<PAGE>
FILING PURSUANT T0
RULE NO. 424(b)(5)
REGISTRATION NO. 333-91561
Prospectus supplement dated February 25, 2000
(To prospectus dated February 22, 2000)
$300,000,000
GMAC MORTGAGE CORPORATION
Seller and Servicer
GMACM HOME EQUITY LOAN TRUST 2000-HE1
Issuer
Residential Asset Mortgage Products, Inc.
Depositor
GMACM Home Equity Loan-Backed Term Notes, Series 2000-HE1
The Trust
. will issue three classes of term notes, the variable funding notes and the
certificates. Only the three classes of term notes are offered by this
prospectus supplement and the accompanying prospectus.
. will make payments on the notes and the certificates primarily from
collections on three groups of residential mortgage loans consisting of home
equity revolving credit line loans and home equity loans.
The Term Notes
. will consist of the following three classes:
<TABLE>
<CAPTION>
Class Balance Designations Note Rate
----- ------------ ------------ ---------
<S> <C> <C> <C>
A-1 $225,000,000 Senior Variable
A-2 $ 25,000,000 Senior Variable
A-3 $ 50,000,000 Senior 7.95%
</TABLE>
. currently have no trading market.
. are not deposits and are not insured or guaranteed by any governmental
agency.
Credit enhancement will consist of:
. Excess interest, to the extent described in this prospectus supplement;
. Overcollateralization and limited cross-collateralization, to the extent
described herein; and
. An irrevocable and unconditional financial guaranty insurance policy issued
by MBIA Insurance Corporation, which will protect holders of the term notes
against certain shortfalls in amounts due to be distributed at the times and
to the extent described herein.
[LOGO OF MBIA]
You should consider carefully the risk factors beginning on page S-17 in
this prospectus supplement.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the term notes or determined that this prospectus
supplement or the prospectus is accurate or complete. It is illegal for anyone
to tell you otherwise.
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.
Bear, Stearns & Co. Inc. is acting as representative of the underwriters for
the issuance of the term notes. Delivery of the term notes is expected to be
made in book entry form on or about February 28, 2000. The term notes will be
offered in the United States and Europe.
Bear, Stearns & Co. Inc. Newman & Associates, Inc.
<PAGE>
Important Notice About Information in this Prospectus Supplement
and the Accompanying Prospectus
We tell you about the term notes in two separate documents that
progressively provide more detail:
. the accompanying prospectus, which provides general information, some
of which may not apply to a particular series of securities, including
your term notes; and
. this prospectus supplement, which describes the specific terms of your
term notes and may be different from the information in the
prospectus.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The Table of Contents on the following page
provides the pages on which these captions can be found.
If you require additional information, the mailing address of the principal
executive office of the depositor is Residential Asset Mortgage Products, Inc.,
8400 Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437, and its
telephone number is (612) 832-7000. For other means of acquiring additional
information about the depositor or the term notes, see "Additional Information,"
"Reports to Securityholders" and "Incorporation of Certain Information by
Reference" in the attached prospectus.
S-2
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page S-
<S> <C>
Summary........................................................................................ 4
Risk Factors................................................................................... 17
Introduction................................................................................... 26
Description of the Mortgage Loans.............................................................. 26
General................................................................................... 26
Initial HELOCs............................................................................ 27
Loan Terms of the HELOCs.................................................................. 28
Initial HELOC Characteristics............................................................. 29
Initial HELs.............................................................................. 37
Loan Terms of the HELs.................................................................... 38
Initial HEL Characteristics............................................................... 38
Conveyance of Subsequent Mortgage Loans; the Pre-Funding Account and the Funding Account.. 43
Non-Recordation of Assignments............................................................ 44
Amendments to Mortgage Documents.......................................................... 45
Optional Removal of Mortgage Loans........................................................ 45
Underwriting Standards.................................................................... 45
The Seller and Servicer........................................................................ 48
General................................................................................... 48
Collection and Other Servicing Procedures................................................. 48
Realization Upon Defaulted Loans.......................................................... 49
Delinquency and Loss Experience of the Servicer's Portfolio............................... 50
Servicing and Other Compensation and Payment of Expenses.................................. 51
The Issuer..................................................................................... 51
The Owner Trustee.............................................................................. 52
The Indenture Trustee.......................................................................... 52
The Enhancer................................................................................... 53
The Enhancer.............................................................................. 53
Financial Information About the Enhancer.................................................. 53
Where You Can Obtain Additional Information About the Enhancer............................ 54
Financial Strength Ratings of the Enhancer................................................ 54
Description of the Securities.................................................................. 54
General................................................................................... 54
Book-Entry Notes.......................................................................... 55
Payments on the Notes..................................................................... 57
Interest Payments on the Notes............................................................ 57
Capitalized Interest Account.............................................................. 58
Principal Payments on the Notes........................................................... 59
Priority of Distributions................................................................. 59
Optional Transfers of Mortgage Loans to Holders of Certificates........................... 61
Reserve Account........................................................................... 61
Overcollateralization and Cross-collateralization......................................... 62
The Paying Agent.......................................................................... 62
Maturity and Optional Redemption.......................................................... 62
Glossary of Terms......................................................................... 63
Description of the Policy...................................................................... 72
Yield and Prepayment Considerations............................................................ 73
The Agreements................................................................................. 82
The Purchase Agreement.................................................................... 82
The Servicing Agreement................................................................... 85
The Trust Agreement and the Indenture..................................................... 87
Use of Proceeds................................................................................ 92
Certain Legal Aspects of the Mortgage Loans.................................................... 92
Certain Federal Income Tax Considerations...................................................... 92
Status as Real Property Loans............................................................. 93
Original Issue Discount................................................................... 93
Market Discount........................................................................... 95
Premium................................................................................... 96
Realized Losses........................................................................... 96
Sales of Notes............................................................................ 96
Backup Withholding........................................................................ 97
Tax Treatment of Foreign Investors........................................................ 97
New Withholding Regulations............................................................... 97
State and Other Tax Consequences............................................................... 98
ERISA Considerations........................................................................... 98
Legal Investment............................................................................... 98
Underwriting................................................................................... 99
Experts........................................................................................ 99
Legal Matters.................................................................................. 99
Ratings........................................................................................ 99
Appendix A - Initial HELOCs -- Characteristics of Loan Groups I and II......................... A-1
Initial Group I HELOC Characteristics..................................................... A-1
Initial Group II HELOC Characteristics.................................................... A-8
Appendix B - Form of Policy.................................................................... B-1
</TABLE>
S-3
<PAGE>
Summary
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this prospectus supplement and the
accompanying prospectus.
Issuer or Trust Fund ...............The GMACM Home Equity Loan Trust 2000-HE1.
Title of the offered securities ....GMACM Home Equity Loan-Backed Term Notes,
Series 2000-HE1
Variable Funding Notes..............GMACM Home Equity Loan-Backed Variable
Funding Notes, Series 2000-HE1. The variable
funding notes are not offered by this
prospectus supplement.
Certificates........................GMACM Home Equity Loan-Backed Certificates,
Series 2000-HE1. The certificates are not
offered by this prospectus supplement.
Depositor...........................Residential Asset Mortgage Products, Inc.
For more information on the depositor, we
refer you to "The Depositor" in the
accompanying prospectus.
Seller and Servicer.................GMAC Mortgage Corporation, a Pennsylvania
corporation, will be the seller and servicer
of the mortgage loans. The servicer will be
obligated to service the mortgage loans
pursuant to the servicing agreement to be
dated as of the closing date, among the
servicer, the issuer and the indenture
trustee.
We refer you to "The Agreements--The
Servicing Agreement" and "The Seller and
Servicer--General" in this prospectus
supplement for further information on the
seller and servicer.
Owner Trustee.......................Wilmington Trust Company.
We refer you to "The Owner Trustee" in this
prospectus supplement for further
information on the owner trustee.
Indenture Trustee...................Norwest Bank Minnesota, National
Association.
We refer you to "The Indenture Trustee" in
this prospectus supplement for further
information on the indenture trustee.
Closing Date........................On or about February 28, 2000.
Cut-Off Date........................February 1, 2000.
S-4
<PAGE>
Payment Date........................The 25th day of each month, or, if that day
is not a business day, the next business
day, beginning on March 27, 2000.
Scheduled final payment date........February 25, 2030. The actual final payment
date could be substantially earlier.
Form of securities..................Book-entry.
See "Description of the
Securities--Book-Entry Notes" in this
prospectus supplement.
Minimum denominations...............$250,000 and integral multiples of $1,000 in
excess of that amount.
The Enhancer .......................MBIA Insurance Corporation.
We refer you to "The Enhancer" in this
prospectus supplement for further
information.
Legal Investment ...................The term notes will not be "mortgage related
securities" for purposes of the SMMEA.
See "Legal Investment" in this prospectus
supplement and "Legal Investment Matters" in
the prospectus.
S-5
<PAGE>
<TABLE>
<CAPTION>
Term Notes
- ---------------------------------------------------------------------------------------------
Class Note Initial Initial Rating
Rate Note Balance (Moody's/S&P) Final Payment Date Designations
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A-1 Variable $225,000,000 Aaa/AAA February 25, 2030 Senior/
Variable Rate
A-2 Variable $ 25,000,000 Aaa/AAA February 25, 2030 Senior/
Variable Rate
A-3 7.95% $ 50,000,000 Aaa/AAA February 25, 2030 Senior/
Fixed Rate
- ---------------------------------------------------------------------------------------------
Total Term Notes $300,000,000
============
- ---------------------------------------------------------------------------------------------
</TABLE>
Other Information:
. Due to losses and prepayments on the home equity revolving credit line
loans and the home equity loans in each loan group, the actual final
payment date on each class of term notes may be substantially earlier than
the dates listed above.
Class A-1 Term Notes
- --------------------
. On any payment date, the note rate for the Class A-1 term notes will be
equal to the least of:
(1) LIBOR plus a margin of 0.25% per annum;
(2) the weighted average net loan rate of the home equity revolving credit
line loans in the related loan group; and
(3) 14.00% per annum.
. The margin for the Class A-1 term notes will increase to 0.50% on the
payment date on which the clean-up call may first be exercised for that
class of notes.
. Beginning on the 13th payment date, 0.50% will be subtracted from the
calculation of the rate in clause (2) above.
. On any payment date for which the note rate has been determined by clause
(2) above, the interest shortfall, if any, will be determined and will be
payable on later payment dates, to the extent funds are available for that
purpose from the related loan group. These interest shortfalls will not be
covered by the financial guaranty insurance policy and may remain unpaid on
the final payment date for that class of notes.
Class A-2 Term Notes
- --------------------
. On any payment date, the note rate for the Class A-2 term notes will be
equal to the least of:
(1) LIBOR plus a margin of 0.28% per annum;
S-6
<PAGE>
(2) the weighted average net loan rate of the home equity revolving credit
line loans in the related loan group; and
(3) 14.00% per annum.
. The margin for the Class A-2 term notes will increase to 0.56% on the
payment date on which the clean-up call may first be exercised for such
class of notes.
. Beginning on the 13th payment date, 0.50% will be subtracted from the
calculation of the rate in clause (2) above.
. On any payment date for which the note rate has been determined by clause
(2) above, the interest shortfall, if any, will be determined and will be
payable on later payment dates, to the extent funds are available for that
purpose from the related loan group. These interest shortfalls will not be
covered by the financial guaranty insurance policy and may remain unpaid on
the final payment date for such class of notes.
Class A-3 Term Notes
- --------------------
. The note rate on the Class A-3 term notes will increase by 0.50% to 8.45%
per annum on the payment date on which the clean-up call may first be
exercised for such class of term notes.
S-7
<PAGE>
The Trust Fund
The depositor will establish the GMACM Home Equity Loan Trust 2000-HE1, a
Delaware business trust, to issue the term notes. The assets of the trust fund
will include the mortgage loans and related assets.
The Mortgage Pool
Unless we indicate otherwise, the statistical information we present in this
prospectus supplement reflects the initial pool of mortgage loans as of the cut-
off date. The aggregate outstanding principal balance of the initial mortgage
loans as of the cut-off date is approximately $225,855,252.80.
. home equity revolving credit line loans to be sold to the issuer will be
adjustable rate home equity revolving credit line loans evidenced by the
related credit line agreements and secured by the related mortgages or
deeds of trust on residential properties.
. No more than approximately 95.42% of the initial home equity revolving
credit line loans (by aggregate principal balance as of the cut-off date)
are secured by second or more junior mortgages or deeds of trust and the
rest are secured by first mortgages or deeds of trust.
The unpaid principal balance of a home equity revolving credit line loan on any
day will be equal to:
. its cut-off date balance,
. plus any additional balances relating to that home equity revolving credit
line loan sold to the issuer before that day,
. minus all collections credited against its principal balance in accordance
with the related home equity revolving credit line loan since the cut-off
date or, if applicable, subsequent cut-off date. The principal balance of a
liquidated home equity revolving credit line loan after the final recovery
of related liquidation proceeds will be zero.
The home equity loans to be sold to the issuer will be fixed rate closed-end
home equity loans evidenced by promissory notes and secured by mortgages or
deeds of trust on the related residential properties. No more than
approximately 97.34% of the initial home equity loans (by aggregate principal
balance as of the cut-off date) are secured by second or more junior mortgages
or deeds of trust and the remainder are secured by first mortgages or deeds of
trust. The initial home equity loans provide for substantially equal payments
in an amount sufficient to amortize the home equity loans over their terms.
S-8
<PAGE>
As of the cut-off date, the home equity revolving credit line loans had the
following characteristics:
Number of loans 7,439
Aggregate principal $185,922,184.30
balance
Average principal $24,992.90
balance
Range of principal $1,004.21 to
balances $500,000.00
Weighted average 7.823%
interest rate
Range of interest 5.000% to 14.000%
rates
Weighted average 18.31%
maximum interest rate
Weighted average 188 months
original term
Weighted average 185 months
remaining term
As of the cut-off date, the home equity loans had the following characteristics:
Number of loans 1,536
Aggregate principal $39,933,068.50
balance
Average principal $25,998.09
balance
Range of principal $2,457.05 to
balances $159,483.20
Weighted average
interest 10.412% rate
Range of interest 5.990% to 16.990%
rates
Weighted average 163 months
original term
Weighted average 162 months
remaining term
See "Description of the Mortgage Loans" in this prospectus supplement.
S-9
<PAGE>
Loan Rate
The loan rate of each mortgage loan is the per annum interest rate required to
be paid by the mortgagor under the terms of the related mortgage note or credit
line agreement. The loan rate borne by each mortgage loan, after the completion
of any initial teaser period during which the loan rate may be fixed or set at a
discounted variable rate for a period of from three to six months, is:
. in the case of a home equity revolving credit line loan, adjustable on the
date specified in the related credit line agreement to a rate based on an
index; and
. in the case of a home equity loan, fixed as of the date of its origination.
Interest on each home equity revolving credit line loan is computed daily and
payable monthly on the average daily outstanding principal balance of that home
equity revolving credit line loan. After any initial teaser period, the loan
rate on each home equity revolving credit line loan will be adjusted on each
adjustment date to a rate equal to the sum of the index and a fixed percentage
specified in the related credit line agreement, and is generally subject to a
maximum loan rate over the life of the home equity revolving credit line loan
specified in the related credit line agreement. As of the cut-off date, the
weighted average loan rate for the home equity revolving credit line loans,
after the expiration of any applicable teaser periods, is approximately 10.498%
and for the home equity loans is approximately 10.412%.
We refer you to "Description of the Mortgage Loans--Initial HELOC
Characteristics" and "--Initial HEL Characteristics" in this prospectus
supplement for further information.
Mortgage Loan Groups
The mortgage loans sold and transferred to the issuer as of the closing date
will be divided into the following three loan groups:
. The first loan group will include home equity revolving credit line loans
that have an aggregate outstanding principal balance as of the cut-off date
of approximately $168,295,306.29. As to each loan in the first loan group
secured by a first lien on the related property, the original principal
balance was generally no more than $252,700 for single-family properties
and $323,400 for two-family properties. As to each loan in the first loan
group secured by a second lien on the related property, (1) the original
principal balance was generally no more than $126,350 for single-family
properties and $161,700 for two-family properties, and (2) if the related
senior lien loan was owned by Fannie Mae at the time the second lien loan
was originated, the sum of the original principal balance of the second
lien loan and the outstanding principal balance of the related senior lien
loan was generally no more than $252,700 for single-family properties and
$323,400 for two-family properties.
. The second loan group will include home equity revolving credit line loans
that have an aggregate outstanding principal balance as of the cut-off date
of approximately $17,626,878.01 and will include loans that do not meet the
restrictions applicable to the first loan group.
. The third loan group will include home equity loans and is expected to have
an
S-10
<PAGE>
aggregate outstanding principal balance as of the cut-off date of
approximately $39,933.068.50.
Payments on the Class A-1 and Class A-2 term notes will be based primarily on
amounts collected or received in respect of the home equity revolving credit
line loans in the first and second loan groups, respectively. The variable
funding notes generally will be entitled to receive a portion of the collections
on the home equity revolving credit line loans in the first or second loan group
depending on the loan group into which the additional balances backing those
variable funding notes are added. Payments on the Class A-3 term notes will be
based primarily on amounts collected or received in respect of the home equity
loans in the third loan group.
Except for the application of any funds on deposit in the reserve account as
described in this prospectus supplement, collections or amounts received in
respect of a loan group will not support or be available for payment to the
holders of term notes or variable funding notes backed by the mortgage loans in
any other loan group.
Pre-Funding Account
On the closing date, approximately $74,144,747 will be deposited into an account
designated the "pre-funding account." Approximately $64,077,816 will be
allocated to purchasing home equity revolving credit line loans and $10,066,932
will be allocated to purchasing home equity loans. This amount will come from
the proceeds of the sale of the term notes. During the pre-funding period as
described in this prospectus supplement, funds on deposit in the pre-funding
account will be used by the issuer to buy mortgage loans from the seller from
time to time.
The pre-funding period will be the period from the closing date to the earliest
of:
. the date on which the amount on deposit in the pre-funding account is less
than $50,000;
. May 28, 2000; or
. the occurrence of a rapid amortization event, as described in this
prospectus supplement.
The mortgage loans sold to the trust after the closing date, as well as all
initial mortgage loans, will conform to certain specified characteristics.
Any amounts remaining in the pre-funding account at the end of the pre-funding
period in excess of $50,000 will be distributed as principal on the related term
notes on the following payment date. Any remaining amounts in the pre-funding
account after the distribution of principal will be deposited into the funding
account.
We refer you to "Description of the Mortgage Loans--Conveyance of Subsequent
Mortgage Loans; the Pre-Funding Account and the Funding Account" in this
prospectus supplement for further information.
Capitalized Interest Account
On the closing date, if required by MBIA, part of the proceeds of the sale of
the term notes will be deposited into an account designated the "capitalized
interest account," which will be held by the indenture trustee. Amounts on
deposit in the capitalized interest account will be withdrawn on each payment
date during the pre-
S-11
<PAGE>
funding period to cover any shortfall in interest payments on the term notes due
to the pre-funding feature during the pre-funding period. Any amounts remaining
in the capitalized interest account at the end of the pre- funding period will
be paid to the seller.
We refer you to "Description of the Securities--Capitalized Interest Account" in
this prospectus supplement for further information.
Funding Account
An account designated the "funding account" will be set up with the indenture
trustee on the closing date. On each payment date during the revolving period
for each class of term notes, the indenture trustee will deposit principal
collections and excess spread for the related loan group into the funding
account, and will apply them first to buy additional balances arising under home
equity revolving credit line loans in the trust and thereafter to buy more
mortgage loans, to the extent they are available. If not all principal
collections in the funding account have been applied to buy additional balances
and mortgage loans at the end of the revolving period for the term notes backed
by the home equity revolving credit line loans, the amount left in the funding
account will be paid to noteholders as a payment of principal. During the
revolving periods, we expect that mortgage loans bought with amounts in the
funding account will be primarily home equity revolving credit line loans.
We refer you to "Description of the Mortgage Loans--Conveyance of Subsequent
Mortgage Loans; the Pre-Funding Account and the Funding Account" in this
prospectus supplement for further information.
Interest Payments
Interest payments on each class of term notes will be made monthly on each
payment date, beginning in March 2000, at the respective note rate described on
page S-6 of this prospectus supplement. Interest on the Class A-1 and Class A-2
term notes for each payment date will accrue from the preceding payment date,
or, in the case of the first payment date, from the closing date, through the
day before that payment date, on the basis of the actual number of days in that
interest period and a 360-day year. The interest period for the Class A-3 term
notes for each payment date will be the calendar month preceding the month in
which that payment date occurs, on the basis of a 360-day year consisting of
twelve 30-day months.
All interest payments on each class of notes for any payment date will be
allocated to the term notes and the variable funding notes pro rata based on
their respective interest accruals from collections with respect to the related
loan group. The interest rate on the variable funding notes for any payment
date will not significantly exceed the note rates on the Class A-1 and Class A-2
term notes for the related interest period.
Principal Payments
With respect to any payment date during each revolving period, except with
respect to distributions of amounts on deposit in the pre-funding account at the
end of the pre-funding period in excess of $50,000.00, no principal will be paid
on the related class of term notes or variable funding notes, and all principal
collections and excess spread will be deposited into the funding account and
used to purchase additional balances relating to home equity revolving credit
line
S-12
<PAGE>
loans and to purchase additional mortgage loans. On each payment date during the
managed amortization period for the term notes backed by the home equity
revolving credit line loans, the aggregate amount payable as principal of each
class of term notes and variable funding notes will be equal to principal
collections for the related loan group for that payment date that are not used
to purchase additional balances. The Class A-3 term notes will not have a
managed amortization period. On each payment date during the rapid amortization
period for each class of term notes, the aggregate amount payable as principal
for each class of term notes and variable funding notes will be equal to the
principal collections for the related loan group for that payment date. In
addition, on each payment date after the end of the revolving period for each
class of term notes, to the extent of funds available for that purpose, holders
of each class of term notes and the holders of the variable funding notes will
be entitled to get certain additional amounts in reduction of their note
balance, generally equal to liquidation loss amounts.
All principal payments due on the Class A-1 and Class A-2 term notes and each
class of variable funding notes will be allocated among those classes of notes
based on the principal collections in the related loan groups until their
outstanding principal balances are paid in full. In no event will principal
payments on any class of notes on a payment date exceed the related principal
balance of such class of notes on that payment date. On the final payment date,
principal will be due and payable on the notes in an amount equal to the related
principal balance remaining outstanding on that payment date.
As to each class of term notes backed by the home equity revolving credit line
loans, the revolving period will be the period beginning on the closing date and
ending on the earlier of February 28, 2001 and the occurrence of a managed
amortization event or certain rapid amortization events; the managed
amortization period will be the period beginning on the first payment date
following the end of the related revolving period and ending on the earlier of
February 28, 2005 and the occurrence of certain rapid amortization events; and
the rapid amortization period will be the period beginning on the earlier of the
first payment date following the end of the managed amortization period and the
occurrence of certain rapid amortization events, and ending upon the termination
of the issuer. A managed amortization event will be deemed to occur on any date
on which the amount on deposit in the funding account equals or exceeds
$10,000,000.
As to the Class A-3 term notes, the revolving period will be the period
beginning on the closing date and ending on the earlier of June 28, 2000 and the
occurrence of certain rapid amortization events; and the rapid amortization
period will be the period beginning on the earlier of the first payment date
following the end of the related revolving period and the occurrence of certain
rapid amortization events, and ending upon the termination of the issuer.
We refer you to "Description of the Securities--Priority of Distributions" in
this prospectus supplement for a description of the allocation of principal
payments on the term notes.
S-13
<PAGE>
Reserve Account
An account designated the "reserve account" will be set up with the indenture
trustee on the closing date. On each payment date, if the aggregate
overcollateralization for all loan groups is less than the aggregate
overcollateralization target for all loan groups, the amount of any remaining
excess spread for each loan group will be deposited in the reserve account to be
applied to cover any unpaid current interest with respect to the term notes
backed by any loan group and any liquidation losses for each loan group not
otherwise covered by principal and interest collections from such loan group.
At the time, if any, that the aggregate overcollateralization for all loan
groups equals or exceeds the aggregate overcollateralization target for all loan
groups, any funds on deposit in the reserve account will no longer be applied to
cover unpaid current interest or liquidation losses.
We refer you to "Description of the Securities--Priority of Distributions" in
this prospectus supplement for further information.
Allocation of Payments on the Mortgage Loans
All collections on the mortgage loans will generally be allocated by the
servicer according to the terms of the related credit line agreements or
mortgage notes between amounts collected in respect of interest and principal.
We refer you to "The Agreements--The Servicing Agreement--P&I Collections" in
this prospectus supplement, which describes the calculation of principal
collections and interest collections on the mortgage loans for the collection
period related to each payment date.
With respect to each payment date, the portion of interest collections for each
loan group available to be applied towards the payment of interest on the
related class of notes will equal interest collections for such loan group for
such payment date.
The portion of principal collections for each loan group available to be applied
towards the payment of principal on the related class of notes will equal:
. at any time during the revolving periods, zero, except for amounts on
deposit in the pre-funding account at the end of the pre-funding period in
excess of $50,000.00,
. at any time during the managed amortization period, net principal
collections on the home equity revolving credit line loans for that payment
date, and
. at any time during the rapid amortization periods, principal collections
for that loan group for that payment date.
During the revolving period for each class of term notes, principal collections
and excess spread for the related loan group will be applied by the trust to buy
mortgage loans and additional balances for that loan group, to the extent
mortgage loans and additional balances are available. During the period from
the closing date to the beginning of the rapid amortization period for the term
notes backed by the home equity revolving credit line loans, principal
collections will also be applied to purchase additional balances for the related
loan group, to the extent additional balances are available. Principal
collections will no longer be applied to acquire mortgage loans after the end of
the revolving periods and will no longer be applied to buy additional balances
during the rapid amortization period for the term notes
S-14
<PAGE>
backed by the home equity revolving credit line loans.
We refer you to "Description of the Securities--Priority of Distributions" in
this prospectus supplement for a description of events that would cause the
rapid amortization period to begin.
Credit Enhancement
The credit enhancement provided for the benefit of the noteholders will consist
of:
. excess interest;
. overcollateralization and limited cross-collateralization; and
. the financial guaranty insurance policy.
We refer you to "The Enhancer" and "Description of the Policy" in this
prospectus supplement.
Optional Redemption
A principal payment may be made to redeem the notes upon the exercise by the
servicer of its option to purchase the mortgage loans in the trust fund after
the aggregate note balance of the notes is reduced to an amount less than or
equal to 10% of their initial aggregate note balance. The purchase price payable
by the servicer for the mortgage loans will be the sum of:
. the aggregate outstanding principal balance of the mortgage loans, or the
fair market value of real estate acquired by foreclosure, plus accrued and
unpaid interest thereon at the weighted average of the net loan rates of
the mortgage loans through the day preceding the payment date of this
purchase;
. an amount equal to any interest shortfalls plus accrued and unpaid interest
on these interest shortfalls; and
. all amounts due and owing MBIA.
Securities--Maturity and Optional Redemption" in this prospectus supplement and
"The Agreements--Termination; Retirement of Securities" in the attached
prospectus for further information.
ERISA Considerations
The term notes are eligible for purchase by pension, profit-sharing or other
employee benefit plans as well as individual retirement accounts and certain
types of Keogh Plans. However, any fiduciary or other investor of assets of a
plan that proposes to acquire or hold the term notes on behalf of or with assets
of any 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 of 1986, as amended, to the proposed investment.
We refer you to "ERISA Considerations" in this prospectus supplement and in the
attached prospectus for further information.
Certain Federal Income Tax Considerations
In the opinion of Orrick, Herrington & Sutcliffe llp, special tax counsel to the
depositor, for federal income tax purposes, the term notes will be characterized
as indebtedness, and neither the issuer, nor any portion of the issuer as
created and governed
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pursuant to the terms and conditions of the trust agreement, will be
characterized as an association, or a publicly traded partnership, taxable as a
corporation for federal income tax purposes, or as a "taxable mortgage pool"
within the meaning of section 7701(i) of the Internal Revenue Code of 1986, as
amended. In addition, each noteholder, by its acceptance of a note, will agree
to treat that note as debt for federal, state and local tax purposes.
For further information regarding certain income tax considerations in respect
of an investment in the term notes, we refer you to "Certain Federal Income Tax
Considerations" in this prospectus supplement and "Material Federal Income Tax
Consequences" and "State and Other Tax Consequences" in the attached prospectus.
Ratings
It is a condition to the issuance of the term notes that they receive the
ratings shown on page S-6 of this prospectus supplement. 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. A
security rating does not address the frequency of prepayments of the mortgage
loans or draws on the home equity revolving credit line loans, the likelihood of
the receipt of any amounts in respect of interest shortfalls or any
corresponding effect on the yield to investors.
We refer you to "Yield and Prepayment Considerations" and "Ratings" in this
prospectus supplement for further information.
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Risk Factors
The term notes are not suitable investments for all investors. In
particular, you should not purchase the term notes unless you understand the
prepayment, credit, liquidity and market risks associated with the term notes.
The term 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 term notes.
<TABLE>
<S> <C>
The mortgaged Although the mortgage loans are secured by liens on mortgaged
properties might properties, this collateral may not give assurance of repayment of
not be adequate the mortgage loans comparable to the assurance of repayment that
security for the many first lien lending programs provide, and the mortgage loans,
mortgage loans. especially those with high combined loan-to-value ratios, may have
risk of repayment characteristics more similar to unsecured consumer
loans.
Approximately 95.76% (by aggregate principal balance as of the
cut-off date) of the initial mortgage loans are secured by second or
more junior mortgages that are subordinate to the rights of the
mortgagee under a senior mortgage or mortgages. The proceeds from
any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding principal balance of these
mortgage loans only to the extent that the claims of the senior
mortgages have been satisfied in full, including any related
foreclosure costs. If the servicer determines that it would be
uneconomical to foreclose on the related mortgaged property, the
servicer may write off the entire outstanding principal balance of
the related mortgage loan. These considerations will be
particularly applicable to mortgage loans secured by second or more
junior mortgages that have high combined loan-to-value ratios
because, in these cases, the servicer is more likely to determine
that foreclosure would be uneconomical. These losses will be borne
by noteholders if the applicable credit enhancement is insufficient
to absorb them.
Defaults on mortgage loans are generally expected to occur with
greater frequency in their early years. The rate of default of
mortgage loans secured by junior mortgages may be greater than that
of mortgage loans secured by senior mortgages on comparable
properties.
</TABLE>
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<TABLE>
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We cannot assure you that the values of the mortgaged properties
have remained or will remain at their levels on the dates of
origination of the related mortgage loans. If the residential real
estate market experiences an overall decline in value, this could
extinguish the value of the interest of a junior mortgagee in the
mortgaged property before having any adverse effect on the interest
of the related senior mortgagees.
Dependency on the As a result of the above considerations, the underwriting standards
creditworthiness of the and procedures applicable to the mortgage loans, as well as the
mortgagors. repayment prospects of the mortgage loans, may be more dependent on
the creditworthiness of the borrower and less dependent on the
adequacy of the mortgaged property as collateral than would be the
case under many first lien lending programs. As to the mortgage
loans, future changes in the borrower's economic circumstances will
have a significant effect on the likelihood of repayment, since
additional draws on the home equity revolving credit line loans may
be made by the borrower in the future up to the applicable credit
limit. Although the home equity revolving credit line loans are
generally subject to provisions whereby the servicer may reduce the
applicable credit limit as a result of a material adverse change in
the borrower's economic circumstances, the servicer generally will
not monitor for these changes and may not become aware of them until
after the borrower has defaulted. Under certain circumstances, a
borrower with an home equity revolving credit line loan may draw his
entire credit limit in response to personal financial needs
resulting from an adverse change in circumstances.
Under the home equity program of the seller relating to the home
equity revolving credit line loans, the seller generally qualifies
mortgagors based on an assumed payment that reflects a loan rate
significantly lower than the related maximum loan rate. The
repayment of any home equity revolving credit line loan may thus be
dependent on the ability of the related mortgagor to make larger
interest payments if the loan rate of the related mortgage loan is
adjusted during the life of the home equity revolving credit line
loan.
</TABLE>
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<TABLE>
<S> <C>
Future changes in a borrower's economic circumstances may result
from a variety of unforeseeable personal factors, including loss of
employment, reduction in income, illness and divorce. Any increase
in prevailing market interest rates may adversely affect a borrower
by increasing debt service on the related home equity revolving
credit line loan or other similar debt of the borrower. In
addition, changes in the payment terms of any related senior
mortgage loan may adversely affect the borrower's ability to pay
principal and interest on the senior mortgage loan. For example,
these changes may result if the senior mortgage loan is an
adjustable rate loan and the interest rate on the loan increases,
which may occur with or without an increase in prevailing market
interest rates if the increase is due to the phasing out of a
reduced initial rate. Specific information about these senior
mortgage loans, other than the amount of these loans at origination
of the corresponding mortgage loan, is not available, and we are not
including it in this prospectus supplement.
General economic conditions, both on a national and regional basis,
will also have an impact on the ability of borrowers to repay their
mortgage loans. Certain geographic regions of the United States
from time to time will experience weaker regional economic
conditions and housing markets, and, as a result, will experience
higher rates of loss and delinquency than mortgage loans generally.
For example, a region's economic condition and housing market may be
directly, or indirectly, adversely affected by natural disasters or
civil disturbances such as earthquakes, hurricanes, floods,
eruptions or riots. The economic impact of any of these types of
events may also be felt in areas beyond the region immediately
affected by the disaster or disturbance. The mortgage loans may be
concentrated in these regions, and this concentration may present
risk considerations in addition to those generally present for
similar mortgage-backed securities without this concentration. You
should note that approximately 38.10% and 10.73% (by aggregate
principal balance as of the cut-off date) of the initial mortgage
loans are secured by mortgaged properties located in the states of
California and Michigan, respectively. In addition, any change in
the deductibility for federal income tax purposes of interest
payments on home equity loans may also have an adverse impact on the
ability of borrowers to repay their mortgage loans.
</TABLE>
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<TABLE>
<S> <C>
Loan rates may reduce The note rate on each class of term notes backed by the home equity
the note rate on each revolving credit line loans will be a floating rate based on LIBOR,
class of term notes limited by the weighted average net loan rate on the mortgage loans
backed by the home in the related loan group. The loan rates of the home equity
equity revolving credit revolving credit line loans adjust based on a different index. As
line loans. such, if LIBOR rises, you could get interest at a rate less than
LIBOR plus the specified margin due to these limitations on the note
rate. In addition, the weighted average loan rate of the mortgage
loans will change, and may decrease over time due to scheduled
amortization of the mortgage loans, prepayments of mortgage loans,
transfers to the issuer of subsequent mortgage loans and removal of
mortgage loans by the seller. We cannot assure you that the
weighted average loan rate of the mortgage loans in any loan group
will not decrease after the date of initial issuance of the term
notes.
Yield and prepayment The yield to maturity of all classes of term notes will depend on
considerations on the the rate and timing of principal payments, including payments in
term notes. excess of required installments, prepayments or terminations,
liquidations and repurchases, on the mortgage loans, the rate and
timing of draws on the related home equity revolving credit line
loans, and the price you pay for your term notes. This yield may be
adversely affected by a higher or lower than anticipated rate of
principal payments or draws on the related home equity revolving
credit line loans. The mortgage loans may be prepaid in full or in
part without penalty. The rate and timing of defaults on the
mortgage loans in a loan group will also affect the yield to
maturity of the related class of term notes.
During the revolving periods, as described in this prospectus
supplement, if the seller does not sell enough additional balances
on the mortgage loans and/or subsequent mortgage loans to the
issuer, the issuer will not fully apply amounts on deposit in the
funding account to the purchase of additional balances on the
mortgage loans and subsequent mortgage loans by the end of the
revolving period for the term notes backed by the home equity
revolving credit line loans. These remaining amounts will be paid
to the holders of the term notes as principal on the first payment
date following the end of the revolving period for the term notes
backed by the home equity revolving credit line loans. See "Yield
and Prepayment Considerations" in this prospectus supplement.
</TABLE>
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<TABLE>
<S> <C>
Limitations on the We cannot assure you that, at any particular time, the seller will
repurchase or be able, financially or otherwise, to repurchase or replace
replacement of defective mortgage loans as described in this prospectus supplement.
defective mortgage Events relating to the seller and its operations could occur that
loans by the seller. would adversely affect the financial ability of the seller to
repurchase defective mortgage loans from the issuer, including the
termination of borrowing arrangements that provide the seller with
funding for its operations, or the sale or other disposition of all
or any significant portion of the seller's assets. If the seller
does not repurchase or replace a defective mortgage loan, then the
servicer, on behalf of the issuer, will try to recover the maximum
amount possible with respect to that defective mortgage loan, and
any resulting delay or loss will be borne by the noteholders, to the
extent that the related credit enhancement does not cover this delay
or loss.
Possible variations in Each subsequent mortgage loan will satisfy the eligibility criteria
the subsequent mortgage referred to in this prospectus supplement at the time the seller
loans from the initial transfers it to the issuer. However, the seller may originate or
mortgage loans. acquire subsequent mortgage loans using credit criteria different
from those it applied to the initial mortgage loans. As such, these
subsequent mortgage loans may be of a different credit quality from
the initial mortgage loans. Thus, after the transfer of subsequent
mortgage loans to the issuer, the aggregate characteristics of the
mortgage loans in each loan group that are part of the trust estate
may vary from those of the initial mortgage loans. See "Description
of the Mortgage Loans--Conveyance of Subsequent Mortgage Loans; the
Pre-Funding Account and the Funding Account" in this prospectus
supplement.
Legal considerations The mortgage loans are secured by mortgages. With respect to
present certain risks. mortgage loans that are secured by first mortgages, the servicer
may, under certain circumstances, agree to a new mortgage lien on
the related mortgaged property having priority over that mortgage.
Mortgage loans secured by second mortgages are entitled to proceeds
that remain from the sale of the related mortgaged property after
any senior mortgage loans and prior statutory liens have been
satisfied. If these proceeds are insufficient to satisfy these
senior loans and prior liens in the aggregate, the issuer, and
accordingly, the noteholders, will bear the risk of delay in
distributions while the servicer obtains a deficiency judgment, to
the extent available in the related state, against the related
mortgagor, and also bear the risk of loss if the servicer cannot
obtain or realize upon that deficiency judgment. See "Certain Legal
Aspects of the Loans" in the prospectus.
</TABLE>
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<TABLE>
<S> <C>
If the seller becomes insolvent, the bankruptcy trustee of the
seller, including the seller itself as a debtor-in-possession, may
try to recharacterize the seller's sale of the mortgage loans as a
borrowing by the seller secured by a pledge of the mortgage loans.
If the bankruptcy trustee, or the seller itself as a
debtor-in-possession, decided to challenge this transfer, you could
experience delays in payments on your term notes, and possible
reductions in the amount paid. The depositor will warrant that the
transfer of its interest in the mortgage loans to the issuer is a
valid transfer and assignment of that interest.
If a conservator, receiver or trustee is appointed for the seller,
or if certain other events relating to the insolvency of the seller
occur, additional balances on the mortgage loans and subsequent
mortgage loans may no longer be transferred by the seller to the
issuer. If this happens, an event of default under the trust
agreement and the indenture will occur, and the indenture trustee
will try to sell the mortgage loans, unless the enhancer or holders
of securities evidencing undivided interests aggregating at least
51% of the aggregate outstanding principal balance of the securities
instruct otherwise. This would cause early payment of the term
notes. If the only default to occur is an insolvency of the seller
or the appointment of a bankruptcy trustee, conservator or receiver
for the seller, the bankruptcy trustee, conservator or receiver,
including the seller itself as a debtor-in-possession, may have the
power to continue to require the seller to transfer additional
balances on the mortgage loans and subsequent mortgage loans to the
issuer, and thus, to prevent the early sale, liquidation or
disposition of the mortgage loans and the commencement of the rapid
amortization period. In addition, a bankruptcy trustee, conservator
or receiver, including the seller itself as a debtor-in-possession,
may have the power to cause the early sale of the mortgage loans and
the early payment of the term notes or to prohibit the continued
transfer of additional balances on the mortgage loans and subsequent
mortgage loans to the issuer.
If the servicer becomes bankrupt or insolvent, the related
bankruptcy trustee, conservator or receiver may have the power to
prevent the appointment of a successor servicer.
</TABLE>
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<TABLE>
<S> <C>
The repurchase option of In certain instances in which a mortgagor either:
the servicer could . requests an increase in the credit limit on the
result in an increase related home equity revolving credit line loan
in prepayments. above the limit stated in the credit line
agreement;
. requests to place a lien on the related
mortgaged property senior to the lien of the
related mortgage loan; or
. refinances the senior lien resulting in a
combined loan-to-value ratio above the previous
combined loan-to-value ratio for that loan;
then the servicer will have the option to repurchase from the trust
estate the related mortgage loan at a price equal to the principal
balance of that mortgage loan at the time of repurchase, plus
accrued and unpaid interest thereon to the date of repurchase.
There are no limitations on the frequency of these repurchases or
the characteristics of the mortgage loans so repurchased. These
repurchases may cause an increase in prepayments on the mortgage
loans, which may reduce the yield on the term notes. In addition,
these repurchases may affect the characteristics of the mortgage
loans in the aggregate with respect to loan rates and credit quality.
Limitations of, and the Credit enhancement will be provided for the term notes in the form
possible reduction and of:
substitution of, credit . excess interest collections, if available;
enhancement.
. overcollateralization and limited
cross-collateralization; and
. the policy, to the limited extent described in
this prospectus supplement.
None of the seller, the depositor, the servicer, the indenture
trustee or any of their respective affiliates will be required to
take any other action to maintain, or have any obligation to replace
or supplement, this credit enhancement or any rating of the term
notes. To the extent that losses are incurred on the mortgage loans
that are not covered by excess interest collections,
overcollateralization, cross-collateralization or the policy,
securityholders, including the holders of the term notes, will bear
the risk of those losses.
Social, economic and The ability of the issuer to purchase subsequent mortgage loans is
other factors could largely dependent upon whether mortgagors perform their payment and
affect the purchase of other obligations required by the related mortgage loans in order
subsequent mortgage that those mortgage loans meet the specified requirements for
loans. transfer on a subsequent transfer date as a subsequent mortgage
loan. The performance by these mortgagors may be affected as a
result of a
</TABLE>
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<TABLE>
<S> <C>
variety of social and economic factors. Economic
factors include interest rates, unemployment levels, the rate of
inflation and consumer perception of economic conditions generally.
However, we cannot predict whether or to what extent economic or
social factors will affect the performance by the related mortgagors
and the availability of subsequent mortgage loans.
Limited liquidity of the A secondary market for the term notes may not develop. Even if a
term notes may limit secondary market does develop, it might not provide you with
the ability to sell the liquidity of investment or continue for the life of the term notes.
term notes or realize a Neither the underwriters nor any other person will have any
desired yield. obligation to make a secondary market in the term notes.
Illiquidity means investors may not be able to find a buyer for the
term notes readily or at prices that will enable them to realize a
desired yield. Illiquidity can have a severe adverse effect on the
market value of the term notes.
The limited assets of The term notes will be payable solely from the assets of the trust
the trust fund for fund. There can be no assurance that the market value of the assets
making payments on the in the trust fund will be equal to or greater than the total
term notes may not be principal amount of the term notes outstanding, plus accrued
sufficient to interest. Moreover, if the assets of the trust fund are ever sold,
distribute all payments the sale proceeds will be applied first to reimburse the indenture
due on the term notes. trustee, servicer and enhancer for their unpaid fees and expenses
before any remaining amounts are distributed to noteholders.
In addition, at the times specified in this prospectus supplement,
mortgage loans may be released to the holders of the GMACM Home
Equity Loan-Backed Certificates, Series 2000-HE1.
Once released, those assets will no longer be available to make
payments to noteholders.
You will have no recourse against the depositor, the seller and
servicer, or any of their affiliates, if any required distribution
on the term notes is not made or for any other default. The only
obligations of the seller with respect to the related trust fund or
the term notes would result from a breach of the representations and
warranties that the seller may make concerning the trust assets.
</TABLE>
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<TABLE>
<S> <C>
Amounts left in the Any amounts in excess of $50,000 remaining in the pre-funding
pre-funding account at account at the end of the pre-funding period will be distributed as
the end of the a prepayment of principal to the holders of the related term notes.
pre-funding period will As a result, the yield to maturity on your investment may be
be used to prepay the adversely affected.
term notes.
</TABLE>
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Introduction
The trust fund will be formed under the Trust Agreement between the
depositor and the owner trustee. The issuer will issue $300,000,000 of GMACM
Home Equity Loan-Backed Term Notes, Series 2000-HE1. These notes will be issued
under the Indenture. In addition, under the Indenture, the issuer will issue
the GMACM Home Equity Loan-Backed Variable Funding Notes, Series 2000-HE1.
Under the Trust Agreement, the issuer will issue one class of GMACM Home Equity
Loan-Backed Certificates, Series 2000-HE1. The term notes and the variable
funding notes are collectively referred to in this prospectus supplement as the
notes. The notes and the certificates are collectively referred to in this
prospectus supplement as the securities. Only the term notes are offered by
this prospectus supplement.
We have defined certain significant terms in the section titled
"Description of the Securities--Glossary of Terms" in this prospectus
supplement. Capitalized terms used in this prospectus supplement but not
defined in this prospectus supplement shall have the meanings assigned to them
in the accompanying prospectus. The term "Payment Account" used in the
prospectus relates to the term "Note Payment Account" as described in this
prospectus supplement.
Description of the Mortgage Loans
General
The statistical information presented in this prospectus supplement relates
to the mortgage loans conveyed to the trust fund on the closing date, or initial
mortgage loans. Unless otherwise indicated, all percentages set forth in this
prospectus supplement are based upon the outstanding principal balances of the
initial mortgage loans as of the cut-off date. The "principal balance" of a
mortgage loan, other than a liquidated mortgage loan, on any day is equal to the
principal balance of that mortgage loan as of the cut-off date, plus (1) any
additional balances in respect of that mortgage loan conveyed to the trust fund,
or additional balances, minus (2) all collections credited against the principal
balance of that mortgage loan in accordance with the related credit line
agreement or mortgage note, as applicable, prior to that day, exclusive of the
pro rata portion thereof attributable to additional balances not conveyed to the
trust fund during the Rapid Amortization Period for the Floating Rate Term
Notes. The "principal balance" of a liquidated mortgage loan after final
recovery of substantially all of the related liquidation proceeds which the
servicer reasonably expects to receive will be zero.
Mortgage loans conveyed to the trust fund after the closing date, or
subsequent mortgage loans, will be selected using generally the same criteria as
that used to select the initial mortgage loans, and generally the same
representations and warranties will be made with respect thereto. See
"Description of the Mortgage Loans--Conveyance of Subsequent Mortgage Loans; the
Pre-Funding Account and the Funding Account" in this prospectus supplement.
The initial mortgage loans will be divided into three Loan Groups as
follows:
(1) Loan Group I will include initial HELOCs that satisfy the following
restrictions:
. As to each loan in Loan Group I secured by a first lien on the
related property, the original principal balance was generally no
more than $252,700 for single-family properties and $323,400 for
two-family properties.
. As to each loan in Loan Group I secured by a second lien on the
related property:
(a) the original principal balance was generally no more than
$126,350; and
(b) if the related senior lien loan was owned by Fannie Mae at
the time the second lien loan was originated, the sum of the
original principal balance of the second lien loan and the
outstanding principal balance of the related senior lien
loan was generally no more than $252,700 for single- family
properties and $323,400 for two-family properties.
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. Any subsequent mortgage loans that are HELOCs and included in
Loan Group I will also satisfy the above requirements.
(2) Loan Group II will include initial HELOCs that do not meet the
restrictions applicable to Loan Group I, and any subsequent mortgage
loans that are HELOCs and that are not included in Loan Group I.
(3) Loan Group III will include the initial HELs and any subsequent
mortgage loans that are HELs.
Payments on the Class A-1 and Class A-2 term notes will be based primarily
on amounts collected or received in respect of the HELOCs in Loan Groups I and
II, respectively. The variable funding notes generally will be entitled to
receive a portion of the collections on the HELOCs in Loan Group I or II
depending on the Loan Group into which the additional balances backing the
variable funding notes are added. Payments on the Class A-3 term notes will be
based primarily on amounts collected or received in respect of the HELs in Loan
Group III.
Initial HELOCs
The initial HELOCs were originated or acquired by the seller, GMAC Mortgage
Corporation, or GMACM. No more than 95.42% (by principal balance as of the cut-
off date) of the initial HELOCs are secured by second mortgages or deeds of
trust and the remainder of which by first mortgages or deeds of trust. The
mortgaged properties securing the initial HELOCs consist primarily of
residential properties. As to approximately 100.00% of the initial HELOCs, the
borrower represented at the time of origination that the related mortgaged
property would be owner occupied as a primary or second home.
All percentages of the initial HELOCs described in this prospectus
supplement are approximate percentages determined, except as otherwise
indicated, by the aggregate principal balance as of the cut-off date of the
initial HELOCs. Each initial HELOC is included in either Loan Group I or Loan
Group II. Certain additional characteristics of the initial HELOCs in Loan
Groups I and II are set forth in Appendix A to this prospectus supplement.
The principal balance as of the cut-off date of the initial HELOCs is
$185,922,184.30. With respect to the initial HELOCs:
. as of the cut-off date, no initial HELOC is 30 days or more
delinquent;
. the average principal balance as of the cut-off date is approximately
$24,992.90;
. the minimum principal balance as of the cut-off date is $1,004.21;
. the maximum principal balance as of the cut-off date is $500,000.00;
. the lowest loan rate and the highest loan rate on the cut-off date are
5.00% and 14.00% per annum, respectively;
. the weighted average loan rate on the cut-off date is approximately
7.82% per annum;
. the minimum and maximum CLTV Ratios as of the cut-off date are 5.45%
and 100.00%, respectively;
. the weighted average CLTV Ratio based on the principal balance as of
the cut- off date of the initial HELOCs is approximately 80.22% as of
the cut-off date;
. the latest scheduled maturity of any initial HELOC is December 18,
2025;
. with respect to approximately 37.72% and approximately 12.24% of the
initial HELOCs, the related mortgaged properties are located in the
States of California and Michigan, respectively; and
. not more than 15.36% of the initial HELOCs do not require an Appraised
Value.
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Loan Terms of the HELOCs
Interest on each HELOC is calculated based on the average daily balance
outstanding during the related billing cycle.
Each HELOC has a loan rate that is subject to adjustment on each adjustment
date, as specified in the related credit line agreement or mortgage note, to
equal the sum of:
. the index; and
. the gross margin;
provided, however, that the loan rate on each initial HELOC will in no event be
greater than the maximum loan rate.
As of the cut-off date, none of the initial HELOCs have a loan rate below
the Teaser Rate. With respect to approximately 33.55% of the initial HELOCs,
the Teaser Rate will be equal to the prime rate less 1.00%.
With respect to approximately 39.59% of the initial HELOCs, the gross
margin is adjustable from time to time based on the then outstanding balance.
These adjustments are 0.25% for balances of $25,001 through $50,000 and 0.50%
for balances of $50,001 or greater.
In certain instances, the gross margins with respect to the initial HELOCs
have been discounted based on specific employee status with GM or its
subsidiaries at the time of origination of the initial HELOC, with no adjustment
in the event of any change in the status of the borrower.
Each initial HELOC was either a 25-year mortgage loan, 15-year mortgage
loan, 10-year mortgage loan or 5-year mortgage loan. The related mortgagor for
each initial HELOC may make a draw at any time during the Draw Period. In
addition, with respect to certain of the initial HELOCs, the related mortgagor
will not be permitted to make any draw during the related Repayment Period. The
Draw Period and the Repayment Period vary for the initial HELOCs based on each
loan's CLTV Ratio at origination, state of origination and original term to
maturity. The 25-year mortgage loans, which comprise approximately 30.06% of
the initial HELOCs, have a Draw Period of 15 years and a Repayment Period of 10
years. With respect to 15-year mortgage loans and 10-year mortgage loans with
CLTV Ratios of 90% or less, the Draw Period will be at any time during the term
of the loan and there will be no Repayment Period, except with respect to
approximately 1.46% of the initial HELOCs, all of which were originated in the
Commonwealth of Massachusetts, which will have a Draw Period for the first 5
years of the loan and a Repayment Period for the last 5 years of the loan with
respect to those 10-year mortgage loans and a Draw Period for the first 10 years
of the loan and a Repayment Period for the last 5 years of the loan with respect
to those 15-year mortgage loans. With respect to the 5-year mortgage loans, the
Draw Period will be 5 years and there will be no Repayment Period.
The maximum amount of each draw with respect to any HELOC is equal to the
excess, if any, of the credit limit of that HELOC over the outstanding principal
balance under the related credit line agreement at the time of that draw. Each
HELOC may be prepaid in full or in part at any time and without penalty, but
with respect to each HELOC, the related mortgagor will have the right during the
related Draw Period to make a draw in the amount of any prepayment theretofore
made with respect to that HELOC. Each mortgagor generally will have access to
make draws by check, subject to applicable law. Generally, the credit line
agreement or mortgage related to each HELOC will, subject to applicable law,
contain a customary "due-on-sale" clause.
As to each HELOC, the mortgagor's right to receive draws during the Draw
Period may be suspended, or the related credit limit may be reduced, for cause
under a number of circumstances, including, but not limited to:
. a materially adverse change in the mortgagor's financial
circumstances;
. a decline in the value of the mortgaged property significantly below
its appraised value at origination; or
. a payment default by the mortgagor.
S-28
<PAGE>
However, generally such suspension or reduction will not affect the payment
terms for previously drawn balances. The servicer, GMAC Mortgage Corporation,
will have no obligation under the Servicing Agreement to investigate as to
whether any such circumstances have occurred and may have no knowledge of them.
Therefore, there can be no assurance that any mortgagor's ability to receive
draws will be suspended or reduced in the event that the foregoing circumstances
occur.
In the event of default under a HELOC, the HELOC may be terminated and
declared immediately due and payable in full. For this purpose, a default
includes, but is not limited to:
. the mortgagor's failure to make any payment as required;
. any action or inaction by the mortgagor that adversely affects the
mortgaged property or the rights in the mortgaged property; or
. fraud or material misrepresentation by a mortgagor in connection with
the HELOC.
Prior to the related Repayment Period or prior to the date of maturity for
loans without Repayment Periods, the mortgagor for each HELOC will be obligated
to make monthly payments thereon in a minimum amount that generally will be
equal to the finance charge applicable to that mortgage loan for the related
billing cycle. Except as described below, if that loan has a Repayment Period,
during that period, the mortgagor will be obligated to make monthly payments
consisting of principal installments which would substantially amortize the
principal balance by the maturity date, plus current finance charges and the sum
of any unpaid fees, insurance premiums and other charges, if any. In addition,
certain mortgagors will be required to pay an annual fee of up to $35. Payments
made by or on behalf of the mortgagor for each HELOC will be applied to any
unpaid finance charges that are due thereon, prior to application, to any unpaid
principal outstanding.
None of the initial HELOCs are insured by mortgage insurance policies
covering all or a portion of any losses on each loan, subject to certain
limitations.
Initial HELOC Characteristics
Set forth below is a description of certain additional characteristics of
the initial HELOCs as of the cut-off date. Unless otherwise specified, all
principal balances of the initial HELOCs are as of the cut-off date and are
rounded to the nearest dollar. Except as indicated otherwise, all percentages
are approximate percentages by aggregate principal balance as of the cut-off
date. Entries in the tables may not add to 100.00% due to rounding.
<TABLE>
<CAPTION>
Property Type
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Property Type Initial HELOCs Cut-Off Date Cut-Off Date
- ------------- -------------- ------------ ------------
<S> <C> <C> <C>
Condominium............................ 505 $ 12,445,345.41 6.69%
Duplex................................. 2 22,556.20 0.01%
Manufactured Housing................... 2 26,997.90 0.01%
PUD.................................... 331 9,272,451.44 4.99%
Single Family.......................... 6,568 163,643,712.13 88.02%
Two Family............................. 31 511,121.22 0.27%
----- --------------- ------
Total............................. 7,439 $185,922,184.30 100.00%
</TABLE>
S-29
<PAGE>
<TABLE>
<CAPTION>
Occupancy Types
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Occupancy Number of as of the as of the
(as indicated by Borrower) Initial HELOCs Cut-Off Date Cut-Off Date
- -------------------------- -------------- ------------ ------------
<S> <C> <C> <C>
Owner Occupied.......................... 7,367 $183,709,727.74 98.81%
Non-Owner Occupied...................... 72 2,212,456.56 1.19%
----- --------------- ------
Total.............................. 7,439 $185,922,184.30 100.00%
</TABLE>
<TABLE>
<CAPTION>
Principal Balances
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Range of Principal Balances ($) Initial HELOCs Cut-Off Date Cut-Off Date
- ------------------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$0.00 to $25,000.00...... 4,971 $ 63,294,794.85 34.04%
$25,000.01 to $50,000.00...... 1,755 63,435,917.25 34.12%
$50,000.01 to $75,000.00...... 390 23,965,561.96 12.89%
$75,000.01 to $100,000.00....... 239 21,280,260.04 11.45%
$100,000.01 to $125,000.00....... 24 2,729,812.36 1.47%
$125,000.01 to $150,000.00....... 30 4,267,261.26 2.30%
$150,000.01 to $175,000.00....... 5 804,339.91 0.43%
$175,000.01 to $200,000.00....... 8 1,513,273.43 0.81%
$200,000.01 to $225,000.00....... 17 4,630,963.24 2.49%
-- ------------ ----
Total........................... 7,439 $185,922,184.30 100.00%
</TABLE>
. The average principal balance of the initial HELOCs as of the cut-off date
is approximately $24,992.90.
S-30
<PAGE>
<TABLE>
<CAPTION>
Combined Loan-to-Value Ratios
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Range of Combined Number of as of the as of the
Loan-to-Value Ratios(%) Initial HELOCs Cut-Off Date Cut-Off Date
- ----------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
0.000% to 50.000%............ 431 $ 10,506,654.06 5.65%
50.001% to 60.000%............ 299 7,444,085.51 4.00%
60.001% to 70.000%............ 589 15,785,733.14 8.49%
70.001% to 80.000%............ 2,469 60,505,232.66 32.54%
80.001% to 90.000%............ 2,405 54,435,097.66 29.28%
90.001% to 100.000%............. 1,246 37,245,381.27 20.03%
----- ------------- ------
Total........................... 7,439 $185,922,184.30 100.00%
. The minimum and maximum CLTV Ratios of the initial HELOCs as of the cut-off
date are approximately 5.45% and 100.00%, respectively, and the weighted
average CLTV Ratio of the initial HELOCs as of the cut-off date is
approximately 80.22%.
Geographical Distributions
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Location Initial HELOCs Cut-Off Date Cut-Off Date
- -------- -------------- ------------ ------------
California.............................. 2,434 $ 70,122,024.98 37.72%
Michigan................................ 924 22,750,565.97 12.24%
New Jersey.............................. 266 7,324,342.23 3.94%
Florida................................. 279 6,509,687.19 3.50%
New York................................ 224 6,034,294.28 3.25%
Other................................... 3,312 73,181,269.65 39.36%
----- ------------- ------
Total......................... 7,439 $185,922,184.30 100.00%
</TABLE>
. "Other" includes states and the District of Columbia with under 3.00%
concentrations individually.
S-31
<PAGE>
<TABLE>
<CAPTION>
Junior Ratios
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Range of Junior Ratios (%) Initial HELOCs Cut-Off Date Cut-Off Date
- -------------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
0.00% to 9.99%.............. 884 $ 16,631,094.80 8.95%
10.00% to 19.99%............... 3,228 64,378,407.69 34.63%
20.00% to 29.99%............... 1,788 50,096,646.49 26.94%
30.00% to 39.99%............... 831 27,479,224.90 14.78%
40.00% to 49.99%............... 344 11,905,491.94 6.40%
50.00% to 59.99%............... 177 6,627,899.11 3.56%
60.00% to 69.99%............... 78 3,665,512.42 1.97%
70.00% to 79.99%............... 49 3,242,176.29 1.74%
80.00% to 89.99%............... 33 1,120,090.15 0.60%
90.00% to 100.00%................ 27 775,640.51 0.42%
-- ---------- -----
Total........................... 7,439 $185,922,184.30 100.00%
. The weighted average Junior Ratio of the initial HELOCs as of the cut-off
date is approximately 25.44%.
Loan Rates
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Range of Loan Rates(%) Initial HELOCs Cut-Off Date Cut-Off Date
- ---------------------- -------------- ------------ ------------
0.001% to 8.000%............. 5,657 $140,283,934.80 75.45%
8.001% to 9.000%............. 94 2,057,192.82 1.11%
9.001% to 10.000%.............. 411 9,161,891.65 4.93%
10.001% to 11.000%.............. 405 8,982,902.50 4.83%
11.001% to 12.000%.............. 297 8,088,776.48 4.35%
12.001% to 13.000%.............. 366 11,000,731.49 5.92%
13.001% to 14.000%.............. 209 6,346,754.56 3.41%
--- ------------ -----
Total........................... 7,439 $185,922,184.30 100.00%
</TABLE>
. The weighted average loan rate of the initial HELOCs as of the cut-off date
is approximately 7.82%.
S-32
<PAGE>
<TABLE>
<CAPTION>
Fully Indexed Gross Margin
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Range of Fully Indexed Number of as of the as of the
Gross Margins(%) Initial HELOCs Cut-Off Date Cut-Off Date
- ---------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
-1.000% to -0.001%.............. 8 $ 264,183.80 0.14%
0.000% to 1.000%............... 3,278 79,226,549.84 42.61%
1.001% to 2.000%............... 1,873 40,122,862.42 21.58%
2.001% to 3.000%............... 717 20,285,202.96 10.91%
3.001% to 4.000%............... 701 21,039,399.17 11.32%
4.001% to 5.000%............... 859 24,848,417.62 13.36%
5.001% to 6.000%............... 3 135,568.49 0.07%
- ---------- -----
Total........................... 7,439 $185,922,184.30 100.00%
. The weighted average fully indexed gross margin of the initial HELOCs as of
the cut-off date is approximately 2.00% per annum.
Credit Utilization Rates
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Range of Credit Number of as of the as of the
Utilization Rates (%) Initial HELOCs Cut-Off Date Cut-Off Date
- --------------------- -------------- ------------ ------------
0.01% to 30.00%............... 1,403 $ 10,106,500.15 5.44%
30.01% to 35.00%............... 230 3,131,077.59 1.68%
35.01% to 40.00%............... 249 3,392,327.26 1.82%
40.01% to 45.00%............... 195 3,219,227.78 1.73%
45.01% to 50.00%............... 242 3,904,153.39 2.10%
50.01% to 55.00%............... 233 4,298,622.85 2.31%
55.01% to 60.00%............... 228 4,940,079.39 2.66%
60.01% to 65.00%............... 212 5,211,368.73 2.80%
65.01% to 70.00%............... 215 5,364,958.76 2.89%
70.01% to 75.00%............... 310 7,948,326.16 4.28%
75.01% to 80.00%............... 265 7,623,634.44 4.10%
80.01% to 85.00%............... 239 7,356,953.28 3.96%
85.01% to 90.00%............... 266 8,336,062.12 4.48%
90.01% to 95.00%............... 247 8,111,289.13 4.36%
95.01% to 100.00%................ 2,891 102,446,337.68 55.10%
100.01% or greater................ 14 531,265.59 0.29%
-- ---------- -----
Total........................... 7,439 $185,922,184.30 100.00%
</TABLE>
. The weighted average credit utilization rate based on the credit limit of
the initial HELOCs as of the cut-off date is approximately 83.07%.
S-33
<PAGE>
<TABLE>
<CAPTION>
Credit Limits
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Range of Credit Limits ($) Initial HELOCs Cut-Off Date Cut-Off Date
- -------------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$0.01 to $ 25,000.00....... 3,168 $ 40,431,064.71 21.75%
$25,000.01 to $ 50,000.00....... 2,987 73,994,291.54 39.80%
$50,000.01 to $ 75,000.00....... 581 25,023,163.54 13.46%
$75,000.01 to $100,000.00........ 541 28,746,271.77 15.46%
$100,000.01 to $125,000.00........ 30 2,556,933.68 1.38%
$125,000.01 to $150,000.00........ 62 5,913,038.26 3.18%
$150,000.01 to $175,000.00........ 8 825,565.86 0.44%
$175,000.01 to $200,000.00........ 23 2,111,581.00 1.14%
$200,000.01 to $225,000.00........ 9 1,563,706.64 0.84%
$225,000.01 to $250,000.00........ 21 2,566,276.62 1.38%
$250,000.01 to $275,000.00........ 2 511,302.89 0.28%
$275,000.01 to $300,000.00........ 2 94,224.69 0.05%
$425,000.01 to $450,000.00........ 1 27,416.33 0.01%
$575,000.01 to $600,000.00........ 1 325,175.50 0.17%
$650,000.01 to $675,000.00........ 1 500,000.00 0.27%
$675,000.01 to $700,000.00........ 1 236,860.05 0.13%
$775000.01 to $800,000.00........ 1 495,311.22 0.27%
- ----------
Total............................ 7,439 $185,922,184.30 100.00%
. The average of the credit limits of the initial HELOCs as of the cut-off
date is approximately $38,434.65.
Maximum Loan Rates
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Maximum Loan Rates (%) Initial HELOCs Cut-Off Date Cut-Off Date
- ---------------------- -------------- ------------ ------------
14.001% to 15.000%............. 135 $ 2,611,290.62 1.40%
15.001% to 16.000%............. 106 2,476,548.76 1.33%
17.001% to 18.000%............. 1,722 40,095,804.67 21.57%
18.001% to 19.000%............. 5,476 140,738,540.25 75.70%
----- -------------- ------
Total............................ 7,439 $185,922,184.30 100.00%
</TABLE>
. The weighted average maximum loan rate of the initial HELOCs as of the
cut-off date is approximately 18.31%.
S-34
<PAGE>
<TABLE>
<CAPTION>
Months Remaining to Scheduled Maturity
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Range of Months Initial HELOCs Cut-Off Date Cut-Off Date
- --------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
0 to 60.................... 7 $ 123,100.93 0.07%
61 to 120.................... 4,202 88,264,585.37 47.47%
121 to 180.................... 1,300 40,233,335.81 21.64%
241 to 300.................... 1,927 57,100,762.19 30.71%
301 + 3 200,400.00 0.11%
- ---------- -----
Total............................ 7,439 $185,922,184.30 100.00%
. The weighted average months remaining to scheduled maturity of the initial
HELOCs as of the cut-off date is approximately 185 months.
Origination Year
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Origination Year Initial HELOCs Cut-Off Date Cut-Off Date
- ---------------- -------------- ------------ ------------
1990...................................... 1 $ 45,000.00 0.02%
1993....................................... 3 41,185.12 0.02%
1994....................................... 2 2,194.97 0.00%
1995....................................... 7 116,779.63 0.06%
1996....................................... 4 72,369.52 0.04%
1997....................................... 15 134,407.54 0.07%
1998....................................... 109 1,453,587.64 0.78%
1999....................................... 6,785 168,779,385.47 90.78%
2000....................................... 513 15,277,274.41 8.22%
--- -----
Total............................ 7,439 $185,922,184.30 100.00%
Lien Priority
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Lien Position Initial HELOCs Cut-Off Date Cut-Off Date
- ------------- -------------- ------------ ------------
First.................................... 213 $ 8,508,190.89 4.58%
Second................................... 7,226 177,413,993.41 95.42%
----- -------------- ------
Total.......................... 7,439 $185,922,184.30 100.00%
</TABLE>
S-35
<PAGE>
<TABLE>
<CAPTION>
Debt-to-Income Ratios
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Range of Debt-to-Income Ratios (%) Initial HELOCs Cut-Off Date Cut-Off Date
---------------------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
0.00% to 9.99%................ 27 $ 958,499.29 0.52%
10.00% to 19.99%................. 474 10,301,417.06 5.54%
20.00% to 29.99%................. 1,623 34,130,860.80 18.36%
30.00% to 39.99%................. 2,402 59,042,928.89 31.76%
40.00% to 49.99%................. 2,433 67,162,840.73 36.12%
50.00% to 59.99%................. 399 11,553,836.81 6.21%
60.00% to 69.99%................. 64 2,154,425.49 1.16%
70.00% to 79.99%................. 7 242,647.79 0.13%
80.00% to 89.99%................. 3 219,563.03 0.12%
90.00% + 7 155,164.41 0.08%
- ---------- -----
Total............................ 7,439 $185,922,184.30 100.00%
Teaser Expiration Month
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Teaser Expiration Month Initial HELOCs Cut-Off Date Cut-Off Date
- ----------------------- -------------- ------------ ------------
No Teaser Date........................... 1,782 $ 45,638,249.50 24.55%
February 2000............................ 1,075 29,722,202.06 15.99%
March 2000............................... 1,346 39,219,321.59 21.09%
April 2000............................... 763 16,065,600.22 8.64%
May 2000................................. 873 16,473,069.27 8.86%
June 2000................................ 1,264 30,358,021.65 16.33%
July 2000................................ 333 8,369,856.07 4.50%
February 2002............................ 1 11,885.85 0.01%
February 2010............................ 1 48,982.54 0.03%
May 2010................................. 1 14,995.55 0.01%
- --------- -----
Total........................... 7,439 $185,922,184.30 100.00%
</TABLE>
S-36
<PAGE>
<TABLE>
<CAPTION>
Documentation Type
Percent of
Initial HELOCs by
Principal Balance Principal Balance
Number of as of the as of the
Documentation Initial HELOCs Cut-Off Date Cut-Off Date
- ------------- -------------- ------------ ------------
<S> <C> <C> <C>
Standard................................. 4,815 $132,145,522.29 71.08%
Family First Direct...................... 688 13,934,944.30 7.50%
No Income No Appraisal................... 923 13,863,239.38 7.46%
No Income Verification................... 672 13,031,246.66 7.01%
Select................................... 205 9,669,820.39 5.20%
Streamline............................... 23 1,051,552.28 0.57%
GM Expanded Family....................... 36 1,038,377.03 0.56%
Super Express............................ 56 896,118.74 0.48%
Alternative.............................. 13 144,221.83 0.08%
Express.................................. 6 128,907.86 0.07%
Quick.................................... 2 18,233.54 0.01%
- --------- -----
Total........................... 7,439 $185,922,184.30 100.00%
</TABLE>
Initial HELs
The initial HELs were originated or acquired by the seller generally in
accordance with the underwriting standards of the seller. The initial HELs are
fixed rate, closed-end home equity loans evidenced by the related mortgage notes
and secured by the related mortgages on the related mortgaged properties.
Approximately 97.34% of the initial HELs (by aggregate principal balance as of
the cut-off date) are secured by second mortgages or deeds of trust and the
remainder are secured by first mortgages or deeds of trust. The mortgaged
properties securing the initial HELs consist primarily of residential
properties. As to 100.00% of the initial HELs, the borrower represented at the
time of origination that the related mortgaged property would be owner occupied
as a primary or second home.
All percentages of the initial HELs described in this prospectus supplement
are approximate percentages determined, unless otherwise indicated, by the
aggregate principal balance as of the cut-off date of the initial HELs. The
initial HELs are all part of Loan Group III.
The principal balance as of the cut-off date of the initial HELs is
$39,933,068.50. With respect to the initial HELs:
. as of the cut-off date, no initial HEL is 30 days or more delinquent;
. the average principal balance as of the cut-off date is approximately
$25,998.09;
. the minimum principal balance as of the cut-off date is $2,457.05;
. the maximum principal balance as of the cut-off date is $159,483.20;
. the lowest loan rate and the highest loan rate on the cut-off date are
5.99% and 16.99% per annum, respectively;
. the weighted average loan rate on the cut-off date is approximately
10.41% per annum;
S-37
<PAGE>
. the minimum and maximum CLTV Ratios as of the cut-off date are 6.00%
and 100.00% respectively;
. the weighted average CLTV Ratio based on the principal balance as of
the cut- off date of the initial HELs is approximately 78.40 % as of
the cut-off date;
. the latest scheduled maturity of any initial HEL is February 1, 2030;
. with respect to 39.89% and 4.14% of the initial HELs, the related
mortgaged properties are located in the States of California and
Florida, respectively; and
. not more than 20.60% of the initial HELs do not require an Appraised
Value.
Loan Terms of the HELs
The loan rate of each initial HEL is the per annum interest rate required
to be paid by the mortgagor under the terms of the related mortgage note. The
loan rate borne by each initial HEL is fixed as of the date of origination of
that initial HEL.
Interest on each HEL is charged on that part of the principal which has not
been paid. Interest is charged from the date the loan is advanced until the
full amount of the principal has been paid. Interest on each HEL is calculated
on a daily basis. The amount of the daily interest is equal to the annual
interest rate divided by the number of days in the year times the outstanding
principal balance.
Each initial HEL had a term to maturity from the date of origination of not
more than 372 months. The initial HELs provide for substantially equal payments
in an amount sufficient to amortize the HELs over their terms.
Initial HEL Characteristics
Set forth below is a description of certain additional characteristics of
the initial HELs as of the cut-off date. Unless otherwise specified, all
principal balances of the initial HELs are as of the cut-off date and are
rounded to the nearest dollar. Except as indicated otherwise, all percentages
are approximate percentages by aggregate principal balance as of the cut-off
date. Entries in the tables may not add to 100.00% due to rounding.
<TABLE>
<CAPTION>
Property Type
Percent of
Initial HELs by
Principal Balance Principal Balance
Number of as of the as of the
Property Type Initial HELs Cut-Off Date Cut-Off Date
- ------------- ------------ ------------ ------------
<S> <C> <C> <C>
Condo......................................... 101 $ 2,146,180.03 5.37%
Duplex - Fourplex............................. 6 110,287.89 0.28%
Manufactured Housing.......................... 5 73,552.49 0.18%
PUD........................................... 60 1,976,543.33 4.95%
Single Family................................. 1,354 35,402,053.23 88.65%
Two Family................................... 10 224,451.53 0.56%
-- ---------- -----
Total............................... 1,536 $39,933,068.50 100.00%
</TABLE>
S-38
<PAGE>
<TABLE>
<CAPTION>
Occupancy Types
Percent of
Initial HELs by
Principal Balance Principal Balance
Occupancy Number of as of the as of the
(as indicated by Borrower) Initial HELs Cut-Off Date Cut-Off Date
- -------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Owner Occupied.............................. 1,528 $39,803,466.79 99.68%
Non-Owner Occupied.......................... 8 129,601.71 0.32%
- ---------- -----
Total............................. 1,536 $39,933,068.50 100.00%
Principal Balances
Percent of
Initial HELs by
Principal Balance Principal Balance
Number of as of the as of the
Range of Principal Balances ($) Initial HELs Cut-Off Date Cut-Off Date
- ------------------------------- ------------ ------------ ------------
$0.00 to $25,000.00....... 974 $16,035,612.13 40.16%
$25,000.01 to $50,000.00....... 453 16,318,028.77 40.86%
$50,000.01 to $75,000.00....... 86 5,200,076.42 13.02%
$75,000.01 to $100,000.00........ 16 1,437,474.39 3.60%
$100,000.01 to $125,000.00........ 3 333,900.00 0.84%
$125,000.01 to $150,000.00........ 3 448,493.59 1.12%
$150,000.01 to $175,000.00........ 1 159,483.20 0.40%
- ---------- -----
Total............................ 1,536 $39,933,068.50 100.00%
. The average principal balance of the initial HELs as of the cut-off date is
approximately $25,998.09.
Combined Loan-to-Value Ratios
Percent of
Initial HELs by
Principal Balance Principal Balance
Number of as of the as of the
Range of CLTV Ratios(%) Initial HELs Cut-Off Date Cut-Off Date
- ----------------------- ------------ ------------ ------------
0.001% to 50.000%............ 101 $ 2,311,752.32 5.79%
50.001% to 60.000%............ 81 1,916,983.05 4.80%
60.001% to 70.000%............ 146 3,659,078.83 9.16%
70.001% to 80.000%............ 494 12,822,238.16 32.11%
80.001% to 90.000%............ 597 15,391,664.74 38.54%
90.001% to 100.000%............. 117 3,831,351.40 9.59%
--- ------------ -----
Total............................ 1,536 $39,933,068.50 100.00%
</TABLE>
. The minimum and maximum CLTV Ratios of the initial HELs as of the cut-off
date are approximately 6.00% and 100.00%, respectively, and the weighted
average CLTV Ratio of the initial HELs as of the cut-off date is
approximately 78.40%.
S-39
<PAGE>
<TABLE>
<CAPTION>
Geographical Distributions
Percent of
Initial HELs by
Principal Balance Principal Balance
Number of as of the as of the
Location Initial HELs Cut-Off Date Cut-Off Date
- -------- ------------ ------------ ------------
<S> <C> <C> <C>
California.................................. 529 $15,927,610.04 39.89%
Florida..................................... 71 1,654,290.22 4.14%
Michigan.................................... 68 1,474,161.34 3.69%
Texas....................................... 62 1,423,570.15 3.56%
New York.................................... 49 1,371,559.06 3.43%
Georgia..................................... 43 1,307,270.27 3.27%
Other....................................... 714 16,774,607.42 42.01%
--- ------------- ------
Total............................. 1,536 $39,933,068.50 100.00%
. "Other" includes states and the District of Columbia with under 3.00%
concentrations individually.
Junior Ratios
Percent of
Initial HELs by
Principal Balance Principal Balance
Number of as of the as of the
Range of Junior Ratios (%) Initial HELs Cut-Off Date Cut-Off Date
- -------------------------- ------------ ------------ ------------
0.00% to 9.99%................ 239 $ 3,812,782.27 9.55%
10.00% to 19.99%................. 721 16,787,558.15 42.04%
20.00% to 29.99%................. 346 10,907,098.51 27.31%
30.00% to 39.99%................. 137 4,744,404.56 11.88%
40.00% to 49.99%................. 55 2,374,814.61 5.95%
50.00% to 59.99%................. 23 791,449.20 1.98%
60.00% to 69.99%................. 5 198,492.60 0.50%
70.00% to 79.99%................. 7 196,773.19 0.49%
80.00% to 89.99%................. 2 85,195.41 0.21%
90.00% to 99.99%................. 1 34,500.00 0.09%
- --------- -----
Total............................ 1,536 $39,933,068.50 100.00%
</TABLE>
. The weighted average Junior Ratio of the initial HELs as of the cut-off
date is approximately 22.11%.
S-40
<PAGE>
<TABLE>
<CAPTION>
Loan Rates
Percent of
Initial HELs by
Principal Balance Principal Balance
Number of as of the as of the
Range of Loan Rates(%) Initial HELs Cut-Off Date Cut-Off Date
- ---------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
0.001% to 8.000%............... 30 $ 335,094.26 0.84%
8.001% to 9.000%............... 18 569,409.50 1.43%
9.001% to 10.000%................ 605 16,270,524.75 40.74%
10.001% to 11.000%................ 536 13,983,747.56 35.02%
11.001% to 12.000%................ 264 6,596,577.75 16.52%
12.001% to 13.000%................ 81 2,119,921.04 5.31%
13.001% to 14.000%................ 1 27,800.00 0.07%
16.001% to 17.000%................ 1 29,993.64 0.08%
- --------- -----
Total.............................. 1,536 $39,933,068.50 100.00%
. The weighted average loan rate of the initial HELs as of the cut-off date
is approximately 10.41%.
Months Remaining to Scheduled Maturity
Percent of
Initial HELs by
Principal Balance Principal Balance
Number of as of the as of the
Range of Months Initial HELs Cut-Off Date Cut-Off Date
- --------------- ------------ ------------ ------------
0 to 60...................... 169 $ 2,549,072.00 6.38%
61 to 120....................... 405 8,571,768.72 21.47%
121 to 180....................... 753 21,803,986.42 54.60%
181 to 240....................... 188 6,220,002.76 15.58%
241 to 300....................... 7 213,436.47 0.53%
301 + 14 574,802.13 1.44%
-- ---------- -----
Total............................... 1,536 $39,933,068.50 100.00%
. The weighted average months remaining to scheduled maturity of the initial
HELs as of the cut-off date is approximately 162 months.
Lien Priority
Percent of
Initial HELs by
Principal Balance Principal Balance
Number of as of the as of the
Lien Position Initial HELs Cut-Off Date Cut-Off Date
- ------------- ------------ ------------ ------------
First...................................... 32 $ 1,063,235.31 2.66%
Second..................................... 1,504 38,869,833.19 97.34%
----- ------------- ------
Total............................ 1,536 $39,933,068.50 100.00%
</TABLE>
S-41
<PAGE>
<TABLE>
<CAPTION>
Origination Year
Percent of
Initial HELs by
Principal Balance Principal Balance
Number of as of the as of the
Origination Year Initial HELs Cut-Off Date Cut-Off Date
- ---------------- ------------ ------------ ------------
<C> <C> <C> <C>
1997....................................... 2 $ 37,867.16 0.09%
1999....................................... 1,403 35,907,815.07 89.92%
2000....................................... 131 3,987,386.27 9.99%
--- ------------ -----
Total........................... 1,536 $39,933,068.50 100.00%
Debt-to-Income Ratios
Percent of
Initial HELs by
Principal Balance Principal Balance
Number of as of the as of the
Range of Debt-to-Income Ratios (%) Initial HELs Cut-Off Date Cut-Off Date
---------------------------------- ------------ ------------ ------------
0.00% to 9.99%................. 6 $ 180,450.20 0.45%
10.00% to 19.99%.................. 47 1,140,738.56 2.86%
20.00% to 29.99%.................. 258 5,765,240.38 14.44%
30.00% to 39.99%.................. 488 12,424,866.26 31.11%
40.00% to 49.99%.................. 642 17,608,829.31 44.10%
50.00% to 59.99%.................. 86 2,490,557.96 6.24%
60.00% to 69.99%.................. 9 322,385.83 0.81%
- ---------- -----
Total............................ 1,536 $39,933,068.50 100.00%
Documentation Type
Percent of
Initial HELs by
Principal Balance Principal Balance
Number of as of the as of the
Documentation Initial HELs Cut-Off Date Cut-Off Date
- ------------- ------------ ------------ ------------
<S> <C> <C> <C>
Standard.................................. 980 $27,240,091.44 68.21%
No Income No Appraisal.................... 350 7,705,140.22 19.30%
No Income Verification.................... 90 2,471,670.73 6.19%
Family First Direct....................... 93 1,883,810.91 4.72%
Super Express............................. 14 308,783.15 0.77%
Select.................................... 5 223,748.82 0.56%
GM Expanded Family........................ 3 80,057.18 0.20%
Streamline................................ 1 19,766.05 0.05%
- --------- -----
Total........................... 1,536 $39,933,068.50 100.00%
</TABLE>
S-42
<PAGE>
The information set forth in the preceding sections is based upon
information provided by the seller and tabulated by the depositor. The
depositor makes no representation as to the accuracy or completeness of that
information.
Conveyance of Subsequent Mortgage Loans; the Pre-Funding Account and the Funding
Account
The Purchase Agreement permits the issuer to acquire subsequent mortgage
loans. Accordingly, the statistical characteristics of the entire pool of
mortgage loans upon the acquisition of the subsequent mortgage loans may vary
somewhat from the statistical characteristics of the initial mortgage loans as
of the cut-off date as presented in this prospectus supplement. During the
Revolving Period for the Floating Rate Term Notes, it is expected that
subsequent mortgage loans acquired with amounts withdrawn from the Funding
Account will consist primarily of HELOCs and be included in Loan Groups I and/or
II.
Each subsequent mortgage loan will have been underwritten substantially in
accordance with the criteria set forth in this prospectus supplement under
"Description of the Mortgage Loans--Underwriting Standards." Subsequent
mortgage loans will be transferred to the issuer pursuant to subsequent transfer
agreements. In connection with the purchase of subsequent mortgage loans on
each date subsequent mortgage loans are conveyed to the trust fund, or
subsequent transfer dates, the issuer will be required to pay to the seller from
amounts on deposit in the Pre-Funding Account, the Custodial Account or the
Funding Account a cash purchase price of 100% of the principal balance thereof.
In each instance in which subsequent mortgage loans are transferred to the trust
fund pursuant to a subsequent transfer agreement, the issuer will designate a
cut-off date with respect to the subsequent mortgage loans acquired on that
date, or a subsequent transfer date. The amount paid from the Pre-Funding
Account, the Custodial Account or the Funding Account, as applicable, on each
subsequent transfer date will not include accrued interest on the subsequent
mortgage loans. Following each subsequent transfer date, the aggregate
principal balance of the mortgage loans will increase by an amount equal to the
aggregate principal balance of the subsequent mortgage loans so acquired and the
amount in the Pre-Funding Account, the Custodial Account or the Funding Account,
as applicable, will decrease accordingly.
Any conveyance of subsequent mortgage loans on a subsequent transfer date
is subject to certain conditions including, but not limited to:
(1) each subsequent mortgage loan must satisfy the representations and
warranties specified in the related subsequent transfer agreement and
the Purchase Agreement;
(2) the seller will select subsequent mortgage loans in a manner that it
reasonably believes is not adverse to the interests of the holders of
the term notes, the holders of the variable funding notes or the
Enhancer; and
(3) as of each subsequent cut-off date, each subsequent mortgage loan will
satisfy the following criteria:
. the subsequent mortgage loan may not be 30 or more days
contractually delinquent as of the related subsequent cut-off
date;
. the original stated term to maturity of the subsequent mortgage
loan will not exceed 360 months;
. the lien securing any subsequent mortgage loan must be a first or
second lien priority;
. the subsequent mortgage loan must have an outstanding principal
balance of at least $1,000 and no more than $511,000 as of the
subsequent cut-off date;
. the subsequent mortgage loan will be underwritten substantially
in accordance with the criteria set forth under "Description of
the Mortgage Loans-- Underwriting Standards" in this prospectus
supplement;
. the subsequent mortgage loan must have a CLTV Ratio at
origination of no more than 100%;
. the subsequent mortgage loan shall not provide for negative
amortization; and
S-43
<PAGE>
. following the purchase of the subsequent mortgage loan by the
issuer, the assets in the trust fund must have a weighted average
loan rate, a weighted average remaining term to maturity and a
weighted average CLTV Ratio at origination, as of each respective
subsequent cut-off date, which would not vary materially from the
initial mortgage loans included initially in the trust fund.
In addition, the indenture trustee will not agree to any transfer of subsequent
mortgage loans without the approval of the Enhancer, which approval shall not be
unreasonably withheld; provided, however that the Enhancer will provide notice
of approval or disapproval within 5 business days or the subsequent mortgage
loans will be deemed approved by the Enhancer. Subsequent mortgage loans with
characteristics materially varying from those set forth above may be purchased
by the issuer and included in the trust fund with the approval of the Enhancer;
provided, however, that the addition of the subsequent mortgage loans will not
materially affect the aggregate characteristics of the entire pool of mortgage
loans.
The Pre-Funding Account. The indenture trustee will establish the Pre-
Funding Account and deposit $74,144,747 therein on the closing date from the net
proceeds of the sale of the securities. Approximately $64,077,816 of the
initial amount deposited in the Pre-Funding Account will be allocated to
purchasing HELOCs and approximately $10,066,932 will be allocated to purchasing
HELs. Monies in the Pre-Funding Account will be applied during the Pre-Funding
Period to purchase subsequent mortgage loans from the seller. The Pre-Funding
Account will be part of the trust fund, but monies on deposit therein will not
be available to cover losses on or in respect of the mortgage loans. Any
amounts in excess of $50,000 remaining on deposit in the Pre-Funding Account at
the end of the Pre-Funding Period will be transferred to the Note Payment
Account and distributed as principal on the related term notes on the next
Payment Date. Any amounts remaining on deposit in the Pre-Funding Account at
the end of the Pre-Funding Period after the transfer to the Note Payment Account
will be deposited into the Funding Account. Monies on deposit in the Pre-
Funding Account may be invested in Permitted Investments as provided in the
Servicing Agreement. Net income on investment of funds in the Pre-Funding
Account will be deposited into or credited to the Capitalized Interest Account.
There can be no assurance that a sufficient number of subsequent mortgage loans
will be available for application of the entire amount on deposit in the Pre-
Funding Account.
The Funding Account. On the closing date, the indenture trustee will
establish the Funding Account. On each Payment Date during the Revolving Period
for each class of term notes, the servicer will deposit Principal Collections
and Excess Spread for the related Loan Group into the Funding Account, and will
apply them first to buy additional balances arising under HELOCs already
included in the trust fund and thereafter to buy subsequent mortgage loans, to
the extent they are available. During the Revolving Periods, we expect that
subsequent mortgage loans will be primarily HELOCs. Principal Collections on
deposit in the Custodial Account prior to deposit into the Funding Account may
also be used to acquire additional balances and subsequent mortgage loans during
the Revolving Periods.
The notes will be subject to redemption in part on the Payment Date
immediately succeeding the date on which the Revolving Period for the Floating
Rate Term Notes ends, in the event that any amounts remain on deposit in the
Funding Account, exclusive of any investment earnings thereon, after giving
effect to the purchase by the issuer of all subsequent mortgage loans and
additional balances, including any purchase on the date on which the Revolving
Period for the Floating Rate Term Notes ends.
Purchase of Additional Balances. During the Managed Amortization Period,
the servicer will apply Principal Collections to purchase additional balances,
however no more subsequent mortgage loans will be purchased. During the Rapid
Amortization Period, no additional balances or subsequent mortgage loans will be
purchased. Any collections in respect of draws made on HELOCs during the Rapid
Amortization Period will be the property of the seller and not the issuer and
will not constitute a part of Principal Collections.
Non-Recordation of Assignments
Subject to the consent of the Enhancer, the seller will not be required to
record assignments of the mortgages to the indenture trustee in the real
property records of the states in which the related mortgaged properties are
located. The seller will retain record title to the mortgages on behalf of the
indenture trustee and the securityholders. Although the recordation of the
assignments of the mortgages in favor of the indenture trustee is
S-44
<PAGE>
not necessary to effect a transfer of the mortgage loans to the indenture
trustee, if the seller were to sell, assign, satisfy or discharge any mortgage
loan prior to recording the related assignment in favor of the indenture
trustee, the other parties to the sale, assignment, satisfaction or discharge
may have rights superior to those of the indenture trustee. In some states, in
the absence of recordation of the assignments of the mortgages, the transfer to
the indenture trustee of the mortgage loans may not be effective against certain
creditors or purchasers from the seller or a trustee in bankruptcy thereof. If
those other parties, creditors or purchasers have rights to the mortgage loans
that are superior to those of the indenture trustee, securityholders could lose
the right to future payments of principal and interest to the extent that those
rights are not otherwise enforceable in favor of the indenture trustee under the
applicable mortgage documents.
Amendments to Mortgage Documents
Subject to applicable law, the servicer may change the terms of the
mortgage documents at any time, provided that such changes:
. do not adversely affect the interests of the securityholders or the
Enhancer; and
. are consistent with prudent business practice.
In addition, the Servicing Agreement will permit the servicer, with certain
limitations described therein, to increase the credit limit or reduce the gross
margin of a HELOC and to reduce the loan rate on a HEL.
Optional Removal of Mortgage Loans
In certain instances in which a mortgagor either:
. requests an increase in the credit limit on the related HELOC above
the limit stated in the related credit line agreement;
. requests to place a lien on the related mortgaged property senior to
the lien of the related mortgage loan; or
. refinances the senior lien resulting in a CLTV Ratio above the
previous CLTV Ratio for that loan;
the servicer will have the option to purchase from the trust fund the related
mortgage loan at a price equal to the Repurchase Price. In addition, the
servicer will also have the option to purchase from the trust fund any mortgage
loan delinquent in payment for a period of sixty days or longer at a price equal
to the Repurchase Price.
Underwriting Standards
All of the mortgage loans will be acquired by the depositor from the
seller. The following is a brief description of the various underwriting
standards and procedures applicable to the mortgage loans.
The seller's underwriting standards with respect to the mortgage loans
generally will conform to those published in the GMACM underwriting guidelines,
including the provisions of the GMACM underwriting guidelines applicable to the
GMAC Mortgage Home Equity Program. The underwriting standards as set forth in
the GMACM underwriting guidelines 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 guidelines
with respect to mortgage loans originated or acquired under the GMAC Mortgage
Home Equity Program provide for varying levels of documentation. For standard
documented loans, such as the programs "Standard" and "Alternative," a
prospective borrower is required to fill out a detailed application providing
pertinent credit information, including tax returns if they are self-employed or
received income from dividends and interest, rental properties or other income
which can be verified via tax returns, and a credit report is obtained. In
addition, a borrower may demonstrate income and employment directly by providing
alternative documentation in the form of a pay stub and a W-2. These loans
require drive-by appraisals for property values of $500,000 or less, and full
appraisals for property values of more than $500,000 and for all three and four
unit properties.
S-45
<PAGE>
Under the GMACM underwriting guidelines, loans may also be originated under
the "Quick Program," a no income verification program for self-employed
borrowers. For those loans, only a credit check and an appraisal are required.
Those loans are generally limited to a loan amount of $50,000 or less, and are
limited to primary residences. In addition, the borrower may be qualified under
a "No Income/No Appraisal" program. Under such a program, a credit check is
required, and the CLTV Ratio is limited to 80%, or 90% in the case of GM and GM
subsidiary employees under the "Family First Direct" program. The borrower is
qualified on his or her stated income in the application, the CLTV Ratio is
based on a Stated Value, except that with respect to CLTV Ratios over 80% under
the "Family First Direct" program, the borrower must supply evidence of value.
The maximum loan under that program is generally limited to $40,000, or $250,000
under the "Family First Direct" program. In addition, the borrower may be
qualified under a "No Income Verification" program. Under that program, a
credit check is required, and the CLTV Ratio is limited to 90%. The borrower is
qualified based on the income stated on the application. Those loans are
generally limited to an amount of $100,000 or less, and are limited to primary
residences. Those loans require drive-by appraisals for property values of
$500,000 or less, and full appraisals for property values of more than $500,000.
In addition, the GMACM underwriting guidelines provide for loans under its
"Select" program to employees and retirees of GM. These 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. Underwriting is
subject to a maximum CLTV Ratio of 100% for primary residences and a maximum
CLTV Ratio of 80% for second homes, and a maximum loan amount of $250,000. The
CLTV Ratio is based on the borrower's Stated Value and no appraisal is made for
CLTV Ratios of 80% or less. The borrower must supply evidence of value when the
property value is under $500,000 and the CLTV Ratio is between 80% and 90%. A
drive-by appraisal is required for a CLTV Ratio greater than 90% and a property
value under $500,000. A full appraisal is required for a CLTV Ratio greater
than 90% with property values of $500,000 and above.
The mortgage loans included in the mortgage pool generally were originated
subject to a maximum CLTV Ratio of 100.00%. Additionally, loans were generally
originated with a maximum total monthly debt-to-income ratio of 45%, although
variances are permitted based on compensating factors. There can be no
assurance that the CLTV Ratio or the debt-to-income ratio for any mortgage loans
will not increase from the levels established at origination.
The underwriting standards set forth in the GMACM underwriting guidelines
with respect to mortgage loans originated under the GMACM Home Equity Program
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 those
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 those
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 the 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.
Conformity with the applicable underwriting standards will vary depending
on a number of factors relating to the specific mortgage loan, including the
principal amount or credit limit, the CLTV Ratio, the loan type or loan program,
and the applicable credit score of the related borrower used in connection with
the origination of the mortgage loan, as determined based on a credit scoring
model acceptable to the seller. Credit scores are not used to deny loans.
However, credit scores are used as a "tool" to analyze a borrower's credit.
Generally, credit scoring models provide a means for evaluating the information
about a prospective borrower that is available from a credit reporting agency.
The underwriting criteria applicable to any program under which the mortgage
loans may be originated may provide that qualification for the loan, the level
of review of the loan's documentation, or the
S-46
<PAGE>
availability of certain loan features, such as maximum loan amount, maximum CLTV
Ratio, property type and use, and documentation level, may depend on the
borrower's credit score.
The following is a brief description of the underwriting standards under
the GMACM Home Equity Program for standard documentation loan programs.
Initially, a prospective borrower, other than a trust if the trust is the
borrower, is required to fill out a detailed application providing pertinent
credit information. As part of the application, the borrower is required to
provide 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. The borrower generally must
show, among other things, a minimum of one year credit history reported on the
credit report and that no mortgage delinquencies, thirty days or greater, in the
past 12 months existed. Borrowers who have less than a 12 month first mortgage
payment history may be subject to certain additional lending restrictions. In
addition, under the GMACM Home Equity Program, generally borrowers with a
previous foreclosure or bankruptcy within the past five years may not be allowed
and a borrower generally must satisfy all judgments, liens and other legal
actions with an original amount of $1,000 or greater prior to closing.
Borrowers with a previous foreclosure or bankruptcy generally do not qualify for
a loan unless extenuating credit circumstances beyond their control are
documented. In addition, an income verification is obtained. If a prospective
borrower is self-employed, the borrower may be required to submit copies of
signed tax returns. The borrower may also be required to authorize verification
of deposits at financial institutions where the borrower has accounts. In the
case of a mortgage loan secured by a property owned by a trust, the foregoing
procedures may be waived where the related credit line agreement is executed on
behalf of the trust.
An appraisal may be made of the mortgaged property securing each mortgage
loan. The appraisal may be either a full appraisal, a drive-by appraisal or a
statistical property evaluation. Any appraisals may be performed by appraisers
independent from or affiliated with the GMAC Mortgage Corporation or their
affiliates. Appraisals, however, will not establish that the mortgaged
properties provide assurance of repayment of the mortgage loans. See "Risk
Factors-The mortgaged properties might not be adequate security for the mortgage
loans" in this prospectus supplement. 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 on or after September 1, 1999, 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. The
seller believes that no more than 20% (by aggregate principal balance as of the
cut-off date) of the initial mortgage loans are secured by mortgaged properties
which may have been appraised using the statistical property evaluation method.
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
for that mortgage loan, an earlier appraisal may be utilized if that 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. Title
searches are undertaken in most cases, and title insurance may be required on
all mortgage loans with credit limits in excess of $100,000.
Under the GMACM Home Equity Program, the CLTV Ratio is generally calculated
by reference to the lower of the appraised value as so determined or the sales
price, if the mortgage loan is originated concurrently with the origination of a
first mortgage loan. In all other cases, the value used is generally the
appraised value as so determined.
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, including
debt service on any related mortgage loan secured by a senior lien on the
related mortgaged property. For qualification purposes the monthly payment is
based solely on the payment of interest only on the loan. The loan rate in
effect from the origination date of a mortgage loan to the first adjustment date
generally will be lower, and may be significantly lower, than the sum of the
then applicable index and gross margin. The mortgage loans will not provide for
negative amortization. Payment of the full outstanding principal balance at
maturity may depend on the borrower's ability to obtain refinancing or to sell
the
S-47
<PAGE>
related mortgaged property prior to the maturity of the mortgage loan, and there
can be no assurance that such refinancing will be available to the borrower or
that such a sale will be possible.
The underwriting standards set forth in the GMACM underwriting guidelines
may be varied in appropriate cases, including in "limited" or "reduced loan
documentation" mortgage loan programs. Limited documentation programs,
including the programs "Streamline," "GM Expanded Family," "Super Express" and
"Express," generally permit fewer supporting documents to be obtained or waive
income, appraisals, asset and employment documentation requirements, and limited
documentation programs generally compensate for increased credit risk by placing
greater emphasis on either the review of the property to be financed or the
borrower's ability to repay the mortgage loan. Generally, in order to be
eligible for a reduced loan documentation program, a borrower must have a good
credit history, and other compensating factors, such as a relatively low CLTV
Ratio, or other favorable underwriting factors, must be present and the
borrower's eligibility for the program may be determined by use of a credit
scoring model.
The Seller and Servicer
General
GMAC Mortgage Corporation is the seller and servicer for all of the
mortgage loans. The seller is an indirect wholly-owned subsidiary of General
Motors Acceptance Corporation and is one of the nation's largest mortgage
bankers. The seller is engaged in the mortgage banking business, including the
origination, purchase, sale and servicing of residential loans.
The notes do not represent an interest in or an obligation of the seller or
the servicer. The seller's only obligations with respect to the notes will be
pursuant to certain limited representations and warranties made by the seller or
as otherwise provided in this prospectus supplement.
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 its program guide and the terms of the Servicing Agreement. On
the closing date, the custodian will be The Bank of Maryland.
Billing statements for HELOCs are mailed monthly by the servicer. The
statement details the monthly activity on the related HELOC and specifies the
minimum payment due to the servicer and the available credit line. Notice of
changes in the applicable loan rate are provided by the servicer to the
mortgagor with those statements. All payments are due by the applicable due
date.
For information regarding foreclosure procedures, see "The Seller and
Servicer--Realization Upon Defaulted Loans" in this prospectus supplement.
Servicing and charge-off policies and collection practices may change over time
in accordance with the servicer's business judgment, changes in the servicer's
portfolio of real estate secured revolving credit line loans that it services
for its clients and applicable laws and regulations, and other considerations.
Collection and Other Servicing Procedures
The servicer will make reasonable efforts to collect all payments called
for under the mortgage loans and will, consistent with the Servicing Agreement,
follow collection procedures which shall be normal and usual in its general
mortgage servicing activities with respect to mortgage loans comparable to the
mortgage loans included in the mortgage pool. Consistent with that standard,
the servicer may in its discretion waive any prepayment charge in connection
with the prepayment of a mortgage loan or extend the due dates for payments due
on a mortgage loan, provided that the insurance coverage for that mortgage loan
or any coverage provided by any alternative credit enhancement will not be
adversely affected by the waiver or the extension.
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The servicer, at its option and in its sole discretion, may make advances
by depositing into the Custodial Account amounts representing installments of
interest on any mortgage loan that is delinquent as of the end of the related
Collection Period if the servicer believes that the advances will be recoverable
from payments on, or other proceeds of, that mortgage loan. If the servicer
makes any optional advances of delinquent interest, the servicer shall be
entitled to reimburse itself by withdrawing those amounts from the Custodial
Account prior to any distribution of amounts on deposit therein to the
noteholders.
In certain instances in which a mortgage loan is in default, or if default
is reasonably foreseeable, and if determined by the servicer to be in the best
interests of the Enhancer and the noteholders, the servicer may permit certain
modifications of the mortgage loan or make forbearances on the mortgage loan
rather than proceeding with foreclosure or repossession, if applicable. In
making the determination, the loss that might result if the mortgage loan were
liquidated would be taken into account. Any modifications may have the effect
of reducing the loan rate or extending the final maturity date of the mortgage
loan. Any modified mortgage loan may remain in the trust fund, 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, the notes. In addition, if a HELOC is in default or, in the
judgment of the servicer a default is reasonably foreseeable, the servicer may,
through modification, convert the HELOC into a fully amortizing HEL.
In any case in which mortgaged property subject to a mortgage loan is being
conveyed by the mortgagor, the servicer shall in general be obligated, to the
extent it has knowledge of the conveyance, to exercise its rights to accelerate
the maturity of the mortgage loan under any due-on-sale clause applicable
thereto, but only if the exercise of those rights is permitted by applicable law
and only to the extent it would not adversely affect or jeopardize coverage
under any applicable credit enhancement arrangements. If the servicer is
prevented from enforcing the due-on-sale clause under applicable law or if the
servicer determines that it is reasonably likely that a legal action would be
instituted by the related mortgagor to avoid enforcement of the due-on-sale
clause, the servicer will enter into an assumption and modification agreement
with the person to whom the property has been or is about to be conveyed,
pursuant to which that person will become liable under the related credit line
agreement subject to certain specified conditions. The original mortgagor may
be released from liability on a mortgage loan if the servicer shall has
determined in good faith that the release will not adversely affect the ability
to make full and timely collections on the related mortgage loan. Any fee
collected by the servicer for entering into an assumption or substitution of
liability agreement will be retained by the servicer as additional servicing
compensation. In connection with any assumption, the loan rate borne by the
related credit line agreement may not be altered.
Mortgagors may, from time to time, request partial releases of the
mortgaged properties, easements, consents to alteration or demolition and other
similar matters. The servicer may approve such a 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 mortgage loan, that the approval will not
adversely affect the security for, and the timely and full collectability of,
the related mortgage loan. Any fee collected by the servicer for processing the
request will be retained by the servicer as additional servicing compensation.
The servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its officers and employees and other persons
acting on behalf of the servicer in connection with its activities under the
Servicing Agreement.
The servicer may be subject to certain restrictions under the Servicing
Agreement with respect to the refinancing of a lien senior to a mortgage loan
secured by a lien on the related mortgaged property. In addition, if a
mortgaged property did not have a lien senior to the related mortgaged loan as
of the cut-off date, then the servicer may not consent to the placing of a lien
senior to the mortgage loan on the related mortgaged property.
Realization Upon Defaulted Loans
With respect to a mortgage loan secured by a lien on a mortgaged property
in default, the servicer will decide whether to foreclose upon the mortgaged
property or with respect to any such mortgage loan, write off the principal
balance of the mortgage loan as a bad debt or take an unsecured note, provided,
however, that if the servicer has actual knowledge that any mortgaged property
is affected by hazardous or toxic wastes or substances and that the acquisition
of the mortgaged property would not be commercially reasonable, then the
servicer shall not
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cause the issuer or the indenture trustee to acquired title to that mortgaged
property in a foreclosure or similar proceeding. In connection with that
decision, the 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 the foreclosure or repossession and resale to
determine whether a foreclosure proceeding or a repossession and resale is
appropriate. To the extent that a mortgage loan secured by a lien on a mortgaged
property is junior to another lien on the related mortgaged property, following
any default thereon, unless foreclosure proceeds for that mortgage loan are
expected to at least satisfy the related senior mortgage loan in full and to pay
foreclosure costs, it is likely that the mortgage loan will be written off as
bad debt with no foreclosure proceeding. See "Risk Factors--The mortgaged
properties might not be adequate security for the mortgage loans" in this
prospectus supplement. In the event that 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 indenture trustee or to its nominee on
behalf of the noteholders. Notwithstanding any acquisition of title and
cancellation of the related mortgage loan, the REO Loan will be considered for
most purposes to be an outstanding mortgage loan held in the trust fund until
such time as the mortgage loan becomes a liquidated mortgage loan. Any income,
net of expenses and fees and other than gains described below, received by the
servicer on the related mortgaged property, prior to its disposition will be
deposited in the Custodial Account upon receipt and will be available at that
time for making payments to noteholders. The foregoing is subject to the proviso
that the servicer shall not be required to expend its own funds in connection
with any foreclosure or attempted foreclosure which is not completed or towards
the correction of any default on a related senior mortgage loan or restoration
of any property unless it shall determine that the expenditure will increase the
related Net Liquidation Proceeds.
With respect to a mortgage loan secured by a lien on a mortgaged property
in default, the servicer may pursue foreclosure, or similar remedies, subject to
any senior lien positions and certain other restrictions pertaining to junior
loans concurrently with pursuing any remedy for a breach of a representation and
warranty made by the seller. However, the 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. Upon the first to occur of final liquidation and
a repurchase or substitution pursuant to a breach of a representation and
warranty, the related mortgage loan will be removed from the trust fund. The
servicer may elect to treat a defaulted mortgage 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
that mortgage loan thereafter incurred will be reimbursable to the servicer from
any amounts otherwise payable to the noteholders, or may be offset by any
subsequent recovery related to that mortgage loan. Alternatively, for purposes
of determining the amount of related liquidation proceeds to be paid to
noteholders, the amount of any loss or the amount required to be drawn under any
applicable form of credit enhancement, the 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 mortgage loan.
The servicer has the option to purchase from the trust fund any mortgage
loan that is in default for at least 60 days at the Repurchase Price. If a
defaulted mortgage loan or REO Loan is not so removed from the trust fund, then,
upon the final liquidation thereof, if a loss is realized which is not covered
by any applicable form of credit enhancement or other insurance, the noteholders
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 mortgagor,
the servicer will be entitled to retain that gain as additional servicing
compensation.
Delinquency and Loss Experience of the Servicer's Portfolio
The following tables summarize the delinquency and loss experience for all
home equity lines of credit loans originated by the seller. The data presented
in the following tables is 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 set forth below.
The information in the tables below has not been adjusted to eliminate the
effect of the significant growth in the size of the servicer's HELOC loan
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of the HELOC loans serviced for each
period would be higher than those shown if certain of the home equity loans were
artificially isolated at a point in time and the information showed the activity
only with respect to those HELOC loans.
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Delinquency and Loss Experience
<TABLE>
<CAPTION>
Home Equity Loan Portfolio Delinquency Experience
====================================================================================================
At December 31, 1999 At December 31, 1998 At December 31, 1997
$ Loans % by $ $ Loans % by $ $ Loans % by $
-------------- ------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Number of Loans 40,566 25,494 20,159
Total Portfolio............... $1,026,843,776 100.00% $656,651,283 100.00% $568,400,751 100.00%
Period of Delinquency:
30-59 Days................. 8,196,006 0.80% 8,640,057 1.32% 8,367,782 1.47%
60-89 Days................. 1,170,808 0.11% 2,193,177 0.33% 1,165,224 0.21%
90+ Days................... 8,703,612 0.85% 2,033,104 0.31% 2,396,182 0.42%
Total Loans................... 18,070,427 1.76% 12,866,339 1.96% 11,929,188 2.10%
Foreclosure................... 3,099,772 0.30% 3,637,492 0.55% 3,333,258 0.59%
Foreclosed.................... 393,032 0.04% 573,533 0.09% 1,951,334 0.34%
Total Loans in Foreclosure.... 3,492,804 0.34% 4,211,025 0.64% 5,284,592 0.93%
Total Delinquent Loans........
$ 21,563,281 2.10% $ 17,077,364 2.60% $ 17,213,780 3.03%
====================================================================================================
Home Equity Loan Portfolio Loss and Foreclosure Experience
====================================================================================================
At December 31, 1999 At December 31, 1998 At December 31, 1997
$ Loans % by $ $ Loans % by $ $ Loans % by $
-------------- ------ ------------ ------ ------------ ------
Number of Loans 40,566 25,494 20,159
Total Portfolio............... $1,026,843,776 100.00% $656,651,283 100.00% $568,400,751 100.00%
Total Loans in Foreclosure.... 3,492,804 0.34% 4,221,025 0.64% 5,284,592 0.64%
Net Chargeoffs for Period..... $ 1,121,386 0.11% $ 1,873,593 0.29% $ 1,332,166 0.29%
====================================================================================================
</TABLE>
. Performing loans in bankruptcy are not included in delinquency
statistics.
Servicing and Other Compensation and Payment of Expenses
The Servicing Fee for each mortgage loan is payable out of the interest
payments on that mortgage loan. The Servicing Fee rate for each mortgage loan
is 0.50% per annum. The compensation to the servicer consists of:
. the Servicing Fee payable to the servicer in respect of its servicing
activities; and
. other related compensation.
The servicer is obligated to pay certain ongoing expenses associated with its
servicing activities and incurred by the servicer in connection with its
responsibilities under the Servicing Agreement.
The Issuer
The GMACM Home Equity Loan Trust 2000-HE1 is a business trust established
under the laws of the State of Delaware, and will be created and governed by the
Trust Agreement, for the purposes described in this prospectus supplement. The
Trust Agreement will constitute the "governing instrument" of the issuer under
the laws of the State of Delaware relating to business trusts. The issuer will
not engage in any activity other than:
. acquiring and holding the mortgage loans and the other assets
comprising the trust fund and proceeds therefrom;
. issuing the notes and the certificates;
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. making payments on the notes and the certificates; and
. engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
The Issuer's principal offices are at Rodney Square North, 1100 North
Market Street, Wilmington, Delaware 19890, in care of Wilmington Trust Company,
as owner trustee.
The Owner Trustee
Wilmington Trust Company will be the owner trustee under the Trust
Agreement. The owner trustee is a Delaware banking corporation, and its
principal offices are located in Wilmington, Delaware.
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 taking any action or for refraining from the taking of any action in good
faith pursuant to the Trust Agreement, or for errors in judgment; provided, that
none of the owner trustee or any director, officer or employee thereof will be
protected against any liability that would otherwise be imposed upon them by
reason of their willful malfeasance, bad faith or negligence in the performance
of their duties, or by reason of their reckless disregard of their 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 entity resulting from
a merger or consolidation, will be the successor owner trustee under the Trust
Agreement.
The commercial bank or trust company serving as owner trustee may have
normal banking relationships with the depositor, the seller and/or their
respective affiliates.
The owner trustee may resign at any time, in which event the indenture
trustee will be obligated to appoint a successor owner trustee as set forth in
the Trust Agreement and the Indenture. The indenture trustee may also remove
the owner trustee if the owner trustee ceases to be eligible to continue as
owner trustee under the Trust Agreement or if the owner trustee becomes
insolvent. Upon becoming aware of such circumstances, the indenture trustee
will be obligated to appoint a successor owner trustee at the direction of the
Enhancer. 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
Norwest Bank Minnesota, National Association, will be the indenture trustee
under the Indenture. The principal offices of the indenture trustee are located
at Norwest Center, Sixth and Marquette, Minneapolis, Minnesota 55479-0070, with
administrative offices located at 11000 Broken Land Parkway, Columbia, Maryland
21044.
The indenture trustee may have normal banking relationships with the
depositor, the seller and/or their respective affiliates.
The indenture trustee may resign at any time, in which event the owner
trustee will be obligated to appoint a successor indenture trustee as set forth
in the Indenture. The owner trustee as set forth in the Indenture may also
remove the indenture trustee if the indenture trustee ceases to be eligible to
continue as indenture trustee under the Indenture or if the indenture trustee
becomes insolvent. Upon becoming aware of such circumstances, the owner trustee
will be obligated to appoint a successor indenture trustee with the consent of
the Enhancer. If so specified in the Indenture, the indenture trustee may also
be removed at any time by the Enhancer or by the holders of a majority 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.
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The Enhancer
The following information has been supplied by the Enhancer for inclusion
in this prospectus supplement. Accordingly, the depositor, the seller, the
servicer and the indenture trustee do not make any representation as to the
accuracy and completeness of this information.
The Enhancer
The Enhancer is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company. MBIA Inc. is not obligated to pay the debts of
or claims against the Enhancer. The Enhancer is domiciled in the State of New
York and licensed to do business in and is subject to regulation under the laws
of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. The Enhancer has two European branches, one
in the Republic of France and the other in the Kingdom of Spain. New York has
laws prescribing minimum capital requirements, limiting classes and
concentrations of investments and requiring the approval of policy rates and
forms. State laws also regulate the amount of both the aggregate and individual
risks that may be insured, the payment of dividends by the Enhancer, changes in
control and transactions among affiliates. Additionally, the Enhancer is
required to maintain contingency reserves on its liabilities in specified
amounts and for specified periods of time.
Financial Information About the Enhancer
The consolidated financial statements of the Enhancer, a wholly owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1998 and
December 31, 1997 and for each of the three years in the period ended December
31, 1998, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1998, and the consolidated financial statements of the Enhancer and
its subsidiaries as of September 30, 1999 and for the nine month periods ended
September 30, 1999 and September 30, 1998 included in the Quarterly Report on
Form 10-Q of MBIA Inc. for the period ended September 30, 1999, are hereby
incorporated by reference into this prospectus supplement and shall be deemed to
be a part hereof. Any statement contained in a document incorporated by
reference herein shall be modified or superseded for purposes of this prospectus
supplement to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this prospectus supplement.
All financial statements of the Enhancer and its subsidiaries included in
documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the
securities shall be deemed to be incorporated by reference into this prospectus
supplement and to be a part hereof from the respective dates of filing such
documents.
The tables below present selected financial information of the Enhancer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities and generally accepted accounting
principles:
<TABLE>
<CAPTION>
Statutory Accounting Practices
-----------------------------------------------
December 31,1998 September 30, 1999
----------------------- ---------------------
(Audited) (Unaudited)
(In Millions)
<S> <C> <C>
Admitted Assets......................................................... $6,521 $6,930
Liabilities............................................................. 4,231 4,571
Capital and Surplus..................................................... 2,290 2,359
</TABLE>
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<TABLE>
<CAPTION>
Generally Accepted Accounting Principles
December 31, 1998 September 30, 1999
----------------------- ---------------------
(Audited) (Unaudited)
(In Millions)
<S> <C> <C>
Assets................................................................ $7,488 $7,422
Liabilities........................................................... 3,211 3,234
Shareholder's Equity................................................. 4,277 4,188
</TABLE>
Where You Can Obtain Additional Information About the Enhancer
Copies of the financial statements of the Enhancer incorporated by
reference herein and copies of the Enhancer's 1998 year-end audited financial
statements prepared in accordance with statutory accounting practices are
available, without charge, from the Enhancer. The address of the Enhancer is
113 King Street, Armonk, New York 10504. The telephone number of the Enhancer
is (914) 273-4545.
Financial Strength Ratings of the Enhancer
Moody's Investors Service, Inc. rates the financial strength of the
Enhancer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc., rates the financial strength of the Enhancer "AAA."
Fitch IBCA, Inc. rates the financial strength of the Enhancer "AAA."
Each rating of the Enhancer should be evaluated independently. The ratings
reflect each respective rating agency's current assessment of the
creditworthiness of the Enhancer and its ability to pay claims on its policies
of insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the notes,
and the ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the notes. The
Enhancer does not guaranty the market price of the notes nor does it guaranty
that the ratings on the notes will not be revised or withdrawn.
Description of the Securities
General
The Class A-1, Class A-2 and Class A-3 term notes, and the variable funding
notes, will be issued pursuant to the Indenture. The certificates will be
issued pursuant to the Trust Agreement.
The following summaries describe certain provisions of the securities, the
Indenture and the Trust Agreement. These summaries do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the applicable agreements. Only the term notes are being
offered by this prospectus supplement.
The notes will be secured by the trust fund, which will be pledged by the
issuer to the indenture trustee pursuant to the Indenture. The trust fund will
consist of, without limitation:
. the mortgage loans, including all additional balances and any
subsequent mortgage loans;
. all amounts on deposit in the Custodial Account, the Note Payment
Account, the Distribution Account, the Capitalized Interest Account,
the Pre-Funding Account, the Reserve Account and the Funding Account;
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. the Policy; and
. all proceeds of the foregoing.
Until the beginning of the Rapid Amortization Period for the Floating Rate
Term Notes, additional balances are expected to become assets of the trust fund.
Apart from the use of any funds in the Custodial Account and/or Funding Account
as described in this prospectus supplement to acquire additional balances,
neither the issuer nor the indenture trustee is obligated to fund any additional
balances.
The variable funding notes will be issued to the seller and may be
transferred to an affiliate of the seller. The Variable Funding Balance will be
increased from time to time until the commencement of the Rapid Amortization
Period for the Floating Rate Term Notes in consideration for additional balances
and, in some cases, subsequent mortgage loans sold to the issuer, if Principal
Collections in respect of the related Collection Period, and, during the
Revolving Period for the Floating Rate Term Notes, funds on deposit in the
Funding Account, are insufficient or unavailable to cover the full consideration
therefor. In addition, the seller may, at its option, sell subsequent mortgage
loans to the issuer from time to time during the Revolving Period for the
Floating Rate Term Notes. The consideration for any sale will be, after the
application of amounts, if any, on deposit in the Custodial Account and/or the
Funding Account, an increase in the Variable Funding Balance. Notwithstanding
any of the foregoing, the Variable Funding Balance may not exceed the Maximum
Variable Funding Balance. Initially, the Variable Funding Balance will be zero.
The variable funding notes generally will be entitled to receive a portion of
the collections on the HELOCs in Loan Groups I or II depending on the Loan Group
or Groups into which the additional balances backing the variable funding notes
are added.
Book-Entry Notes
The term notes will initially be issued as book-entry notes. Term Note
Owners may elect to hold their term notes through The Depository Trust Company,
or DTC, in the United States, or Clearstream, Luxembourg or the Euroclear System
in Europe if they are Participants in those systems, or indirectly through
organizations that are Participants in those systems. The book-entry notes will
be issued in one or more securities that equal the aggregate Term Note Balance
of the term notes, and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Clearstream, Luxembourg and the Euroclear System will hold
omnibus positions on behalf of their Participants through customers' securities
accounts in the names of Clearstream, Luxembourg and the Euroclear System on the
books of their respective depositaries, which in turn will hold such positions
in customers' securities accounts in the depositaries' names on the books of
DTC. Investors may hold beneficial interests in the book-entry notes in minimum
denominations representing Term Note Balances of $250,000 and in integral
multiples of $1,000 in excess thereof. Except as described below, no Term Note
Owner will be entitled to receive a Definitive Note. Unless and until
Definitive Notes are issued, it is anticipated that the only "Holder" of the
term notes will be Cede & Co., as nominee of DTC. Term Note Owners will not be
"Holders" or "Noteholders" as those terms are used in the Indenture.
A Term Note Owner's ownership of a book-entry note will be recorded on the
records of the Securities Intermediary that maintains that Term Note Owner's
account for such purpose. In turn, the Securities 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 Securities Intermediary, the
interest of which will in turn be recorded on the records of DTC, if the Term
Note Owner's Securities Intermediary is not a DTC Participant, and on the
records of Clearstream, Luxembourg or the Euroclear System, as appropriate.
Term Note Owners will receive all payments of principal of and interest on
the term notes from the indenture trustee through DTC and DTC Participants.
Except under the circumstances described below, while the term notes are
outstanding, under the DTC Rules, DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the term notes and is
required to receive and transmit payments of principal of and interest on the
term notes. Participants and indirect Participants with which Term Note Owners
have accounts with respect to term notes are similarly required to make book-
entry transfers and receive and transmit payments on behalf of their respective
Term Note Owners. Accordingly, although Term Note Owners will not possess
physical certificates, the DTC Rules provide a mechanism by which Term Note
Owners will receive payments and will be able to transfer their interests.
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<PAGE>
Term Note Owners will not receive or be entitled to receive Definitive
Notes representing their respective interests in the term notes, except under
the limited circumstances described below. Unless and until Definitive Notes
are issued, Term Note Owners that are not Participants may transfer ownership of
their term notes only through Participants and indirect Participants by
instructing the Participants and indirect Participants to transfer the term
notes, by book-entry transfer, through DTC for the account of the purchasers of
the term notes, which account is maintained with the related Participants.
Under the DTC Rules and in accordance with DTC's normal procedures, transfers of
ownership of the term 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 Term Note
Owners.
Under a book-entry format, Term Note Owners of the book-entry notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the indenture trustee to Cede & Co. Payments with respect to term
notes held through Clearstream, Luxembourg or the Euroclear System will be
credited to the cash accounts of Clearstream, Luxembourg Participants or
Euroclear System Participants in accordance with the relevant system's rules and
procedures, to the extent received by the related Depositary. Such 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 Term Note Owner to pledge book-entry notes to
persons or entities that do not participate in the Depositary system, or
otherwise take actions in respect of such book-entry notes, may be limited due
to the lack of physical certificates for such book-entry notes. In addition,
the issuance of the term notes in book-entry form may reduce the liquidity
thereof in the secondary market, since certain 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 the DTC accounts of which the book-entry notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries the holdings of which include such book-entry notes.
Clearstream, Luxembourg or the Euroclear System operator, as the case may be,
will take any other action permitted to be taken by Term Note Owners under the
Indenture on behalf of a Clearstream, Luxembourg Participant or Euroclear System
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the related Depositary to effect such actions on its
behalf through DTC.
Definitive Notes will be issued to Term Note Owners or their nominees,
rather than to DTC, if:
. the indenture trustee determines that the DTC is no longer willing,
qualified or able to properly discharge its responsibilities as
nominee and depository with respect to the book-entry notes and the
indenture trustee is unable to locate a qualified successor;
. the indenture trustee elects to terminate the book-entry system
through DTC; or
. after the occurrence of an Event of Default, Term Note Owners
representing Percentage Interests aggregating at least a majority of
the Term Note Balances of the term notes advise DTC through the
Financial Intermediaries and the DTC Participants in writing that the
continuation of the book-entry system through DTC, or a successor
thereto, is no longer in the best interests of Term Note Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the indenture trustee will be required to notify all Term
Note Owners of the occurrence of such 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 thereafter the indenture trustee will recognize the holders of those
Definitive Notes as "Holders" and "Noteholders" under the Indenture.
Although DTC, Clearstream, Luxembourg and the Euroclear System have agreed
to the foregoing procedures in order to facilitate transfers of term notes
between and among Participants of DTC, Clearstream, Luxembourg and the Euroclear
System, they will be under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. See "Risk
Factors--Book-Entry Registration" in this prospectus supplement and "Description
of the Securities--Form of Securities" in the prospectus.
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Clearstream, Luxembourg was incorporated in 1970 as "Cedel S.A.," a company
with limited liability under Luxembourg law, or a societe anonyme. Cedel S.A.
subsequently changed its name to Cedelbank. On January 10, 2000, Cedelbank's
parent company, Cedel International, societe anonyme ("CI") merged its clearing,
settlement and custody business with that of Deutsche Borse Clearing AG ("DBC").
The merger involved the transfer by CI of substantially all of its assets and
liabilities (including its shares in CB) to a new Luxembourg company, New Cedel
International, societe anonyme ("New CI"), which is 50% owned by CI and 50%
owned by DBC's parent company Deutsche Borse AG. The shareholders of these two
entities are banks, securities dealers and financial institutions. Cedel
International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5
percent of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to re-name the companies in the group in order to give them a cohesive
brand name. The new brand name that was chosen is "Clearstream." Effective
January 14, 2000 New CI has been renamed "Clearstream International, societe
anonyme." On January 18, 2000, Cedelbank was renamed "Clearstream Banking,
societe anonyme," and Cedel Global Services was renamed "Clearstream Services,
societe anonyme."
On January 17, 2000 DBC was renamed "Clearstream Banking AG." This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking," the entity previously
named "Cedelbank" and the entity previously named "Deutsche Borse Clearing AG."
Clearstream, Luxembourg holds securities for its customers and facilitates
the clearance and settlement of securities transactions between Clearstream,
Luxembourg customers through electronic book-entry changes in accounts of
Clearstream, Luxembourg customers, thereby eliminating the need for physical
movement of certificates. Transactions may be settled by Clearstream,
Luxembourg in any of 36 currencies, including United States Dollars.
Clearstream, Luxembourg provides to its customers, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Clearstream, Luxembourg
also deals with domestic securities markets in over 30 countries through
established depository and custodial relationships. Clearstream, Luxembourg is
registered as a bank in Luxembourg, and as such is subject to regulation by the
Commission de Surveillance du Secteur Financier, `CSSF', which supervises
Luxembourg banks. Clearstream, Luxembourg's customers are world-wide financial
institutions including underwriters, securities brokers and dealers, banks,
trust companies and clearing corporations. Clearstream, Luxembourg's U.S.
customers are limited to securities brokers and dealers, and banks. Currently,
Clearstream, Luxembourg has approximately 2,000 customers located in over 80
countries, including all major European countries, Canada, and the United
States. Indirect access to Clearstream, Luxembourg is available to other
institutions that clear through or maintain a custodial relationship with an
account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System (MGT/EOC) in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
Payments on the Notes
Payments on the notes will be made by the indenture trustee or the paying
agent on each Payment Date, commencing in March 2000. Payments on the notes
will be made to the persons in the names of which such notes are registered at
the close of business on the day prior to each Payment Date, or, in the case of
the term notes, if the term notes are no longer book-entry notes, at the related
Record Date. See "Description of the Securities--Form of Securities" in the
prospectus. Payments will be made by wire transfer, check or money order mailed
to the address of the person entitled thereto, which, in the case of book-entry
notes, will be DTC or its nominee, as it appears on the note register, in the
amounts calculated as described in this prospectus supplement on the related
Determination Date. However, the final payment in respect of the term notes, if
the term notes are no longer book-entry notes, will be made only upon
presentation and surrender thereof at the office or the agency of the indenture
trustee specified in the notice to noteholders of such final payment. The
paying agent will initially be the indenture trustee.
Interest Payments on the Notes
Interest payments will be made on the notes on each Payment Date at the
applicable Note Rate for the related Interest Period, subject to the limitations
set forth below, which may result in Interest Shortfalls.
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As to each class of Floating Rate term notes, the related "Note Rate" for
each Interest Period will be a floating rate equal to the least of:
(1) LIBOR plus a specified margin;
(2) the Net Loan Rate, as described below; and
(3) 14.0% per annum.
The margins for the Class A-1 and Class A-2 term notes will be 0.25% per annum
and 0.28% per annum, respectively. Notwithstanding the foregoing, the margins
on the Class A-1 and Class A-2 term notes will increase to 0.50% per annum and
0.56% per annum, respectively, commencing on the related Step-up Date.
As to the Class A-3 term notes, the Note Rate for each Interest Period will
be a fixed rate equal to 7.95% per annum. Notwithstanding the foregoing, the
Note Rate on the Class A-3 term notes will increase by 0.50% to 8.45% per annum
commencing on the related Step-up Date.
Further, on any Payment Date for which the related Note Rate on a class of
Floating Rate Term Notes has been determined pursuant to clause (2) of the
definition of Note Rate above, the Interest Shortfall created thereby will
accrue interest at the related Note Rate, as adjusted from time to time, and
will be paid on subsequent Payment Dates to the extent funds are available
therefor. Interest Shortfalls will not be covered by the Policy and may remain
unpaid on the Final Payment Date.
Interest on each class of Floating Rate Term Notes in respect of any
Payment Date will accrue during the related Interest Period on the basis of the
actual number of days in that Interest Period and a 360-day year. Interest on
the Class A-3 term notes in respect of any Payment Date will accrue during the
related Interest Period on the basis of a 30-day calendar month and a 360-day
year. Interest payments on each class of term notes will be funded from
Interest Collections on the mortgage loans in the related Loan Group and, if
necessary, from draws on the Policy.
All interest payments on the notes in respect of any Payment Date will be
allocated to the term notes and the variable funding notes pro rata based on
their respective interest accruals. The interest rate on the variable funding
notes for any Payment Date will not significantly exceed the Note Rates on the
Floating Rate Term Notes for the related Interest Period.
On each Payment Date, LIBOR will be established by the indenture trustee.
The establishment of LIBOR as to each Interest Period by the indenture trustee
and the indenture trustee's calculation of the rate of interest applicable to
the notes for the related Interest Period will, in the absence of manifest
error, be final and binding.
Capitalized Interest Account
On the closing date, if required by the Enhancer, a cash deposit will be
made into the Capitalized Interest Account from the proceeds of the sale of the
term notes. On each Payment Date during the Pre-Funding Period, the indenture
trustee will transfer from the Capitalized Interest Account to the Note Payment
Account an amount equal to the excess, if any, of:
(1) the sum of:
. the amount of interest accrued at the applicable Note Rate or
Rates on the amount on deposit in the Pre-Funding Account as of
the preceding Payment Date, or as of the closing date, in the
case of the first Payment Date; and
. the amount of the monthly fees paid to the Enhancer, the owner
trustee and the indenture trustee;
over
(2) the amount of reinvestment earnings on funds on deposit in the
Pre-Funding Account;
to the extent amounts available in the Note Payment Account to pay interest on
the notes are insufficient.
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On the Payment Date following the end of the Pre-Funding Period, the
indenture trustee will distribute to the seller any amounts remaining in the
Capitalized Interest Account after taking into account withdrawals therefrom on
that Payment Date. The Capitalized Interest Account will be closed following
that payment.
Principal Payments on the Notes
No principal will be payable on any class of term notes during the related
Revolving Period, except to the limited extent described under "Description of
the Mortgage Loans--Conveyance of Subsequent Mortgage Loans; the Pre-Funding
Account and the Funding Account" in this prospectus supplement where amounts on
deposit in the Pre-Funding Account at the end of the Pre-Funding Period that
exceed $50,000 are distributed on the term notes, since during this period
Principal Collections and Excess Spread will be used to purchase additional
balances and subsequent mortgage loans. On each Payment Date during the Managed
Amortization Period, principal will be payable on each class of Floating Rate
Term Notes and the variable funding notes in an amount equal to Net Principal
Collections for the related Loan Group for the related Collection Period. On
each Payment Date during the Rapid Amortization Period for each class of notes,
principal will be payable on the notes in an amount equal to Principal
Collections for the related Loan Group for the related Collection Period.
During the Rapid Amortization Period, the seller will receive principal
distributions pari passu with noteholders in respect of payments of principal
allocable to additional balances created after the commencement of the Rapid
Amortization Period and not conveyed to the trust fund. In addition, on each
Payment Date following the end of the Revolving Period for each class of notes,
to the extent of funds available therefor, holders of the related class of term
notes and the variable funding notes will be entitled to receive certain
additional amounts to be applied in reduction of the related Note Balances or
Variable Funding Balance, as applicable, equal to Liquidation Loss Amounts, as
described in this prospectus supplement.
All principal payments due and payable on each class of Floating Rate Term
Notes and the variable funding notes for each Payment Date will be allocated
among those classes of notes based on the Principal Collections in the related
Loan Group until the related Note Balance or Variable Funding Balance thereof is
paid in full. In no event will principal payments on any class of notes on a
Payment Date exceed the related Note Balance or Variable Funding Balance, as
applicable, on that Payment Date. On the Final Payment Date, principal will be
due and payable on the notes in an amount equal to the related Note Balance or
Variable Funding Balance, as applicable, remaining outstanding on that Payment
Date.
Priority of Distributions
On each Payment Date, from amounts withdrawn from the Custodial Account
(including any draw on the Policy for that Payment Date and any amounts paid
with respect to any limited reimbursement agreement), the following payments
will be made in the following order of priority:
(1) from P&I Collections for each Loan Group, to the Note Payment Account,
for payment to the Holders of the related class of term notes and, as
applicable, variable funding notes, pro rata, interest for the related
Interest Period at the related Note Rate on the related Note Balance
immediately prior to that Payment Date, other than any Interest
Shortfalls;
(2) during the Amortization Periods, to the Note Payment Account, the
Principal Distribution Amount for each Loan Group backing the Floating
Rate Term Notes and variable funding notes for payment to the Holders
of the related class or classes of notes; and the Principal
Distribution Amount for Loan Group III for payment to the Holders of
the Class A-3 term notes;
(3) the amount of the premium for the Policy to the Enhancer, with
interest thereon, as provided in the Insurance Agreement; and
(4) to the Enhancer, to reimburse it for prior draws made on the Policy,
with interest thereon, as provided in the Insurance Agreement;
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(5) during the Revolving Periods, to the Funding Account, the amount, but
not in excess of the related Group Excess Spread for each Loan Group
backing the Floating Rate Term Notes and variable funding notes,
necessary to be applied on that Payment Date so that the
Overcollateralization Amount for the related Loan Group backing the
Floating Rate Term Notes and variable funding notes is not less than
the Overcollateralization Target Amount for each such Loan Group; and
the amount, but not in excess of the Group Excess Spread for Loan
Group III, necessary to be applied on that Payment Date so that the
Overcollateralization Amount for Loan Group III is not less than the
Overcollateralization Target Amount for Loan Group III;
(6) during the Amortization Periods, to the Note Payment Account, the
amount, but not in excess of the related Group Excess Spread for each
Loan Group backing the Floating Rate Term Notes and variable funding
notes, necessary to be applied on that Payment Date for payment to the
holders of the related class or classes of notes so that the
Overcollateralization Amount for the related Loan Group backing the
Floating Rate Term Notes and variable funding notes is not less than
the Overcollateralization Target Amount for each such Loan Group; and
the amount, but not in excess of the Group Excess Spread for Loan
Group III, necessary to be applied on that Payment Date for payment to
the holders of the Class A-3 term notes so that the
Overcollateralization Amount for Loan Group III is not less than the
Overcollateralization Target Amount for Loan Group III;
(7) if the aggregate Overcollateralization Amount for all Loan Groups is
less than the aggregate Overcollateralization Target Amount for all
Loan Groups, the remaining Group Excess Spread for each Loan Group
shall be deposited in the Reserve Account to be applied from time to
time pursuant to clause (8) below; and, at the time, if any, that the
aggregate Overcollateralization Amount for all Loan Groups equals or
exceeds the aggregate Overcollateralization Target Amount for all Loan
Groups, the remaining Group Excess Spread for each Loan Group,
together with any funds then on deposit in the Reserve Account, shall
be applied pursuant to clauses (9) through (12) below;
(8) to the Note Payment Account from funds on deposit in the Reserve
Account, the sum, but not in excess of the amount, if any, then on
deposit in the Reserve Account, of:
(a) any shortfalls in current interest for any class of term notes
and, as applicable, variable funding notes that have not been
paid to the related Holders pursuant to clause (1) above on that
Payment Date or prior Payment Dates, other than any Interest
Shortfalls; and
(b) any Liquidation Loss Amounts for each Loan Group not otherwise
covered by payments pursuant to clause (2) above on that Payment
Date or prior Payment Dates, for payment to the holders of the
related class or classes of term notes and, as applicable,
variable funding notes, pro rata, based on the amount of unpaid
interest and/or Liquidation Loss Amounts;
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(9) to the Enhancer, any other amounts owed the Enhancer pursuant to the
Insurance Agreement;
(10) from any remaining Group Excess Spread for each Loan Group, to the
Note Payment Account, for payment to the holders of the related class
or classes of term notes and, as applicable, variable funding notes,
pro rata, any Interest Shortfalls not previously paid, together with
interest thereon at the related Note Rate, based on the amount
remaining unpaid with respect to the related class or classes of term
notes;
(11) during the Amortization Periods, to the indenture trustee, certain
other amounts owing to the indenture trustee by the servicer to the
extent remaining unpaid; and
(12) any remaining amount, to the Distribution Account, for distribution to
the certificateholders;
provided, that on the Final Payment Date, the amount to be paid pursuant to
clause (2) above will be equal to the sum of the aggregate Term Note Balance and
the Variable Funding Balance immediately prior to that Payment Date.
For purposes of the foregoing, the Note Balance or Variable Funding
Balance, as applicable, of each class of notes on each Payment Date during the
Amortization Periods for that class of notes will be reduced by the pro rata
portion allocable to those notes of all Liquidation Loss Amounts for that
Payment Date, but only to the extent that the Liquidation Loss Amounts are not
otherwise covered by payments made pursuant to clauses (2) or (8) above or by a
draw on the Policy and the Overcollateralization Amount for the related Loan
Group or Groups for that Payment Date is zero. In the event of any reduction of
the Note Balance of any class of term notes, the amount of the principal
reductions allocated to the term notes will be payable to the noteholders on
later Payment Dates only to the extent of any excess cashflow remaining on those
later Payment Dates.
An affiliate of the Enhancer will enter into a limited reimbursement
agreement whereby some amounts payable under the Policy will be reimbursed to
the Enhancer, or if directed by the Enhancer, will be paid directly to the
issuer by a third party. The issuer will not be a party to the limited
reimbursement agreement and will have no rights with respect to the limited
reimbursement agreement. In the event amounts are not paid to the issuer under
the limited reimbursement agreement, the Enhancer will nevertheless remain
obligated to make all payments required to be made under the Policy as described
in this Prospectus Supplement. In addition, the amount of the draw under the
Policy will be reduced by any amount paid directly to the issuer under the
limited reimbursement agreement.
Optional Transfers of Mortgage Loans to Holders of Certificates
Subject to the conditions specified in the Servicing Agreement, on any
Payment Date 100% of the holders of the certificates may, but will not be
obligated to, remove certain mortgage loans from the trust fund without prior
notice to the noteholders. Mortgage loans so designated will be removed only
upon satisfaction of certain conditions specified in the Servicing Agreement,
including, among other things, that:
. with respect to each related Loan Group as of the applicable Payment
Date, after giving effect to the removal of the applicable mortgage
loans, the Overcollateralization Amount will equal or exceed the
Overcollateralization Target Amount;
. the mortgage loans to be removed are selected at random and each
holder of the certificates represents and warrants that no selection
procedures that the holder of the certificates reasonably believes are
adverse to the interests of the noteholders or the Enhancer were used
by the holder of the certificates in selecting the mortgage loans to
be removed;
. the Enhancer shall have certain approval rights as set forth in the
Servicing Agreement; and
. notice of the removal of mortgage loans is given to the Rating
Agencies.
Reserve Account
On or after the closing date the indenture trustee will establish the
Reserve Account. On each Payment Date, the indenture trustee will transfer from
the Reserve Account to the Note Payment Account the amount, but not
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in excess of the amount, if any, then on deposit in the Reserve Account, of any
unpaid current interest for any class of notes on that Payment Date or prior
Payment Dates, or any Liquidation Loss Amounts for each Loan Group not otherwise
covered by the payment of the Principal Distribution Amount for that Loan Group
on that Payment Date or prior Payment Dates. The Reserve Account will be funded
only from amounts representing the Excess Spread, if any, for each Loan Group
remaining after the Excess Spread is applied towards the creation and/or
maintenance of overcollateralization with respect to that Loan Group. Moneys on
deposit in the Reserve Account may be invested in Permitted Investments as
provided in the Servicing Agreement. Net income on the investment of funds in
the Reserve Account will be retained in the Reserve Account.
Overcollateralization and Cross-collateralization
The cashflow mechanics of the trust fund are intended to create
overcollateralization by depositing the Excess Spread in the Funding Account
during the Revolving Periods and applying it to acquire additional balances
and/or subsequent mortgage loans and by using a portion or all of the Excess
Spread to make principal payments on the notes during the Amortization Periods.
The application of Excess Spread will continue until the Overcollateralization
Amount for a Loan Group equals the Overcollateralization Target Amount for that
Loan Group at which point the application of Excess Spread will cease unless
necessary on a later Payment Date to increase the amount of
overcollateralization to the target level. In addition, the
Overcollateralization Target Amount may be permitted to step down in the future,
in which case a portion of the Excess Spread will not be used to acquire
additional balances and/or subsequent mortgage loans or paid to the holders of
the notes but will instead be distributed to the holders of the certificates.
As a result of these mechanics, the weighted average lives of the notes will be
different than they would have been in the absence of these mechanics.
The cashflow mechanics of the trust fund are intended to provide limited
cross-collateralization by depositing any remaining Excess Spread in the Reserve
Account and applying it to cover any unpaid current interest for any class of
notes or any remaining Liquidation Loss Amounts that are not otherwise covered
by P&I Collections with respect to the related Loan Group. Application of any
remaining Excess Spread will continue until the aggregate Overcollateralization
Amount for all Loan Groups equals or exceeds the aggregate Overcollateralization
Target Amount for all Loan Groups at which point any funds on deposit in the
Reserve Account will be applied in accordance with the normal distribution
priorities. The trapping of any remaining Excess Spread in the Reserve Account
may resume on a later Payment Date or Dates if the aggregate
Overcollateralization Amount for all Loan Groups falls below the aggregate
Overcollateralization Target Amount for all Loan Groups.
To the extent that the protection provided by the application of Excess
Spread and the availability of overcollateralization and limited cross-
collateralization are exhausted and if payments are not made under the Policy as
required, noteholders may incur a loss on their investments.
The Paying Agent
The paying agent will initially be the indenture trustee. The paying agent
will have the revocable power to withdraw funds from the Note Payment Account
for the purpose of making payments to the noteholders.
Maturity and Optional Redemption
The notes will be payable in full on the Final Payment Date, to the extent
of the aggregate outstanding Note Balance on that date, if any. In addition, a
principal payment may be made in redemption of the notes upon the exercise by
the servicer of its option to purchase the mortgage loans together with the
related assets of the trust fund after the aggregate Note Balance of the notes
is reduced to an amount less than or equal to 10% of the initial aggregate Note
Balance. The purchase price of the mortgage loans that are not REO Loans will be
the sum of the outstanding principal balance of the mortgage loans and accrued
and unpaid interest thereon, including any Interest Shortfalls and interest
thereon, at the weighted average of the loan rates of the mortgage loans through
the day preceding the Payment Date on which the purchase occurs, together with
all amounts due and owing the Enhancer with respect to the notes. The purchase
price of the REO Loans will be the sum of the fair market values of the REO
Loans on the Payment Date on which the purchase occurs.
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Glossary of Terms
Below are abbreviated definitions of significant capitalized terms used in
this prospectus supplement. Capitalized terms used in this prospectus
supplement but not defined in this prospectus supplement shall have the meanings
assigned to them in the accompanying prospectus. The Servicing Agreement,
Indenture and Trust Agreement may each contain more complete definitions of the
terms used in this prospectus supplement and reference should be made to those
agreements for a more complete understanding of these terms.
"Aggregate Balance Differential" means, with respect to any Payment Date
and any variable funding note, the sum of the Balance Differentials that have
been added to the Variable Funding Balance of that variable funding note prior
to that Payment Date.
"Amortization Periods" means the Managed Amortization Period and the Rapid
Amortization Period.
"Appraised Value" means, with respect to any mortgage loan, the appraised
value of the related mortgaged property determined in the appraisal used in the
origination of that mortgage loan, which may have been obtained at an earlier
time; provided that if the mortgage loan was originated simultaneously with 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 related mortgaged property.
"Balance Differential" means, with respect to any Payment Date, the amount,
if any, by which the sum of the aggregate principal balance of all subsequent
mortgage loans and the amount of any additional balances transferred to the
Trust Estate and included in Loan Groups I and/or II during the related
Collection Period exceeds the aggregate Principal Collections for the previous
Collection Period.
"Capitalized Interest Account" means an account established and held by the
indenture trustee designated the "capitalized interest account."
"Clearstream, Luxembourg" means Clearstream Banking, societe anonyme, 67 Bd
Grande-Duchesse Charlotte, L-2967 Luxembourg.
"CLTV Ratio" means, with respect to each HELOC, the ratio, expressed as a
percentage of:
(1) the sum of:
. the credit limit thereof; and
. any outstanding principal balance, at the origination of that
HELOC, of all other mortgage loans, if any, secured by senior or
subordinate liens on the related mortgaged property;
over
(2) the Appraised Value, or, when not available, the Stated Value, of that
HELOC.
With respect to each HEL, the CLTV Ratio generally will be the ratio,
expressed as a percentage, of:
(1) the sum of:
. the initial principal balance of that HEL; and
. any outstanding principal balance, at origination of that HEL, of
all other mortgage loans, if any, secured by senior or
subordinate liens on the related mortgaged property;
over
(2) the Appraised Value, or, when not available, the Stated Value of that
HEL.
"Collection Period" means, with respect to any Payment Date, the calendar
month preceding the month of that Payment Date.
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"Deficiency Amount" means, with respect to any Payment Date, an amount if
any, equal to the sum of:
. the amount by which the aggregate amount of accrued interest on the
notes, excluding any Relief Act Shortfalls for that Payment Date, at
the respective Note Rates on that Payment Date exceeds the amount on
deposit in the Note Payment Account available for interest
distributions on that Payment Date; and
. (1) with respect to any Payment Date that is not the Final Payment
Date, any Liquidation Loss Amount for that Payment Date, to the
extent not included in the Principal Distribution Amount for that
Payment Date or a reduction in the overcollateralization amount;
or
(2) on the Final Payment Date, the aggregate outstanding balance of
the notes to the extent otherwise not paid on that date.
"Deleted Loan" means a defective mortgage loan that has been removed from
the trust fund pursuant to the terms of the Purchase Agreement.
"Depositary" means DTC.
"Determination Date" means the 18th day of each month, or if the 18th day
is not a business day, the next succeeding business day.
"Distribution Account" means the account established pursuant to the Trust
Agreement for the deposit of amounts distributable to the holders of the
certificates.
"Draw Period" means, with respect to each mortgage loan, the period stated
in the related credit line agreement.
"DTC Rules" means the rules, regulations and procedures creating and
affecting DTC and its operations.
"Eligible Substitute Loan" means a mortgage loan substituted by the seller
for a Deleted Loan and assigned to the same Loan Group as the Deleted Loan,
which mortgage loan must, on the date of the substitution:
. have an outstanding principal balance, or in the case of a
substitution of more than one mortgage loan for a Deleted Loan, an
aggregate outstanding principal balance, not in excess of the
principal balance of the related Deleted Loan;
. have a loan rate, Net Loan Rate and, if applicable, gross margin no
lower than and not more than 1% in excess of the loan rate, Net Loan
Rate and gross margin, respectively, of the related Deleted Loan;
. have a CLTV Ratio at the time of substitution no higher than that of
the Deleted Loan at the time of substitution;
. have a remaining term to maturity not more than one year earlier and
not later than the remaining term to maturity of the Deleted Loan;
. comply with each representation and warranty as to the mortgage loans
set forth in the Purchase Agreement, deemed to be made as of the date
of substitution; and
. satisfy certain other conditions specified in the Indenture.
"Enhancer" means MBIA Insurance Corporation.
"Excess Spread" means, with respect to each Loan Group, the related Group
Excess Spread for that Loan Group.
"Final Payment Date" means the final Payment Date occurring in February
2030.
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"Floating Rate Term Notes" means the Class A-1 and Class A-2 term notes.
"Funding Account" means the account established by the indenture trustee in
its name designated the "funding account."
"GM" means General Motors Corporation.
"Group Excess Spread" means, with respect to any Payment Date and Loan
Group and without taking into account any draw on the Policy for that Payment
Date, the excess, if any, of:
. Interest Collections for the related Collection Period with respect to
mortgage loans in that Loan Group;
over
. the sum of:
(1) the portion of the Servicing Fee and the premium for the Policy
allocable to that Loan Group for the related Payment Date; and
(2) the amounts paid on that Payment Date to the holders of the term
notes and, with respect to Loan Groups I and II only, the
variable funding notes pursuant to clause (1) of the payment
priorities described under "Description of the
Securities--Priority of Distributions" in this prospectus
supplement.
"HEL" means each fixed rate home equity loan included in the mortgage pool.
"HELOC" means each adjustable rate home equity revolving credit line loan
included in the mortgage pool.
"Indenture" means the indenture, dated as of the closing date, between the
issuer and the indenture trustee.
"Initial Mortgage Documents" means the initial mortgage loans, the related
loan agreements, also referred to as credit line agreements, evidencing the
HELOCs, the related mortgage notes, the mortgages and other related documents.
"Insurance Agreement" means the insurance agreement dated as of February 1,
2000, among the Enhancer, the seller, the depositor, the servicer, the indenture
trustee and the issuer.
"Insured Amount" means, as of any Payment Date, any Deficiency Amount plus
any Preference Amount.
"Interest Collections" means, with respect to any Payment Date, an amount
equal to the sum of:
. the amounts collected during the related Collection Period, including
Net Liquidation Proceeds, allocated to interest pursuant to the terms
of the related credit line agreements or mortgage notes, as
applicable, exclusive of the pro rata portion thereof attributable to
additional balances not conveyed to the trust fund during the Rapid
Amortization Period for the Floating Rate Term Notes, reduced by the
servicing fees for that Collection Period, plus amounts in respect of
any optional servicer advance pursuant to the terms of the Servicing
Agreement; and
. the interest portion of:
(1) the Repurchase Price for any Deleted Loans; and
(2) the cash purchase price paid in connection with any optional
purchase of the mortgage loans by the servicer.
"Interest Period" means, with respect to the Floating Rate Term Notes and
any Payment Date, the period from the preceding Payment Date, or, in the case of
the first Payment Date, from the closing date, through the day
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preceding that Payment Date. "Interest Period" means, with respect to the Class
A-3 term notes and any Payment Date, the calendar month preceding the month in
which that Payment Date occurs.
"Interest Shortfall" means, with respect to a class of Floating Rate
Term Notes, the excess of:
. the amount of interest that would have accrued on that class of
Floating Rate Term Notes during the related Interest Period had
that amount been based on LIBOR plus the related margin for that
class, but not at a rate in excess of 14.0% per annum;
over
. the interest actually accrued on that class of Floating Rate Term
Notes during that Interest Period.
"Junior Ratio" means, with respect to each HELOC, the ratio, expressed
as a percentage, of the credit limit of that HELOC to the sum of:
. the greater of the principal balance as of the cut-off date or
the credit limit, if applicable, of that HELOC; and
. the principal balance of any related senior mortgage loan at
origination of that HELOC.
"LIBOR" means, with respect to any Interest Period other than the first
Interest Period, a rate equal to the rate for United States dollar deposits for
one month that appears on the Telerate Screen Page 3750 as of 11:00 a.m.,
London, England time, on the second LIBOR Business Day prior to the first day of
that Interest Period. With respect to the first Interest Period, LIBOR means a
rate equal to the rate for United States dollar deposits for one month that
appears on the Telerate Screen Page 3750 as of 11:00 a.m., London, England time,
two LIBOR Business Days prior to the closing date. If no quotations can be
obtained and no Reference Bank Rate is available, LIBOR will be LIBOR applicable
to the preceding Payment Date.
"LIBOR Business Day" means any day other than:
. a Saturday or a Sunday; or
. a day on which banking institutions in the city of London,
England are required or authorized by law to be closed.
"Liquidation Loss Amount" means, with respect to any Payment Date and
any liquidated mortgage loan in a Loan Group, the unrecovered principal balance
of that liquidated mortgage loan at the end of the related Collection Period in
which that mortgage loan became a liquidated mortgage loan, after giving effect
to the Net Liquidation Proceeds in connection with that liquidated mortgage
loan.
"Loan Group" means each of the three loan groups as described in this
prospectus supplement.
"Managed Amortization Event" means the event deemed to occur on any
date on which the amount on deposit in the Funding Account equals or exceeds
$10,000,000.
"Managed Amortization Period" means, with respect to each class of
Floating Rate Term Notes, the period beginning on the first Payment Date
following the end of the related Revolving Period and ending on the earlier of:
. February 28, 2005; and
. the occurrence of a Rapid Amortization Event.
The Class A-3 term notes will not have a Managed Amortization Period.
"Maximum Variable Funding Balance" means $65,000,000.
"Net Liquidation Proceeds" means, with respect to any mortgage loan,
the proceeds, excluding amounts drawn on the Policy, received in connection with
the liquidation of that mortgage loan, whether through trustee's sale,
foreclosure sale or otherwise, reduced by related expenses, but not including
the portion, if any, of the amount
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that exceeds the principal balance of the mortgage loan at the end of the
Collection Period immediately preceding the Collection Period in which the
mortgage loan became a liquidated mortgage loan.
"Net Loan Rate" means, with respect to any Payment Date and Loan Group
I or II, the weighted average of the loan rates of the mortgage loans in each
such Loan Group as of the first day of the calendar month in which the related
Interest Period begins, net of the premium rate on the Policy, the rate of the
fee of the servicer and, beginning on the thirteenth Payment Date, 0.50%,
adjusted to an effective rate reflecting interest calculated on the basis of a
360-day year assumed to consist of twelve 30-day months.
"Net Principal Collections" means, with respect to any Payment Date,
the excess, if any, of Principal Collections for Loan Groups I and II for that
Payment Date over the aggregate amount of additional balances created during the
related Collection Period and conveyed to the issuer, or, during each Rapid
Amortization Period, Principal Collections for the related Loan Group for that
date. After the commencement of the Rapid Amortization Period for the Floating
Rate Term Notes, Principal Collections for Loan Groups I and II for a Collection
Period will no longer be applied to acquire additional balances during that
Collection Period.
"Note Balance" means the Term Note Balance and/or the Variable Funding
Balance, as the context requires.
"Note Payment Account" means the account established pursuant to the
Indenture for the deposit of amounts distributable to the holders of the notes.
"Note Rate" means, with respect to each term note, the rate of interest
borne by that note as described under "Description of the Securities--Interest
Payments on the Notes" in this prospectus supplement.
"Overcollateralization Amount" means, with respect to any Loan Group
and any Payment Date, the amount, if any, by which the outstanding principal
balance of the mortgage loans in that Loan Group as of the close of business on
the last day of the related Collection Period, together with the related portion
of the property of the issuer allocable to that Loan Group, including the
allocable portion of the amounts on deposit in the Pre-Funding Account, the
Funding Account and the Reserve Account, exceeds the Note Balance of the related
class of term notes, together with, in the case of Loan Groups I and II only,
the portion, if any, of the variable funding notes related to that Loan Group.
"Overcollateralization Target Amount" means, with respect to any Loan
Group and any Payment Date prior to the thirtieth (30th) Payment Date, an amount
equal to the sum of:
. at least 1.75% of the Note Balance of the related class of term
notes as of the closing date, together with, in the case of Loan
Groups I and II only, the portion, if any, of the variable
funding notes related to that Loan Group, after taking into
account the payment of the Principal Distribution Amount for that
Loan Group on the related Payment Date; and
. 100% of the principal balances of all mortgage loans in that Loan
Group that are 180 or more days contractually delinquent as of
the last day of the related Collection Period;
and thereafter, means the amount as adjusted from time to time pursuant to the
terms of the Indenture.
"P&I Collections" means, with respect to any Payment Date, an amount
equal to the sum of:
. Interest Collections for that Payment Date; and
. during the Managed Amortization Period for the Floating Rate Term
Notes, Net Principal Collections for that Payment Date, and
during the Rapid Amortization Period, Principal Collections for
that Payment Date.
"Participants" means participants in the DTC, Euroclear or Clearstream,
Luxembourg systems.
"Payment Date" means the 25th day of each month or, if such day is not
a business day, then the next succeeding business day.
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"Plan" means any pension, profit-sharing or other employee benefit plan
as well as an individual retirement account and certain types of Keogh Plans.
"Policy" means the financial guaranty insurance policy provided by the
Enhancer, dated as of February 28, 2000.
"Pool Balance" means, with respect to any date, the aggregate of the
sum of the principal balances of all mortgage loans as of that date and amounts,
if any, on deposit in the Pre-Funding Account.
"Preference Amount" means any amount previously distributed to a
noteholder on the notes that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a
final nonappealable order of a court having competent jurisdiction.
"Pre-Funding Account" means the account established by the indenture
trustee in its name designated the "pre-funding account."
"Pre-Funding Period" means the period from the closing date to the
earliest of:
. the date on which the amount on deposit in the Pre-Funding
Account is less than $50,000;
. May 28, 2000; or
. the occurrence of a Rapid Amortization Event.
"Principal Collections" means, with respect to any Payment Date, an
amount equal to the sum of:
. the amount collected during the related Collection Period,
including Net Liquidation Proceeds allocated to principal
pursuant to the terms of the related credit line agreements or
mortgage notes, as applicable, exclusive of the pro rata portion
thereof attributable to additional balances not conveyed to the
trust fund during the Rapid Amortization Period for the Floating
Rate Term Notes; and
. the principal portion of the Repurchase Price for any Deleted
Loans, any amounts required to be deposited in the Custodial
Account by the seller pursuant to the Purchase Agreement; and the
cash purchase price paid in connection with any optional purchase
of the mortgage loans by the servicer.
"Principal Distribution Amount" means, with respect to any Loan Group
and any Payment Date:
. during the Revolving Period, the amount, if any, transferred from
the Pre-Funding Account to the Note Payment Account relating to
that Loan Group at the end of the Pre-Funding Period;
. during the Managed Amortization Period, Net Principal Collections
for the mortgage loans in that Loan Group; and
. during the Rapid Amortization Period, Principal Collections for
the mortgage loans in that Loan Group;
provided, that on any Payment Date during the Amortization Periods, the
Principal Distribution Amount shall also include an amount equal to the
aggregate Liquidation Loss Amounts, if any, for the mortgage loans in the
related Loan Group.
"Purchase Agreement" means the mortgage loan purchase agreement, dated
as of the cut-off date, among the seller, the depositor, as purchaser, the
issuer and the indenture trustee.
"Rapid Amortization Event" means the occurrence of any one of the
following events:
(1) the failure on the part of the seller:
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. to make any payment or deposit required to be made under the
Purchase Agreement within five (5) business days after the date
the payment or deposit is required to be made; or
. to observe or perform in any material respect any other covenants
or agreements of the seller set forth in the Purchase Agreement,
which failure continues unremedied for a period of sixty (60)
days after written notice thereof to the seller, and the failure
materially and adversely affects the interests of the Enhancer or
the securityholders; provided, that a Rapid Amortization Event
will not be deemed to occur if the seller has repurchased or
caused to be repurchased or substituted for the related mortgage
loans or all mortgage loans, as applicable, during that period in
accordance with the provisions of the Indenture;
(2) any representation or warranty made by the seller in the Purchase Agreement
shall prove to have been incorrect in any material respect when made and
shall continue to be incorrect in any material respect for the related cure
period specified in the Servicing Agreement after written notice and as a
result of which the interests of the Enhancer or the securityholders are
materially and adversely affected ; provided, that a Rapid Amortization
Event will not be deemed to occur if the seller has repurchased or caused
to be repurchased or substituted for the related mortgage loans or all
mortgage loans, as applicable, during that period in accordance with the
provisions of the Indenture;
(3) the entry against the seller of a decree or order by a court or agency or
supervisory authority having jurisdiction in the premises for the
appointment of a trustee, conservator, receiver or liquidator in any
insolvency, conservatorship, receivership, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for the
winding up or liquidation of its affairs, and the continuance of any decree
or order unstayed and in effect for a period of sixty (60) consecutive
days;
(4) the seller shall voluntarily submit to proceedings under any federal or
state bankruptcy, insolvency or other similar law or code relating to the
seller or the issuer or relating to all or substantially all of its
property or the seller or the issuer shall admit in writing its inability
to pay its debts generally as they become due, file a petition to take
advantage of any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors or voluntarily suspend payment
of its obligations;
(5) the issuer becomes subject to regulation by the Securities and Exchange
Commission as an investment company within the meaning of the Investment
Company Act of 1940, as amended;
(6) a servicing default occurs and is unremedied under the Servicing Agreement
and a qualified successor servicer has not been appointed;
(7) the occurrence of a draw on the Policy and the failure by the servicer to
reimburse the Enhancer for any amount owed to the Enhancer pursuant to the
Insurance Agreement on account of the draw, which failure continues
unremedied for a period of 90 days after written notice to the servicer;
(8) the issuer is determined to be an association or a publicly traded
partnership taxable as a corporation for federal income tax purposes; or
(9) an event of default under the Insurance Agreement, except for a default by
the Enhancer, unless the Enhancer cannot be replaced without additional
expense.
In the case of any event described in (1), (2), (6), (7) or (9), a
Rapid Amortization Event will be deemed to have occurred only if, after any
applicable grace period described in those clauses, either the indenture
trustee, the Enhancer or securityholders evidencing not less than 51% of the
aggregate Note Balance of the securities, by written notice to the depositor,
the servicer and the owner trustee, and to the indenture trustee, if given by
the securityholders, declare that a Rapid Amortization Event has occurred as of
the date of the notice. In the case of any event described in clauses (3), (4),
(5) or (8), a Rapid Amortization Event will be deemed to have occurred without
any notice or other action on the part of the indenture trustee, the Enhancer or
the securityholders immediately upon the occurrence of the event; provided, that
any Rapid Amortization Event may be waived and deemed of no effect
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with the written consent of the Enhancer and each Rating Agency, subject to the
satisfaction of any conditions to that waiver.
"Rapid Amortization Period" means, with respect to each class of Floating
Rate Term Notes, the period beginning on the earlier of:
. the first Payment Date following the end of the Managed Amortization
Period; and
. the occurrence of a Rapid Amortization Event;
and ending upon the termination of the issuer. With respect to the Class A-3
term notes, "Rapid Amortization Period" means the period beginning on the
earlier of:
. the first Payment Date following the end of the related Revolving
Period; and
. the occurrence of a Rapid Amortization Event;
and ending upon the termination of the issuer.
"Rating Agencies" means Moody's Investors Service, Inc., and Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.
"Record Date" means, with respect to the Floating Rate Term Notes and any
Payment Date, the close of business on the last business day preceding that
Payment Date, and with respect to the Class A-3 term notes and any Payment Date,
the last day of the calendar month preceding that Payment Date.
"Reference Bank" means each of Barclays Bank plc, National Westminster Bank
and Bankers Trust Company.
"Reference Bank Rate" means, with respect to any Interest Period, as
follows: the arithmetic mean (rounded upwards, if necessary, to the nearest one
sixteenth of one percent) of the offered rates for United States dollar deposits
for one month which are offered by the Reference Banks as of 11:00 a.m., London,
England time, on the second LIBOR Business Day prior to the first day of such
Interest Period to prime banks in the London interbank market for a period of
one month in amounts approximately equal to the sum of the outstanding Note
Balance of the notes; provided, that at least two Reference Banks provide that
rate. If fewer than two offered rates appear, the Reference Bank Rate will be
the arithmetic mean of the rates quoted by one or more major banks in New York
City, selected by the indenture trustee after consultation with the servicer and
the Enhancer, as of 11:00 a.m., New York 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 Note Balance of the notes. If no quotations
can be obtained, the Reference Bank Rate will be the Reference Bank Rate
applicable to the preceding Interest Period.
"Relief Act Shortfalls" means current interest shortfalls resulting from
the application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
"REO Loan" means a mortgage loan where title to the related mortgaged
property has been obtained by the trustee or its nominee on behalf of the
noteholders of the related series.
"Repayment Period" means, with respect to each mortgage loan, the time
period stated in the related credit line agreement during which draws can no
longer be made.
"Repurchase Price" means, with respect to any mortgage loan, the amount
equal to the principal balance of that mortgage loan at the time of the removal,
plus accrued and unpaid interest on that mortgage loan to the date of removal.
"Reserve Account" means the reserve account established by the indenture
trustee.
"Revolving Period" means, with respect to each class of Floating Rate Term
Notes, the period beginning on the closing date and ending on the earlier of:
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. February 28, 2001; and
. the occurrence of a Managed Amortization Event or a Rapid
Amortization Event.
With respect to the Class A-3 term notes, the "Revolving Period" means the
period beginning on the closing date and ending on the earlier of:
. June 28, 2000; and
. the occurrence of a Rapid Amortization Event.
"Securities Intermediary" means, with respect to each Term Note Owner,
the brokerage firm, bank, thrift institution or other securities intermediary
that maintains that Term Note Owner's account.
"Servicing Agreement" means the servicing agreement, dated as of the
closing date, among the servicer, the issuer and the indenture trustee.
"Servicing Fee" means, with respect to each mortgage loan, the fee paid
to the servicer in respect of its servicing activities in connection with that
mortgage loan.
"Stated Value" means, with respect to each mortgage loan for which the
documentation type is known, the stated value of the related mortgaged property
given by the related mortgagor in his or her application.
"Step-up Date" means, with respect to any class of term notes, the
first Payment Date on which the aggregate Term Note Balance of that class of
term notes is less than 10% of the initial aggregate Term Note Balance of that
Class.
"Teaser Rate" means, with respect to each mortgage loan with an
adjustable loan rate, the rate equal to the sum of the related index and the
related gross margin, which is in effect during the first 6 months of the term
of that mortgage loan.
"Telerate Screen Page 3750" means the display page so designated on the
Bridge Telerate Capital Markets Report, or such other page as may replace page
3750 on such service for the purpose of displaying London interbank offered
rates of major banks. If the rate does not appear on that page, or some other
page as may replace that page on such service, or if the service is no longer
offered, some other service for displaying LIBOR or comparable rates as may be
selected by the indenture trustee after consultation with the servicer, the rate
will be the Reference Bank Rate.
"Term Note Balance" means, with respect to any Payment Date and any
term note, the initial principal balance of that term note reduced by all
payments of principal of that term note prior to the related Payment Date.
"Term Note Owners" means Persons acquiring beneficial ownership
interests in the term notes.
"Trust Agreement" means the trust agreement, dated as of the closing
date, between the depositor and the owner trustee.
"Trust Estate" means the mortgage loans included in the assets of the
issuer.
"Underwriting Agreement" means the underwriting agreement, dated the
date of this prospectus supplement, between Bear, Stearns & Co. Inc., as
representative of the underwriters listed therein, and the depositor.
"Variable Funding Balance" means, with respect to any Payment Date and
any variable funding note, the initial principal balance of that variable
funding note:
. increased by the Aggregate Balance Differential for that variable
funding note immediately prior to the related Payment Date; and
. reduced by all distributions of principal thereon prior to that
Payment Date.
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Description of the Policy
The following information has been supplied by the Enhancer for
inclusion in this prospectus supplement. The Enhancer does not accept any
responsibility for the accuracy or completeness of this prospectus supplement or
any information or disclosure contained in this prospectus supplement, or
omitted from this prospectus supplement, other than with respect to the accuracy
of the information regarding the Policy and the Enhancer set forth under the
headings "Description of the Policy" and "The Enhancer" in this prospectus
supplement. Additionally, the Enhancer makes no representation regarding the
notes or the advisability of investing in the notes. No representation is made
by the depositor, the servicer, the indenture trustee, the underwriter or any of
their affiliates as to the accuracy or completeness of the information in those
sections.
The Enhancer, in consideration of the payment of a premium and subject
to the terms of the Policy, thereby unconditionally and irrevocably guarantees
to any noteholder that an amount equal to each full and complete Insured Amount
will be received from the Enhancer by the indenture trustee or its successors,
as indenture trustee for the noteholders, on behalf of the noteholders, for
distribution by the indenture trustee to each noteholder of that noteholder's
proportionate share of the Insured Amount.
The Enhancer's obligations under the Policy, with respect to a
particular Insured Amount, will be discharged to the extent funds equal to the
applicable Insured Amount are received by the indenture trustee, whether or not
those funds are properly applied by the indenture trustee. Insured Amounts will
be made only at the time set forth in the Policy, and no accelerated Insured
Amounts will be made regardless of any acceleration of the notes, unless the
acceleration is at the sole option of the Enhancer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the trust fund or the
indenture trustee for withholding taxes, if any, including interest and
penalties in respect of any liability for withholding taxes, Interest Shortfalls
or Relief Act Shortfalls.
The Enhancer will pay any Insured Amount that is a Preference Amount on
the business day following receipt on a business day by the Enhancer's fiscal
agent of the following:
. a certified copy of the order requiring the return of a
preference payment;
. an opinion of counsel satisfactory to the Enhancer that the order
is final and not subject to appeal;
. an assignment in a form that is reasonably required by the
Enhancer, irrevocably assigning to the Enhancer all rights and
claims of the noteholder relating to or arising under the notes
against the debtor which made the preference payment or otherwise
with respect to the preference payment; and
. appropriate instruments to effect the appointment of the Enhancer
as agent for the noteholder in any legal proceeding related to
the preference payment, which instruments are in a form
satisfactory to the Enhancer;
provided that if these documents are received after 12:00 p.m., New York time,
on that business day, they will be deemed to be received on the following
business day. Payments by the Enhancer will be disbursed to the receiver or the
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the noteholder and not to any noteholder directly
unless the noteholder has returned principal or interest paid on the notes to
the receiver or trustee in bankruptcy, in which case that payment will be
disbursed to the noteholder.
The Enhancer will pay any other amount payable under the Policy no
later than 12:00 p.m., New York time, on the later of the Payment Date on which
the related Deficiency Amount is due or the third business day following receipt
in New York, New York on a business day by State Street Bank and Trust Company,
N.A., as fiscal agent for the Enhancer or any successor fiscal agent appointed
by the Enhancer of a notice from the indenture trustee specifying the Insured
Amount which is due and owing on the applicable Payment Date, provided that if
the notice is received after 12:00 p.m., New York time, on that business day, it
will be deemed to be received on the following business day. If any notice
received by the Enhancer's fiscal agent is not in proper form or is otherwise
insufficient for the purpose of making a claim under the Policy, it will be
deemed not to have been received by the
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Enhancer's fiscal agent for the purposes of this paragraph, and the Enhancer or
the fiscal agent, as the case may be, will promptly so advise the indenture
trustee and the indenture trustee may submit an amended notice.
Insured Amounts due under the Policy, unless otherwise stated in the
Policy, will be disbursed by the Enhancer's fiscal agent to the indenture
trustee, on behalf of the noteholders, by wire transfer of immediately available
funds in the amount of the Insured Amount less, in respect of Insured Amounts
related to Preference Amounts, any amount held by the indenture trustee for the
payment of the Insured Amount and legally available therefor.
The fiscal agent is the agent of the Enhancer only and the fiscal agent
will in no event be liable to noteholders for any acts of the fiscal agent or
any failure of the Enhancer to deposit or cause to be deposited sufficient funds
to make payments due under the Policy.
Subject to the terms of the Servicing Agreement, the Enhancer will be
subrogated to the rights of each noteholder to receive payments under the notes
to the extent of any payment by the Enhancer under the Policy.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the meanings set forth in the Indenture as of the date of
execution of the Policy, without giving effect to any subsequent amendment or
modification to the Indenture unless the amendment or modification has been
approved in writing by the Enhancer.
The Policy is not cancelable for any reason. The premium on the Policy
is not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the notes.
The Policy is being issued under and pursuant to, and will be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
A form of the Policy is attached to this prospectus supplement as
Appendix B.
Yield and Prepayment Considerations
The yield to maturity of a note will depend on the price paid by the
related noteholder for that note, the note Rate, the rate and timing of
principal payments, including payments in excess of the monthly payment made by
the related mortgagor, prepayments in full or terminations, liquidations and
repurchases, on the mortgage loans in the related Loan Group and, in the case of
the HELOCs, the rate and timing of draws and the allocations thereof.
In general, if a term note is purchased at a premium over its face
amount and payments of principal of such term note occur at a rate faster than
that assumed at the time of purchase, the purchaser's actual yield to maturity
will be lower than that anticipated at the time of purchase. Conversely, if a
term note is purchased at a discount from its face amount and payments of
principal of such term note occur at a rate that is slower than that assumed at
the time of purchase, the purchaser's actual yield to maturity will be lower
than originally anticipated.
With respect to certain HELOCs, the loan rate at origination may be
below the rate that would result from the sum of the then-applicable index and
gross margin. Under the GMACM underwriting guidelines, mortgagors are generally
qualified based on an assumed payment which reflects a rate significantly lower
than the maximum rate. The repayment of any HELOC may thus be dependent on the
ability of the borrower to make larger interest payments following the
adjustment of the loan rate.
For any mortgage loans secured by junior mortgages, any inability of
the mortgagor to pay off the balance thereof may also affect the ability of the
mortgagor to obtain refinancing at any time of any related senior mortgage loan,
thereby preventing a potential improvement in the mortgagor's circumstances.
Under the Servicing Agreement the servicer may be restricted or prohibited from
consenting to any refinancing of any related senior
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mortgage loan, which in turn could adversely affect the mortgagor's
circumstances or result in a prepayment or default under the corresponding
junior mortgage loan.
In addition to the mortgagor's personal economic circumstances, a
number of factors, including homeowner mobility, job transfers, changes in the
mortgagor's housing needs, the mortgagor's net equity in the mortgaged property,
changes in the value of the mortgaged property, national and regional economic
conditions, enforceability of due-on-sale clauses, prevailing market interest
rates, servicing decisions, solicitations and the availability of mortgage
funds, seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments on the
mortgage loans or draws on the HELOCs. There can be no assurance as to the rate
of principal payments on the mortgage loans or draws on the HELOCs. The mortgage
loans may be prepaid in full or in part without penalty. The rate of principal
payments and the rate of draws may fluctuate substantially from time to time.
Generally, home equity loans are not viewed by borrowers as permanent financing.
Due to the unpredictable nature of both principal payments and draws on the
HELOCs, the rates of principal payments net of draws on the HELOCs may be much
more volatile than for typical first lien mortgage loans.
The yield to maturity of the term notes, and the rate and timing of
principal payments on the mortgage loans or draws on the HELOCs, may also be
affected by a wide variety of specific terms and conditions applicable to the
respective programs under which the mortgage loans were originated. For example,
the HELOCs may provide for future draws to be made only in specified minimum
amounts, or alternatively may permit draws to be made by check in any amount. A
pool of mortgage loans including HELOCs subject to the latter provisions may be
likely to remain outstanding longer with a higher aggregate principal balance
than a pool of mortgage loans including HELOCs with the former provisions,
because of the relative ease of making new draws. Furthermore, the HELOCs may
provide for interest rate changes on a daily or monthly basis, or may have gross
margins that may vary under certain circumstances over the term of the loan. In
extremely high market interest rate scenarios, term notes backed by mortgage
loans including HELOCs 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.
As a result of the payment terms of the HELOCs, there may be no
principal payments on any class of Floating Rate Term Notes in any given month.
In addition, it is possible that the aggregate draws on HELOCs may exceed the
aggregate payments with respect to principal on the mortgage loans for the
related period. Each class of the Floating Rate Term Notes provide for a period
during which all or a portion of the Principal Collections on the mortgage loans
are reinvested in additional balances and/or subsequent mortgage loans or are
accumulated in a trust account pending commencement of an amortization period
with respect to that class of term notes.
The Servicing Agreement permits 100% of the holders of the
certificates, at their option, subject to the satisfaction of certain conditions
specified in the Servicing Agreement, to remove certain mortgage loans from the
trust fund at any time during the life of the trust fund, so long as the
aggregate amount of mortgage loans in the related Loan Group, after giving
effect to the removal of the applicable mortgage loans, is not less than the
Overcollateralization Target Amount. Removals of mortgage loans may affect the
rate at which principal is distributed to noteholders by reducing the overall
Pool Balance and thus the amount of Principal Collections. See "Description of
the Securities--Optional Transfers of Mortgage Loans to Holders of the
Certificates" in this prospectus supplement.
The mortgage loans generally will contain due-on-sale provisions
permitting the related mortgagee to accelerate the maturity of a mortgage loan
upon sale or certain transfers by the mortgagor of the underlying mortgaged
property. The servicer will generally 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.
The extent to which mortgage 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
term notes. See "The Seller and Servicer--Collection and Other Servicing
Procedures" in this prospectus supplement for a description of certain
provisions of the Servicing Agreement that may affect the prepayment experience
on the mortgage loans.
S-74
<PAGE>
On the closing date, the indenture trustee will establish the
Pre-Funding Account. Amounts on deposit in the Pre-Funding Account will come
from the proceeds of the sale of the term notes. During the Pre-Funding Period,
funds on deposit in the Pre-Funding Account will be used by the issuer to buy
subsequent mortgage loans from the seller from time to time. Any amounts in
excess of $50,000 remaining in the Pre-Funding Account at the end of the
Pre-Funding Period will be distributed as principal on the related term notes on
the following Payment Date. All remaining amounts will be deposited into the
Funding Account for the purchase of additional balances and subsequent mortgage
loans. The issuer believes that substantially all of the amounts in the
Pre-Funding Account will be used to purchase subsequent mortgage loans. It is
unlikely however, that the aggregate principal amount of subsequent mortgage
loans purchased by the trust fund will be identical to the amounts on deposit in
the Pre-Funding Account, and consequently, noteholders may receive some
prepayment of principal. See "Description of the Mortgage Loans--Conveyance of
Subsequent Mortgage Loans; the Pre-Funding Account and the Funding Account" in
this prospectus supplement.
The servicer may allow the refinancing of a mortgage loan in the trust
fund by accepting prepayments for that mortgage loan 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 by an unrelated entity. In the event of a
refinancing, the new loan would not be included in the trust fund and,
therefore, the refinancing would have the same effect as a prepayment in full of
the related mortgage loan. The 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, or other financial incentives. Targeted solicitations may be based on a
variety of factors, including the credit of the borrower or the location of the
mortgaged property. In addition, the servicer may encourage refinancing of
mortgage loans, including defaulted mortgage loans, under which creditworthy
borrowers assume the outstanding indebtedness of the defaulted mortgage loans
which may be removed from the trust fund. 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 fund may decline.
Investors in the term notes should note that in certain instances in
which a mortgagor either:
. requests an increase in the credit limit on the related HELOC
above the limit stated in the related credit line agreement;
. requests to place a lien on the related mortgaged property senior
to the lien of the related mortgage loan; or
. refinances the senior lien resulting in a CLTV Ratio above the
previous CLTV Ratio for that loan;
the servicer will have the option to purchase from the trust fund the related
mortgage loan at the Repurchase Price. There are no limitations on the frequency
of the repurchases or the characteristics of the mortgage loans so repurchased.
In addition, on any Payment Date the seller, in its capacity as the holder of
the certificates, may designate certain mortgage loans for removal from the
trust fund. Those repurchases may lead to an increase in prepayments on the
mortgage loans in the trust fund, which may reduce the yield on the term notes.
In addition, repurchases may affect the characteristics of the mortgage loans in
the trust fund in the aggregate with respect to loan rates and credit quality.
Although the loan rates on the HELOCs are subject to periodic
adjustments, the adjustments generally:
. will not increase the loan rates over a fixed maximum rate during
the life of any HELOC; and
. will be based on an index, which may not rise and fall
consistently with prevailing market interest rates, plus the
related gross margin, which may vary under certain circumstances,
and which may be different from margins being used at the time
for newly originated adjustable rate mortgage loans.
As a result, the loan rates on the HELOCs at any time may not equal the
prevailing rates for similar, newly originated adjustable rate home equity
mortgage loans and accordingly the rate of principal payments, if any, and
S-75
<PAGE>
draws on the HELOCs may be lower or higher than would otherwise be anticipated.
There can be no certainty as to the rate of principal payments on the mortgage
loans or draws on the HELOCs during any period or over the life of the term
notes.
The yield to investors on each class of Floating Rate Term Notes will
be sensitive to fluctuations in the level of LIBOR and the related Note Rate
will be capped. See "Risk Factors--Loan rates may reduce the note rate on each
class of term notes backed by the adjustable rate home equity revolving credit
line loans" in this prospectus supplement.
With respect to the indices used in determining the Note Rates for the
term notes or the loan rates of the underlying mortgage loans, a number of
factors affect the performance of each index and may cause an index to move in a
manner different from other indices. To the extent that an 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 holders of
the term notes due to the rising interest rates may occur later than that which
would be produced by other indices, and in a period of declining rates, an index
may remain higher than other market interest rates which may result in a higher
level of prepayments of the mortgage loans, which, in the case of HELOCs, adjust
in accordance with that index, than of mortgage loans which adjust in accordance
with other indices.
The timing of changes in the rate of principal payments on a term note
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 payment of principal on a term
note, 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 occurring at a
rate higher or lower than the rate anticipated by the investor during the period
immediately following the issuance of the term notes would not be fully offset
by a subsequent like reduction or increase in the rate of principal payments.
The rate and timing of defaults on the mortgage loans will also affect
the rate and timing of principal payments on the mortgage loans and thus the
yield on the term notes. There can be no assurance as to the rate of losses or
delinquencies on any of the mortgage loans, however, the rate of losses and
delinquencies are likely to be higher than those of traditional first lien
mortgage loans, particularly in the case of mortgage loans with high CLTV Ratios
or low Junior Ratios. To the extent that any losses are incurred on any of the
mortgage loans that are not covered by the applicable credit enhancements,
holders of the term notes will bear all risk of losses resulting from default by
mortgagors. Even where the Policy covers all losses incurred on the mortgage
loans, the effect of losses may be to increase prepayment rates on the mortgage
loans, thus reducing the weighted average life and affecting the yield to
maturity.
Amounts on deposit in the Funding Account may be used during the
Revolving Periods to acquire additional balances and subsequent mortgage loans.
In the event that, at the end of the Revolving Period for the Floating Rate Term
Notes, any amounts on deposit in the Funding Account have not been used to
acquire subsequent mortgage loans or additional balances, then the notes will be
prepaid in part on the following Payment Date.
"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 thereof of each dollar distributed in reduction of principal of
that security, assuming no losses. The weighted average life of the term notes
will be influenced by, among other factors, the rate of principal payments, and,
with respect to the HELOCs, the rate of draws, on the mortgage loans.
The primary source of information available to investors concerning the
term notes will be the monthly statements discussed in this prospectus
supplement under "The Agreements--The Trust Agreement and the Indenture--Reports
to Noteholders," which will include information as to the outstanding Term Note
Balance. There can be no assurance that any additional information regarding the
term notes will be available through any other source. In addition, the
depositor is not aware of any source through which price information about the
term notes will be generally available on an ongoing basis. The limited nature
of information regarding the term notes may adversely affect the liquidity of
the term notes, even if a secondary market for the term notes becomes available.
S-76
<PAGE>
The constant prepayment rate, or CPR, model is used in this prospectus
supplement with respect to the HELOCs. The CPR model assumes that the
outstanding principal balance of a pool of mortgage loans prepays at a specified
constant annual rate of CPR. In generating monthly cash flows, this rate is
converted to an equivalent constant monthly rate. To assume 35% CPR or any other
CPR percentage is to assume that the stated percentage of the Pool Balance is
prepaid over the course of a year. With respect to the HELs, the prepayment
model used in this prospectus supplement, referred to as PPC, assumes an initial
5% CPR that increases each month by 1.8182% per annum until it reaches 25% CPR
in month 12. No representation is made that the mortgage loans will prepay at
that or any other rate.
The tables set forth below are based on a CPR or PPC, as applicable,
constant draw rate, in the case of the HELOCs, and which, for purposes of the
assumptions, is the amount of additional balances drawn each month as an
annualized percentage of the Pool Balance outstanding at the beginning of that
month, and optional termination assumptions as indicated in the tables below and
further assume that the initial HELOCs and initial HELs consist of mortgage
loans having the following characteristics:
<TABLE>
<CAPTION>
Original Term Remaining Term
Balance Gross WAC Net WAC (months) (months)
------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Group I HELOCs..... $225,000,000 10.838% 10.338% 190 187
Group II HELOCs..... $25,000,000 9.887% 9.387% 172 170
HELs................ $50,000,000 10.412% 9.912% 163 162
</TABLE>
In addition, it was assumed that:
(1) payments are made in accordance with the description set forth in
this prospectus supplement under "Description of the
Securities--Priority of Distributions";
(2) payments on the notes will be made on the 25th day of each
calendar month regardless of the day on which the Payment Date
actually occurs commencing in March 2000;
(3) no extension past the scheduled maturity date of a mortgage loan
is made;
(4) no delinquencies or defaults occur;
(5) in the case of the HELOCs, monthly draws are calculated under
each of the assumptions as set forth in the tables below before
giving effect to prepayments;
(6) the mortgage loans pay on the basis of a 30-day month and a
360-day year;
(7) there is no restriction on the Maximum Variable Funding Balance;
(8) no Rapid Amortization Event or Managed Amortization Event occurs;
(9) each mortgage loan is payable monthly;
(10) the closing date is February 28, 2000;
(11) for each Payment Date, LIBOR is equal to 5.88% per annum;
(12) the initial Term Note Balance is as set forth on the cover page
of this prospectus supplement;
(13) all principal payments due and payable on the Floating Rate Term
Notes and the variable funding notes related to each Loan Group
will be allocated to those classes on a pro rata basis; and
(14) the optional termination for each class of term notes is based
upon the Term Note Balance of that particular class declining to
an amount less than or equal to 10% of that class' initial Term
Note Balance.
S-77
<PAGE>
The actual characteristics and performance of the mortgage loans will
likely differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cash flows might behave under varying prepayment and,
in the case of the HELOCs, draw scenarios. For example, it is very unlikely that
the mortgage loans will prepay and/or experience draws at a constant rate until
maturity or that all mortgage loans will prepay and/or experience draws at the
same rate. Moreover, the diverse remaining terms to stated maturity of the
mortgage loans could produce slower or faster principal distributions than
indicated in the tables at the various assumptions specified, even if the
weighted average remaining term to stated maturity of the mortgage loans is as
assumed. Any difference between these assumptions and the actual characteristics
and performance of the mortgage loans, or actual prepayment experience, will
affect the percentages of initial Term Note Balances outstanding over time and
the weighted average life of the term notes. Neither the CPR or PPC models nor
any other prepayment model or assumption purports to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the mortgage loans included
in the mortgage pool. Variations in the actual prepayment experience and the
principal balances of the mortgage loans that prepay may increase or decrease
each weighted average life shown in the following tables. These variations may
occur even if the average prepayment experience of all mortgage loans equals the
CPR or PPC, as applicable.
S-78
<PAGE>
<TABLE>
<CAPTION>
Percentage of Initial Class A-1 Term Note Balance
Payment Date Percentage of Balance
- -------------------------------------------- ---------------------------------------------------------------------------
CPR 10% 25% 30% 35% 40% 45% 50%
- -------------------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial.................................... 100 100 100 100 100 100 100
February 2001.............................. 100 100 100 100 100 100 100
February 2002.............................. 97 81 75 70 64 59 53
February 2003.............................. 94 65 56 48 41 35 29
February 2004.............................. 90 52 42 34 26 20 15
February 2005.............................. 86 41 31 23 17 12 8
February 2006.............................. 73 29 21 14 9 6 4
February 2007.............................. 61 20 13 9 5 3 1
February 2008.............................. 51 14 9 5 3 1 *
February 2009.............................. 41 10 5 3 1 * *
February 2010.............................. 33 6 3 2 1 * 0
February 2011.............................. 25 4 2 1 * 0 0
February 2012.............................. 19 2 1 * 0 0 0
February 2013.............................. 13 1 * * 0 0 0
February 2014.............................. 7 1 * 0 0 0 0
February 2015.............................. 2 * 0 0 0 0 0
February 2016.............................. 0 0 0 0 0 0 0
Weighted Average Life to 10% call (years).. 8.34 4.57 3.92 3.42 3.03 2.73 2.48
Weighted Average Life to maturity (years).. 8.44 4.76 4.10 3.58 3.18 2.86 2.59
</TABLE>
. The table above was calculated with the assumptions that:
(1) except where indicated, no optional termination is exercised; and
(2) in the case of the HELOCs, a gross CPR as disclosed above less a
constant draw rate of 10.0%.
. All percentages listed in the table above are rounded to the nearest 1%.
. Use of a "*" in the table above denotes a value that is less than 1% but
greater than 0.
S-79
<PAGE>
<TABLE>
<CAPTION>
Percentage of Initial Class A-2 Term Note Balance
Payment Date Percentage of Balance
- ------------------------------------------------ -----------------------------------------------------------------------
CPR 10% 25% 30% 35% 40% 45% 50%
- ------------------------------------------------ --------- --------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial........................................ 100 100 100 100 100 100 100
February 2001.................................. 100 100 100 100 100 100 100
February 2002.................................. 96 80 75 69 64 58 53
February 2003.................................. 92 63 55 47 40 34 28
February 2004.................................. 87 50 41 33 26 20 15
February 2005.................................. 82 39 30 22 16 11 8
February 2006.................................. 68 27 19 13 9 6 3
February 2007.................................. 56 19 12 8 5 3 1
February 2008.................................. 45 12 8 4 2 1 *
February 2009.................................. 35 8 5 2 1 * *
February 2010.................................. 27 5 3 1 * * 0
February 2011.................................. 19 3 1 * * 0 0
February 2012.................................. 12 1 1 * 0 0 0
February 2013.................................. 6 * * 0 0 0 0
February 2014.................................. 1 0 0 0 0 0 0
February 2015.................................. 0 0 0 0 0 0 0
February 2016.................................. 0 0 0 0 0 0 0
Weighted Average Life to 10% call (years)...... 7.70 4.43 3.82 3.36 2.99 2.70 2.46
Weighted Average Life to maturity (years)...... 7.77 4.60 3.99 3.51 3.13 2.82 2.57
</TABLE>
. The table above was calculated with the assumptions that:
(1) except where indicated, no optional termination is exercised; and
(2) in the case of the HELOCs, a gross CPR as disclosed above less a
constant draw rate of 10.0%.
. All percentages listed in the table above are rounded to the nearest 1%.
. Use of a "*" in the table above denotes a value that is less than 1% but
greater than 0.
S-80
<PAGE>
<TABLE>
<CAPTION>
Percentage of Initial Class A-3 Term Note Balance
Payment Date Percentage of Balance
- ------------------------------------------------ -----------------------------------------------------------------------
PPC 0% 50% 75% 100% 125% 150% 175%
- ------------------------------------------------ --------- --------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial........................................ 100 100 100 100 100 100 100
February 2001.................................. 96 90 86 83 79 75 71
February 2002.................................. 92 75 67 59 51 44 38
February 2003.................................. 88 62 51 42 34 26 20
February 2004.................................. 83 51 39 30 22 16 11
February 2005.................................. 77 42 30 21 14 9 5
February 2006.................................. 71 34 22 14 9 5 3
February 2007.................................. 64 27 16 10 5 3 1
February 2008.................................. 57 21 12 6 3 1 *
February 2009.................................. 49 16 8 4 2 * 0
February 2010.................................. 40 11 5 2 1 0 0
February 2011.................................. 30 7 3 1 * 0 0
February 2012.................................. 19 4 1 * 0 0 0
February 2013.................................. 6 1 * 0 0 0 0
February 2014.................................. 0 0 0 0 0 0 0
Weighted Average Life to 10% call (years)...... 8.23 4.79 3.78 3.07 2.57 2.20 1.92
Weighted Average Life to maturity (years)...... 8.26 4.93 3.96 3.25 2.74 2.35 2.04
</TABLE>
. The table above was calculated with the assumptions that:
(1) except where indicated, no optional termination is exercised; and
(2) in the case of the HELs, a percentage of PPC as disclosed above.
. All percentages listed in the table above are rounded to the nearest 1%.
. Use of a "*" in the table above denotes a value that is less than 1% but
greater than 0.
S-81
<PAGE>
The Agreements
The Purchase Agreement
The initial mortgage loans to be transferred to the issuer by the
depositor were or will be purchased by the depositor from the seller pursuant to
the Purchase Agreement. The following summary describes certain terms of the
Purchase Agreement. The summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the provisions of the
Purchase Agreement. See "The Agreements" in the prospectus.
Under the Purchase Agreement, the seller has agreed to transfer,
without recourse, to the depositor the initial mortgage loans and related
additional balances. Pursuant to an assignment by the depositor executed on the
closing date, upon the transfer to the depositor, the initial mortgage loans
will be transferred, without recourse, by the depositor to the issuer, as well
as the depositor's rights in, to and under the Purchase Agreement, which will
include the obligation, except during the Rapid Amortization Period, to purchase
additional balances relating to the initial mortgage loans. Subsequent mortgage
loans are intended to be purchased by the issuer from the seller on or before
May 28, 2000, as set forth in the Purchase Agreement, from funds on deposit in
the Pre-Funding Account. Subsequent mortgage loans are also intended to be
purchased, under certain circumstances, by the issuer from the seller from funds
on deposit in the Funding Account. The Purchase Agreement will provide that the
subsequent mortgage loans must conform to certain specified characteristics
described above under "Description of the Mortgage Loans--Conveyance of
Subsequent Mortgage Loans; the Pre-Funding Account and the Funding Account." For
a general description of the seller, see "The Seller and Servicer" in this
prospectus supplement.
Transfer of Mortgage Loans. Pursuant to the Purchase Agreement, the
seller will transfer and assign, without recourse, to the depositor all of its
right, title and interest in and to the Initial Mortgage Documents and all of
the additional balances thereafter created prior to the commencement of the
Rapid Amortization Period. The purchase price of the initial mortgage loans is a
specified amount payable by the depositor, as provided in the Purchase
Agreement. The purchase price paid for any subsequent mortgage loans by the
indenture trustee, at the direction of the issuer, from amounts on deposit in
the Pre-Funding Account shall be one hundred percent (100%) of the aggregate
principal balances of the subsequent mortgage loans as of the date so
transferred, as identified on the mortgage loan schedule attached to the related
subsequent transfer agreement provided by the seller. The purchase price of each
additional balance is the amount of the related new advance and is payable by
the issuer, either in cash, including withdrawals from the Funding Account, or
in the form of an increase in the Variable Funding Balance of the variable
funding notes, and, in certain circumstances, the issuance of additional
variable funding notes, as provided in the Purchase Agreement and the Indenture.
The Purchase Agreement will require that, within the time period
specified in the Purchase Agreement, the seller deliver to the indenture
trustee, as the issuer's agent for such purpose, the mortgage loans and the
Initial Mortgage Documents. In lieu of delivery of original mortgages, the
seller may deliver true and correct copies of the original mortgages that have
been certified as to authenticity by the appropriate county recording office
where those mortgages were recorded.
Representations and Warranties. The seller will represent and warrant
to the depositor, and to the issuer with respect to any subsequent mortgage
loans, that, among other things:
. the information with respect to the mortgage loans set forth in
the schedule attached to the Purchase Agreement is true and
correct in all material respects; and
. immediately prior to the sale of the initial mortgage loans to
the depositor and the subsequent mortgage loans to the issuer,
the seller was the sole owner and holder of the mortgage loans
free and clear of any and all liens and security interests.
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<PAGE>
The seller will also represent and warrant to the depositor, and to the
issuer with respect to any subsequent mortgage loans, that, among other things,
as of the closing date and the related subsequent transfer date with respect to
any subsequent mortgage loans:
. the Purchase Agreement constitutes a legal, valid and binding
obligation of the seller; and
. the Purchase Agreement constitutes a valid transfer and
assignment of all right, title and interest of the seller in and
to the initial mortgage loans or the subsequent mortgage loans,
as applicable, and the proceeds thereof.
Within 150 days of the closing date or the related subsequent transfer
date with respect to any subsequent mortgage loans, the custodian will review or
cause to be reviewed the mortgage loans and the Initial Mortgage Documents and
if any mortgage loan or Initial Mortgage Document is found to be defective in
any material respect which may materially and adversely affect the value of the
related mortgage loan or the interests of the indenture trustee, as pledgee of
the trust fund, the securityholders or the Enhancer in that mortgage loan and
the defect is not cured within 90 days following notification thereof to the
seller and the issuer by the custodian, the seller will be obligated under the
Purchase Agreement to deposit the Repurchase Price into the Custodial Account.
In lieu of any deposit into the Custodial Account, the seller may substitute an
Eligible Substitute Loan. Any purchase or substitution will result in the
removal of the defective mortgage loan from the trust fund. The obligation of
the seller to remove a Deleted Loan from the trust fund is the sole remedy
regarding any defects in the mortgage loans and Initial Mortgage Documents
available to the issuer, the certificateholders, or the owner trustee on behalf
of the certificateholders, and the noteholders, or the indenture trustee on
behalf of the noteholders, against the seller.
In connection with the substitution of an Eligible Substitute Loan, the
seller will be required to deposit in the Custodial Account an amount equal to
the excess of the principal balance of the related Deleted Loan over the
principal balance of that Eligible Substitute Loan.
In addition, the seller will be obligated to deposit the Repurchase
Price or substitute an Eligible Substitute Loan with respect to a mortgage loan
as to which there is a material breach of a representation or warranty in the
Purchase Agreement and the breach is not cured by the seller within the time
provided in the Purchase Agreement.
In addition, the seller has made representations and warranties to the
depositor with respect to the initial mortgage loans and will make certain
representations and warranties to the issuer with respect to any subsequent
mortgage loans. The representations and warranties of the seller will be
assigned to the indenture trustee for the benefit of the noteholders, and
therefore a breach of the representations and warranties of the seller will be
enforceable on behalf of the trust fund.
The representations and warranties will generally include, among other
things, that:
. as of the cut-off date, or related subsequent transfer date, with
respect to any subsequent mortgage loans, the information set
forth in a schedule of the related mortgage loans is true and
correct in all material respects as of the date or dates
respecting which the information is furnished;
. the seller was the sole holder and owner of the mortgage loans
free and clear of any and all liens and security interests;
. to the best of seller's knowledge, each mortgage loan complied in
all material respects with all applicable local, state and
federal laws;
. no mortgage loan is 30 days or more delinquent in payment of
principal and interest; and
. to the best of seller's knowledge, there is no delinquent
recording or other tax or fee or assessment lien against any
related mortgaged property.
The depositor will assign to the owner trustee all of its right, title
and interest in the Purchase Agreement, insofar as the Purchase Agreement
relates to the representations and warranties made by the seller in respect of
the initial mortgage loans and any remedies provided for with respect to any
breach of the representations and warranties. If the seller cannot cure a breach
of any representation or warranty made by it in respect of a mortgage loan which
materially and adversely affects the interests of the noteholders or the
Enhancer in that mortgage loan,
S-83
<PAGE>
within 90 days after notice from the servicer, the seller will be obligated to
repurchase the mortgage loan at the Repurchase Price.
As to any mortgage loan required to be purchased by the seller as
provided above, rather than purchase the mortgage loan, the seller may, at its
sole option, remove the Deleted Loan from the trust fund and substitute in its
place an Eligible Substitute Loan.
Assignment of the Mortgage Loans. On the closing date, the depositor
will cause the initial mortgage loans to be assigned without recourse to the
trust fund and on any subsequent transfer date the seller will cause the related
subsequent mortgage loans to be assigned without recourse to the indenture
trustee, as assignee of the owner trustee, on behalf of the trust fund, together
with all principal and interest received on or with respect to the mortgage
loans after the cut-off date or related subsequent cut-off date with respect to
any subsequent mortgage loans, other than principal and interest due on or
before the cut-off date or related subsequent cut-off date. The owner trustee,
on behalf of the trust fund, will, concurrently with the assignment, grant a
security interest in the trust fund to the indenture trustee to secure the
notes. Each initial mortgage loan will be identified in a schedule appearing as
an exhibit to the Purchase Agreement and each subsequent mortgage loan will be
identified in a schedule appearing as an exhibit to the related subsequent
transfer agreement. These schedules will include, among other things,
information as to the principal balance of each initial mortgage loan as of the
cut-off date or of any subsequent mortgage loans as of the subsequent cut-off
date, as well as information respecting the loan rate, the currently scheduled
monthly payment of principal and interest, the maturity of the related credit
line agreement or mortgage note, as applicable, and the CLTV Ratio at
origination or modification.
The seller will, as to each mortgage loan, deliver to the custodian the
legal documents relating to that mortgage loan that are in possession of the
seller, which will include the following:
(1) the credit line agreement or mortgage note, as applicable, and
any modification or amendment thereto, endorsed without recourse
in blank;
(2) the mortgage, or a copy of the mortgage certified by an officer
of the servicer for any mortgage not returned from the public
recording office, with evidence of recording indicated thereon;
(3) an assignment in recordable form of the mortgage; and
(4) if applicable, any riders or modifications to the credit line
agreement or mortgage note, as applicable, and mortgage, together
with certain other documents at the times as set forth in the
related agreement.
The assignments may be blanket assignments covering mortgages secured by
mortgaged properties located in the same county, if permitted by law. With the
exception of items (1), (2) and (3), the seller may not be required to deliver
one or more of the documents if the documents are missing from the files of the
party from whom the related mortgage loans were purchased.
Review of Mortgage Loans. Bank of Maryland will be the custodian with
respect to the mortgage loans pursuant to a custodial agreement and will
maintain possession of and review documents relating to the mortgage loans as
the agent of the indenture trustee or, following payment in full of the notes
and discharge of the Indenture, the owner trustee.
The custodian will hold the documents relating to the mortgage loans in
trust for the benefit of the holders of the securities and will review the
documents within 150 days. If any document is found to be defective in any
material respect, the custodian will be required to notify the indenture
trustee, as pledgee of the issuer. The indenture trustee will be required to
then notify the seller. If the seller cannot cure the defect 90 days after
notice of the defect is given to the seller, the seller will be required to,
within 90 days, either repurchase the related mortgage loan or any property
acquired in respect thereof from the indenture trustee, or substitute for that
mortgage loan a new mortgage loan in accordance with the standards set forth in
this prospectus supplement. The depositor will not be obligated to purchase or
substitute for the defective mortgage loan if the seller defaults on its
obligation to do so. The obligation to repurchase or substitute for a mortgage
loan constitutes the sole remedy available to the noteholders or the indenture
trustee for a material defect in a constituent document. Any mortgage loan not
so purchased or substituted for shall remain in the trust fund.
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The Servicing Agreement
The following summary describes certain terms of the Servicing
Agreement. 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. See "The Agreements" in the prospectus.
All of the mortgage loans will initially be serviced by the servicer,
but may be subserviced by one or more subservicers designated by the servicer
pursuant to subservicing agreements between the servicer and any future
subservicers. For a general description of the servicer and its activities, and
certain information concerning the servicer's delinquency experience on
residential mortgage loans, see "The Seller and Servicer--Delinquency and Loss
Experience of the Servicer's Portfolio" in this prospectus supplement.
P&I Collections. All collections on the mortgage loans will generally
be allocated in accordance with the related credit line agreements or mortgage
notes, as applicable, between amounts collected in respect of interest and
amounts collected in respect of principal.
The servicer will be required to establish and maintain the Custodial
Account. On each Determination Date, the servicer will determine the aggregate
amounts required to be withdrawn from the Custodial Account and deposited into
the Note Payment Account and the Distribution Account prior to the close of
business on the business day next succeeding each Determination Date.
The servicer will make withdrawals from the Custodial Account,
including but not limited to the following, and deposit the withdrawn amounts as
follows:
. to the Note Payment Account, an amount equal to the P&I
Collections on the business day prior to each Payment Date; and
. to pay to itself or the seller various reimbursement amounts and
other amounts as provided in the Servicing Agreement.
Events of Default; Rights Upon Event of Default. A servicing default
under the Servicing Agreement generally will include:
. any failure by the servicer to deposit to the Custodial Account,
Funding Account, Reserve Account, Distribution Account or the
Note Payment Account any required payment which continues
unremedied for five (5) business days after the date upon which
written notice of the failure shall have been given to the
servicer by the issuer or the indenture trustee, or to the
servicer, the issuer and the indenture trustee by the Enhancer;
. any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
Servicing Agreement which continues unremedied for 45 days after
the date upon which written notice of the failure shall have been
given to the servicer by the Issuer or the indenture trustee, or
to the servicer, the issuer and the indenture trustee by the
Enhancer;
. certain events of insolvency, bankruptcy, readjustment of debt,
marshalling of assets and liabilities or similar proceedings
regarding the servicer and certain actions by the servicer
indicating its insolvency or inability to pay its obligations;
and
. certain other events relating to the servicer.
So long as a servicing default under the Servicing Agreement remains
unremedied, either the depositor, the Enhancer, so long as it is not in default
of its payment obligations under the Policy, or the indenture trustee may, by
written notification to the servicer and to the issuer or the indenture trustee,
as applicable, terminate all of the rights and obligations of the servicer under
the Servicing Agreement, other than any right of the servicer as securityholder
and other than the right to receive servicing compensation and expenses for
servicing the mortgage loans during any period prior to the date of termination,
and reimbursement of other amounts the servicer is entitled to withdraw from the
Custodial Account, whereupon the indenture trustee, within 90 days of the
termination, will succeed to all responsibilities, duties and liabilities of the
servicer under the Servicing Agreement, other than the obligation to
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purchase mortgage loans under certain circumstances, and will be entitled to
similar compensation arrangements. In the event that the indenture trustee would
be obligated to succeed 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 an approved mortgage servicing institution
with a net worth of at least $10,000,000 to act as successor to the servicer
under the Servicing Agreement; provided that any successor servicer shall be
acceptable to the Enhancer, as evidenced by the Enhancer's prior written
consent, which consent shall not be unreasonably withheld; and provided further
that the appointment of any successor servicer will not result in the
qualification, reduction or withdrawal of the ratings assigned to the notes by
the Rating Agencies, if determined without regard to the Policy. Pending the
appointment of a successor servicer, the indenture trustee is obligated to act
as servicer unless prohibited by law from so acting. The indenture trustee and
the successor servicer may agree upon the servicing compensation to be paid,
which in no event may be greater than the compensation to the initial servicer
under the Servicing Agreement.
Servicing Compensation and Payment of Expenses. The principal servicing
compensation to be paid to the servicer in respect of its servicing activities
will be equal to 0.50% per annum, based on the aggregate principal balance of
the mortgage loans. The servicer will retain all assumption fees and late
payment charges, to the extent collected from mortgagors, and any benefit which
may accrue as a result of the investment of funds in the Custodial Account, the
Note Payment Account or the Distribution Account.
The servicer, or, if specified in the Servicing Agreement, the
indenture trustee on behalf of the trust fund, will pay or cause to be paid
certain ongoing expenses associated with the trust fund and incurred by it in
connection with its responsibilities under the Servicing Agreement, including,
without limitation, payment of the fees of the Enhancer, payment of the fees and
disbursements of the indenture trustee, the owner trustee, the custodian, the
note registrar and any paying agent, and payment of expenses incurred in
enforcing the obligations of the seller. If the servicer is not the same person
as the seller, the servicer will be entitled to reimbursement of expenses
incurred in enforcing the obligations of the seller under certain limited
circumstances. In addition, as indicated in the preceding section, the servicer
will be entitled to reimbursements for certain expenses incurred by it in
connection with liquidated mortgage loans and in connection with the restoration
of mortgaged properties, that right of reimbursement being prior to the rights
of noteholders to receive any related liquidation proceeds, including insurance
proceeds.
Evidence as to Compliance. The Servicing Agreement provides for
delivery on or before a specified date in each year, to the depositor, the
Enhancer and the indenture trustee, of an annual statement signed by an officer
of the servicer to the effect that the servicer has fulfilled in all material
respects the minimum servicing standards set forth in the Uniform Single
Attestation Program for Mortgage Bankers throughout the preceding year or, if
there has been a material default in the fulfillment of any servicing
obligation, the statement shall specify each known default and the nature and
status thereof. The statement may be provided as a single form making the
required statements as to the Servicing Agreement along with other similar
agreements.
The Servicing Agreement also provides that on or before a specified
date in each year, beginning on the first date that is at least a specified
number of months after the cut-off date, a firm of independent public
accountants will furnish a statement to the depositor and the indenture trustee
to the effect that, on the basis of an examination by that firm conducted
substantially in compliance with the standards established by the American
Institute of Certified Public Accountants, the servicing of mortgage loans under
the related agreements, including the Servicing Agreement, was conducted
substantially in compliance with the minimum servicing standards set forth in
the Uniform Single Attestation Program for Mortgage Bankers, to the extent that
procedures in the Uniform Single Attestation Program for Mortgage Bankers are
applicable to the servicing obligations set forth in the related agreements,
except for any significant exceptions or errors in records that shall be
reported in the statement.
Copies of the annual statement of an officer of the servicer may be
obtained by noteholders without charge upon written request to the servicer, at
the address indicated in the monthly statement to noteholders.
Certain Matters Regarding the Servicer. The Servicing Agreement
provides that the servicer may not resign from its obligations and duties under
the Servicing Agreement except upon a determination that performance of its
obligations and duties is no longer permissible under applicable law or except
in connection with a permitted transfer of servicing. No such resignation will
become effective until the indenture trustee or a successor servicer has assumed
the servicer's obligations and duties under the Servicing Agreement.
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The Servicing Agreement also provides that, except as set forth below,
neither the servicer nor any director, officer, employee or agent of the
servicer will be under any liability to the trust fund or the noteholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the Servicing Agreement, or for errors in judgment; provided,
however, that neither the servicer nor any such person will be protected against
any liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties or by reason of
reckless disregard of obligations and duties thereunder. The Servicing Agreement
further provides that the servicer and any director, officer, employee or agent
of the servicer is entitled to indemnification by the trust fund and will be
held harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Servicing Agreement, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
Servicing Agreement provides that the servicer will not be under any obligation
to appear in, prosecute or defend any legal or administrative action that is not
incidental to its respective duties under the Servicing Agreement and which in
its opinion may involve it in any expense or liability. The servicer may,
however, in its discretion undertake any action which it may deem necessary or
desirable with respect to the Servicing Agreement and the rights and duties of
the parties thereto and the interests of the noteholders thereunder. In that
event, the legal expenses and costs of the action and any liability resulting
from the action will be expenses, costs and liabilities of the trust fund and
the servicer will be entitled to be reimbursed out of funds otherwise payable to
noteholders.
Any person into which the servicer may be merged or consolidated, any
person resulting from any merger or consolidation to which the servicer is a
party or any person succeeding to the business of the servicer will be the
successor of the servicer under the Servicing Agreement, provided that resulting
entity meets the requirements set forth in the Servicing Agreement. In addition,
notwithstanding the prohibition on its resignation, the servicer may assign its
rights and delegate its duties and obligations under the Servicing Agreement to
any person reasonably satisfactory to the Enhancer and meeting the requirements
set forth in the Servicing Agreement; provided, that consent to any assignment
may not be unreasonably withheld. In the case of any assignment, the servicer
will be released from its obligations under the Servicing Agreement, exclusive
of liabilities and obligations incurred by it prior to the time of the
assignment.
Amendment. The Servicing Agreement may be amended by the parties
thereto, provided that any amendment be accompanied by a letter from each Rating
Agency that the amendment will not result in the qualification, reduction or
withdrawal of the rating then assigned to the notes, if determined without
regard to the Policy, and provided further, that the consent of the Enhancer and
the indenture trustee shall be obtained.
The Trust Agreement and the Indenture
The following summary describes certain terms of the Trust Agreement
and the Indenture. This summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the respective provisions of
the Trust Agreement and the Indenture. 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 mortgage loans, the indenture trustee will be entitled
to direct the issuer in the exercise of all rights and remedies of the trust
fund against the seller under the Purchase Agreement and against the servicer
under the Servicing Agreement.
Reports To Noteholders. The indenture trustee will, to the extent
information is provided to it by the servicer pursuant to the terms of the
Servicing Agreement, make available to each holder of the term notes, at its
address listed on the note register maintained with the indenture trustee, and
each Rating Agency, the Enhancer and the depositor, a report setting forth
certain amounts relating to the term notes for each Payment Date, including,
among other things:
(1) the amount of principal, if any, payable on that Payment Date to
the holders of the term notes;
(2) the amount of interest payable on that Payment Date to the
holders of the term notes and the amount, if any, of Interest
Shortfalls;
(3) the Term Note Balance after giving effect to any payment of
principal on that Payment Date;
(4) the P & I Collections for each Loan Group for the related
Collection Period;
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(5) the aggregate principal balance of the mortgage loans in each
Loan Group as of the end of the preceding Collection Period;
(6) the balance of the Pre-Funding Account as of the end of the
preceding Collection Period;
(7) the balances of the Funding Account, Capitalized Interest Account
and Reserve Account as of the end of the preceding Collection
Period;
(8) the aggregate principal balance of all subsequent mortgage loans
transferred pursuant to a subsequent transfer agreement since the
closing date;
(9) the Overcollateralization Amount for each Loan Group as of the
end of the preceding Collection Period; and
(10) the amount paid, if any, under the Policy for that Payment Date.
In the case of information furnished pursuant to clauses (1) and (2) above, the
amounts will be expressed as a dollar amount per $25,000 in face amount of term
notes.
The indenture trustee will make the reports to holders of the term
notes, and, at its option, any additional files containing the same information
in an alternative format, available each month to holders of the term notes, and
other parties to the Indenture via the indenture trustee's internet website and
its fax-on-demand service. The indenture trustee's fax-on-demand service may be
accessed by calling (301) 815-6610. The indenture trustee's internet website
shall initially be located at www.ctslink.com. Assistance in using the website
or the fax-on-demand service can be obtained by calling the indenture trustee's
customer service desk at (301) 815-6600. Parties that are unable to use the
above distribution options are entitled to have a paper copy mailed to them via
first class mail by calling the customer service desk and indicating they would
like to receive a paper copy. The indenture trustee shall have the right to
change the way the reports to holders of the term notes are distributed in order
to make the distribution more convenient and/or more accessible and the
indenture trustee shall provide timely and adequate notification to all above
parties regarding any changes.
Certain Covenants. The Indenture will provide that the issuer may not
consolidate or merge with or into any other entity, unless:
(1) 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;
(2) the surviving 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;
(3) no event of default under the Indenture shall have occurred and
be continuing immediately after the merger or consolidation;
(4) the issuer has received consent of the Enhancer and has been
advised that the ratings of the notes, without regard to the
Policy, then in effect would not be reduced or withdrawn by any
Rating Agency as a result of the merger or consolidation;
(5) any action that is necessary to maintain the lien and security
interest created by the Indenture has been taken;
(6) 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
(7) 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:
(1) except as expressly permitted by the Indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the issuer;
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(2) claim any credit on or make any deduction from the principal and
interest payable in respect of the notes, other than amounts
withheld under the Internal Revenue Code of 1986, as amended, 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;
(3) 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 thereby; or
(4) 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 thereof, or any interest therein or the proceeds thereof.
The Issuer may not engage in any activity other than as specified under
"The Issuer" in this prospectus supplement.
Events of Default; Rights Upon Event of Default. An event of default
under the Indenture includes:
(1) a default for five (5) days or more in the payment of any
principal of or interest on any note;
(2) there occurs a default in the observance or performance in any
material respect of any covenant or agreement of the issuer made
in the Indenture, or any representation or warranty of the issuer
made in the Indenture or in any certificate delivered pursuant to
or in connection with the Indenture proving to have been
incorrect in any material respect as of the time when the same
shall have been made that has a material adverse effect on the
noteholders or the Enhancer, and the default shall continue or
not be cured, or the circumstance or condition in respect of
which the representation or warranty was incorrect shall not have
been eliminated or otherwise cured, for a period of 30 days after
there shall have been given, by registered or certified mail, to
the issuer by the indenture trustee or to the issuer and the
indenture trustee by the holders of at least 25% of the
outstanding Note Balance of the notes or the Enhancer, a written
notice specifying the default or incorrect representation or
warranty and requiring it to be remedied and stating that the
notice is a notice of default under the Indenture;
(3) there occurs the filing of a decree or order for relief by a
court having jurisdiction in the premises in respect of the
issuer or any substantial part of the trust fund in an
involuntary case under any applicable federal or state
bankruptcy, insolvency or other similar law now or hereafter in
effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the
issuer or for any substantial part of the trust fund, or ordering
the winding-up or liquidation of the issuer's affairs, and the
decree or order shall remain unstayed and in effect for a period
of 60 consecutive days; or
(4) there occurs the commencement by the issuer of a voluntary case
under any applicable federal or state bankruptcy, insolvency or
other similar law now or hereafter in effect, or the consent by
the issuer to the entry of an order for relief in an involuntary
case under any such law, or the consent by the issuer to the
appointment or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of
the issuer or for any substantial part of the assets of the trust
fund, or the making by the issuer of any general assignment for
the benefit of creditors, or the failure by the issuer generally
to pay its debts as those debts become due, or the taking of any
action by the issuer in furtherance of any of the foregoing.
If an event of default with respect to the notes at the time
outstanding occurs and is continuing, either the indenture trustee, acting on
the direction of at least 51% of the noteholders, the Enhancer or the holders of
notes representing a majority of the aggregate Note Balance, with the written
consent of the Enhancer, may declare all notes to be due and payable
immediately. Such declaration may, under certain circumstances, be rescinded and
annulled by the Enhancer or the holders of notes representing a majority of the
aggregate Note Balance, with the written consent of the Enhancer.
If, following an event of default with respect to the notes, the notes
have been declared to be due and payable, the indenture trustee, acting on the
direction of at least 51% of the noteholders, with the written consent of the
Enhancer, notwithstanding any acceleration, may elect to maintain possession of
the collateral securing the notes
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and to continue to apply payments on the collateral as if there had been no
declaration of acceleration if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the notes as they would
have become due if there had not been a declaration. In addition, the indenture
trustee may not sell or otherwise liquidate the collateral securing the notes
following an event of default, unless:
. all noteholders consent to the sale;
. 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 and to reimburse the Enhancer at the date
of the sale; or
. the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes
as payments would have become due if the notes had not been
declared due and payable, and the indenture trustee obtains the
consent of the holders of notes representing 66 2/3% of the then
aggregate Note Balance and the Enhancer.
In the event that the indenture trustee liquidates the collateral in
connection with an event of default, the Indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of an event of default, the
amount available for payments to the noteholders would be less than would
otherwise be the case. However, the indenture 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 noteholders after the occurrence of an event of default.
In the event the principal of the notes is declared due and payable as
described above, the holders of any notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of the related note less the amount of the discount that is unamortized.
No noteholder generally will have any right under the Indenture to
institute any proceeding with respect to the Indenture unless:
(1) the holder previously has given to the indenture trustee written
notice of default and the continuance thereof;
(2) the holders of any note evidencing not less than 25% of the
aggregate Percentage Interests constituting that note:
. have made written request upon the indenture trustee to
institute the proceeding in its own name as indenture
trustee thereunder; and
. have offered to the indenture trustee reasonable indemnity;
(3) the indenture trustee has neglected or refused to institute any
proceeding for 60 days after receipt of the request and
indemnity; and
(4) no direction inconsistent with the written request has been given
to the indenture trustee during the 60 day period by the holders
of a majority of the outstanding principal balances of that note,
except as otherwise provided for in the related agreement with
respect to the Enhancer.
However, the indenture trustee will be under no obligation to exercise any of
the trusts or powers vested in it by the Indenture 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 the notes, unless the noteholders have
offered to the indenture trustee reasonable security or indemnity against the
costs, expenses and liabilities which may be incurred therein or thereby.
Amendment and Modification of Trust Agreement and Indenture. The Trust
Agreement may be amended from time to time by the parties thereto provided that
any amendment be accompanied by an opinion of counsel addressed to the owner
trustee and the Enhancer to the effect that the amendment:
. complies with the provisions of the Trust Agreement; and
. will not cause the trust fund to be subject to an entity level
tax.
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With the consent of the holders of a majority of each of the
outstanding term notes and variable funding notes and the Enhancer, 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.
However, without the consent of the holder of each outstanding note affected
thereby and the Enhancer, no supplemental indenture will:
(1) change the due date of any installment of principal of or
interest on any note or reduce the principal amount thereof, the
interest rate specified thereon or change any place of payment
where or the coin or currency in which any note or any interest
thereon is payable;
(2) impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment;
(3) reduce the percentage of the aggregate Note Balance 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
certain provisions of the Indenture or of certain defaults
thereunder and their consequences as provided for in the
Indenture;
(4) 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;
(5) decrease the percentage of the aggregate Note Balance required to
amend the sections of the Indenture which specify the applicable
percentage of the Note Balance necessary to amend the Indenture
or certain other related agreements;
(6) 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 such calculation; or
(7) 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 Enhancer 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 the Indenture.
Termination; Redemption of Term Notes. The obligations created by the
Trust Agreement, other than certain limited payment and notice obligations of
the owner trustee and the depositor, respectively, will terminate upon the
payment to the related securityholders, including the notes issued pursuant to
the Indenture, of all amounts held by the servicer and required to be paid to
the securityholders and the payment of all amounts due and owing the Enhancer
under the Insurance Agreement following the earliest of:
. the final distribution of all moneys or other property or
proceeds of the trust fund in accordance with the terms of the
Indenture and the Trust Agreement;
. the Final Payment Date; or
. the purchase by the servicer of all mortgage loans pursuant to
the Servicing Agreement. See "Description of the
Securities--Maturity and Optional Redemption" in this prospectus
supplement.
The Indenture will be discharged, except with respect to certain
continuing rights specified in the Indenture, upon the distribution to
noteholders of all amounts required to be distributed pursuant to the Indenture.
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 noteholders for any
action taken or for refraining from the taking of any action in good faith
pursuant to the Indenture or for errors in judgment; provided, however, that
none of the indenture trustee and any director, officer or employee thereof will
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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 certain limitations set forth in the Indenture, the indenture trustee
and any director, officer, employee or agent of the indenture trustee will 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 any merger or
consolidation will be the successor of the indenture trustee under the
Indenture.
Use of Proceeds
The proceeds from the sale of the term notes will be used, together
with the proceeds from the sale of the variable funding notes and the
certificates to the seller, to purchase the initial mortgage loans from the
depositor and, subsequently, to purchase certain subsequent mortgage loans as
described in this prospectus supplement.
Certain Legal Aspects of the Mortgage Loans
A federal circuit court decision may adversely affect the indenture
trustee's interest in the mortgage loans included in the trust fund even if the
mortgage loans constitute chattel paper. In a federal court case in the Tenth
Circuit, the court's decision included language to the effect that accounts sold
by an entity which subsequently became bankrupt remained property of the
debtor's bankruptcy estate. Sales of chattel paper, like sales of accounts, are
governed by Article 9 of the UCC. If the seller is subject to the federal
bankruptcy code and becomes a debtor under the federal bankruptcy code, and a
court were to follow the reasoning of the Tenth Circuit and apply that reasoning
to chattel paper, noteholders could experience a delay in, or reduction of,
distributions as to the mortgage loans that constitute chattel paper and were
sold to the trust fund.
Certain Federal Income Tax Considerations
The following is a general discussion of anticipated material federal
income tax consequences of the purchase, ownership and disposition of the term
notes offered under this prospectus supplement and the accompanying prospectus.
This discussion has been prepared with the advice of Orrick, Herrington &
Sutcliffe LLP as counsel to the depositor. This discussion is directed solely to
noteholders that hold the term notes as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended, 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:
. 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
. 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 supplement
and/or the accompanying prospectus.
In addition to the federal income tax consequences described in this
prospectus supplement and the accompanying prospectus, potential investors
should consider the state and local tax consequences, if any, of the
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purchase, ownership and disposition of the notes. See "State and Other Tax
Consequences" in this prospectus supplement. 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.
In the opinion of Orrick, Herrington & Sutcliffe LLP, special tax
counsel to the depositor, for federal income tax purposes, the term notes will
be characterized as indebtedness, and neither the issuer nor any portion of the
issuer will be characterized as an association, or a publicly traded
partnership, taxable as a corporation or as a taxable mortgage pool within the
meaning of Section 7701(i) of the Internal Revenue Code of 1986, as amended.
The following discussion is based in part upon the rules governing
original issue discount that are described in Sections 1271-1273 and 1275 of the
Internal Revenue Code of 1986, as amended, 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 term
notes. For purposes of this tax discussion, references to a "noteholder" or a
"holder" are to the beneficial owner of a term 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 Section 7701(a)(19)(C)(v) of the Internal Revenue Code of 1986, as
amended; and notes held by a real estate investment trust will not constitute
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Internal
Revenue Code of 1986, as amended, and interest on notes will not be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Internal Revenue Code of 1986, as
amended.
Original Issue Discount
The term notes are not expected to be considered issued with original
issue discount since the principal amount of the term 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 original issue discount, if any, on a note would 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.
In the case of 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 may 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 Payment 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, if the accrued interest to be paid on the first Payment
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.
Notwithstanding the general definition of original issue discount,
original issue discount on a note will be considered to be de minimis if it is
less than 0.25% of the stated redemption price of the note multiplied by its
weighted average maturity. For this purpose, the weighted average maturity of
the note is computed as the sum of the amounts determined, as to each payment
included in the stated redemption price of the note, by multiplying (1) the
number of complete years, rounding down for partial years, from the issue date
until the payment is expected to be made, possibly taking into account a
prepayment assumption, by (2) 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 note. 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 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 "Certain Federal Income Tax Considerations--Market Discount" in this
prospectus supplement for a description of the election under the OID
Regulations.
If original issue discount on a note is in excess of a de minimis
amount, the holder of the note 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, 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
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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:
. 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
. the daily portions of original issue discount for all days during
the accrual period prior to that day, less
. any principal payments made during the accrual period relating to
the note.
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
Section 1276 of the Internal Revenue Code of 1986, as amended, 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 "Certain Federal Income Tax Consequences--Premium" in this
prospectus supplement. 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 of Section 1276 of the Internal Revenue Code of 1986, as amended,
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 "Certain Federal Income
Tax Consequences--Original Issue Discount" in this prospectus supplement.
Section 1276(b)(3) of the Internal Revenue Code of 1986, as amended,
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
Section 1276 of the Internal Revenue Code of 1986, as amended, 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: (1) on the basis of
a constant yield method, or (2) 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.
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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 Section 1277 of the Internal Revenue Code of 1986, as
amended, 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 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 "Certain Federal Income Tax
Consequences--Market Discount" in this prospectus supplement. 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 Section 171 of the
Internal Revenue Code of 1986, as amended.
Realized Losses
Under Section 166 of the Internal Revenue Code of 1986, as amended,
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 of 1986, as
amended, 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
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capital gain or loss, provided the note is held as a capital asset, in most
cases, property held for investment, within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended.
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 in this prospectus supplement under "Certain Federal Income
Tax Considerations--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 of 1986, as amended. 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.
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 of 1986, as amended, 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 (1) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (2) 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
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after December 31, 2000, 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
"Certain Federal Income Tax Consequences," potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the term notes offered by this prospectus supplement and the
accompanying 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
The term notes are eligible for purchase by any Plan. Any fiduciary or
other investor of Plan assets that proposes to acquire or hold the term notes on
behalf of or with assets of any 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 the
Internal Revenue Code of 1986, as amended, to the proposed investment. See
"ERISA Considerations" in the prospectus.
Each purchaser of a term note, by its acceptance of the term note,
shall be deemed to have represented that the acquisition and holding of the term
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 of 1986, as amended, for which no statutory, regulatory or administrative
exemption is available. See "ERISA Considerations" in the prospectus.
The term notes may not be purchased with the assets of a Plan if the
underwriters, the depositor, the servicer, the indenture trustee, the owner
trustee, the Enhancer or any of their affiliates:
. has investment or administrative discretion with respect to the
Plan assets;
. has authority or responsibility to give, or regularly gives,
investment advice regarding the 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 Plan assets
and will be based on the particular investment needs for the
Plan; or
. is an employer maintaining or contributing to the Plan.
On January 5, 2000, the DOL published final regulations under Section
401(c) of ERISA. The final 401(c) Regulations will take effect on July 5, 2001.
The sale of any of the term notes to a Plan is in no respect a
representation by the issuer or the underwriters that the investment meets all
relevant legal requirements with respect to investments by Plans generally or
any particular Plan, or that the investment is appropriate for Plans generally
or any particular Plan.
Legal Investment
The term notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
Accordingly, many institutions with legal authority to invest in
mortgage-related securities may not be legally authorized to invest in the term
notes. No representation is made herein as to whether the term 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 term notes as legal investments for such
purchasers prior to investing in the term notes. See "Legal Investment Matters"
in the prospectus.
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Underwriting
Subject to the terms and conditions set forth in the Underwriting
Agreement, the underwriters have agreed to purchase, and the depositor has
agreed to sell to the underwriters, the term notes.
In the Underwriting Agreement, the underwriters have agreed, subject to
the terms and conditions set forth in the Underwriting Agreement, to purchase
all of the term notes if any of the term notes are purchased.
The distribution of the term notes by the underwriters 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 term notes, before deducting expenses payable by the
depositor, will be approximately 99.77% of the aggregate Term Note Balance as of
the closing date.
The depositor has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or contribute to payments the underwriters may be required to make in respect of
those liabilities. The depositor is an affiliate of an underwriter, Newman &
Associates, Inc.
The underwriters intend to make a secondary market in the term notes,
but have no obligation to do so. There can be no assurance that a secondary
market for the term notes will develop, or if it does develop, that it will
provide holders of the term notes with liquidity of investment at any particular
time or for the life of the term notes. The term notes will not be listed on any
securities exchange.
Upon receipt of a request by an investor who has received an electronic
prospectus supplement and prospectus from either underwriter or a request by
that investor's representative within the period during which there is an
obligation to deliver a prospectus supplement and prospectus, the depositor or
the applicable underwriter will promptly deliver, or cause to be delivered,
without charge, a paper copy of the prospectus supplement and prospectus.
Until 90 days from the date of this prospectus supplement, all dealers
effecting transactions in the term notes, whether or not participating in this
distribution, may be required to deliver a prospectus supplement and prospectus.
This is in addition to the obligation of dealers to deliver a prospectus
supplement and prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
Experts
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1998 and December 31, 1997 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1998,
incorporated by reference in this prospectus supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
Legal Matters
Certain legal matters with respect to the term notes will be passed
upon for the depositor by Orrick, Herrington & Sutcliffe LLP, New York, New York
and for the underwriters by Brown & Wood, LLP, New York, New York.
Ratings
It is a condition to issuance the term notes that they be rated "Aaa"
by Moody's Investors Service, Inc., or Moody's, and "AAA" by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard &
Poor's. The depositor has not requested a rating on the term notes by any rating
agency other than Moody's and Standard & Poor's. However, there can be no
assurance as to whether any other rating agency will rate the term notes or, if
it does, what rating would be assigned by any other rating agency. Any rating on
the term notes by another rating agency could be lower than the ratings assigned
to the term notes by Moody's and Standard
S-99
<PAGE>
& Poor's. A securities rating addresses the likelihood of the receipt by the
holders of the term notes of distributions on the mortgage loans. The rating
takes into consideration the structural, legal and tax aspects associated with
the certificates and the term notes, but does not address Interest Shortfalls.
The ratings on the term notes do not constitute statements regarding the
possibility that the holders of the term notes 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.
S-100
<PAGE>
Appendix A
Initial HELOCs -- Characteristics of Loan Groups I and II
Initial Group I HELOC Characteristics
Set forth below is a description of certain additional characteristics
of the initial HELOCs in Loan Group I as of the cut-off date. Unless otherwise
specified, all principal balances of the initial HELOCs in Loan Group I are as
of the cut-off date and are rounded to the nearest dollar. Except as otherwise
indicated, all percentages are approximate percentages by the aggregate
principal balance as of the cut-off date of the initial HELOCs in Loan Group I.
Entries in the tables may not add to 100.00% due to rounding.
<TABLE>
<CAPTION>
Property Type of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Property Type Group I HELOCs Cut-Off Date Cut-Off Date
- ------------- -------------- ------------ ------------
<S> <C> <C> <C>
Condominium............................... 493 $11,775,331.91 7.00%
Duplex.................................... 2 22,556.20 0.01%
Manufactured Housing...................... 2 26,997.90 0.02%
PUD....................................... 324 8,632,006.32 5.13%
Single Family............................. 6,389 147,327,292.74 87.54%
Two-Family................................ 31 511,121.22 0.30%
-- ---------- -----
Total........................... 7,241 $168,295,306.29 100.00%
Occupancy Types of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Occupancy Number of Initial of the as of the
(as indicated by Borrower) Group I HELOCs Cut-Off Date Cut-Off Date
- -------------------------- -------------- ------------ ------------
Owner Occupied............................ 7,173 $166,471,849.73 98.92%
Non-Owner Occupied........................ 68 1,823,456.56 1.08%
-- ------------ -----
Total........................... 7,241 $168,295,306.29 100.00%
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
Principal Balances of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Range of Principal Balances ($) Group I HELOCs Cut-Off Date Cut-Off Date
- ------------------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$0.00 to $25,000.00....... 4,925 $62,692,979.11 37.25%
$25,000.01 to $50,000.00....... 1,717 61,948,280.51 36.81%
$50,000.01 to $75,000.00....... 373 22,889.412.10 13.60%
$75,000.01 to $100,000.00...... 208 18,495,135.87 10.99%
$100,000.01 to $125,000.00...... 13 1,475,799.12 0.88%
$125,000.01 to $150,000.00...... 3 442,234,97 0.26%
$150,000.01 to $175,000.00...... 1 151,464.61 0.09%
$175,000.01 to $200,000.00...... 1 200,000.00 0.12%
- ---------- -----
Total.......................... 7,241 $168,295,306.29 100.00%
. The average principal balance of the initial HELOCs in Loan Group I as of
the cut-off date is approximately $23,242.00.
Combined Loan-to-Value Rations of Group I HELOC Loans
Percent of
Initial Group I
HELOCs by
Principal Balance as Principal Balance
Range of Combined Number of Initial of the as of the
Loan-to-Value Ratios(%) Group I HELOCs Cut-Off Date Cut-Off Date
- ----------------------- -------------- ------------ ------------
0.000% to 50.000%............. 423 $ 9,742,369.57 5.79%
50.001% to 60.000%............. 291 6,320,114.43 3.76%
60.001% to 70.000%............. 569 13,583,652.21 8.07%
70.001% to 80.000%............. 2,360 51,427,591.28 30.56%
80.001% to 90.000%............. 2,365 51,258,006.73 30.46%
90.001% to 100.000%............ 1,233 35,963,572.07 21.37%
----- ------------- ------
Total........................... 7,241 $168,295,306.29 100.00%
. The minimum and maximum CLTV Ratios of the initial HELOCs in Loan Group I
as of the cut-off date are approximately 5.45% and 100.00%, respectively,
and the weighted average CLTV Ratio of the initial HELOCs in Loan Group I
as of the cut-off date is approximately 80.63%.
Geographical Distributions of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Location Group I HELOCs Cut-Off Date Cut-Off Date
- -------- -------------- ------------ ------------
California............................... 2,368 $63,963,594.68 38.01%
Michigan................................. 863 18,222,136.77 10.83%
New Jersey............................... 257 6,316,952.97 3.75%
Florida.................................. 275 6,194,548.53 3.68%
New York................................. 222 5,648,294.28 3.36%
Other.................................... 3,256 67,949,779.06 40.38%
----- ------------- ------
Total........................... 7,241 $168,295,306.29 100.00%
. "Other" includes states and the District of Columbia with under 3.00%
concentrations individually.
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Junior Ratios of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Range of Junior Ratios (%) Group I HELOCs Cut-Off Date Cut-Off Date
- -------------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
0.00% to 9.99%................. 882 $16,483,094.80 9.79%
10.00% to 19.99%................ 3,198 62,961,637.00 37.41%
20.00% to 29.99%................ 1,753 47,424,922.67 28.18%
30.00% to 39.99%................ 782 23,475,850.87 13.95%
40.00% to 49.99%................ 316 8,359,300.09 4.97%
50.00% to 59.99%................ 154 4,485,639.62 2.67%
60.00% to 69.99%................ 67 2,542,180.84 1.51%
70.00% to 79.99%................ 37 1,124,708.94 0.67%
80.00% to 89.99%................ 27 678,532.04 0.40%
90.00% to 100.00%............... 25 759,439.42 0.45%
-- ---------- -----
Total........................... 7,241 $168,295.306.29 100.00%
. The weighted average Junior Ratio of the initial HELOCs in Loan Group I as
of the cut-off date is approximately 23.49%.
Loan Rates of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Range of Loan Rates(%) Group I HELOCs Cut-Off Date Cut-Off Date
- ---------------------- -------------- ------------ ------------
0.001% to 8.000%............... 5,496 $125,230,610.03 74.41%
8.001% to 9.000%............... 91 1,837,864.80 1.09%
9.001% to 10.000%.............. 398 8,475,816.44 5.04%
10.001% to 11.000%.............. 395 8,191,588.05 4.87%
11.001% to 12.000%.............. 291 7,691,271.18 4.57%
12.001% to 13.000%.............. 364 10,861,284.87 6.45%
13.001% to 14.000%.............. 206 6,006,870.92 3.57%
--- ------------ -----
Total........................... 7,241 $168,295,306.29 100.00%
. The weighted average loan rate of the initial HELOCs in Loan Group I as of
the cut-off date is approximately 7.88%.
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
Fully Indexed Gross Margin of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Range of Fully Indexed Gross Margins(%) Group I HELOCs Cut-Off Date Cut-Off Date
--------------------------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Less than 0.000%............... 7 $ 243,683.80 0.14%
0.000% to 1.000%............... 3,152 67,069,417.07 39.85%
1.001% to 2.000%............... 1,831 37,261,039.86 22.14%
2.001% to 3.000%............... 703 19,158,396.42 11.38%
3.001% to 4.000%............... 691 20,048,033.61 11.91%
4.001% to 5.000%............... 854 24,379,167.04 14.49%
5.001% to 6.000%............... 3 135,568.49 0.08%
- ---------- -----
Total........................... 7,241 $168,295,306.29 100.00%
. The weighted average fully indexed gross margin of the initial HELOCs in
Loan Group I as of the cut-off date is approximately 2.09% per annum.
Credit Utilization Rates of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Range of Credit Number of Initial of the as of the
Utilization Rates (%) Group I HELOCs Cut-Off Date Cut-Off Date
- ---------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
0.01% to 30.00%............... 1,351 $ 9,145,692.64 5.43%
30.01% to 35.00%............... 220 2,497,497.33 1.48%
35.01% to 40.00%............... 245 3,180,786.98 1.89%
40.01% to 45.00%............... 189 2,795,297.50 1.66%
45.01% to 50.00%............... 238 3,577,880.61 2.13%
50.01% to 55.00%............... 227 3,865,487.43 2.30%
55.01% to 60.00%............... 221 4,202,899.15 2.50%
60.01% to 65.00%............... 205 4,294,593.03 2.55%
65.01% to 70.00%............... 210 4,854,281.41 2.88%
70.01% to 75.00%............... 303 7,258,975.80 4.31%
75.01% to 80.00%............... 258 6,578,475.95 3.91%
80.01% to 85.00%............... 231 6,372,645.29 3.79%
85.01% to 90.00%............... 263 7,979,480.18 4.74%
90.01% to 95.00%............... 241 7,369,521.37 4.38%
95.01% to 100.00%.............. 2,825 93,790,526.03 55.73%
100.01% or greater....................... 14 531,265.59 0.32%
-- ---------- -----
Total........................... 7,241 $168,295,306.29 100.00%
</TABLE>
. The weighted average credit utilization rate of the initial HELOCs in Loan
Group I as of the cut-off date, based on the credit limits of the initial
HELOCs in Loan Group I as of the cut-off date is approximately 83.39%.
A-4
<PAGE>
<TABLE>
<CAPTION>
Credit Limits of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Range of Credit Limits ($) Group I HELOCs Cut-Off Date Cut-Off Date
- -------------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
$0.01 to $ 25,000.00..... 3,167 $40,419,064.71 24.02%
$25,000.01 to $ 50,000.00..... 2,962 73,303,829.48 43.56%
$50,000.01 to $ 75,000.00..... 569 24,411,158.25 14.50%
$75,000.01 to $100,000.00...... 504 26,864,230.40 15.96%
$100,000.01 to $125,000.00...... 28 2,315,284.08 1.38%
$125,000.01 to $150,000.00...... 6 694,122.83 0.41%
$175,000.01 to $200,000.00...... 3 229,016.23 0.14%
$225,000.01 to $250,000.00...... 2 58,600.31 0.03%
- --------- -----
Total........................... 7,241 $168,295,306.29 100.00%
. The average of the credit limits of the initial HELOCs in Loan Group I as
of the cut-off date is approximately $35,378.22.
Maximum Loan Rates of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Maximum Loan Rates (%) Group I HELOCs Cut-Off Date Cut-Off Date
- ---------------------- -------------- ------------ ------------
14.001% to 15.000%.............. 134 $ 2,566,007.77 1.52%
15.001% to 16.000%.............. 105 2,386,049.11 1.42%
17.001% to 18.000%.............. 1,646 34,544,278.83 20.53%
18.001% to 19.000%.............. 5,356 128,798,970.58 76.53%
----- -------------- ------
Total.......................... 7,241 $168,295,306.29 100.00%
. The weighted average maximum loan rate of the initial HELOCs in Loan Group
I as of the cut-off date is approximately 18.31%.
Months Remaining to Scheduled Maturity of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Range of Months Group I HELOCs Cut-Off Date Cut-Off Date
- --------------- -------------- ------------ ------------
0 to 60..................... 7 $ 123,100.93 0.07%
61 to 120.................... 4,070 76,789,703.04 45.63%
121 to 180.................... 1,285 38,711,065.56 23.00%
241 to 300.................... 1,877 52,621,036.76 31.27%
301 or greater........................... 2 50,400.00 0.03%
- --------- -----
Total........................... 7,241 $168,295,306.29 100.00%
</TABLE>
. The weighted average months remaining to scheduled maturity of the initial
HELOCs in Loan Group I as of the cut-off date is approximately 187 months.
A-5
<PAGE>
<TABLE>
<CAPTION>
Origination Year of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Origination Year Group I HELOCs Cut-Off Date Cut-Off Date
- ---------------- -------------- ------------ ------------
<C> <C> <C> <C>
1990..................................... 1 $ 45,000.00 0.03%
1993..................................... 2 34,735.12 0.02%
1994..................................... 2 2,194.97 0.00%
1995..................................... 7 116,779.63 0.07%
1996..................................... 4 72,369.52 0.04%
1997..................................... 15 134,407.54 0.08%
1998..................................... 106 1,422,281.64 0.85%
1999..................................... 6,614 152,882,256.06 90.84%
2000..................................... 490 13,585,281.81 8.07%
--- ------------- -----
Total........................... 7,241 $168,295,306.29 100.00%
Lien Priority of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Lien Position Group I HELOCs Cut-Off Date Cut-Off Date
- ------------- -------------- ------------ ------------
First.................................... 212 $ 8,372,190.89 4.97%
Second................................... 7,029 159,923,115.40 95.03%
----- -------------- ------
Total........................... 7,241 $168,295,306.29 100.00%
Debt-to-Income Ratios of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Range of Debt-to-Income Ratios (%) Group I HELOCs Cut-Off Date Cut-Off Date
---------------------------------- -------------- ------------ ------------
<S> <C> <C> <C>
0.00% to 9.99%.................. 26 $ 710,290.01 0.42%
10.00% to 19.99%................... 462 8,739,230.05 5.19%
20.00% to 29.99%................... 1,592 32,201,613.49 19.13%
30.00% to 39.99%................... 2,336 52,899,833.11 31.43%
40.00% to 49.99%................... 2,359 60,920,723.07 36.20%
50.00% to 59.99%................... 390 10,842,160.07 6.44%
60.00% to 69.99%................... 60 1,514,081.26 0.90%
70.00% to 79.99%................... 7 242,647.79 0.14%
80.00% to 89.99%................... 2 69,563.03 0.04%
90.00% or greater................. 7 155,164.41 0.09%
- ---------- -----
Total........................... 7,241 $168,295,306.29 100.00%
</TABLE>
A-6
<PAGE>
<TABLE>
<CAPTION>
Teaser Expiration Month of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Teaser Expiration Month Group I HELOCs Cut-Off Date Cut-Off Date
- ----------------------- -------------- ------------ ------------
<S> <C> <C> <C>
No Teaser................................ 1,745 $43,064,696.26 25.59%
February 2000............................ 1,052 27,829,753.62 16.54%
March 2000............................... 1,292 33,930,271.42 20.16%
April 2000............................... 740 14,301,696.52 8.50%
May 2000................................. 859 14,424,739.63 8.57%
June 2000................................ 1,230 27,224,982.26 16.18%
July 2000................................ 320 7,443,302.64 4.42%
February 2002............................ 1 11,885.85 0.01%
February 2010............................ 1 48,982.54 0.03%
May 2010................................. 1 14,995.55 0.01%
- --------- -----
Total........................... 7,241 $168,295,306.29 100.00%
Documentation Type of Group I HELOC Loans
Percent of
Initial Group I HELOCs by
Principal Balance as Principal Balance
Number of Initial of the as of the
Documentation Group I HELOCs Cut-Off Date Cut-Off Date
- ------------- -------------- ------------ ------------
Standard................................. 4,706 $121,739,406.07 72.34%
No Income No Appraisal................... 919 13,722,559.75 8.18%
Family First Direct...................... 663 12,595,767.36 7.48%
No Income Verification................... 662 12,579,802.86 7.47%
Select................................... 162 4,861,611.57 2.89%
GM Expanded Family....................... 35 892,150.90 0.53%
Super Express............................ 54 884,718.74 0.53%
Streamline............................... 19 677,925.81 0.40%
Alternative.............................. 13 144,221.83 0.09%
Express.................................. 6 128,907.86 0.08%
Quick.................................... 2 18,233.54 0.01%
- --------- -----
Total.......................... 7,241 $168,295,306.29 100.00%
</TABLE>
A-7
<PAGE>
Initial Group II HELOC Characteristics
Set forth below is a description of certain additional characteristics
of the initial HELOCs in Loan Group II as of the cut-off date. Unless otherwise
specified, all principal balances of the initial HELOCs in Loan Group II are as
of the cut-off date and are rounded to the nearest dollar. Except as indicated
otherwise, all percentages are approximate percentages by aggregate principal
balance as of the cut-off date. Entries in the tables may not add to 100.00% due
to rounding.
<TABLE>
<CAPTION>
Property Type of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance as Principal Balance as
Number of Initial of the of the
Property Type Group II HELOCs Cut-Off Date Cut-Off Date
- ------------- --------------- ------------ ------------
<S> <C> <C> <C>
Single-Family Dwelling.................... 179 $16,316,419.39 92.57%
PUD....................................... 7 640,445.12 3.63%
Condominium............................... 12 670,013.50 3.80%
-- ---------- -----
Total........................... 198 $17,626,878.01 100.00%
Occupancy Types of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance as Principal Balance as
Occupancy Number of Initial of the of the
(as indicated by Borrower) Group II HELOCs Cut-Off Date Cut-Off Date
- -------------------------- --------------- ------------ ------------
Owner Occupied............................. 194 $17,237,878.01 97.79%
Non-Owner Occupied......................... 4 389,000.00 2.21%
- ---------- -----
Total........................... 198 $17,626,878.01 100.00%
Principal Balances of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Range of Principal Balances ($) Group II HELOCs Cut-Off Date Cut-Off Date
- ------------------------------- --------------- ------------ ------------
$0.00 to $25,000.00..... 46 $ 601,815.74 3.41%
$25,000.01 to $50,000.00..... 38 1,487,636.74 8.44%
$50,000.01 to $75,000.00..... 17 1,076,149.86 6.11%
$75,000.01 to $100,000.00...... 31 2,785,124.17 15.80%
$100,000.01 to $125,000.00...... 11 1,254,013.24 7.11%
$125,000.01 to $150,000.00...... 27 3,825,026.29 21.70%
$150,000.01 to $175,000.00...... 4 652,875.30 3.70%
$175,000.01 to $200,000.00...... 7 1,313,273.43 7.45%
$200,000.01 and greater.................. 17 4,630,963.24 26.27%
-- ------------ ------
Total........................... 198 $17,626,878.01 100.00%
</TABLE>
. The average principal balance of the initial HELOCs in Loan Group II as of
the cut-off date is approximately $89,024.64.
A-8
<PAGE>
<TABLE>
<CAPTION>
Combined Loan-to-Value Ratios of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance as Principal Balance
Range of Combined Number of Initial of the as of the
Loan-to-Value Ratios (%) Group II HELOCs Cut-Off Date Cut-Off Date
- ------------------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
0.000% to 50.000%.............. 8 $ 764,284.49 4.34%
50.001% to 60.000%.............. 8 1,123,971.08 6.38%
60.001% to 70.000%.............. 20 2,202,080.93 12.49%
70.001% to 80.000%.............. 109 9,077,641.38 51.50%
80.001% to 90.000%.............. 40 3,177,090.93 18.02%
90.001% to 100.000%.............. 13 1,281,809.20 7.27%
-- ------------ -----
Total............................. 198 $17,626.878.01 100.00%
. The minimum and maximum CLTV Ratios of the initial HELOCs in Loan Group II
as of the cut-off date are approximately 17.41% and 100.00%, respectively,
and the weighted average CLTV Ratio of the initial HELOCs in Loan Group II
as of the cut-off date is approximately 76.30%.
Geographical Distributions of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Location Group II HELOCs Cut-Off Date Cut-Off Date
- -------- --------------- ------------ ------------
California................................... 66 $6,158,430.30 34.94%
Michigan..................................... 61 4,528,429.20 25.69%
New Jersey................................... 9 1,007,389.26 5.72%
Washington................................... 4 986,713.30 5.60%
Colorado..................................... 7 806,706.59 4.58%
Other........................................ 51 4,139,209.36 23.48%
-- ------------ ------
Total............................. 198 $17,626,878.01 100.00%
</TABLE>
. "Other" includes states and the District of Columbia with under 3.00%
concentrations individually.
A-9
<PAGE>
<TABLE>
<CAPTION>
Junior Ratios of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Range of Junior Ratios (%) Group II HELOCs Cut-Off Date Cut-Off Date
- -------------------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
0.00% to 9.99%................... 2 $ 148,000.00 0.84%
10.00% to 19.99%................... 30 1,416,770.69 8.04%
20.00% to 29.99%................... 35 2,671,723.82 15.16%
30.00% to 39.99%................... 49 4,003,374.03 22.71%
40.00% to 49.99%................... 28 3,546,191.85 20.12%
50.00% to 59.99%................... 23 2,142,259,49 12.15%
60.00% to 69.99%................... 11 1,123,331.58 6.37%
70.00% to 79.99%................... 12 2,117,467.35 12.01%
80.00% to 89.99%................... 6 441,558.11 2.51%
90.00% to 100.00%.................. 2 16,201.09 0.09%
- --------- -----
Total............................... 198 $17,626,878.01 100.00%
. The weighted average Junior Rate of the initial HELOCs in Loan Group II as
of the cut-off date is approximately 44.05%.
Loan Rates of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Range of Loan Rates(%) Group II HELOCs Cut-Off Date Cut-Off Date
- ---------------------- --------------- ------------ ------------
0.001% to 8.000%.................. 161 $15,053,324.77 85.40%
8.001% to 9.000%.................. 3 219,328.02 1.24%
9.001% to 10.000%.................. 13 686,075.21 3.89%
10.001% to 11.000%.................. 10 791,314.45 4.49%
11.001% to 12.000%.................. 6 397,505.30 2.26%
12.001% to 13.000%.................. 2 139,446.62 0.79%
13.001% to 14.000%.................. 3 339,883.64 1.93%
- ---------- -----
Total............................... 198 $17,626,878.01 100.00%
</TABLE>
. The weighted average loan rate of the initial HELOCs in Loan Group II as of
the cut-off date is approximately 7.27%.
A-10
<PAGE>
<TABLE>
<CAPTION>
Fully Indexed Gross Margin of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Range of Fully Indexed Gross Margins(%) Group II HELOCs Cut-Off Date Cut-Off Date
--------------------------------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Less than 0.00%............................ 1 $ 20,500.00 0.12%
0.000% to 1.000%.................. 126 12,157,132.77 68.97%
1.001% to 2.000%.................. 42 2,861,822.56 16.24%
2.001% to 3.000%.................. 14 1,126,806.54 6.39%
3.001% to 4.000%.................. 10 991,365.56 5.62%
4.001% to 5.000%.................. 5 469,250.58 2.66%
---------- -----
Total............................. 198 $17,626,878.01 100.00%
</TABLE>
. The weighted average fully indexed gross margin of the initial HELOCs in
Loan Group II as of the cut-off date is approximately 1.14% per annum.
A-11
<PAGE>
<TABLE>
<CAPTION>
Credit Utilization Rates of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Range of Credit Utilization Rates (%) Group II HELOCs Cut-Off Date Cut-Off Date
- ------------------------------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
0.01% to 30.00%.................. 52 $ 960,807.51 5.45%
30.01% to 35.00%.................. 10 633,580.26 3.59%
35.01% to 40.00%.................. 4 211,540.28 1.20%
40.01% to 45.00%.................. 6 423,930.28 2.41%
45.01% to 50.00%.................. 4 326,272.78 1.85%
50.01% to 55.00%.................. 6 433,135.42 2.46%
55.01% to 60.00%.................. 7 737,180.24 4.18%
60.01% to 65.00%.................. 7 916,775.70 5.20%
65.01% to 70.00%.................. 5 510,677.35 2.90%
70.01% to 75.00%.................. 7 689,350.36 3.91%
75.01% to 80.00%.................. 7 1,045,158.49 5.93%
80.01% to 85.00%.................. 8 984,307.99 5.58%
85.01% to 90.00%.................. 3 356,581.94 2.02%
90.01% to 95.00%.................. 6 741,767.76 4.21%
95.01% to 100.00%................. 66 8,655,811.65 49.11%
-- ------------ ------
Total............................. 198 $17,626,878.01 100.00%
</TABLE>
. The weighted average credit utilization rate of the initial HELOCs in Loan
Group II as of the cut-off date, based on the credit limits of the initial
HELOCs in Loan Group II as of the cut-off date is approximately 80.00%.
A-12
<PAGE>
<TABLE>
<CAPTION>
Credit Limits of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Range of Credit Limits ($) Group II HELOCs Cut-Off Date Cut-Off Date
- -------------------------- --------------- ------------ ------------
$0.01 to $25,000.00.......... 1 $ 12,000.00 0.07%
$25,000.01 to $50,000.00.......... 25 690,462.06 3.92%
$50,000.01 to $75,000.00.......... 12 612,005.29 3.47%
$75,000.01 to $100,000.00......... 37 1,882,041.37 10.68%
$100,000.01 to $125,000.00......... 2 241,649.60 1.37%
$125,000.01 to $150,000.00......... 56 5,218,915.43 29.61%
$150,000.01 to $175,000.00......... 8 825,565.86 4.68%
$175,000.01 to $200,000.00......... 20 1,882,564.77 10.68%
$200,000.01 to $225,000.00......... 9 1,563,706.64 8.87%
$225,000.01 to $250,000.00......... 19 2,507,676.31 14.23%
$250,000.01 to $275,000.00......... 2 511,302.89 2.90%
$275,000.01 to $300,000.00......... 2 94,224.69 0.53%
$425,000.01 to $450,000.00......... 1 27,416.33 0.16%
$575,000.01 to $600,000.00......... 1 325,175.50 1.84%
$650,000.01 to $675,000.00......... 1 500,000.00 2.84%
$675,000.01 to $700,000.00......... 1 236,860.05 1.34%
$775,000.01 to $800,000.00......... 1 495,311.22 2.81%
- ---------- -----
Total............................. 198 $17,626,878.01 100.00%
. The average of the credit limits of the initial HELOCs in Loan Group II as
of the cut-off date is approximately $150,210.61.
Maximum Loan Rates of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Maximum Loan Rates (%) Group II HELOCs Cut-Off Date Cut-Off Date
- ---------------------- --------------- ------------ ------------
<S> <C> <C> <C>
14.001% to 15.000%................ 1 $ 45,282.85 0.26%
15.001% to 16.000%................ 1 90,499.65 0.51%
17.001% to 18.000%................ 76 5,551,525.84 31.49%
18.001% to 19.000%................ 120 11,939,569.67 67.74%
--- ------------- ------
Total............................. 198 $17,626,878.01 100.00%
</TABLE>
. The weighted average maximum loan rate of the initial HELOCs in Loan Group
II as of the cut-off date is approximately 18.32%.
A-13
<PAGE>
<TABLE>
<CAPTION>
Months Remaining to Scheduled Maturity of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Range of Months Group II HELOCs Cut-Off Date Cut-Off Date
- --------------- --------------- ------------ ------------
<C> <C> <C> <C> <C>
61 to 120.......................... 132 $11,474,882.33 65.10%
121 to 180.......................... 15 1,522,270.25 8.64%
241 to 300.......................... 50 4,479,725.43 25.41%
301 to greater...................... 1 150,000.00 0.85%
- ---------- -----
Total............................. 198 $17,626,878.01 100.00%
. The weighted average months remaining to scheduled maturity of the initial
HELOCs in Loan Group II as of the cut-off date is approximately 170 months.
Origination Year of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Origination Year Group II HELOCs Cut-Off Date Cut-Off Date
- ---------------- --------------- ------------ ------------
1993.......................................... 1 $ 6,450.00 0.04%
1998.......................................... 3 31,306.00 0.18%
1999.......................................... 171 15,897,129.41 90.19%
2000.......................................... 23 1,691,992.60 9.60%
-- ------------ -----
Total............................. 198 $17,626,878.01 100.00%
Lien Priority of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Lien Position Group II HELOCs Cut-Off Date Cut-Off Date
- ------------- --------------- ------------ ------------
<S> <C> <C> <C>
First..................................... 1 $ 136,000.00 0.77%
Second.................................... 197 17,490,878.01 99.23%
--- ------------- ------
Total........................... 198 $17,626,878.01 100.00%
</TABLE>
A-14
<PAGE>
<TABLE>
<CAPTION>
Debt-to-Income Ratios of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Range of Debt-to-Income Ratios (%) Group II HELOCs Cut-Off Date Cut-Off Date
---------------------------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
0.00% to 9.99%...................... 1 $ 248,209.28 1.41%
10.00% to 19.99%..................... 12 1,562,187.01 8.86%
20.00% to 29.99%..................... 31 1,929,247.31 10.94%
30.00% to 39.99%..................... 66 6,143,095.78 34.85%
40.00% to 49.99%..................... 74 6,242,117.66 35.41%
50.00% to 59.99%..................... 9 711,676.74 4.04%
60.00% to 69.99%..................... 4 640,344.23 3.63%
80.00% to 89.99%..................... 1 150,000.00 0.85%
- ---------- -----
Total............................ 198 $17,626,878.01 100.00%
Teaser Expiration Month of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance Principal Balance
Number of Initial as of the as of the
Teaser Expiration Month Group II HELOCs Cut-Off Date Cut-Off Date
- ----------------------- --------------- ------------ ------------
No Teaser 37 $2,573,553.24 14.60%
February 2000............................... 23 1,892,448.44 10.74%
March 2000.................................. 54 5,289,050.17 30.01%
April 2000.................................. 23 1,763,903.70 10.01%
May 2000 14 2,048,329.64 11.62%
June 2000 34 3,133,039.39 17.77%
July 2000 13 926,553.43 5.26%
-- ---------- -----
Total............................. 198 $17,626,878.01 100.00%
</TABLE>
A-15
<PAGE>
<TABLE>
<CAPTION>
Documentation Type of Group II HELOC Loans
Percent of
Initial Group II
HELOCs by
Principal Balance as Principal Balance as
Number of Initial of the of the
Documentation Group II HELOCs Cut-Off Date Cut-Off Date
- ------------- --------------- ------------ ------------
<S> <C> <C> <C>
Standard................................... 109 $10,406,116.22 59.04%
Select..................................... 43 4,808,208.82 27.28%
Family First Direct........................ 25 1,339,176.94 7.60%
No Income Verification..................... 10 451,443.80 2.56%
Streamline................................. 4 373,626.47 2.12%
GM Expanded Family......................... 1 146,226.13 0.83%
No Income No Appraisal..................... 4 90.679.63 0.51%
Super Express.............................. 2 11,400.00 0.06%
- --------- -----
Total........................... 198 $17,626,878.01 100.00%
</TABLE>
A-16
<PAGE>
Appendix B
Form of Policy
OBLIGATIONS: $[ ] POLICY NUMBER: [ ]
------------------------ -
MBIA Insurance Corporation (the "Insurer"), in consideration of the
payment of the premium and subject to the terms of this Note Guaranty Insurance
Policy (this "Policy"), hereby unconditionally and irrevocably guarantees to any
Owner that an amount equal to each full and complete Insured Amount will be
received from the Insurer by Norwest Bank Minnesota, National Association, or
its successors, as indenture trustee for the Owners (the "Indenture Trustee"),
on behalf of the Owners, for distribution by the Indenture Trustee to each Owner
of each Owner's proportionate share of the Insured Amount. The Insurer's
obligations hereunder with respect to a particular Insured Amount shall be
discharged to the extent funds equal to the applicable Insured Amount are
received by the Indenture Trustee, whether or not those funds are properly
applied by the Indenture Trustee. Insured Amounts will be made only at the time
set forth in the Policy, and no accelerated Insured Amounts will be made
regardless of any acceleration of the notes, unless the acceleration is at the
sole option of the Insurer.
Notwithstanding the foregoing paragraph, this Policy does not cover
shortfalls, if any, attributable to the liability of the trust fund or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability), Interest Shortfalls or Relief Act
Shortfalls.
The Insurer will pay any Insured Amount that is a Preference Amount on
the Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (a) a certified copy of the order requiring the return of a
preference payment, (b) an opinion of counsel satisfactory to the Insurer that
such order is final and not subject to appeal, (c) an assignment in such form as
is reasonably required by the Insurer, irrevocably assigning to the Insurer all
rights and claims of the Owner relating to or arising under the Obligations
against the debtor which made such preference payment or otherwise with respect
to such preference payment and (d) appropriate instruments to effect the
appointment of the Insurer as agent for such Owner in any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the Insurer, provided that if such documents are received after
12:00 noon, New York City time, on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Obligations to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Insurer will pay any other amount payable hereunder no later than
12:00 noon, New York City time, on the later of the Payment Date on which the
related Deficiency Amount is due or the third Business Day following receipt in
New York, New York on a Business Day by State Street Bank and Trust Company,
N.A., as Fiscal Agent for the Insurer, or any successor fiscal agent appointed
by the Insurer (the "Fiscal Agent"), of a Notice (as described below), 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 by the Fiscal Agent is not in proper form or is
otherwise insufficient for the purpose of making claim hereunder, it shall be
deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Indenture Trustee and the Indenture Trustee may submit an
amended Notice.
Insured Amounts due hereunder, unless otherwise stated herein, will be
disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the Owners
by wire transfer of immediately available funds in the amount of the Insured
Amount less, in respect of Insured Amounts related to Preference Amounts, any
amount held by the Indenture Trustee for the payment of such Insured Amount and
legally available therefor.
The Fiscal Agent is the agent of the Insurer only, and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Insurer to deposit, or cause to be deposited, sufficient funds to
make payments due under this Policy.
B-1
<PAGE>
Subject to the terms of the Agreement, the Insurer shall be subrogated
to the rights of each Owner to receive payments under the Obligations to the
extent of any payment by the Insurer hereunder.
As used herein, the following terms shall have the following meanings:
"Agreement" means the Indenture dated as of February [ ], 2000, among
the GMACM Home Equity Loan Trust 2000-HE1, as Issuer, and the Indenture Trustee,
as indenture trustee, without regard to any amendment or supplement thereto,
unless such amendment or supplement has been approved in writing by the Insurer.
"Business Day" means any day other than (a) a Saturday or a Sunday (b)
a day on which the Insurer is closed or (c) a day on which banking institutions
in New York City or in the city in which the corporate trust office of the
Indenture Trustee under the Agreement is located are authorized or obligated by
law or executive order to close.
"Deficiency Amount" means (a) with respect to any Payment Date, the
amount by which the aggregate amount of accrued interest on the notes (excluding
any Relief Act Shortfalls for such Payment Date) at the respective Note Rates on
such Payment Date exceeds the amount on deposit in the Note Payment Account
available for interest distributions on such Payment Date and (b)(i) with
respect to any Payment Date that is not the Final Payment Date, any Liquidation
Loss Amount for such Payment Date, to the extent not included in the Principal
Distribution Amount on such Payment Date or a reduction in the
overcollateralization amount or (ii) on the Final Payment Date, the aggregate
outstanding balance of the notes to the extent otherwise not paid on such date.
"Insured Amount" means (a) as of any Payment Date, any Deficiency
Amount and (b) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing by facsimile substantially in the form of Exhibit A attached hereto,
the original of which is subsequently delivered by registered or certified mail,
from the Indenture Trustee specifying the Insured Amount which shall be due and
owing on the applicable Payment Date.
"Owner" means each noteholder (as defined in the Agreement) who, on the
applicable Payment Date, is entitled under the terms of the applicable notes to
payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner
on the Obligations that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Agreement as of the date of
execution of this Policy, without giving effect to any subsequent amendment to
or modification of the Agreement unless such amendment or modification has been
approved in writing by the Insurer.
Any notice hereunder or service of process on the Fiscal Agent may be
made at the address listed below for the Fiscal Agent or such other address as
the Insurer shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
THIS 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 insurance provided by this Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
B-2
<PAGE>
This Policy is not cancelable for any reason. The premium on this
Policy is not refundable for any reason, including payment, or provision being
made for payment, prior to maturity of the Obligations.
IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed
and attested this [ ] day of [ ], [ ].
MBIA INSURANCE CORPORATION
By_________________________
Title______________________
Attest:
By _______________________________
Secretary
B-3
<PAGE>
EXHIBIT A
TO NOTE GUARANTY INSURANCE
POLICY NUMBER: [________]
NOTICE UNDER NOTE GUARANTY
INSURANCE POLICY NUMBER: [________]
State Street Bank and Trust Company, N.A., as Fiscal Agent
for MBIA Insurance Corporation
15th Floor
61 Broadway
New York, NY 10006
Attention: Municipal Registrar and
Paying Agency
MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
The undersigned, a duly authorized officer of [NAME OF INDENTURE TRUSTEE],
as indenture trustee (the "Indenture Trustee"), hereby certifies to State Street
Bank and Trust Company, N.A. (the "Fiscal Agent") and MBIA Insurance Corporation
(the "Insurer"), with reference to Note Guaranty Insurance Policy Number:
[_________________] (the "Policy") issued by the Insurer in respect of the $[ ]
GMACM Home Equity Loan Trust 2000-HE1 (the "Obligations"), that:
(a) the Indenture Trustee is the indenture trustee under the Servicing
Agreement, dated as of February [ ], 2000, among GMAC Home Equity Loan
Trust 2000-HE1, as Issuer, GMAC Mortgage Corporation, as Servicer, and the
Indenture Trustee, as indenture trustee for the Owners;
(b) the amount due under clause (a) of the definition of Deficiency
Amount for any Payment Date occurring on [_________________] (the
"Applicable Payment Date") is $[_________________];
(c) the amount due under clause (b) of the definition of Deficiency
Amount for the Applicable Payment Date is $[_________________];
(d) the sum of the amounts listed in paragraphs (b) and (c) above is
$[ ] (the "Deficiency Amount");
(e) the amount previously distributed payments on the Obligations that
is recoverable and sought to be recovered as a voidable preference by a
trustee in bankruptcy pursuant to the Bankruptcy Code in accordance with a
final nonappealable order of a court having competent jurisdiction is
$[_________________] (the "Preference Amount");
(f) the total Insured Amount due is $[___________], which amount
equals the sum of the Deficiency Amount and the Preference Amount;
(g) the Indenture Trustee is making a claim under and pursuant to the
terms of the Policy for the dollar amount of the Insured Amount set forth
in (d) above to be applied to the payment of the Deficiency Amount for the
Applicable Payment Date in accordance with the Agreement and for the dollar
amount of the Insured Amount set forth in (e) above to be applied to the
payment of any Preference Amount; and
(h) the Indenture Trustee directs that payment of the Insured Amount
be made to the following account by bank wire transfer of federal or other
immediately available funds in accordance with the terms of the Policy:
[INDENTURE TRUSTEE'S ACCOUNT NUMBER].
B-4
<PAGE>
Any capitalized term used in this Notice and not otherwise defined herein
shall have the meaning assigned thereto in the Policy.
Any Person Who Knowingly And With Intent To Defraud Any Insurance Company Or
Other Person Files An Application For Insurance Or Statement Of Claim Containing
Any Materially False Information, Or Conceals For The Purpose Of Misleading,
Information Concerning Any Fact Material Thereto, Commits A Fraudulent Insurance
Act, Which Is A Crime, And Shall Also Be Subject To A Civil Penalty Not To
Exceed Five Thousand Dollars And The Stated Value Of The Claim For Each Such
Violation.
IN WITNESS WHEREOF, the Indenture Trustee has executed and delivered this
Notice under the Policy as of the [_____] day of [_________________], [_____].
[NAME OF INDENTURE TRUSTEE], as Indenture
Trustee
By___________________________________
Title________________________________
B-5
<PAGE>
$300,000,000
GMAC MORTGAGE CORPORATION
Seller and Servicer
GMACM HOME EQUITY LOAN TRUST 2000-HE1
Issuer
Residential Asset Mortgage Products, Inc.
Depositor
GMACM Home Equity Loan-Backed Term Notes, Series 2000-HE1
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
Underwriters
Bear, Stearns & Co. Inc. Newman & Associates, Inc.
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus supplement or the
prospectus and, if given or made, such information or representation must not
be relied upon. This prospectus supplement and the prospectus do not constitute
an offer to sell or a solicitation of an offer to buy any securities other than
the term notes offered hereby, nor an offer of the term notes in any state or
jurisdiction in which, or to any person to whom, such offer would be unlawful.
The delivery of this prospectus supplement or the prospectus at any time does
not imply that information herein or therein is correct as of any time
subsequent to its date; however, if any material change occurs while this
prospectus supplement or the prospectus is required by law to be delivered,
this prospectus supplement or the prospectus will be amended or supplemented
accordingly.
Until May 25, 2000, all dealers selling the term notes, whether or not
participating in this distribution, will deliver a prospectus supplement and
the prospectus to which it relates. This delivery requirement is in addition to
the obligation of dealers to deliver a prospectus supplement and prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
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 CERTIFICATES 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:
mortgage loans secured by first or junior liens on one- to four-family
residential properties;
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;
home improvement installment sales contracts and installment loan
agreements, either unsecured or secured;
manufactured housing installment sales contracts and installment loan
agreements; or
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.
February 22, 2000
<PAGE>
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:
this prospectus, which provides general information, some of which may not
apply to your series of securities; and
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 116.
-------------------
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Introduction........................... 4
The Trusts............................. 4
General............................ 4
Characteristics of Loans........... 6
Revolving Credit Loans............. 12
The Contracts...................... 14
Mexico Loans....................... 15
The Mortgaged Properties........... 16
The Agency Securities.............. 17
Private Securities................. 18
Trust Asset Program.................... 19
Underwriting Standards............. 19
The Negotiated Conduit Asset
Program.......................... 23
Description of the Securities.......... 25
General............................ 25
Form of Securities................. 25
Assignment of Loans................ 27
Representations with Respect to
Loans............................ 29
Repurchases of Loans............... 30
Limited Right of Substitution...... 32
Certain Insolvency and Bankruptcy
Issues........................... 33
Assignment of Agency or Private
Securities....................... 33
Excess Spread and Excluded
Spread........................... 33
Payments on Loans.................. 34
Withdrawals from the Custodial
Account.......................... 36
Distributions of Principal and
Interest on the Securities....... 37
Advances........................... 38
Prepayment Interest Shortfalls..... 39
Funding Account.................... 39
Reports to Securityholders......... 40
Servicing and Administration of
Loans............................ 41
Description of Credit Enhancement...... 45
General............................ 45
Letters of Credit.................. 46
Subordination...................... 47
Overcollateralization.............. 48
Mortgage Pool Insurance Policies... 48
Special Hazard Insurance
Policies......................... 50
Bankruptcy Bonds................... 50
Reserve Funds...................... 51
Financial Guaranty Insurance
Policies; Surety Bonds........... 51
Maintenance of Credit
Enhancement...................... 52
Reduction or Substitution of Credit
Enhancement...................... 52
Other Financial Obligations Related to
the Securities....................... 53
Swaps and Yield Supplement
Agreements....................... 53
Purchase Obligations............... 53
Insurance Policies on Loans............ 54
Primary Insurance Policies......... 54
Standard Hazard Insurance on
Mortgaged Properties............. 55
Standard Hazard Insurance on
Manufactured Homes............... 56
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of FHA Insurance Under
Title I.......................... 57
FHA Mortgage Insurance............. 59
VA Mortgage Guaranty............... 59
The Depositor.......................... 60
Residential Funding Corporation........ 60
The Agreements......................... 60
Events of Default; Rights Upon
Event of Default................. 61
Amendment.......................... 64
Termination; Retirement of
Securities....................... 65
The Trustee........................ 66
The Owner Trustee.................. 66
The Indenture Trustee.............. 66
Yield Considerations................... 67
Maturity and Prepayment
Considerations....................... 70
Certain Legal Aspects of the Loans..... 74
The Mortgage Loans................. 74
The Manufactured Housing
Contracts........................ 83
The Home Improvement Contracts..... 85
Enforceability of Certain
Provisions....................... 86
Consumer Protection Laws........... 87
Applicability of Usury Laws........ 87
Environmental Legislation.......... 87
Soldiers' and Sailors' Civil Relief
Act of 1940...................... 88
Default Interest and Limitations on
Prepayments...................... 89
Forfeitures in Drug and RICO
Proceedings...................... 89
Negative Amortization Loans........ 89
Material Federal Income Tax
Consequences......................... 90
General............................ 90
Classification of REMICs and
FASITs........................... 90
Taxation of Owners of REMIC and
FASIT Regular Certificates....... 91
Pass-through Entities Holding FASIT
Regular Certificates............. 96
Taxation of Owners of REMIC
Residual Certificates............ 96
Backup Withholding with Respect to
Securities....................... 104
Foreign Investors in Regular
Certificates..................... 104
State and Other Tax Consequences....... 105
ERISA Considerations................... 105
ERISA Plan Asset Regulations....... 106
Prohibited Transaction
Exemptions....................... 107
Insurance Company General
Accounts......................... 110
Representations From Investing
Plans............................ 110
Tax-Exempt Investors............... 111
Consultation with Counsel.......... 111
Legal Investment Matters............... 112
Use of Proceeds........................ 113
Methods of Distribution................ 113
Legal Matters.......................... 114
Financial Information.................. 114
Additional Information................. 114
Reports to Securityholders............. 115
Incorporation of Certain Information by
Reference............................ 115
Glossary............................... 116
</TABLE>
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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:
one- to four-family first or junior lien mortgage loans, including
closed-end home equity loans, Home Loans and Cooperative Loans;
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;
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;
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;
partial balances of, or partial interests in, any of the assets described
above;
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;
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 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;
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;
hazard insurance policies and primary insurance policies, if any; and
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.'
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Unless the context indicates otherwise, as used in this prospectus, mortgage
loans includes:
mortgage loans or closed-end home equity loans secured by first or junior
liens on one- to four- family residential properties;
Home Loans; and
Cooperative Loans.
Unless the context indicates otherwise, as used in this prospectus,
Contracts includes:
manufactured housing contracts; and
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 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:
directly or through its affiliates, including Residential Funding
Corporation;
sellers who are affiliates of the depositor including HomeComings Financial
Network, Inc., Residential Money Centers, Inc., and GMAC Mortgage
Corporation; or
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
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<PAGE>
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 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:
adjustable rate loans, known as ARM loans;
negatively amortizing ARM loans;
Balloon Loans;
Convertible Mortgage Loans;
Buy-Down Loans;
Additional Collateral Loans;
Pledged Asset Mortgage Loans;
simple interest loans;
actuarial loans;
delinquent loans;
re-performing loans;
Mexico Loans;
Cooperative Loans;
6
<PAGE>
High Cost Loans;
GPM Loans;
GEM Loans;
fixed rate loans;
loans that have been modified;
loans that provide for payment on a bi-weekly or other non-monthly basis
during the term of the loan; and
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:
the aggregate principal balance of the loans;
the type of property securing the loans and related lien priority, if any;
the original or modified and/or remaining terms to maturity of the loans;
the range of principal balances of the loans at origination or
modification;
the aggregate credit limits and the range of credit limits of the related
credit line agreements in the case of revolving credit loans;
the range of the years of origination of the loans;
the earliest origination or modification date and latest maturity date of
the loans;
the loan-to-value ratios, known as LTV ratios, or the combined LTV ratios
of the loans, as applicable;
the weighted average loan rate and range of loan rates borne by the loans;
the applicable index, the range of gross margins, the weighted average
gross margin, the frequency of adjustments and maximum loan rate;
the geographic distribution of the mortgaged properties;
the number and percentage of home improvement contracts that are partially
insured by the FHA under Title I;
the weighted average junior ratio and Credit Utilization Rate;
the weighted average and range of debt-to-income ratios;
the distribution of loan purposes; and
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.
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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 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:
the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of six months, one year or other terms to maturity;
the weekly auction average investment yield of U.S. Treasury bills of
various maturities;
the daily bank prime loan rate made available by the Federal Reserve Board;
the cost of funds of member institutions of any of the regional Federal
Home Loan Banks;
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
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
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<PAGE>
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 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:
Buy-Down Funds contributed by the seller of the mortgaged property or
another source and placed in the Buy-Down Account;
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<PAGE>
if the Buy-Down Funds are contributed on a present value basis, investment
earnings on the Buy-Down Funds; or
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 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
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
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<PAGE>
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:
acquired by the designated seller or Residential Funding Corporation as a
performing loan;
acquired under Residential Funding Corporation's negotiated conduit asset
program; or
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, 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.
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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:
the borrower agrees to pay a reduced monthly payment for a specified trial
period typically lasting 3 to 6 months;
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;
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
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.
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
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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:
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,
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
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:
a materially adverse change in the borrower's financial circumstances;
a decline in the value of the mortgaged property significantly below its
appraised value at origination; or
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:
the borrower's failure to make any payment as required;
any action or inaction by the borrower that materially and adversely
affects the mortgaged property or the rights in the mortgaged property; or
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:
a new appraisal or other indication of value is obtained; and
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
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.
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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.
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.
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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.
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
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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:
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,
a representation by the originator of the loan, which may be based solely
on the above clause, or
the fact that the mailing address for the borrower is the same as the
address of the mortgaged property.
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 practicable, mortgage loans
that it deems to be of the quality and type that generally meets the purchase
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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.
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
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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 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
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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 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:
a statistical valuation;
a broker's price opinion;
an automated appraisal, drive by appraisal or other certification of value;
or
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
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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:
a representation by the related seller as to value;
an appraisal or other valuation obtained prior to origination; or
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 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
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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.
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
negotiated conduit asset program are not typically purchased pursuant to master
commitments.
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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
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 NEGOTIATED CONDUIT ASSET PROGRAM
Some of the loans included in a trust may have been acquired and evaluated
under Residential Funding Corporations' negotiated conduit asset program. The
negotiated conduit asset 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 negotiated conduit asset program 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 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 Negotiated Conduit Asset Program Loans: Every
negotiated conduit asset program 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:
the mortgage loan's payment terms and characteristics,
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negotiated conduit asset program
the borrower's credit score,
the value of the mortgaged property which may be estimated using a broker's
price opinion or a statistical valuation,
the credit and legal documentation associated with the loan,
the seasoning of the loan,
a reevaluation of the financial capacity, eligibility and experience of the
seller and/or servicer of the loan, and
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 negotiated conduit asset program 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 negotiated conduit asset program loans may have missing or defective
loan documentation. Neither Residential Funding Corporation nor the seller will
be obligated to repurchase a negotiated conduit asset program 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:
a single class of securities;
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;
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;
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;
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
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
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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 Clearstream Bank, societe anonyme, formerly known as
Cedelbank, SA, or Clearstream, 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. Clearstream and Euroclear System will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream'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 Clearstream 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.
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 Clearstream
or Euroclear System participant as a result of a transaction with a DTC
participant, other than a depositary holding on behalf of Clearstream or
Euroclear System, will be credited during a subsequent securities settlement
processing day, which must be a business day for Clearstream 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 Clearstream
participants on that business day. Cash received in Clearstream or Euroclear
System as a result of sales of securities by or through a Clearstream
participant or Euroclear System participant to a DTC participant, other than the
depositary for Clearstream or Euroclear System, will be received with value on
the DTC settlement date, but will be available in the relevant Clearstream 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 Clearstream 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 Clearstream
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
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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.
Clearstream participants and Euroclear System participants may not deliver
instructions directly to the depositaries.
Clearstream, as a professional depository, holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between Clearstream participants through electronic
book-entry changes in accounts of Clearstream participants, thereby
eliminating the need for physical movement of securities. As a professional
depository, Clearstream 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.
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
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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 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:
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;
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;
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;
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
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
recorded for any transfer of the related lien and the assignment would be
delivered to the trustee, or the custodian.
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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 negotiated
conduit asset 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
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
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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 negotiated conduit asset program, or loans
underlying any private securities, for any loan, in most cases, Residential
Funding Corporation will represent and warrant that:
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;
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;
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;
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;
to the best of Residential Funding Corporation's knowledge, each mortgaged
property is free of material damage and is in good repair;
each loan complied in all material respects with all applicable local,
state and federal laws at the time of origination;
to the best of Residential Funding Corporation's knowledge, there is no
delinquent tax or assessment lien against the related mortgaged property;
and
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:
liens of real property taxes and assessments not yet due and payable;
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;
liens of any senior mortgages, in the case of loans secured by junior liens
on the related mortgaged property; and
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
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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.
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 negotiated conduit asset 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
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purchased or substituted 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:
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;
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;
have an LTV ratio or combined LTV ratio, as applicable, at the time of
substitution no higher than that of the repurchased loan;
have a remaining term to maturity not greater than, and not more than one
year less than, that of the repurchased loan;
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
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
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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
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.
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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:
all payments on account of principal of the loans comprising a trust;
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;
Liquidation Proceeds;
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;
any Buy-Down Funds and, if applicable, investment earnings thereon,
required to be paid to securityholders;
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;
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
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:
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;
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;
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;
in the case of the Payment Account, a trust account or accounts maintained
with the trustee; or
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.
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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:
the amount of any Advances made by the master servicer or the servicer as
described in this prospectus under ' -- Advances';
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;
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;
any distributions received on any Agency Securities or private securities
included in the trust; and
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.
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
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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:
to make deposits to the Payment Account as described in this prospectus
under ' -- Payments on Loans;'
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;
to pay to itself or any subservicer unpaid servicing fees and subservicing
fees, out of payments or collections of interest on each loan;
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;
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;
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
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represent interest on each loan, including any loan as to which title to
the underlying mortgaged property was acquired;
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;
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;
to withdraw any amount deposited in the Custodial Account that was not
required to be deposited in the Custodial Account;
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;
to pay to itself or any subservicer for the funding of any draws made on
the revolving credit loans, if applicable;
to make deposits to the funding account in the amounts and in the manner
provided in the related agreement, if applicable; and
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 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.
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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
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 negotiated conduit asset 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
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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.
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
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
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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):
the aggregate amount of interest collections and principal collections, if
applicable;
the amount, if any, of the distribution allocable to principal;
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;
the aggregate unpaid principal balance of the loans after giving effect to
the distribution of principal on that distribution date;
the outstanding principal balance or notional amount of each class of
securities after giving effect to the distribution of principal on that
distribution date;
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;
the book value of any property acquired by the trust through foreclosure or
grant of a deed in lieu of foreclosure;
the balance of the reserve fund, if any, at the close of business on that
distribution date;
the percentage of the outstanding principal balances of the senior
securities, if applicable, after giving effect to the distributions on that
distribution date;
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;
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;
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;
the servicing fee payable to the master servicer or the servicer and the
subservicer;
the aggregate amount of any Draws;
the FHA insurance amount, if any; and
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.
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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:
collection of payments from borrowers and remittance of those collections
to the master servicer or servicer in the case of a subservicer;
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;
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;
attempting to cure delinquencies;
supervising foreclosures;
collections on Additional Collateral;
inspection and management of mortgaged properties under various
circumstances; and
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
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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,
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.
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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
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:
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;
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;
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
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 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
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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
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
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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.'
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:
a letter of credit;
subordination provided by any class of subordinated securities for the
related series;
overcollateralization;
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;
a reserve fund;
a financial guaranty insurance policy or surety bond;
derivatives products; or
another form as may be described in the accompanying prospectus supplement.
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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:
Defaulted Mortgage Losses;
Special Hazard Losses;
Bankruptcy Losses; and
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, 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:
the amount payable under the credit enhancement arrangement, if any,
provided for a series;
any conditions to payment thereunder not otherwise described in this
prospectus;
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
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
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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.
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.
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.
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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.
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:
any required primary insurance policy is in effect for the defaulted loan
and a claim thereunder has been submitted and settled;
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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;
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
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), 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.'
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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.
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
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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 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.
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
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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.
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
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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.
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.
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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
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:
the insured percentage of the loss on the related mortgaged property;
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
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:
rents or other payments received by the insured (other than the proceeds of
hazard insurance) that are derived from the related mortgaged property;
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;
amounts expended but not approved by the primary insurer;
claim payments previously made on the mortgage loan; and
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:
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;
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
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
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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.
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
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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
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:
the net unpaid principal amount and the uncollected interest earned to the
date of default,
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,
uncollected court costs,
amount of attorney's fees on an hourly or other basis for time actually
expended and billed not to exceed $500, and
amount of expenses for recording the assignment of the security to the
United States.
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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.
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:
the amount of FHA insurance claims approved for payment related to those
loans, and
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
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.
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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
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.
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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
Nopvember 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
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,
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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.
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:
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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;
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
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
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.
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Indenture
An event of default under the indenture for each series of notes, in most
cases, will include:
default for five days or more in the payment of any principal of or
interest on any note of the series;
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;
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
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:
the holders of 100% of the then aggregate outstanding amount of the notes
of the series consent to that sale,
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
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
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:
the holder previously has given to the trustee written notice of default
and the continuance of that default,
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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,
the trustee has neglected or refused to institute that proceeding for 60
days after receipt of that request and indemnity, and
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:
to cure any ambiguity;
to correct or supplement any provision therein which may be inconsistent
with any other provision therein or to correct any error;
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;
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;
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
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
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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
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
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.
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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.
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
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
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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
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
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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.
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
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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
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
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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
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:
homeowner mobility;
economic conditions;
changes in borrowers' housing needs;
job transfers;
unemployment;
borrowers' equity in the properties securing the mortgages;
servicing decisions;
enforceability of due-on-sale clauses;
mortgage market interest rates;
mortgage recording taxes;
solicitations and the availability of mortgage funds; and
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.
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
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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
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
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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 negotiated conduit asset
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 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:
the rate of Principal Prepayments of the loans in the pool may be higher
than would otherwise be the case;
in some cases, the average credit or collateral quality of the loans
remaining in the pool may decline; and
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:
as to ARM loans, not increase or decrease the loan rates by more than a
fixed percentage amount on each adjustment date;
not increase the loan rates over a fixed percentage amount during the life
of any revolving credit loan or ARM loan; and
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
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of principal payments and Draws, if applicable, may be lower or higher that
would 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.
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
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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
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
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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 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
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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 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.'
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
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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.
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.
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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.
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
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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.
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
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
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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 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
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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;
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,
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
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
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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
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
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
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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.
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
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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
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
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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.
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
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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.
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
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contribute to the contamination. Furthermore, liability under CERCLA is not
limited to the original or unamortized principal 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.
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
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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
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.
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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. 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
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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
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
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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.
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.
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
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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 uncert ificated 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.
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
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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:
on the basis of a constant yield method,
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
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
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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.
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.
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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
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
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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.'
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 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
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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
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
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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
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:
will not be permitted to be offset by deductions, losses or loss carryovers
from other activities,
will be treated as 'unrelated business taxable income' to an otherwise
tax-exempt organization and
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.
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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
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
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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 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:
residual interests in the entity are not held by Disqualified
Organizations; and
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;
(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
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(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
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.
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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.
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.
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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.
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.
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
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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
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
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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
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
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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
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.
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.
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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.
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.
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.
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.
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:
the trust must consist solely of assets of the type that have been included
in other investment pools;
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
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:
(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:
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(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
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
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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, which were issued in final form on January 4, 2000
and generally become applicable on July 5, 2001, 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 July 5, 2001, 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 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 July 5, 2001.
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.
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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
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.
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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 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.
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.
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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:
by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters
by placements by the depositor with institutional investors through
dealers; and
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
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
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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, 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.
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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.
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 issued in final form on January 4, 2000.
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.
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.
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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.
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:
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
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described in Section 168(h)(2)(D) of the Internal Revenue Code the Federal
Home Loan Mortgage Corporation),
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
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:
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;
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
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.
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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.
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.
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.
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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.
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 the 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.
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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.
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.
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