage
loans and the securityholders and is generally consistent with the master
servicer's policies with respect to similar loans; and provided further that
some modifications, including reductions in the loan rate, partial forgiveness
or a maturity extension, may only be taken if the home loan is in default or if
default is reasonably foreseeable. For home loans that come into and continue in
default, the master servicer may take a variety of actions including foreclosure
upon the mortgaged property, writing off the balance of the home loan as bad
debt, taking a deed in lieu of foreclosure, accepting a short sale, permitting a
short refinancing, arranging for a repayment plan, modifications as described
above, or taking an unsecured note. See "Description of the
Securities--Servicing and Administration of Loans" in the prospectus.
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OPTIONAL REPURCHASE OF DEFAULTED HOME LOANS
Under the servicing agreement, the master servicer will have the option to
purchase from the trust any home loan which is 60 days or more delinquent at a
purchase price equal to its Stated Principal Balance plus its accrued interest.
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes terms of the trust agreement and the
indenture. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the trust agreement
and the indenture. Whenever particular defined terms of the indenture are
referred to, the defined terms are incorporated by reference in this prospectus
supplement. See "The Agreements" in the prospectus.
THE TRUST FUND
Simultaneously with the issuance of the notes, the issuer will pledge the
trust fund to the indenture trustee as collateral for the notes. As pledgee of
the home loans, the indenture trustee will be entitled to direct the trust in
the exercise of all rights and remedies of the trust against the seller under
the home loan purchase agreement and against the master servicer under the
servicing agreement.
REPORTS TO HOLDERS
The indenture trustee will mail to each holder of notes, at its address
listed on the security register maintained with the indenture trustee, a report
setting forth amounts relating to the notes for each payment date, among other
things:
<TABLE>
<S> <C>
o the amount of principal payable on the payment date to the holders of securities;
o the amount of interest payable on the payment date to the holders of securities;
o the aggregate note balance of the notes after giving effect to the payment of principal on the payment
date;
o principal and interest collections for the related collection period;
o the aggregate Stated Principal Balance of the home loans as of the end of the preceding collection
period;
o the Outstanding Reserve Amount as of the end of the related collection period; and
o the amount paid, if any, under the financial guaranty insurance policy for
the payment date.
</TABLE>
In the case of information furnished under first and second listed clause
above relating to the notes, the amounts shall be expressed as a dollar amount
per $1,000 in face amount of notes.
CERTAIN COVENANTS
The indenture will provide that the issuer may not consolidate with or merge
into any other entity, unless:
o the entity formed by or surviving the consolidation or merger is organized
under the laws of the United States, any state or the District of
Columbia;
o the entity expressly assumes, by an indenture supplemental to the
indenture, the issuer's obligation to make due and punctual payments upon
the notes and the performance or observance of any agreement and covenant
of the issuer under the indenture;
o no event of default shall have occurred and be continuing immediately
after the merger or consolidation;
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o the issuer has received consent of the financial guaranty insurer and has
been advised that the ratings of the securities, without regard to the
financial guaranty insurance policy, then in effect would not be reduced
or withdrawn by any rating agency as a result of the merger or
consolidation;
o any action that is necessary to maintain the lien and security
interest created by the indenture is taken;
o the issuer has received an opinion of counsel to the effect that the
consolidation or merger would have no material adverse tax consequence to
the issuer or to any noteholder or certificateholder; and
o the issuer has delivered to the indenture trustee an officer's certificate
and an opinion of counsel each stating that the consolidation or merger
and the supplemental indenture comply with the indenture and that all
conditions precedent, as provided in the indenture, relating to the
transaction have been complied with.
The issuer will not, among other things;
o except as expressly permitted by the indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the issuer;
o claim any credit on or make any deduction from the principal and interest
payable relating to the notes, other than amounts withheld under the
Internal Revenue Code or applicable state law, or assert any claim against
any present or former holder of notes because of the payment of taxes
levied or assessed upon the issuer;
o permit the validity or effectiveness of the indenture to be impaired or
permit any person to be released from any covenants or obligations with
respect to the notes under the indenture except as may be expressly
permitted by the indenture; or
o permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance to be created on or extend to or otherwise arise upon or
burden the assets of the issuer or any part of its assets, or any of its
interest or the proceeds of its assets, other than under the indenture.
The issuer may not engage in any activity other than as specified under "The
Issuer" in this prospectus supplement.
MODIFICATION OF INDENTURE
With the consent of the holders of a majority of the outstanding notes and
the financial guaranty insurer, the issuer and the indenture trustee may execute
a supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the indenture, or modify, except as provided below, in any
manner the rights of the noteholders. Without the consent of the holder of each
outstanding note affected by that modification and the financial guaranty
insurer, however, no supplemental indenture will:
o change the due date of any installment of principal of or interest on
any note or reduce its principal amount, its interest rate specified
or change any place of payment where or the coin or currency in which
any note or any of its interest is payable;
o impair the right to institute suit for the enforcement of some
provisions of the indenture regarding payment;
o reduce the percentage of the aggregate amount of the outstanding
notes, the consent of the holders of which is required for any
supplemental indenture or the consent of the holders of which is
required for any waiver of compliance with some provisions of the
indenture or of some defaults thereunder and their consequences as
provided for in the indenture;
o modify or alter the provisions of the indenture regarding the voting
of notes held by the issuer, the depositor or an affiliate of any of
them;
o decrease the percentage of the aggregate principal amount of notes
required to amend the sections of the indenture which specify the
applicable percentage of aggregate principal amount of the notes
necessary to amend the indenture or some other related agreements;
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o modify any of the provisions of the indenture in a manner as to affect
the calculation of the amount of any payment of interest or principal
due on any note, including the calculation of any of the individual
components of the calculation; or
o permit the creation of any lien ranking prior to or, except as
otherwise contemplated by the indenture, on a parity with the lien of
the indenture with respect to any of the collateral for the notes or,
except as otherwise permitted or contemplated in the indenture,
terminate the lien of the indenture on any collateral or deprive the
holder of any note of the security afforded by the lien of the
indenture.
The issuer and the indenture trustee may also enter into supplemental
indentures, with the consent of the financial guaranty insurer and without
obtaining the consent of the noteholders, for the purpose of, among other
things, curing any ambiguity or correcting or supplementing any provision in the
indenture that may be inconsistent with any other provision in this prospectus
supplement.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE ISSUER
Neither the indenture trustee nor any director, officer or employee of the
indenture trustee will be under any liability to the issuer or the related
noteholders for any action taken or for refraining from the taking of any action
in good faith under the indenture or for errors in judgment. None of the
indenture trustee and any director, officer or employee of the indenture trustee
will be protected against any liability which would otherwise be imposed by
reason of willful malfeasance, bad faith or negligence in the performance of
duties or by reason of reckless disregard of obligations and duties under the
indenture. Subject to limitations in the indenture, the indenture trustee and
any director, officer, employee or agent of the indenture trustee shall be
indemnified by the issuer and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or negligence in the performance of its duties under the
indenture or by reason of reckless disregard of its obligations and duties under
the indenture. All persons into which the indenture trustee may be merged or
with which it may be consolidated or any person resulting from a merger or
consolidation shall be the successor of the indenture trustee under the
indenture.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of anticipated material federal income
tax consequences of the purchase, ownership and disposition of the notes offered
under this prospectus. This discussion has been prepared with the advice of
[Thacher Proffitt & Wood] [Orrick, Herrington & Sutcliffe LLP] [Stroock &
Stroock & Lavan LLP] as counsel to the depositor. This discussion is directed
solely to noteholders that hold the notes as capital assets within the meaning
of Section 1221 of the Internal Revenue Code and does not purport to discuss all
federal income tax consequences that may be applicable to particular categories
of investors, some of which may be subject to special rules, including banks,
insurance companies, foreign investors, tax-exempt organizations, dealers in
securities or currencies, mutual funds, real estate investment trusts, natural
persons, cash method taxpayers, S corporations, estates and trusts, investors
that hold the notes as part of a hedge, straddle or, an integrated or conversion
transaction, or holders whose "functional currency" is not the United States
dollar. Also, it does not address alternative minimum tax consequences or the
indirect effects on the holders of equity interests in a noteholder. Further,
the authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. Taxpayers and preparers of tax returns should be aware that under
applicable Treasury regulations a provider of advice on specific issues of law
is not considered an income tax return preparer unless the advice (a) is given
as to events that have occurred at the time the advice is rendered and is not
given as to the consequences of contemplated actions, and (b) is directly
relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their tax advisors and tax return preparers regarding
the preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed in this prospectus. In addition to the federal
income tax consequences described in this prospectus, potential investors should
consider the state and local tax consequences, if any, of the purchase,
ownership and disposition of the notes. See "State and Other Tax Consequences."
Noteholders are advised to consult their tax advisors concerning the federal,
state, local or other tax consequences to them of the purchase, ownership and
disposition of the notes offered under this prospectus.
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In the opinion of _________________, as tax counsel to the depositor, for
federal income tax purposes, assuming compliance with all provisions of the
indenture, trust agreement and related documents, (a) the notes will be treated
as indebtedness and (b) the issuer, as created under the terms and conditions of
the trust agreement, will not be characterized as an association, or publicly
traded partnership within the meaning of Internal Revenue Code section 7704,
taxable as a corporation or as a taxable mortgage pool within the meaning of
Internal Revenue Code section 7701(i). The following discussion is based in part
upon the rules governing original issue discount that are described in Internal
Revenue Code sections 1271-1273 and 1275 and in the Treasury regulations issued
under these sections, referred to as the OID Regulations. The OID Regulations do
not adequately address various issues relevant to, and in some instances provide
that they are not applicable to, securities such as the notes. For purposes of
this tax discussion, references to a "noteholder" or a "holder" are to the
beneficial owner of a note.
STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will not constitute
"loans . . . secured by an interest in real property" within the meaning of
Internal Revenue Code section 7701(a)(19)(C)(v); and notes held by a real estate
investment trust will not constitute "real estate assets" within the meaning of
Internal Revenue Code section 856(c)(4)(A) and interest on notes will not be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Internal Revenue Code section 856(c)(3)(B).
ORIGINAL ISSUE DISCOUNT
[For federal income tax purposes, the notes will not be treated as having
been issued with original issue discount since the principal amount of the notes
will not exceed their issue price by more than a de minimis amount. The stated
interest thereon will be taxable to a noteholder as ordinary interest income
when received or accrued in accordance with the noteholder's method of tax
accounting. Under the OID Regulations, a holder of a note issued with a de
minimis amount of original issue discount must include the discount in income,
on a pro rata basis, as principal payments are made on the note. The OID
Regulations also would permit a noteholder to elect to accrue de minimis
original issue discount into income currently based on a constant yield method.
See "--Market Discount" for a description of the election under the OID
Regulations.]
[For federal income tax purposes, the notes will be treated as having been
issued with original issue discount, because the stated redemption price at
maturity for the notes will exceed their issue price by more than a de minimis
amount. The original issue discount on a note will be the excess of its stated
redemption price at maturity over its issue price. The issue price of a
particular class of notes will be the first cash price at which a substantial
amount of notes of that class is sold, excluding sales to bond houses, brokers
and underwriters, on the closing date. If less than a substantial amount of a
particular class of notes is sold for cash on or prior to the closing date, the
issue price of the class will be treated as the fair market value of that class
on the closing date. Under the OID Regulations, the stated redemption price of a
note is equal to the total of all payments to be made on the note other than
"qualified stated interest." "Qualified stated interest" includes interest that
is unconditionally payable at least annually at a single fixed rate, or in the
case of a variable rate debt instrument, at a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," or a
combination of "qualified floating rates" that typically does not operate in a
manner that accelerates or defers interest payments on the note.]
[For notes bearing adjustable note rates, the determination of the total
amount of original issue discount and the timing of the inclusion of original
issue discount will vary according to the characteristics of the notes. In
general terms original issue discount is accrued by treating the note rate of
the notes as fixed and making adjustments to reflect actual note rate payments.]
[Some classes of the notes provide for the first interest payment on these
notes to be made more than one month after the date of issuance, a period which
is longer than the subsequent monthly intervals between interest payments.
Assuming the "accrual period", as defined in the fourth paragraph below, for
original issue discount is each monthly period that ends on a distribution date,
in some cases, as a consequence of this "long first accrual period," some or all
interest payments may be required to be included in the stated redemption price
of the note and accounted for as original issue discount.]
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[In addition, for those classes of the notes where the accrued interest to
be paid on the first distribution date is computed for a period that begins
prior to the closing date, a portion of the purchase price paid for a note will
reflect the accrued interest. In those cases, information returns to the
noteholders and the IRS will be based on the position that the portion of the
purchase price paid for the interest accrued during periods prior to the closing
date is treated as part of the overall purchase price of the note, and not as a
separate asset the purchase price of which is recovered entirely out of interest
received on the next distribution date, and that portion of the interest paid on
the first distribution date in excess of interest accrued for a number of days
corresponding to the number of days from the closing date to the first
distribution date should be included in the stated redemption price of the note.
However, the OID Regulations state that all or some portion of the accrued
interest may be treated as a separate asset the cost of which is recovered
entirely out of interest paid on the first distribution date. It is unclear how
an election to do so would be made under the OID Regulations and whether the
election could be made unilaterally by a noteholder.]
[The holder of notes issued with more than a de minimis amount of original
issue discount must include in ordinary gross income the sum of the "daily
portions" of original issue discount for each day during its taxable year on
which it held the note, including the purchase date but excluding the
disposition date. In the case of an original holder of a note, the daily
portions of original issue discount will be determined as follows.]
[As to each "accrual period," that is, unless otherwise stated in the
accompanying prospectus supplement, each period that ends on a date that
corresponds to a distribution date and begins on the first day following the
immediately preceding accrual period, or in the case of the first period, begins
on the closing date, a calculation will be made of the portion of the original
issue discount that accrued during this accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if any,
of (1) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the note, if any, in future
periods and (B) the distributions made on the note during the accrual period of
amounts included in the stated redemption price, over (2) the adjusted issue
price of the note at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated using a discount rate equal to the original yield to maturity of the
notes, and possibly assuming that distributions on the note will be received in
future periods based on the trust assets being prepaid at a rate equal to a
prepayment assumption. For these purposes, the original yield to maturity of the
note would be calculated based on its issue price and possibly assuming that
distributions on the note will be made in all accrual periods based on the trust
assets being prepaid at a rate equal to a prepayment assumption. The adjusted
issue price of a note at the beginning of any accrual period will equal the
issue price of the note, increased by the aggregate amount of original issue
discount that accrued on the note in prior accrual periods, and reduced by the
amount of any distributions made on the note in prior accrual periods of amounts
included in its stated redemption price. The original issue discount accruing
during any accrual period, computed as described above, will be allocated
ratably to each day during the accrual period to determine the daily portion of
original issue discount for that day. Although the issuer will calculate
original issue discount, if any, based on its determination of the accrual
periods, a noteholder may, subject to some restrictions, elect other accrual
periods.]
[A subsequent purchaser of a note that purchases the note at a price,
excluding any portion of the price attributable to accrued qualified stated
interest, less than its remaining stated redemption price will also be required
to include in gross income the daily portions of any original issue discount
relating to the note. However, each daily portion will be reduced, if the cost
is in excess of its "adjusted issue price," in proportion to the ratio that
excess bears to the aggregate original issue discount remaining to be accrued on
the note. The adjusted issue price of a note on any given day equals:
o the adjusted issue price, or, in the case of the first accrual period, the
issue price, of the note at the beginning of the accrual period which
includes that day, plus
o the daily portions of original issue discount for all days during the
accrual period prior to that day, less
o any principal payments made during the accrual period relating to the
note.]
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MARKET DISCOUNT
A noteholder that purchases a note at a market discount, that is, assuming
the note is issued without original issue discount, at a purchase price less
than its remaining stated principal amount, will recognize gain upon receipt of
each distribution representing stated principal. In particular, under Internal
Revenue Code section 1276 the noteholder, in most cases, will be required to
allocate the portion of each distribution representing stated principal first to
accrued market discount not previously included in income, and to recognize
ordinary income to that extent.
A noteholder may elect to include market discount in income currently as it
accrues rather than including it on a deferred basis in accordance with the
foregoing. If made, the election will apply to all market discount bonds
acquired by the noteholder on or after the first day of the first taxable year
to which the election applies. In addition, the OID Regulations permit a
noteholder to elect to accrue all interest, discount, including de minimis
market or original issue discount, and premium in income as interest, based on a
constant yield method. If this election were made for a note with market
discount, the noteholder would be deemed to have made an election to include
currently market discount in income for all other debt instruments having market
discount that the noteholder acquires during the taxable year of the election or
after that year, and possibly previously acquired instruments. Similarly, a
noteholder that made this election for a note that is acquired at a premium
would be deemed to have made an election to amortize bond premium for all debt
instruments having amortizable bond premium that the noteholder owns or
acquires. See "--Premium." Each of these elections to accrue interest, discount
and premium for a note on a constant yield method would be irrevocable.
However, market discount for a note will be considered to be de minimis for
purposes Internal Revenue Code section 1276 if the market discount is less than
0.25% of the remaining principal amount of the note multiplied by the number of
complete years to maturity remaining after the date of its purchase. In
interpreting a similar rule for original issue discount on obligations payable
in installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied for market
discount, possibly taking into account a prepayment assumption. If market
discount is treated as de minimis under this rule, it appears that the actual
discount would be treated in a manner similar to original issue discount of a de
minimis amount. See "--Original Issue Discount."
Internal Revenue Code section 1276(b)(3) specifically authorizes the
Treasury Department to issue regulations providing for the method for accruing
market discount on debt instruments, the principal of which is payable in more
than one installment. Until regulations are issued by the Treasury Department,
some rules described in the legislative history to the Internal Revenue Code
section 1276, or the Committee Report, apply. The Committee Report indicates
that in each accrual period market discount on notes should accrue, at the
noteholder's option: (a) on the basis of a constant yield method, or (b) in the
case of a note issued without original issue discount, in an amount that bears
the same ratio to the total remaining market discount as the stated interest
paid in the accrual period bears to the total amount of stated interest
remaining to be paid on the notes as of the beginning of the accrual period.
Moreover, any prepayment assumption used in calculating the accrual of original
issue discount is also used in calculating the accrual of market discount.
Because the regulations referred to in this paragraph have not been issued, it
is not possible to predict what effect these regulations might have on the tax
treatment of a note purchased at a discount in the secondary market. Further, it
is uncertain whether a prepayment assumption would be required to be used for
the notes if they were issued with original issue discount.
To the extent that notes provide for monthly or other periodic distributions
throughout their term, the effect of these rules may be to require market
discount to be includible in income at a rate that is not significantly slower
than the rate at which the discount would accrue if it were original issue
discount. Moreover, in any event a holder of a note typically will be required
to treat a portion of any gain on the sale or exchange of the note as ordinary
income to the extent of the market discount accrued to the date of disposition
under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income.
Further, under Internal Revenue Code section 1277 a holder of a note may be
required to defer a portion of its interest deductions for the taxable year
attributable to any indebtedness incurred or continued to purchase or carry a
note purchased with market discount. For these purposes, the de minimis rule
referred to in the third preceding paragraph applies. Any deferred interest
expense would not exceed the market discount that accrues during that taxable
year and is, in most cases, allowed as a deduction not later than the year in
which the market discount is includible in income. If the holder elects to
include market discount in income currently as it accrues on all market
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discount instruments acquired by that holder in that taxable year or after that
year, the interest deferral rule described above will not apply.
PREMIUM
If a holder purchases a note for an amount greater than its remaining
principal amount, the holder will be considered to have purchased the note with
amortizable bond premium equal in amount to the excess, and may elect to
amortize the premium using a constant yield method over the remaining term of
the note and to offset interest otherwise to be required to be included in
income relating to that note by the premium amortized in that taxable year. If
this election is made, it will apply to all debt instruments having amortizable
bond premium that the holder owns or subsequently acquires. The OID Regulations
also permit noteholders to elect to include all interest, discount and premium
in income based on a constant yield method. See "--Market Discount." The
Committee Report states that the same rules that apply to accrual of market
discount, which rules may require use of a prepayment assumption in accruing
market discount for notes without regard to whether the notes have original
issue discount, would also apply in amortizing bond premium under Internal
Revenue Code section 171.
REALIZED LOSSES
Under Internal Revenue Code section 166 both corporate and noncorporate
holders of the notes that acquire those notes in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their notes become wholly or partially worthless
as the result of one or more Realized Losses on the trust assets. However, it
appears that a noncorporate holder that does not acquire a note in connection
with a trade or business will not be entitled to deduct a loss under Section 166
of the Internal Revenue Code until the holder's note becomes wholly worthless,
that is, until its outstanding principal balance has been reduced to zero, and
that the loss will be characterized as a short-term capital loss.
Each holder of a note will be required to accrue interest and original issue
discount for that note, without giving effect to any reductions in distributions
attributable to defaults or delinquencies on the trust assets until it can be
established that any reduction ultimately will not be recoverable. As a result,
the amount of taxable income reported in any period by the holder of a note
could exceed the amount of economic income actually realized by the holder in
that period. Although the holder of a note eventually will recognize a loss or
reduction in income attributable to previously accrued and included income that,
as the result of a Realized Loss, ultimately will not be realized, the law is
unclear as to the timing and character of the loss or reduction in income.
SALES OF NOTES
If a note is sold, the selling noteholder will recognize gain or loss equal
to the difference between the amount realized on the sale and its adjusted basis
in the note. The adjusted basis of a note, in most cases, will equal the cost of
that note to that noteholder, increased by the amount of any original issue
discount or market discount previously reported by the noteholder for that note
and reduced by any amortized premium and any principal payment received by the
noteholder. Except as provided in the following three paragraphs, any gain or
loss will be capital gain or loss, provided the note is held as a capital asset,
in most cases, property held for investment, within the meaning of Internal
Revenue Code section 1221.
Gain recognized on the sale of a note by a seller who purchased the note at
a market discount will be taxable as ordinary income in an amount not exceeding
the portion of the discount that accrued during the period the note was held by
the holder, reduced by any market discount included in income under the rules
described above under "--Market Discount" and "--Premium."
A portion of any gain from the sale of a note that might otherwise be
capital gain may be treated as ordinary income to the extent that the note is
held as part of a "conversion transaction" within the meaning of Section 1258 of
the Internal Revenue Code. A conversion transaction generally is one in which
the taxpayer has taken two or more positions in the same or similar property
that reduce or eliminate market risk, if substantially all of the taxpayer's
return is attributable to the time value of the taxpayer's net investment in the
transaction. The amount of gain so realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable Federal rate", which rate is computed and published
monthly by the IRS, at the time the taxpayer enters into the conversion
transaction, subject to appropriate reduction for prior inclusion of interest
and other ordinary income items from the transaction.
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Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include any net capital
gain in total net investment income for the taxable year, for purposes of the
rule that limits the deduction of interest on indebtedness incurred to purchase
or carry property held for investment to a taxpayer's net investment income.
BACKUP WITHHOLDING
Payments of interest and principal, as well as payments of proceeds from the
sale of notes, may be subject to the "backup withholding tax" under Section 3406
of the Internal Revenue Code at a rate of 31% if recipients of the payments fail
to furnish to the payor information, including their taxpayer identification
numbers, or otherwise fail to establish an exemption from the tax. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against the recipient's federal income tax. Furthermore, penalties may be
imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
The issuer will report to the holders and to the IRS for each calendar year
the amount of any "reportable payments" during that year and the amount of tax
withheld, if any, relating to payments on the notes.
TAX TREATMENT OF FOREIGN INVESTORS
Interest paid on a note to a nonresident alien individual, foreign
partnership or foreign corporation that has no connection with the United States
other than holding notes, known as nonresidents, will normally qualify as
portfolio interest and will be exempt from federal income tax, except, in
general, where (a) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (b) the recipient
is a controlled foreign corporation to which the issuer is a related person.
Upon receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from the interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate, unless this
rate were reduced or eliminated by an applicable tax treaty, on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to nonresidents. For these purposes a noteholder may be considered to be related
to the issuer by holding a certificate or by having common ownership with any
other holder of a certificate or any affiliate of that holder.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations referred to as the New
Withholding Regulations, which make modifications to the withholding, backup
withholding and information reporting rules described above in the three
preceding paragraphs. The New Withholding Regulations attempt to unify
certification requirements and modify reliance standards. The New Withholding
Regulations will generally be effective for payments made after December 31,
1999, subject to transition rules. Prospective investors are urged to consult
their tax advisors regarding the New Withholding Regulations.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences," potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the notes offered by this prospectus. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax advisors
about the various tax consequences of investments in the notes offered by this
prospectus.
ERISA CONSIDERATIONS
Any fiduciary or other investor of ERISA plan assets that proposes to
acquire or hold the notes on behalf of or with ERISA plan assets of any ERISA
plan should consult with its counsel with respect to the potential applicability
of the fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and Section 4975 of the Internal Revenue Code to
the proposed investment. See "ERISA Considerations" in the prospectus.
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Each purchaser of a note, by its acceptance of the note, shall be deemed to
have represented that the acquisition of the note by the purchaser does not
constitute or give rise to a prohibited transaction under Section 406 of ERISA
or Section 4975 of the Internal Revenue Code, for which no statutory, regulatory
or administrative exemption is available. See "ERISA Considerations--Prohibited
Transaction Exemptions--Notes" in the prospectus.
The notes may not be purchased with the assets of an ERISA plan if the
depositor, the master servicer, the indenture trustee, the owner trustee or any
of their affiliates:
o has investment or administrative discretion with respect to the ERISA
plan assets;
o has authority or responsibility to give, or regularly gives, investment
advice regarding the ERISA plan assets, for a fee and under an agreement
or understanding that the advice will serve as a primary basis for
investment decisions regarding the ERISA plan assets and will be based on
the particular investment needs for the ERISA plan; or
o is an employer maintaining or contributing to the ERISA plan.
The sale of any of the notes to an ERISA plan is in no respect a
representation by the depositor or the underwriter that such an investment meets
all relevant legal requirements relating to investments by ERISA plans generally
or any particular ERISA plan, or that such an investment is appropriate for
ERISA plans generally or any particular ERISA plan.
LEGAL INVESTMENT
The notes will not constitute "mortgage related securities" for purposes of
SMMEA. Accordingly, many institutions with legal authority to invest in mortgage
related securities may not be legally authorized to invest in the notes. No
representation is made in this prospectus supplement as to whether the notes
constitute legal investments for any entity under any applicable statute, law,
rule, regulation or order. Prospective purchasers are urged to consult with
their counsel concerning the status of the notes as legal investments for the
purchasers prior to investing in notes.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, dated
_________________ between ____________________, as the underwriter, has agreed
to purchase and the depositor has agreed to sell the notes. It is expected that
delivery of the notes will be made only in book-entry form through the Same Day
Funds Settlement System of DTC on or about __________________ against payment
therefor in immediately available funds.
In connection with the notes, the underwriter has agreed, subject to the
terms and conditions of the underwriting agreement, to purchase all of its notes
if any of its notes are purchased by the underwriting agreement.
In addition, the underwriting agreement provides that the obligation of the
underwriter to pay for and accept delivery of the notes is subject to, among
other things, the receipt of legal opinions and to the conditions, among others,
that no stop order suspending the effectiveness of the depositor's Registration
Statement shall be in effect, and that no proceedings for that purpose shall be
pending before or threatened by the Commission.
The distribution of the notes by the underwriter may be effected from time
to time in one or more negotiated transactions, or otherwise, at varying prices
to be determined at the time of sale. Proceeds to the depositor from the sale of
the notes, before deducting expenses payable by the depositor, will be
approximately _______% of the aggregate Stated Principal Balance of the notes
plus its accrued interest from the cut-off date.
The underwriter may effect these transactions by selling the notes 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 notes, 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 underwriter in the distribution of the related notes may be deemed to be
underwriters and any profit on the resale of the notes positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended.
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The depositor has been advised by the underwriter that it presently intends
to make a market in the notes offered hereby; however, it is not obligated to do
so, any market-making may be discontinued at any time, and there can be no
assurance that an active public market for the notes will develop.
The underwriting agreement provides that the depositor will indemnify the
underwriter and that under limited circumstances the underwriter will indemnify
the depositor against some liabilities, including liabilities under the
Securities Act of 1933, or contribute to payments the underwriter may be
required to make for these liabilities.
EXPERTS
The consolidated financial statements of _____________, as of December 31,
199_ and 199_ and for each of the years in the three-year period ended December
31, 199_ are incorporated by reference in this prospectus supplement and in the
registration statement in reliance upon the report of ______________,
independent certified public accountants, incorporated by reference in this
prospectus supplement, and upon the authority of the firm as experts in
accounting and auditing.
LEGAL MATTERS
Legal matters concerning the notes will be passed upon for the depositor by
_________, New York, New York and for the underwriter by _________________, New
York, New York.
RATINGS
It is a condition to issuance that the notes be rated "___" by _________ and
"____" by __________________. The depositor has not requested a rating on the
notes by any rating agency other than ___________ and ___________. However,
there can be no assurance as to whether any other rating agency will rate the
notes, or, if it does, what rating would be assigned by any other rating agency.
A rating on the notes by another rating agency, if assigned at all, may be lower
than the ratings assigned to the notes by ____________ and ____________. A
securities rating addresses the likelihood of the receipt by holders of notes of
distributions on the home loans. The rating takes into consideration the
structural and legal aspects associated with the notes. The ratings on the notes
do not, however, constitute statements regarding the possibility that holders
might realize a lower than anticipated yield. A securities rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating organization. Each securities
rating should be evaluated independently of similar ratings on different
securities.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in limited circumstances, the globally offered Residential Asset
Mortgage Products, Inc., Home Loan Asset-Backed Notes, Series ____________,
which are referred to as the global securities, will be available only in
book-entry form. Investors in the global securities may hold the global
securities through any of DTC, Cedelbank or Euroclear. The global securities
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors through Cedelbank and
Euroclear will be conducted in the ordinary way in accordance with the normal
rules and operating procedures of Cedelbank and Euroclear and in ACCORDANCE WITH
CONVENTIONAL EUROBOND PRACTICE, THAT IS, seven calendar day settlement.
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding notes will be effected on a delivery-against-payment basis
through the respective depositaries of Cedelbank and Euroclear, in that
capacity, and as DTC participants.
Non-U.S. holders of global securities will be subject to U.S. withholding
taxes unless the holders meet some requirements and deliver appropriate U.S. tax
documents to the securities clearing organizations or
their participants.
INITIAL SETTLEMENT
All global securities will be held in book-entry form by DTC 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. As a result, Cedelbank and Euroclear
will hold positions on behalf of their participants through their relevant
depositary which in turn will hold these positions in their accounts as DTC
participants.
Investors electing to hold their global securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their global securities through Cedelbank 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. Global securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
<PAGE>
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.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior home loan
asset-backed notes issues in same-day funds. Trading between Cedelbank and/or
Euroclear participants. Secondary market trading between Cedelbank participants
or Euroclear participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds. Trading between DTC, seller and
Cedelbank or Euroclear participants. When global securities are to be
transferred from the account of a DTC participant to the account of a Cedelbank
participant or a Euroclear participant, the purchaser will send instructions to
Cedelbank or Euroclear through a Cedelbank participant or Euroclear participant
at least one business day prior to settlement. Cedelbank or Euroclear will
instruct the relevant depositary, as the case may be, to receive the global
securities against payment. Payment will include interest accrued on the global
securities from and including the last coupon payment date to and excluding the
settlement date, on the basis of the actual number of days in that accrual
period and a year assumed to consist of 360 days. For transactions settling on
the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. Payment will then be made by the relevant
depositary to the DTC participant's account against delivery of the global
securities. After settlement has been completed, the global securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the Cedelbank participant's or
Euroclear participant's account. The securities credit will appear the next day,
European time, and the cash debt 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 on the
intended value date, i.e., the trade fails, the Cedelbank or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedelbank participants and Euroclear participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the global securities are credited to their account one day later. As an
alternative, if Cedelbank or Euroclear has extended a line of credit to them,
Cedelbank participants or Euroclear participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedelbank participants or Euroclear participants purchasing
global securities would incur overdraft charges for one day, assuming they
cleared the overdraft when the global securities were credited to their
accounts. However, interest on the global securities would accrue from the value
date. Therefore, in many cases the investment income on the global securities
earned during that one-day period may substantially reduce or offset the amount
of the overdraft charges, although the result will depend on each Cedelbank
participant's or Euroclear participant's particular cost of funds. Since the
settlement is taking place during New York business hours, DTC participants can
employ their usual procedures for crediting global securities to the respective
European depositary for the benefit of Cedelbank participants or Euroclear
participants. The sale proceeds will be available to the DTC
I-2
<PAGE>
seller on the settlement date. Thus, to the DTC participants a cross-market
transaction will settle no differently than a trade between two DTC
participants.
TRADING BETWEEN CEDELBANK OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, Cedelbank participants and Euroclear
participants may employ their customary procedures for transactions in which
global securities are to be transferred by the respective clearing system,
through the respective depositary, to a DTC participant. The seller will send
instructions to Cedelbank or Euroclear through a Cedelbank participant or
Euroclear participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective depositary, as
appropriate, to credit 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 coupon payment to and excluding the settlement date
on the basis of the actual number of days in that accrual period and a year
assumed to consist to 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of
Cedelbank participant or Euroclear participant the following day, and receipt of
the cash proceeds in the Cedelbank participant's or Euroclear participant's
account would be back-valued to the value date, which would be the preceding
day, when settlement occurred in New York. Should the Cedelbank participant or
Euroclear participant have a line of credit with its respective clearing system
and elect to be in debt in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date, i.e.,
the trade fails, receipt of the cash proceeds in the Cedelbank participant's or
Euroclear participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
global securities from DTC participants for delivery to Cedelbank participants
or Euroclear participants should note that these trades would automatically fail
on the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedelbank or Euroclear for one day, until
the purchase side of the trade is reflected in their Cedelbank or
Euroclear accounts, in accordance with the clearing system's customary
procedures;
(b) borrowing the global securities in the U.S. from a DTC
participant no later than one day prior to settlement, which would give
the global securities sufficient time to be reflected in their Cedelbank
or Euroclear account in order to settle the sale side of the trade; or
(c) 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
Cedelbank participant or Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Cedelbank 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 generally applies to
payments of interest, including original issue discount, on registered debt
issued by U.S. Persons, unless:
I-3
<PAGE>
each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between the beneficial owner and the
U.S. entity required to withhold tax complies with applicable
certification requirements, and
the beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate: Exemption for Non-U.S. Persons (Form
W-8).
Beneficial holders of global securities that are Non-U.S. persons can obtain a
complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes, a
new Form W-8 must be filed within 30 days of the change.
Exemption for Non-U.S. persons with effectively connected income (Form
4224). 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 4224, the Exemption from Withholding of Tax on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States.
Exemption or reduced rate for Non-U.S. persons resident in treaty
countries (Form 1001). 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 1001, Holdership, Exemption or
Reduced Rate Certificate. If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by note holders or their agent. 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, the 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 1001 or a Form 4224 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-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year. The term "U.S.
person" means:
a citizen or resident of the United States,
a corporation, partnership or other entity organized in or under the
laws of the United States or any of its political subdivisions, unless,
in the case of a partnership, future Treasury regulations provide
otherwise,
an estate that is subject to U.S. federal income tax regardless of the
source of its income, or
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.
I-4
<PAGE>
Some trusts not described in last clause above 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.
I-5
<PAGE>
RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
$___________
Home Loan Asset-Backed Notes,
Series _______
Prospectus Supplement
______________________
[Underwriter]
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the notes offered in this prospectus supplement in any state
where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the notes offered hereby and with respect to their
unsold allotments or subscriptions. In addition, all dealers selling the notes,
whether or not participating in this offering, may be required to deliver a
prospectus supplement and prospectus until _____________.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance and
distribution of the Securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration $ ^ 792,014
Statement
Legal Fees and Expenses $ 1,000,000
Accounting Fees and Expenses $ 750,000
Trustee's Fees and Expenses $ 100,000
(including counsel fees)
Blue Sky Fees and Expenses $ 70,000
Printing and Engraving Expenses $ 300,000
Rating Agency Fees $ 2,000,000
Insurance Fees and Expenses $ 250,000
Miscellaneous $ 100,000
Total $ ^ 5,362,014
Indemnification of Directors and Officers (Item 15 of Form S- 3).
The Pooling and Servicing Agreements or the Trust Agreements, as
applicable, will provide that no director, officer, employee or agent of the
Registrant is liable to the Trust Fund or the Certificateholders, except for
such person's own willful misfeasance, bad faith, gross negligence in the
performance of duties or reckless disregard of obligations and duties. The
Pooling and Servicing Agreements or the Trust Agreements, as applicable, will
further provide that, with the exceptions stated above, a director, officer,
employee or agent of the Registrant is entitled to be indemnified against any
loss, liability or expense incurred in connection with legal action relating to
such Pooling and Servicing Agreements or the Trust Agreements, as applicable,
and related Certificates other than such expenses related to particular Mortgage
Loans or Contracts.
Any underwriters who execute an Underwriting Agreement in the form filed as
Exhibit 1.1 or EXHIBIT 1.2 to this Registration Statement will agree to
indemnify the Registrant's directors and its officers who signed this
Registration Statement against certain liabilities which might arise under the
Securities Act of 1933 from certain information furnished to the Registrant by
or on behalf of such indemnifying party.
<PAGE>
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of the State of Delaware, the Registrant (i) shall
indemnify and hold harmless each person who was or is a party or is threatened
to be made a party to any action, suit or proceeding described in subsections
(a) and (b) by reason of the fact that he is or was a director or officer, or
his testator or intestate is or was a director or officer of the Registrant,
against expenses, judgments, fines and amounts paid in settlement, and (ii)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any such action, suit or
<PAGE>
proceeding if such person is or was serving at the request of the Registrant as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise.
Certain controlling persons of the Registrant may also be entitled to
indemnification from General Motors Acceptance Corporation, an indirect parent
of the Registrant. Under Section 145, General Motors Acceptance Corporation may
or shall, subject to various exceptions and limitations, indemnify its directors
or officers and may purchase and maintain insurance as follows:
(a) The Certificate of Incorporation, as amended, of General Motors
Acceptance Corporation provides that no director shall be personally liable to
General Motors Acceptance Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to General Motors Acceptance
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174, or any successor provision thereto, of the Delaware Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
(b) Under Article VI of its By-Laws, General Motors Acceptance
Corporation shall indemnify and advance expenses to every director and officer
(and to such person's heirs, executors, administrators or other legal
representatives) in the manner and to the full extent permitted by applicable
law as it presently exists, or may hereafter be amended, against any and all
amounts (including judgments, fines, payments in settlement, attorneys' fees and
other expenses) reasonably incurred by or on behalf of such person in connection
with any threatened, pending or completed action, suit or proceeding, whether
civil, criminal administrative or investigative (a "proceeding"), in which such
director or officer was or is made or is threatened to be made a party or is
otherwise involved by reason of the fact that such person is or was a director
or officer of General Motors Acceptance Corporation, or is or was serving at the
request of General Motors Acceptance Corporation, as a director, officer,
employee, fiduciary or member of any other corporation, partnership, joint
venture, trust, organization or other enterprise. General Motors Acceptance
Corporation shall not be required to indemnify a person in connection with a
proceeding initiated by such person if the proceeding was not authorized by the
Board of Directors of General Motors Acceptance Corporation. General Motors
Acceptance Corporation shall pay the expenses of directors and officers incurred
in defending any proceeding in advance of its final disposition ("advancement of
expenses"); provided, however, that the payment of expenses incurred by a
director or officer in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the director or officer to repay
all amounts advanced if it should be ultimately determined that the director or
officer is not entitled to be indemnified under Article VI of the By-Laws or
otherwise. If a claim for indemnification or advancement of expenses by an
officer or director under Article VI of the By-Laws is not paid in full within
ninety days after a written claim therefor has been received by General Motors
Acceptance Corporation, the claimant may file suit to recover the unpaid amount
of such claim, and if successful in whole or in part, shall be entitled to the
requested indemnification or advancement of expenses under applicable law. The
rights conferred on any person by Article VI of the By-Laws shall not be
exclusive of any other rights which such person may have or hereafter acquire
under any statute, provision of the Certificate of Incorporation,
<PAGE>
By-Laws, agreement, vote of stockholders or disinterested directors of General
Motors Acceptance Corporation or otherwise. The obligation, if any, of General
Motors Acceptance Corporation to indemnify any person who was or is serving at
its request as a director, officer or employee of another corporation,
partnership, joint venture, trust, organization or other enterprise shall be
reduced by any amount such person may collect as indemnification from such other
corporation, partnership, joint venture, trust, organization or other
enterprise.
(c) A director or officer who has been wholly successful, on the
merits or otherwise, in the defense of a civil or criminal action or proceeding
of the character described in paragraphs (a) or (b) above, shall be entitled to
indemnification as authorized in such paragraphs.
As a subsidiary of General Motors Corporation, General Motors Acceptance
Corporation is insured against liabilities which it may incur by reason of the
foregoing provisions of the Delaware General Corporation Law and directors and
officers of General Motors Acceptance Corporation are insured against some
liabilities which might arise out of their employment and not be subject to
indemnification under said General Corporation Law.
Pursuant to resolutions adopted by the Board of Directors of General Motors
Corporation, that company to the fullest extent permissible under law will
indemnify, and has purchased insurance on behalf of, directors or officers of
the company, or any of them, who incur or are threatened with personal
liability, including expenses, under Employee Retirement Income Security Act of
1974 or any amendatory or comparable legislation or regulation thereunder.
Exhibits (Item 16 of Form S-3).
*1.1 Form of Underwriting Agreement for Mortgage Asset-Backed Pass-Through
Certificates.
*1.2 Form of Underwriting Agreement for Asset- Backed Notes.
*3.1 Certificate of Incorporation.
*3.2 By-Laws.
*4.1 Form of Pooling and Servicing Agreement.
*4.2 Form of Trust Agreement.
*4.3 Form of Indenture.
*5.1 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to legality.
*5.2 Opinion of Thacher Proffitt & Wood with respect to legality.
*5.3 Opinion of Stroock & Stroock & Lavan LLP with respect to legality.
*8.1 Opinion of Orrick, Herrington & Sutcliffe LLP with respect to certain tax
matters.
<PAGE>
*8.2 Opinion of Thacher Proffitt & Wood with respect to certain tax matters
(included as part of Exhibit 5.2).
*8.3 Opinion of Stroock & Stroock & Lavan LLP with respect to certain tax
matters (included as part of Exhibit 5.3).
*10.1 Form of Mortgage Loan Purchase Agreement.
*10.2 Form of Servicing Agreement.
*23.1Consent of Orrick, Herrington & Sutcliffe LLP (included as part of Exhibit
5.1 and Exhibit 8.1).
*23.2 Consent of Thacher Proffitt & Wood (included as part of Exhibit 5.2).
*23.3Consent of Stroock & Stroock & Lavan LLP (included as part of Exhibit
5.3).
*24.1 Power of Attorney.
*24.2Certified Copy of the Resolutions of the Board of Directors of the
Registrant.
- --------------------
* As previously filed with this Registration Statement.
Undertakings (Item 17 of Form S-3).
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement; and
<PAGE>
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3, reasonably believes
that the security rating requirement referred to in Transaction Requirement B.2
or B.5 of Form S-3 will be met by the time of sale of the securities registered
hereby, and has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minneapolis, State of Minnesota, on ^ December 7, 1999.
RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
By:/s/ Bruce J. Paradis*
Bruce J. Paradis
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C>
/s/Bruce J. Paradis* Director, President and ^ December 6, 1999
Bruce J. Paradis Chief Executive Officer
(Principal Executive
Officer)
/s/Davee L. Olson* Director and Chief ^ December 6, 1999
Davee L. Olson Financial Officer
(Principal Financial
Officer)
/s/Jack Katzmark* Treasurer and Controller ^ December 6, 1999
Jack Katzmark (Principal Accounting
Officer)
/s/Dennis W. Sheehan, Jr.* Director ^ December 6, 1999
Dennis W. Sheehan, Jr.
</TABLE>
<PAGE>
* BY: /S/ DIANE S. WOLD
DIANE S. WOLD
ATTORNEY-IN-FACT PURSUANT
TO A POWER OF ATTORNEY FILED
WITH THE REGISTRATION
STATEMENT
<PAGE>
