<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-42510
PROSPECTUS SUPPLEMENT DATED NOVEMBER 20, 2000
(TO PROSPECTUS DATED SEPTEMBER 21, 2000)
$332,000,000
GMAC MORTGAGE CORPORATION
SELLER AND SERVICER
GMACM HOME EQUITY LOAN TRUST 2000-HE4
ISSUER
RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
DEPOSITOR
GMACM HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 2000-HE4
THE TRUST
o will issue two classes of term notes, the variable funding notes and
the certificates. Only the two classes of term notes are offered by
this prospectus supplement and the accompanying prospectus.
o will make payments on the notes and the certificates primarily from
collections on two groups of residential mortgage loans consisting of
home equity revolving credit line loans and home equity loans.
THE TERM NOTES
o will consist of the following two classes:
<TABLE>
<CAPTION>
NOTE
CLASS BALANCE DESIGNATIONS RATE
------- --------------- -------------- ---------
<S> <C> <C> <C>
A-1 $272,716,000 Senior Variable
A-2 $ 59,284,000 Senior Variable
</TABLE>
o currently have no trading market.
o are not deposits and are not insured or guaranteed by any governmental
agency.
CREDIT ENHANCEMENT WILL CONSIST OF:
o Excess interest, to the extent described in this prospectus
supplement;
o Overcollateralization and limited cross-collateralization, to the
extent described in this prospectus supplement; and
o 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 in this
prospectus supplement.
[MBIA LOGO OMITTED]
------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-18 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 November 29, 2000. The term notes will be
offered in the United States and Europe
BEAR, STEARNS & CO. INC. LEHMAN BROTHERS
<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:
o the accompanying prospectus, which provides general information,
some of which may not apply to a particular series of securities,
including your term notes; and
o 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.
<PAGE>
TABLE OF CONTENTS
PAGE S-
Summary........................................... 4
Risk Factors.......................................18
Introduction.......................................27
Description of the Mortgage Loans..................27
General .................................27
Initial HELOCs............................28
Loan Terms of the HELOCs..................29
Initial HELOC Characteristics.............31
Initial HELs..............................45
Loan Terms of the HELs....................45
Initial HEL Characteristics...............46
Conveyance of Subsequent Mortgage Loans;
the Pre-Funding Account and the Funding
Account..................................55
Underwriting Standards....................57
The Sellers and Servicer...........................60
General .................................60
Delinquency and Loss Experience of the
Servicer's Portfolio.....................60
Servicing and Other Compensation and
Payment of Expenses......................63
The Issuer.........................................63
The Owner Trustee..................................63
The Indenture Trustee..............................64
The Enhancer.......................................64
The Enhancer..............................65
Financial Information About the Enhancer..65
Where You Can Obtain Additional
Information About the Enhancer...........66
Financial Strength Ratings of the
Enhancer.................................66
Description of the Securities......................67
General .................................67
Book-Entry Notes..........................67
Payments on the Notes.....................70
Interest Payments on the Notes............70
Capitalized Interest Account..............71
PAGE S-
Principal Payments on the Notes...........72
Priority of Distributions.................72
Optional Transfers of Mortgage Loans to
Holders of Certificates..................74
Reserve Account...........................74
Overcollateralization and
Cross-collateralization..................75
The Paying Agent..........................75
Maturity and Optional Redemption..........75
Glossary of Terms.........................76
Description of the Policy..........................86
Yield and Prepayment Considerations................88
The Agreements.....................................96
The Purchase Agreement....................96
The Servicing Agreement...................98
The Trust Agreement and the Indenture....104
Use of Proceeds...................................110
Certain Legal Aspects of the Mortgage Loans.......110
Material Federal Income Tax Considerations........110
Status as Real Property Loans............111
Original Issue Discount..................111
Market Discount..........................113
Premium 115
Realized Losses..........................115
Sales of Notes...........................115
Backup Withholding.......................116
Tax Treatment of Foreign Investors.......116
New Withholding Regulations..............117
State and Other Tax Consequences..................117
ERISA Considerations..............................117
Legal Investment..................................118
Underwriting......................................118
Experts .........................................119
Legal Matters.....................................119
Ratings .........................................119
Appendix A - Form of Policy.......................A-1
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-HE4.
Title of the offered securities.............GMACM Home Equity Loan-Backed Term
Notes, Series 2000-HE4.
Variable Funding Notes......................GMACM Home Equity Loan-Backed
Variable Funding Notes, Series
2000-HE4. The variable funding notes
are not offered by this prospectus
supplement.
Certificates................................GMACM Home Equity Loan-Backed
Certificates, Series 2000-HE4. 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, or GMACM,
a Pennsylvania corporation, is the
originator of substantially all of
the mortgage loans. GMACM will be
the seller of some of the initial
mortgage loans and most of the
subsequent mortgage loans. The
remainder of the initial mortgage
loans and some of the subsequent
mortgage loans will be sold to the
depositor by a trust established by
an affiliate of GMACM, which in turn
acquired the mortgage loans from
GMACM. GMACM will also be the
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
Sellers 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...........................Wells Fargo Bank Minnesota, N.A.
S-4
<PAGE>
We refer you to "The Indenture
Trustee" in this prospectus
supplement for further information
on the indenture trustee.
Closing Date................................On or about November 29, 2000.
Cut-Off Date................................November 1, 2000.
Payment Date................................The 25th day of each month, or, if
that day is not a business day, the
next business day, beginning on
December 26, 2000.
Scheduled final payment date................November 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 FINAL PAYMENT DATE DESIGNATIONS
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A-1 Variable $272,716,000 Aaa/AAA/AAA November 25, 2030 Senior/
Variable Rate
A-2 Variable $59,284,000 Aaa/AAA/AAA November 25, 2030 Senior/
Variable Rate
Total Term $332,000,000
Notes
-------------------------------------------------------------------------------------------------------------------
</TABLE>
OTHER INFORMATION:
o 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 occur substantially earlier
than the dates listed above.
CLASS A-1 TERM NOTES
o 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 0.210% per annum;
(2) the weighted average net loan rate of the mortgage loans in the related
loan group; and
(3) 14.00% per annum.
o The margin for the Class A-1 term notes will increase to
0.420% per annum for each interest period beginning after the
payment date on which the clean-up call may first be exercised.
o Beginning on the 13th payment date, 0.50% will be subtracted from the
calculation of the rate in clause (2) above.
o 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
o 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 0.245% per annum;
(2) the weighted average net loan rate of the mortgage loans in the related
loan group; and
(3) 14.00% per annum.
S-6
<PAGE>
o The margin for the Class A-2 term notes will increase to 0.490% per annum for
each interest period beginning after the payment date on which the clean-up
call may first be exercised.
o Beginning on the 13th payment date, 0.50% will be subtracted from the
calculation of the rate in clause (2) above.
o 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.
S-7
<PAGE>
THE TRUST FUND The depositor will establish the GMACM Home
Equity Loan Trust 2000-HE4, 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 is approximate and 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 $249,054,805 and will consist of
home equity revolving credit line loans and home
equity loans.
Home Equity Revolving Credit Line Loans:
o The 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.
o No more than approximately 94.87% of the
initial home equity revolving credit
line loans (by aggregate principal
balance as of the cut-off date) are
secured by second 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:
o its cut-off date balance,
o plus any additional balances relating to
that home equity revolving credit line
loan sold to the issuer before that day,
o 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.
Home Equity Loans:
o 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.
o No more than approximately 95.27% of the
initial home equity loans (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.
o 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 included in Loan Group I had the following
characteristics:
Number of loans 6,943
Aggregate principal balance $147,390,593.21
Average principal balance $21,228.66
Range of principal balances $1,000.00 to $249,922.00
Weighted average interest rate 8.579%
Range of interest rates 5.990% to 14.490%
Weighted average maximum interest rate 18.140%
Weighted average original term 201 months
Weighted average remaining term 197 months
As of the cut-off date the home equity revolving credit line
loans included in Loan Group II had the following
characteristics:
Number of loans 783
Aggregate principal balance $39,360,462.76
Average principal balance $50,268.79
Range of principal balances $1,391.54 to $891,121.88
Weighted average interest rate 8.461%
Range of interest rates 5.990% to 14.490%
Weighted average maximum interest rate 18.168%
Weighted average original term 183 months
Weighted average remaining term 179 months
S-9
<PAGE>
As of the cut-off date, the home equity loans included in
Loan Group I had the following characteristics:
Number of loans 2,359
Aggregate principal balance $57,191,784.07
Average principal balance $24,244.08
Range of principal balances $10,500.00 to $150,000.00
Weighted average interest rate 11.016%
Range of interest rates 6.990% to 14.125%
Weighted average original term 207 months
Weighted average remaining term 207 months
As of the cut-off date, the home equity loans included in
Loan Group II had the following characteristics:
Number of loans 54
Aggregate principal balance $5,111,965.29
Average principal balance $94,666.02
Range of principal balances $13,000.00 to $200,000.00
Weighted average interest rate 10.008%
Range of interest rates 9.500% to 13.625%
Weighted average original term 235 months
Weighted average remaining term 235 months
See "Description of the Mortgage Loans" in this prospectus
supplement.
S-10
<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.
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, during which
the loan rate may be fixed or set at a discounted variable rate for a period of
from three to six months, 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
an 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. The
loan rate on each home equity loan is fixed as of the date of its origination.
As of the cut-off date, the weighted average loan rate for the home equity
revolving credit line loans is approximately 8.554% and for the home equity
loans is approximately 10.934%.
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 two loan groups:
o 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 $147,390,593.21 and home equity loans that have an
aggregate outstanding principal balance as of the cut-off date of
$57,191,784.07. As to each home equity revolving credit line loan and home
equity loan in the first loan group secured by a first lien on the related
property, the credit limit or 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 credit limit or 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 credit limit or 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.
o 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 $39,360,462.76 and home equity loans that have an aggregate
outstanding balance as of the cut-off date of $5,111,965.29. The second
loan group will include mortgage loans that do not meet the restrictions
applicable to the first loan group.
S-11
<PAGE>
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 mortgage 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 mortgage 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.
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 $82,945,194.67 will be deposited into an
account designated the "pre-funding account." Approximately $68,133,622.72 will
be allocated to purchasing home equity revolving credit line loans and home
equity loans in the first loan group and approximately $14,811,571.95 will be
allocated to purchasing home equity revolving credit line loans and home equity
loans in the second loan group. 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 sellers from time to time.
The pre-funding period will be the period from the closing date to the earliest
of:
o the date on which the amount on deposit in the pre-funding account is less
than $50,000;
o February 27, 2001; or
o 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 the enhancer, 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-funding period to cover any shortfall in interest
payments on the term notes due to
S-12
<PAGE>
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 GMACM.
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, the amount left in the
funding account will be paid to noteholders as a payment of principal. During
the revolving period, 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 December 2000, at the respective note rate described
on page S-6 of this prospectus supplement. Interest on the 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.
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 term notes for the related
interest period.
PRINCIPAL PAYMENTS
With respect to any payment date during the 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 loans and to purchase additional mortgage loans. On each payment date
during the managed amortization period for the term notes, 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. 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 notes and variable funding notes
will be equal to the principal
S-13
<PAGE>
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
receive certain additional amounts in reduction of their note balance, generally
equal to liquidation loss amounts and amounts necessary to increase the
overcollateralization amount to the overcollateralization target amount.
All principal payments due on the term notes and the 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, the revolving period will be the period
beginning on the closing date and ending on the earlier of May 31, 2002 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 May 31, 2006 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.
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.
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 both loan groups is less than the aggregate
overcollateralization target for both 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 both loan groups
equals or exceeds the aggregate overcollateralization target for both loan
groups, any funds on deposit in the reserve account will no longer be applied to
cover unpaid current interest or liquidation losses.
S-14
<PAGE>
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--Principal Collections
and Interest 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:
o at any time during the revolving period, 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;
o at any time during the managed amortization period, net principal
collections on the mortgage loans for that payment date; and
o at any time during the rapid amortization period, principal collections
for that payment date.
During the revolving period for each class of term notes, principal collections
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, 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 period and
will no longer be applied to buy additional balances during the rapid
amortization period.
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:
o excess interest;
o overcollateralization and limited cross-collateralization; and
o the financial guaranty insurance policy.
We refer you to "The Enhancer" and "Description of the Policy" in this
prospectus supplement.
S-15
<PAGE>
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 the initial aggregate note balance. The purchase price payable
by the servicer for the mortgage loans will be the sum of:
o 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;
o an amount equal to any interest shortfalls plus accrued and unpaid interest
on these interest shortfalls; and
o all amounts due and owing the enhancer.
We refer you to "Description of the 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.
MATERIAL 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 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 material income tax considerations in respect
of an investment in the term notes, we refer you to "Material Federal Income Tax
Considerations" and "State and Other Tax Consequences" in this prospectus
supplement and "Material Federal Income Tax Consequences" and "State and Other
Tax Consequences" in the attached prospectus.
S-16
<PAGE>
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.
S-17
<PAGE>
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.
THE MORTGAGED PROPERTIES Although the mortgage loans are secured by liens
MIGHT NOT BE ADEQUATE SECURITY on mortgaged properties, this collateral may not
FOR THE MORTGAGE LOANS. give assurance of repayment of the mortgage
loans comparable to the assurance of repayment
that many first lien lending programs provide,
and the mortgage loans, especially those with
high combined loan-to-value ratios, may have
risk of repayment characteristics more similar
to unsecured consumer loans.
Approximately 94.97% (by aggregate principal
balance as of the cut-off date) of the initial
mortgage loans are secured by second 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 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.
S-18
<PAGE>
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
CREDITWORTHINESS OF THE underwriting standards and procedures applicable
MORTGAGORS. to the mortgage loans, as well as the 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 a 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 GMACM relating
to the home equity revolving credit line loans,
GMACM 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.
S-19
<PAGE>
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 29.21% and 13.38% (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.
S-20
<PAGE>
LOAN RATES MAY REDUCE THE NOTE The note rate on each class of term notes will
RATE ON EACH CLASS OF TERM be a floating rate based on LIBOR, limited by
NOTES. the weighted average net loan rate on the
mortgage loans in the related loan group and a
maximum note rate of 14.00% per annum. The loan
rates of the home equity revolving credit line
loans adjust based on a different index. The
loan rates of the home equity loans are fixed.
As 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 sellers. 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
CONSIDERATIONS ON THE notes will depend on the rate and timing of
TERM NOTES. principal payments, including payments in 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 period, as described in
this prospectus supplement, if the sellers do
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. These remaining amounts
will be paid to the holders of the related class
of term notes as principal on the first payment
date following the end of the revolving period
for the term notes. See "Yield and Prepayment
Considerations" in this prospectus supplement.
S-21
<PAGE>
LIMITATIONS ON THE We cannot assure you that, at any particular
REPURCHASE OR time, a seller will be able, financially or
REPLACEMENT OF otherwise, to repurchase or replace defective
DEFECTIVE MORTGAGE mortgage loans as described in this prospectus
LOANS BY THE SELLERS. supplement. Events relating to a seller and its
operations could occur that 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 sellers do 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 THE Each subsequent mortgage loan will satisfy the
SUBSEQUENT MORTGAGE LOANS FROM eligibility criteria referred to in this
THE INITIAL MORTGAGE LOANS. prospectus supplement at the time either seller
transfers it to the issuer. However, the sellers
may originate or 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 PRESENT The mortgage loans are secured by mortgages.
CERTAIN RISKS. With respect to 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.
S-22
<PAGE>
If either seller becomes insolvent, the
bankruptcy trustee of that 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 a seller, or if certain other
events relating to the insolvency of a seller
occur, additional balances on the mortgage loans
and subsequent mortgage loans may no longer be
transferred by that seller to the issuer and a
rapid amortization event could occur. However,
the bankruptcy trustee, conservator or receiver,
including the seller itself as a
debtor-in-possession, may have the power to
continue to require the transfer of additional
balances on the mortgage loans and subsequent
mortgage loans to the issuer, and thus, to
prevent 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.
S-23
<PAGE>
THE REPURCHASE OPTION In certain instances in which a mortgagor
OF THE SERVICER COULD either:
RESULT IN AN INCREASE IN
PREPAYMENTS. o requests an increase in the credit limit
on the related home equity revolving
credit line loan above the limit stated
in the credit line agreement;
o requests to place a lien on the related
mortgaged property senior to the lien of
the related mortgage loan; or
o 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
POSSIBLE REDUCTION AND notes in the form of:
SUBSTITUTION OF, CREDIT
ENHANCEMENT. o excess interest collections, if
available;
o overcollateralization and limited
cross-collateralization; and
o the policy, to the limited extent
described in this prospectus supplement.
None of the sellers, 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 OTHER The ability of the issuer to purchase subsequent
FACTORS COULD AFFECT THE mortgage loans is largely dependent upon whether
PURCHASE OF SUBSEQUENT mortgagors perform their payment and other
MORTGAGE LOANS. obligations required by the related mortgage
loans in order that those mortgage loans meet
the specified requirements for transfer on a
subsequent transfer date as a subsequent
mortgage loan. The performance by these
mortgagors may be affected as a result of a
S-24
<PAGE>
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
TERM NOTES MAY LIMIT develop. Even if a secondary market does
THE ABILITY TO SELL THE develop, it might not provide you with liquidity
TERM NOTES OR REALIZE A of investment or continue for the life of the
DESIRED YIELD. term notes. Neither the underwriter nor any
other person will have any 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
THE TRUST FUND FOR MAKING assets of the trust fund. There can be no
PAYMENTS ON THE TERM NOTES assurance that the market value of the assets in
MAY NOT BE SUFFICIENT TO the trust fund will be equal to or greater than
DISTRIBUTE ALL PAYMENTS DUE the total principal amount of the term notes
ON THE TERM NOTES. outstanding, plus accrued interest. Moreover, if
the assets of the trust fund are ever sold, the
sale proceeds will be applied first to reimburse
the indenture 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-HE4.
Once released, those assets will no longer be
available to make payments to noteholders.
You will have no recourse against the depositor,
the sellers 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 sellers with respect
to the related trust fund or the term notes
would result from a breach of the
representations and warranties that the sellers
may make concerning the trust assets.
S-25
<PAGE>
AMOUNTS LEFT IN THE Any amounts in excess of $50,000 remaining in
PRE-FUNDING ACCOUNT AT the pre-funding account at the end of the
THE END OF THE PRE- pre-funding period will be distributed as a
FUNDING PERIOD WILL BE prepayment of principal to the holders of the
USED TO PREPAY THE related term notes. As a result, the yield to
TERM NOTES. maturity on your investment may be adversely
affected.
S-26
<PAGE>
INTRODUCTION
The trust fund will be formed under the trust agreement, to be dated as
of the closing date, between the depositor and the owner trustee. The issuer
will issue $332,000,000 of GMACM Home Equity Loan-Backed Term Notes, Series
2000-HE4. These notes will be issued under the indenture, to be dated as of the
closing date, between the issuer and the indenture trustee. In addition, under
the indenture, the issuer will issue the GMACM Home Equity Loan-Backed Variable
Funding Notes, Series 2000-HE4. Under the trust agreement, the issuer will issue
one class of GMACM Home Equity Loan-Backed Certificates, Series 2000-HE4. 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
corresponds to the term "Note Payment Account" as described in this prospectus
supplement. The term "Funding Account" used in the prospectus corresponds to the
term "Pre-Funding Account" as described in this prospectus supplement. The
conveyance of the mortgage loans to the trust fund and the issuance of the notes
described in this prospectus supplement is a "Designated Seller Transaction" as
that term is used in the prospectus.
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 approximate and 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 the HELOCs 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 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.
S-27
<PAGE>
The initial mortgage loans will be divided into two Loan Groups as follows:
(1) Loan Group I will include initial HELOCs and HELs that satisfy the
following restrictions:
o As to each loan in Loan Group I secured by a first lien on the
related property, the credit limit or original principal
balance was generally no more than $252,700 for single-family
properties and $323,400 for two-family properties.
o As to each loan in Loan Group I secured by a second lien on
the related property:
(a) the credit limit or original principal balance was
generally no more than $126,350 for single-family
properties and $161,700 for two-family properties; 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 credit limit or original principal balance of
the second lien loan and the outstanding original
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.
o Any subsequent mortgage loans that are HELOCs or HELs and
included in Loan Group I will also satisfy the above
requirements.
(2) Loan Group II will include initial HELOCs and HELs that do not meet
the restrictions applicable to Loan Group I. In addition, Loan Group
II will include any subsequent mortgage loans that are not included in
Loan Group I.
Payments on the Class A-1 term notes and the Class A-2 term notes will be
based primarily on amounts collected or received in respect of the mortgage
loans in Loan Groups I and II, respectively. The variable funding notes
generally will be entitled to receive a portion of the collections on the
mortgage loans in Loan Group I or II depending on the Loan Group into which the
additional balances backing the variable funding notes are added.
INITIAL HELOCS
Substantially all of the initial HELOCs were originated or acquired by GMAC
Mortgage Corporation or GMACM. No more than 94.87% (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.
The principal balance as of the cut-off date of the initial HELOCs is
$186,751,055.97. With respect to the initial HELOCs:
o as of the cut-off date, no initial HELOC is 30 days or more delinquent;
o the average principal balance as of the cut-off date is $24,171.76;
o the minimum principal balance as of the cut-off date is $1,000.00;
o the maximum principal balance as of the cut-off date is $891,121.88;
S-28
<PAGE>
o the lowest loan rate and the highest loan rate on the cut-off date are
5.990% and 14.490% per annum, respectively;
o the weighted average loan rate on the cut-off date is approximately
8.554% per annum;
o the minimum and maximum CLTV Ratios as of the cut-off date are 2.10% and
105.57%, respectively;
o the weighted average CLTV Ratio based on the principal balance as of the
cut-off date of the initial HELOCs is approximately 76.55% as of the
cut-off date;
o the latest scheduled maturity of any initial HELOC is December 21, 2025;
o with respect to approximately 27.99% and approximately 16.81% of the
initial HELOCs, the related mortgaged properties are located in the
States of California and Michigan, respectively; and
o not more than 22.20% of the initial HELOCs do not require an appraisal.
As used in this prospectus supplement, a mortgage loan is considered to be
"30 to 59 days" or "30 or more days" delinquent when a payment due on any due
date remains unpaid as of the close of business on the next following monthly
due date. However, since the determination as to whether a mortgage loan falls
into this category is made as of the close of business on the last business day
of each month, a mortgage loan with a payment due on November 1 that remained
unpaid as of the close of business on November 30 would still be considered
current as of November 30. If that payment remained unpaid as of the close of
business on December 31, the mortgage loan would then be considered to be 30 to
59 days delinquent. Delinquency information presented in this prospectus
supplement as of the cut-off date is determined and prepared as of the close of
business on the last business day immediately prior to the cut-off date.
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:
o the index; and
o the gross margin;
provided, however, that the loan rate on each initial HELOC will in no event be
greater than the maximum loan rate.
The index for each HELOC is the "prime rate" (or high point of any range of
"prime rates") established by the financial institutions surveyed by The Wall
Street Journal in publishing its "Money Rates" (or any replacement) Table or, if
such rate is not available, a substitute rate selected in accordance with the
related credit line agreement or mortgage note, as applicable.
As of the cut-off date, none of the initial HELOCs have a loan rate below
the Teaser Rate. With respect to approximately 38.24% of the initial HELOCs, the
Teaser Rate will be equal to the prime rate less 1.00%.
With respect to approximately 42.74% 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 $25,000.01 through $50,000.00 and
0.50% for balances of $50,000.01 or greater.
S-29
<PAGE>
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, 20-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 40.65% 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, 10-year
mortgage loans and 5-year mortgage loans, the Draw Period will generally be the
entire term of the loan and there will be no Repayment Period. The entire
outstanding principal balance of each HELOC with no Repayment Period will be due
on the maturity date of the HELOC.
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:
o a materially adverse change in the mortgagor's financial circumstances;
o a decline in the value of the mortgaged property significantly below its
appraised value at origination; or
o a payment default by the mortgagor.
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:
o the mortgagor's failure to make any payment as required;
o any action or inaction by the mortgagor that adversely affects the
mortgaged property or the rights in the mortgaged property; or
o 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 a Repayment Period, 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
S-30
<PAGE>
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 in Loan Group I and Loan Group II, or the Group I HELOCs and
Group II HELOCs, respectively, as of the cut-off date. Unless otherwise
specified, all principal balances of the initial HELOCs in each Loan Group 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.
INITIAL HELOC CHARACTERISTICS FOR LOAN GROUP I
<TABLE>
<CAPTION>
PROPERTY TYPE OF GROUP I HELOC LOANS
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
PROPERTY TYPE GROUP I HELOCS BALANCE DATE BALANCE
------------- -------------- ------- ------------
<S> <C> <C> <C>
Single Family 6,178 $130,642,178.89 88.64%
Condominium 432 9,476,324.11 6.43
PUD 262 5,877,288.60 3.99
Two to Four Family 69 1,365,309.61 0.93
Manufactured Housing 2 29,492.00 0.02
----- --------------- -------
TOTAL 6,943 $147,390,593.21 100.00%
</TABLE>
OCCUPANCY TYPES OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
OCCUPANCY NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
(AS INDICATED BY BORROWER) GROUP I HELOCS BALANCE DATE BALANCE
------------- -------------- ------- ------------
<S> <C> <C> <C>
Owner Occupied 6,843 $144,685,162.64 98.16%
Second Home 100 2,705,430.57 1.84
----- --------------- ------
TOTAL 6,943 $147,390,593.21 100.00%
</TABLE>
S-31
<PAGE>
PRINCIPAL BALANCES OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
INITIAL GROUP I PERCENT OF
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF PRINCIPAL BALANCES ($) GROUP I HELOCS BALANCE DATE BALANCE
------------------------------- -------------- ------- ------------
<S> <C> <C> <C>
$0.00 to $25,000.00 5,112 $62,528,147.98 42.42%
$25,000.01 to $50,000.00 1,324 47,058,032.34 31.93
$50,000.01 to $75,000.00 318 19,814,731.50 13.44
$75,000.01 to $100,000.00 158 13,778,669.59 9.35
$100,000.01 to $125,000.00 19 2,145,304.55 1.46
$125,000.01 to $150,000.00 6 835,243.86 0.57
$150,000.01 to $175,000.00 1 173,109.45 0.12
$175,000.01 to $200,000.00 2 360,000.00 0.24
$200,000.01 + 3 697,353.94 0.47
------ --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
o The average principal balance of the initial Group I HELOCs as of the
cut-off date is approximately $21,228.66.
COMBINED LOAN-TO-VALUE RATIOS OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
RANGE OF COMBINED NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
LOAN-TO-VALUE RATIOS (%) GROUP I HELOCS BALANCE DATE BALANCE
------------------------ -------------- ------- ------------
<S> <C> <C> <C>
0.01% to 40.00% 334 $6,842,185.68 4.64%
40.01% to 50.00% 262 5,950,060.52 4.04
50.01% to 60.00% 405 8,280,187.90 5.62
60.01% to 70.00% 696 14,547,296.22 9.87
70.01% to 80.00% 2,384 51,454,133.21 34.91
80.01% to 90.00% 2,204 43,713,842.37 29.66
90.01% to 100.00% 657 16,543,549.88 11.22
100.01% + 1 59,337.43 0.04
----- --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
o The minimum and maximum combined loan-to-value ratios of the initial Group
I HELOCs as of the cut-off date are approximately 2.10% and 105.57%,
respectively, and the weighted average combined loan-to-value ratio of the
initial Group I HELOCs as of the cut-off date is approximately 76.56%.
GEOGRAPHICAL DISTRIBUTIONS OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
LOCATION GROUP I HELOCS BALANCE DATE BALANCE
-------- -------------- ------- ------------
<S> <C> <C> <C>
California 1,507 $ 39,630,924.48 26.89%
Michigan 1,187 23,069,982.76 15.65
New Jersey 308 7,471,551.75 5.07
Massachusetts 306 6,648,611.81 4.51
Florida 296 6,087,041.17 4.13
New York 213 5,518,680.73 3.74
Illinois 211 4,229,333.99 2.87
Connecticut 195 4,005,157.28 2.72
Pennsylvania 227 3,934,179.46 2.67
Colorado 172 3,910,804.10 2.65
Washington 174 3,574,133.51 2.42
Other 2,147 39,310,192.17 26.67
----- --------------- ------
TOTAL 6,943 $147,390,593.21 100.00%
</TABLE>
o "Other" includes states and the District of Columbia with under 2.00%
concentrations individually.
S-32
<PAGE>
JUNIOR RATIOS OF GROUP I HELOC LOANS (1)(2)(3)
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF JUNIOR RATIOS (%) GROUP I HELOCS BALANCE DATE BALANCE
-------------------------- -------------- ------- ------------
<S> <C> <C> <C>
0.001% to 10.000% 635 $ 8,047,439.41 5.80%
10.001% to 20.000% 3,116 59,225,768.18 42.68
20.001% to 30.000% 1,546 36,919,204.19 26.61
30.001% to 40.000% 775 19,135,912.28 13.79
40.001% to 50.000% 332 7,597,168.96 5.48
50.001% to 60.000% 162 4,263,360.48 3.07
60.001% to 70.000% 91 1,821,932.12 1.31
70.001% to 80.000% 33 786,861.19 0.57
80.001% to 90.000% 21 507,331.65 0.37
90.001% to 100.000% 19 454,147.96 0.33
----- --------------- ------
Total 6,730 $138,759,126.42 100.00%
</TABLE>
(1) The Junior Ratio of a HELOC is the ratio (expressed as a percentage) of the
credit limit of such HELOC to the sum of such credit limit and the
outstanding balance of any senior mortgage computed as of the date such
HELOC is underwritten.
(2) The weighted average Junior Ratio of the initial Group I HELOCs that are
secured by second liens on the mortgaged properties as of the cut-off date
is approximately 24.02%.
(3) Includes only the initial Group I HELOCs secured by second liens.
LOAN RATES OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF LOAN RATES (%) GROUP I HECLOCS BALANCE DATE BALANCE
----------------------- --------------- ------- ------------
<S> <C> <C> <C>
5.000% to 5.999% 314 $ 7,538,097.66 5.11%
6.000% to 6.999% 1,794 46,305,169.17 31.42
8.000% to 8.999% 2,535 53,832,995.71 36.52
9.000% to 9.999% 93 2,174,478.53 1.48
10.000% to 10.999% 1,211 21,913,596.17 14.87
11.000% to 11.999% 530 7,043,400.19 4.78
12.000% to 12.999% 156 2,645,207.97 1.79
13.000% to 13.999% 225 4,360,833.54 2.96
14.000% to 14.999% 85 1,576,814.27 1.07
----- ---------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
o The weighted average loan rate of the initial Group I HELOCs as of the cut-off
date is approximately 8.579% per annum.
FULLY INDEXED GROSS MARGIN OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
RANGE OF FULLY INDEXED NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
GROSS MARGINS (%) GROUP I HELOCS BALANCE DATE BALANCE
----------------- -------------- ------- ------------
<S> <C> <C> <C>
Less Than 0.000% 2 $ 51,381.23 0.03%
0.000% to 0.999% 2,885 60,374,657.54 40.96
1.000% to 1.999% 2,332 48,356,374.86 32.81
2.000% to 2.999% 967 22,086,166.27 14.98
3.000% to 3.999% 339 7,252,927.64 4.92
4.000% to 4.999% 406 9,088,894.81 6.17
5.000% to 5.999% 12 180,190.86 0.12
----- --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
o The weighted average fully indexed gross margin of the initial Group I HELOCs
as of the cut-off date is approximately 1.455% per annum.
S-33
<PAGE>
CREDIT UTILIZATION RATES OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
RANGE OF CREDIT UTILIZATION NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RATES (%) GROUP I HELOCS BALANCE DATE BALANCE
--------------------------- ----------------- ------------ -----------------
<S> <C> <C> <C>
0.001% to 10.000% 450 $ 1,459,073.79 0.99%
10.001% to 20.000% 588 3,987,401.32 2.71
20.001% to 30.000% 594 6,493,651.87 4.41
30.001% to 40.000% 508 6,948,070.57 4.71
40.001% to 50.000% 497 8,353,258.01 5.67
50.001% to 60.000% 466 10,020,949.19 6.80
60.001% to 70.000% 449 10,258,323.73 6.96
70.001% to 80.000% 626 14,260,297.15 9.68
80.001% to 90.000% 442 12,642,058.83 8.58
90.001% to 100.000% 2,312 72,552,662.25 49.22
100.001% + 11 414,846.50 0.28
----- --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
o The weighted average credit utilization rate based on the cut-off date credit
limit of the initial Group I HELOCs as of the cut-off date is approximately
77.43%.
CREDIT LIMITS OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF CREDIT LIMITS ($) GROUP I HELOCS BALANCE DATE BALANCE
-------------------------- -------------- ------- ------------
<S> <C> <C> <C>
$0.00 to $25,000.00 3,134 $38,063,413.49 25.82%
$25,000.01 to $50,000.00 2,537 55,262,589.00 37.49
$50,000.01 to $75,000.00 594 20,991,255.23 14.24
$75,000.01 to $100,000.00 589 26,077,350.57 17.69
$100,000.01 to $125,000.00 41 3,162,445.52 2.15
$125,000.01 to $150,000.00 26 1,833,531.51 1.24
$150,000.01 to $175,000.00 5 185,870.46 0.13
$175,000.01 to $200,000.00 8 663,777.08 0.45
$200,000.01 to $225,000.00 1 222,000.00 0.15
$225,000.01 to $250,000.00 8 928,360.35 0.63
---- --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
o The average of the credit limits of the initial Group I HELOCs as of the cut-
off date is approximately $36,978.64.
MAXIMUM LOAN RATES OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
MAXIMUM LOAN RATES (%) GROUP I HELOCS BALANCE DATE BALANCE
---------------------- -------------- ------- ------------
<S> <C> <C> <C>
15.000% to 15.999% 10 $ 99,590.61 0.07%
16.000% to 16.999% 29 426,350.70 0.29
17.000% to 17.999% 80 1,049,809.83 0.71
18.000% to 18.999% 6,710 144,623,163.53 98.12
19.000% to 19.999% 114 1,191,678.54 0.81
----- --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
o The weighted average maximum loan rate of the initial Group I HELOCs as of0
the cut-off date is approximately 18.140% per annum.
S-34
<PAGE>
MONTHS REMAINING TO SCHEDULED MATURITY OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF MONTHS GROUP I HELOCS BALANCE DATE BALANCE
--------------- -------------- ------- ------------
<S> <C> <C> <C>
0 to 60 6 $ 167,393.38 0.11%
61 to 120 3,660 72,455,852.95 49.16
121 to 180 527 12,287,493.37 8.34
181 to 240 1 35,000.00 0.02
241 to 300 2,749 62,444,853.51 42.37
----- --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
o The weighted average months remaining to scheduled maturity of the initial
Group I HELOCs as of the cut-off date is approximately 197 months.
ORIGINATION YEAR OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
ORIGINATION YEAR GROUP I HELOCS BALANCE DATE BALANCE
---------------- -------------- ------- ------------
<S> <C> <C> <C>
1990 2 $ 85,572.40 0.06%
1992 1 3,000.00 0.00
1993 3 109,000.00 0.07
1994 1 62,695.47 0.04
1995 4 34,536.54 0.02
1996 1 4,000.00 0.00
1997 17 230,629.15 0.16
1998 151 1,787,793.72 1.21
1999 467 6,025,135.97 4.09
2000 6,296 139,048,229.96 94.34
----- --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
LIEN PRIORITY OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
LIEN NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
POSITION GROUP I HELOCS BALANCE DATE BALANCE
-------- -------------- ------- ------------
<S> <C> <C> <C>
First 213 $ 8,631,466.79 5.86%
Second 6,730 138,759,126.42 94.14
----- --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
S-35
<PAGE>
DEBT-TO-INCOME RATIOS OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF DEBT-TO-INCOME RATIOS (%) GROUP I HELOCS BALANCE DATE BALANCE
---------------------------------- -------------- ------- ------------
<S> <C> <C> <C>
0.000% to 10.000% 44 $ 1,156,730.90 0.78%
10.001% to 20.000% 398 6,967,246.69 4.73
20.001% to 30.000% 1,447 27,376,765.99 18.57
30.001% to 40.000% 2,277 46,239,383.00 31.37
40.001% to 50.000% 2,347 55,095,693.25 37.38
50.001% to 60.000% 381 9,510,615.12 6.45
60.001% + 49 1,044,158.26 0.71
----- --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
o The weighted average debt-to-income ratio of the initial Group I HELOCs as
of the cut-off date is approximately 37.63%.
TEASER EXPIRATION MONTH OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
TEASER EXPIRATION MONTH GROUP I HELOCS BALANCE DATE BALANCE
----------------------- -------------- ------- ------------
<S> <C> <C> <C>
None 2,295 $39,632,254.82 26.89%
November 2000 1,223 29,238,004.87 19.84
December 2000 822 19,554,487.49 13.27
January 2001 823 20,649,440.61 14.01
February 2001 715 14,821,063.11 10.06
March 2001 583 11,723,186.70 7.95
April 2001 481 11,755,277.16 7.98
May 2001 1 16,878.45 0.01
----- --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
DOCUMENTATION TYPE OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
DOCUMENTATION GROUP I HELOCS BALANCE DATE BALANCE
------------- -------------- ------- ------------
<S> <C> <C> <C>
Full Documentation 5,458 $119,691,550.26 81.21%
Limited Documentation 688 12,580,980.79 8.54
No Documentation 551 9,193,409.52 6.24
No Income Verification 125 2,979,425.05 2.02
Stated 76 1,999,753.18 1.36
Streamline 18 534,355.67 0.36
Alternative 27 411,118.74 0.28
----- --------------- ------
TOTAL 6,943 $147,390,593.21 100.00%
</TABLE>
S-36
<PAGE>
LOAN PURPOSE OF GROUP I HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
LOAN PURPOSE GROUP I HELOCS BALANCE DATE BALANCE
------------ -------------- ------- ------------
<S> <C> <C> <C>
Other 5,602 $120,687,812.12 81.88%
Home Improvement 910 17,688,216.32 12.00
Debt Consolidation 410 8,730,319.39 5.92
Education 21 284,245.38 0.19
----- --------------- ------
TOTAL 6,943 $147,390,593.21 100.00%
</TABLE>
<TABLE>
<CAPTION>
CREDIT SCORES AS OF THE DATE OF ORIGINATION OF GROUP I HELOC LOANS
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF CREDIT SCORES GROUP I HELOCS BALANCE DATE BALANCE
---------------------- -------------- ------- ------------
<S> <C> <C> <C>
520 to 539 1 10,964.70 0.01
540 to 559 4 40,098.49 0.03
560 to 579 6 50,427.55 0.03
580 to 599 5 41,377.67 0.03
600 to 619 49 1,076,352.50 0.73
620 to 639 351 7,498,777.03 5.09
640 to 659 536 11,649,285.58 7.90
660 to 679 564 13,111,713.20 8.90
680 to 699 946 22,951,573.67 15.57
700 to 719 953 21,021,876.17 14.26
720 to 739 956 21,130,054.48 14.34
740 to 759 990 19,371,403.39 13.14
760 to 779 944 17,970,843.02 12.19
780 to 799 509 9,099,905.69 6.17
800 to 819 106 1,877,806.53 1.27
820 to 839 2 64,470.00 0.04
860 to 879 1 19,890.88 0.01
n/a 20 403,772.66 0.27
----- --------------- ------
Total 6,943 $147,390,593.21 100.00%
</TABLE>
o Of the initial Group I HELOCs with available credit scores, the weighted
average credit score of the initial Group I HELOCs as of the cut-off date is
approximately 715.
S-37
<PAGE>
INITIAL HELOC CHARACTERISTICS FOR LOAN GROUP II
PROPERTY TYPE OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
PROPERTY TYPE GROUP I HELOCS BALANCE DATE BALANCE
------------- -------------- ------- ------------
<S> <C> <C> <C>
Single Family 693 $35,629,245.93 90.52%
PUD 52 2,223,894.36 5.65
Condominium 36 1,358,649.47 3.45
Two to Four Family 2 148,673.00 0.38
--- -------------- ------
TOTAL 783 $39,360,462.76 100.00%
</TABLE>
OCCUPANCY TYPES OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
OCCUPANCY NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
(AS INDICATED BY BORROWER) GROUP I HELOCS BALANCE DATE BALANCE
-------------------------- -------------- ------- ------------
<S> <C> <C> <C>
Owner Occupied 764 $37,581,736.93 95.48%
Second Home 19 1,778,725.83 4.52
--- -------------- ------
TOTAL 783 $39,360,462.76 100.00%
</TABLE>
PRINCIPAL BALANCES OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF PRINCIPAL BALANCES ($) GROUP I HELOCS BALANCE DATE BALANCE
------------------------------- -------------- ------- ------------
<S> <C> <C> <C>
$1 to $25,000 261 $3,323,762.18 8.44%
$25,001 to $50,000 256 9,614,223.19 24.43
$50,001 to $75,000 123 7,639,672.40 19.41
$75,001 to $100,000 58 5,072,675.81 12.89
$100,001 to $125,000 26 2,967,066.63 7.54
$125,001 to $150,000 38 5,386,553.17 13.69
$150,001 to $175,000 4 654,630.79 1.66
$175,001 to $200,000 5 987,488.14 2.51
$200,001 + 12 3,714,390.45 9.44%
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
o The average principal balance of the initial Group II HELOCs as of the
cut-off date is approximately $50,268.79.
S-38
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
RANGE OF COMBINED NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
LOAN-TO-VALUE RATIOS (%) GROUP I HELOCS BALANCE DATE BALANCE
------------------------ -------------- ------- ------------
<S> <C> <C> <C>
0.01% to 40.00% 12 $1,248,165.31 3.17%
40.01% to 50.00% 14 1,039,130.15 2.64
50.01% to 60.00% 33 3,005,989.66 7.64
60.01% to 70.00% 79 4,076,578.80 10.36
70.01% to 80.00% 336 16,846,197.09 42.80
80.01% to 90.00% 246 10,327,768.78 26.24
90.01% to 100.00% 63 2,816,632.97 7.16
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
o The minimum and maximum combined loan-to-value ratios of the initial Group II
HELOCs as of the cut-off date are approximately 23.50% and 100.00%,
respectively, and the weighted average combined loan-to-value ratio of the
initial Group II HELOCs as of the cut-off date is approximately 76.51%.
GEOGRAPHICAL DISTRIBUTIONS OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
LOCATION GROUP I HELOCS BALANCE DATE BALANCE
-------- -------------- ------- ------------
<S> <C> <C> <C>
California 229 $12,647,347.41 32.13%
Michigan 194 8,316,740.19 21.13
New Jersey 52 2,536,869.64 6.45
Connecticut 28 1,659,395.37 4.22
Florida 15 1,629,805.66 4.14
New York 30 1,543,953.42 3.92
Washington 23 1,463,401.89 3.72
Colorado 21 1,212,983.62 3.08
Massachusetts 26 983,077.63 2.50
Illinois 15 818,149.29 2.08
Other 150 6,548,738.64 16.64
--- -------------- ------
TOTAL 783 $39,360,462.76 100.00%
</TABLE>
o "Other" includes states and the District of Columbia with under 2.00%
concentrations individually.
S-39
<PAGE>
JUNIOR RATIOS OF GROUP II HELOC LOANS (1)(2)(3)
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF JUNIOR RATIOS (%) GROUP I HELOCS BALANCE DATE BALANCE
------------------------- -------------- ------- ------------
<S> <C> <C> <C>
0.001% to 10.000% 40 $589,156.42 1.53%
10.001% to 20.000% 257 7,930,320.24 20.64
20.001% to 30.000% 191 10,805,463.93 28.13
30.001% to 40.000% 128 7,939,753.76 20.67
40.001% to 50.000% 50 3,742,258.41 9.74
50.001% to 60.000% 42 3,183,181.10 8.29
60.001% to 70.000% 25 966,633.90 2.52
70.001% to 80.000% 31 2,410,092.07 6.27
80.001% to 90.000% 8 479,631.35 1.25
90.001% to 100.000% 9 372,849.70 0.97
--- ------------- ------
Total 781 38,419,340.88 100.00%
</TABLE>
(1) The Junior Ratio of a HELOC is the ratio (expressed as a percentage) of the
credit limit of such HELOC to the sum of such credit limit and the
outstanding balance of any senior mortgage computed as of the date such
HELOC is underwritten.
(2) The weighted average Junior Ratio of the initial Group II HELOCs that are
secured by second liens on the mortgaged properties as of the cut-off date
is approximately 34.88%.
(3) Includes only the initial Group II HELOCs secured by second liens.
LOAN RATES OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF LOAN RATES (%) GROUP I HELOCS BALANCE DATE BALANCE
----------------------- -------------- ------- ------------
<S> <C> <C> <C>
5.000% to 5.999% 55 $3,892,472.39 9.89%
6.000% to 6.999% 138 9,036,315.62 22.96
8.000% to 8.999% 380 17,548,480.68 44.58
9.000% to 9.999% 21 1,035,854.29 2.63
10.000% to 10.999% 97 4,595,758.52 11.68
11.000% to 11.999% 41 968,374.16 2.46
12.000% to 12.999% 19 917,035.21 2.33
13.000% to 13.999% 26 1,202,292.70 3.05
14.000% to 14.999% 6 163,879.19 0.42
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
o The weighted average loan rate of the initial Group II HELOCs as of the
cut-off date is approximately 8.461% per annum.
S-40
<PAGE>
FULLY INDEXED GROSS MARGIN OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF FULLY INDEXED GROSS MARGINS (%) GROUP I HELOCS BALANCE DATE BALANCE
---------------------------------------- -------------- ------- ------------
<S> <C> <C> <C>
Less Than 0.000% 1 $36,633.21 0.09%
0.000% to 0.999% 345 19,736,734.13 50.14
1.000% to 1.999% 264 12,017,624.86 30.53
2.000% to 2.999% 112 4,845,170.27 12.31
3.000% to 3.999% 30 1,402,519.13 3.56
4.000% to 4.999% 31 1,321,781.16 3.36
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
o The weighted average fully indexed gross margin of the initial Group II
HELOCs as of the cut-off date is approximately 1.183% per annum.
CREDIT UTILIZATION RATES OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF CREDIT UTILIZATION RATES (%) GROUP I HELOCS BALANCE DATE BALANCE
------------------------------------- -------------- ------- ------------
<S> <C> <C> <C>
0.001% to 10.000% 85 $683,776.40 1.74%
10.001% to 20.000% 77 1,465,923.86 3.72
20.001% to 30.000% 70 1,753,248.30 4.45
30.001% to 40.000% 56 1,933,769.69 4.91
40.001% to 50.000% 68 3,362,483.00 8.54
50.001% to 60.000% 33 1,467,316.78 3.73
60.001% to 70.000% 33 2,119,443.33 5.38
70.001% to 80.000% 47 3,035,516.22 7.71
80.001% to 90.000% 53 3,937,344.60 10.00
90.001% to 100.000% 260 19,552,340.39 49.68
100.001% + 1 49,300.19 0.13
--- -------------- ------
TOTAL 783 $39,360,462.76 100.00%
</TABLE>
o The weighted average credit utilization rate based on the cut-off date credit
limit of the initial Group II HELOCs as of the cut-off date is approximately
76.20%.
CREDIT LIMITS OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF CREDIT LIMITS ($) GROUP I HELOCS BALANCE DATE BALANCE
-------------------------- -------------- ------- ------------
<S> <C> <C> <C>
$0.01 to $25,000.00 42 $572,923.34 1.46%
$25,000.01 to $50,000.00 217 5,904,376.34 15.00
$50,000.01 to $75,000.00 127 5,312,498.01 13.50
$75,000.01 to $100,000.00 145 7,239,857.36 18.39
$100,000.01 to $125,000.00 10 785,112.90 1.99
$125,000.01 to $150,000.00 139 10,331,028.02 26.25
$150,000.01 to $175,000.00 26 1,433,804.35 3.64
$175,000.01 to $200,000.00 27 2,084,395.46 5.30
$200,000.01 to $225,000.00 8 249,696.90 0.63
$225,000.01 to $250,000.00 28 2,850,262.54 7.24
$250,000.01 + 14 2,596,507.54 6.60%
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
The average of the credit limits of the initial Group II HELOCs as of the
cut-off date is approximately $97,351.41.
S-41
<PAGE>
MAXIMUM LOAN RATES OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
MAXIMUM LOAN RATES (%) GROUP I HELOCS BALANCE DATE BALANCE
---------------------- -------------- ------- ------------
<S> <C> <C> <C>
15.000% to 15.999% 1 $5,000.00 0.01%
16.000% to 16.999% 2 25,314.78 0.06
17.000% to 17.999% 4 78,129.41 0.20
18.000% to 18.999% 767 39,000,056.97 99.08
19.000% to 19.999% 9 251,961.60 0.64
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
o The weighted average maximum loan rate of the initial Group II HELOCs as of
the cut-off date is approximately 18.168% per annum.
MONTHS REMAINING TO SCHEDULED MATURITY OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF MONTHS GROUP I HELOCS BALANCE DATE BALANCE
--------------- -------------- ------- ------------
<S> <C> <C> <C>
0 to 60 1 $22,000.00 0.06%
61 to 120 538 24,731,438.06 62.83
121 to 180 29 1,179,860.40 3.00
241 to 300 215 13,427,164.30 34.11
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
o The weighted average months remaining to scheduled maturity of the initial
Group II HELOCs as of the cut-off date is approximately 179 months.
ORIGINATION YEAR OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
ORIGINATION YEAR GROUP I HELOCS BALANCE DATE BALANCE
---------------- -------------- ------- ------------
<S> <C> <C> <C>
1993 1 $13,000.00 0.03%
1995 1 22,000.00 0.06
1998 5 46,893.95 0.12
1999 44 1,137,148.06 2.89
2000 732 38,141,420.75 96.90
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
LIEN PRIORITY OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
LIEN POSITION GROUP I HELOCS BALANCE DATE BALANCE
------------- -------------- ------- ------------
<S> <C> <C> <C>
First 2 $941,121.88 2.39%
Second 781 38,419,340.88 97.61
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
S-42
<PAGE>
DEBT-TO-INCOME RATIOS OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF DEBT-TO-INCOME RATIOS (%) GROUP I HELOCS BALANCE DATE BALANCE
---------------------------------- -------------- ------- ------------
<S> <C> <C> <C>
10.001% to 20.000% 36 $2,022,770.58 5.14%
20.001% to 30.000% 137 7,499,691.44 19.05
30.001% to 40.000% 253 12,295,129.25 31.24
40.001% to 50.000% 286 14,061,220.42 35.72
50.001% to 60.000% 55 2,859,577.97 7.27
60.001% + 16 622,073.10 1.58
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
o The weighted average debt-to-income ratio of the initial Group I HELOCs as of
the cut-off date is approximately 38.20%.
TEASER EXPIRATION MONTH OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
TEASER EXPIRATION MONTH GROUP I HELOCS BALANCE DATE BALANCE
----------------------- -------------- ------- ------------
<S> <C> <C> <C>
None 210 $8,883,194.07 22.57%
December 2000 110 6,304,885.03 16.02
November 2000 109 5,851,549.30 14.87
January 2001 114 5,687,385.84 14.45
March 2001 82 4,552,343.99 11.57
February 2001 102 4,146,946.23 10.54
April 2001 56 3,934,158.30 10.00
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
DOCUMENTATION TYPE OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
DOCUMENTATION GROUP I HELOCS BALANCE DATE BALANCE
------------- -------------- ------- ------------
<S> <C> <C> <C>
Full Documentation 611 $31,911,217.78 81.07%
Limited Documentation 129 5,912,477.66 15.02
No Income Verification 13 923,853.73 2.35
No Documentation 22 401,389.39 1.02
Alternative 5 127,314.78 0.32
Streamline 2 59,209.42 0.15
Stated 1 25,000.00 0.06
--- -------------- ------
TOTAL 783 $39,360,462.76 100.00%
</TABLE>
S-43
<PAGE>
LOAN PURPOSE OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
LOAN PURPOSE GROUP I HELOCS BALANCE DATE BALANCE
------------ -------------- ------- ------------
<S> <C> <C> <C>
Other 580 $28,302,303.03 71.91%
Home Improvement 147 7,883,052.84 20.03
Debt Consolidation 52 3,135,230.82 7.97
Education 4 39,876.07 0.10
--- -------------- ------
TOTAL 783 $39,360,462.76 100.00%
</TABLE>
CREDIT SCORES AS OF THE DATE OF ORIGINATION OF GROUP II HELOC LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELOCS BY CUT-OFF
RANGE OF CREDIT SCORES GROUP I HELOCS BALANCE DATE BALANCE
---------------------- -------------- ------- ------------
<S> <C> <C> <C>
580 to 599 3 $171,545.89 0.44%
600 to 619 9 468,250.26 1.19
620 to 639 26 1,126,543.71 2.86
640 to 659 49 2,258,205.16 5.74
660 to 679 60 3,699,318.81 9.40
680 to 699 106 5,624,431.48 14.29
700 to 719 105 6,329,912.28 16.08
720 to 739 112 5,027,750.39 12.77
740 to 759 134 6,554,558.22 16.65
760 to 779 112 4,969,921.25 12.63
780 to 799 60 2,886,658.74 7.33
800 to 819 6 225,379.81 0.57
n/a 1 17,986.76 0.05
--- -------------- ------
Total 783 $39,360,462.76 100.00%
</TABLE>
o Of the initial Group II HELOCs with available credit scores, the weighted
average credit score of the initial Group II HELOCs as of the cut-off date
is 719.
S-44
<PAGE>
INITIAL HELS
The initial HELs were originated or acquired by GMACM, generally in
accordance with the underwriting standards of GMACM. 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 95.27% 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 principal balance as of the cut-off date of the initial HELs is
$62,303,749.36.
With respect to the initial HELs:
o as of the cut-off date, no initial HEL is 30 days or more
delinquent;
o the average principal balance as of the cut-off date is $25,820.04;
the minimum principal balance as of the cut-off date is $10,500.00;
o the maximum principal balance as of the cut-off date is $200,000.00;
o the lowest loan rate and the highest loan rate on the cut-off date
are 6.990% and 14.125% per annum, respectively;
o the weighted average loan rate on the cut-off date is approximately
10.933% per annum;
o the minimum and maximum CLTV Ratios as of the cut-off date are 5.59%
and 100.00% respectively;
o the weighted average CLTV Ratio based on the principal balance as of
the cut-off date of the initial HELs is approximately 79.53% as of
the cut-off date;
o the latest scheduled maturity of any initial HEL is November 1,
2030;
o with respect to 32.86% and 6.22% of the initial HELs, the related
mortgaged properties are located in the States of California and New
York, respectively; and
o All of the initial HELs require an appraisal.
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 360 months. The initial HELs provide for substantially equal
payments in an amount sufficient to amortize the HELs over their terms.
S-45
<PAGE>
INITIAL HEL CHARACTERISTICS
Set forth below is a description of certain additional characteristics
of the initial HELs in Loan Group I and Loan Group II, or the Group I HELs and
Group II HELs, respectively, as of the cut-off date. Unless otherwise specified,
all principal balances of the initial HELs in each Loan Group 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.
INITIAL HEL CHARACTERISTICS FOR LOAN GROUP I
PROPERTY TYPE OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
PROPERTY TYPE GROUP I HELS BALANCE DATE BALANCE
------------- -------------- ------- ------------
<S> <C> <C> <C>
Single Family 2,137 $52,163,657.29 91.21%
Condominum 163 3,638,823.42 6.36
PUD 59 1,389,303.36 2.43
----- -------------- ------
TOTAL 2,359 $57,191,784.07 100.00%
</TABLE>
OCCUPANCY TYPES OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
OCCUPANCY NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
(AS INDICATED BY BORROWER) GROUP I HELS BALANCE DATE BALANCE
-------------------------- -------------- ------- ------------
<S> <C> <C> <C>
Owner Occupied 2,349 $56,940,259.07 99.56%
Second Home 10 251,525.00 0.44
----- -------------- ------
TOTAL 2,359 $57,191,784.07 100.00%
</TABLE>
PRINCIPAL BALANCES OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
RANGE OF PRINCIPAL BALANCES ($) GROUP I HELS BALANCE DATE BALANCE
------------------------------- -------------- ------- ------------
<S> <C> <C> <C>
$1 to $25,000 1,775 $30,755,291.47 53.78%
$25,001 to $50,000 447 16,238,292.60 28.39
$50,001 to $75,000 85 5,197,700.00 9.09
$75,001 to $100,000 44 4,019,500.00 7.03
$100,001 to $125,000 6 688,000.00 1.20
$125,001 to $150,000 2 293,000.00 0.51
----- -------------- ------
Total 2,359 $57,191,784.07 100.00%
</TABLE>
o The average principal balance of the initial Group I HELs as of the cut-off
date is approximately $24,244.08.
S-46
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
RANGE OF COMBINED NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
LOAN-TO-VALUE RATIOS (%) GROUP I HELS BALANCE DATE BALANCE
------------------------ -------------- ------- ------------
<S> <C> <C> <C>
0.01% to 40.00% 100 $2,317,131.93 4.05%
40.01% to 50.00% 57 1,403,392.14 2.45
50.01% to 60.00% 99 2,567,902.10 4.49
60.01% to 70.00% 176 4,255,918.94 7.44
70.01% to 80.00% 525 13,435,395.43 23.49
80.01% to 90.00% 816 19,767,914.36 34.56
90.01% to 100.00% 586 13,444,129.17 23.51
----- -------------- ------
Total 2,359 $57,191,784.07 100.00%
</TABLE>
o The minimum and maximum combined loan-to-value ratios of the initial Group I
HELs as of the cut-off date are approximately 5.59% and 100.00%,
respectively, and the weighted average combined loan-to-value ratio of the
initial Group I HELs as of the cut-off date is approximately 80.02%.
GEOGRAPHICAL DISTRIBUTIONS OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
LOCATION GROUP I HELS BALANCE DATE BALANCE
------------ -------------- ------- ------------
<S> <C> <C> <C>
California 606 $17,697,647.87 30.94%
New York 117 3,352,897.04 5.86
Texas 123 2,692,224.30 4.71
Florida 126 2,519,093.86 4.40
New Jersey 96 2,353,792.84 4.12
Michigan 92 1,929,637.29 3.37
Pennsylvania 77 1,810,359.93 3.17
Georgia 70 1,606,588.21 2.81
Massachusetts 40 1,242,998.36 2.17
Virginia 55 1,203,154.84 2.10
Washington 45 1,183,069.63 2.07
Illinois 57 1,167,649.61 2.04
Colorado 47 1,163,633.18 2.03
Other 808 17,269,037.11 30.19
----- -------------- ------
TOTAL 2,359 $57,191,784.07 100.00%
</TABLE>
o "Other" includes states and the District of Columbia with under 2.00%
concentrations individually.
S-47
<PAGE>
JUNIOR RATIOS OF GROUP I HEL LOANS (1)(2)(3)
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
RANGE OF JUNIOR RATIOS (%) GROUP I HELS BALANCE DATE BALANCE
-------------------------- -------------- ------- ------------
<S> <C> <C> <C>
0.001% to 10.000% 241 $3,920,455.45 7.23%
10.001% to 20.000% 1,066 21,859,110.51 40.30
20.001% to 30.000% 608 16,135,029.40 29.75
30.001% to 40.000% 201 7,286,257.58 13.43
40.001% to 50.000% 75 2,756,895.01 5.08
50.001% to 60.000% 38 1,253,662.20 2.31
60.001% to 70.000% 11 502,335.42 0.93
70.001% to 80.000% 8 322,700.00 0.59
80.001% to 90.000% 3 168,000.00 0.31
90.001% to 100.000% 2 40,000.00 0.07
----- -------------- ------
Total 2,253 $54,244,445.57 100.00%
</TABLE>
(1) The Junior Ratio of a HEL is the ratio (expressed as a percentage) of the
outstanding balance of such HEL to the sum of such outstanding balance and
the outstanding balance of any senior mortgage computed as of the date such
HEL is underwritten.
(2) The weighted average Junior Ratio of the initial Group I HELs that are
secured by second liens on the mortgaged properties as of the cut-off date
is approximately 23.51%.
(3) Includes only the initial Group I HELs secured by second liens.
LOAN RATES OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
RANGE OF LOAN RATES (% GROUP I HELS BALANCE DATE BALANCE
---------------------- -------------- ------- ------------
<S> <C> <C> <C>
6.000% to 6.999% 1 $20,000.00 0.03%
8.000% to 8.999% 1 18,500.00 0.03
9.000% to 9.999% 578 15,441,009.15 27.00
10.000% to 10.999% 594 14,498,693.44 25.35
11.000% to 11.999% 447 11,380,144.74 19.90
12.000% to 12.999% 457 9,726,851.17 17.01
13.000% to 13.999% 260 5,750,276.82 10.05
14.000% to 14.999% 21 356,308.75 0.62
----- -------------- ------
Total 2,359 $57,191,784.07 100.00%
</TABLE>
o The weighted average loan rate of the initial Group I HELs as of the cut-off
date is approximately 11.016% per annum.
S-48
<PAGE>
MONTHS REMAINING TO SCHEDULED MATURITY OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
RANGE OF MONTHS GROUP I HELS BALANCE DATE BALANCE
--------------- -------------- ------- ------------
<S> <C> <C> <C>
0 to 60 139 $2,471,012.07 4.32%
61 to 120 373 7,363,790.79 12.88
121 to 180 1,167 26,646,461.80 46.59
181 to 240 137 3,814,212.81 6.67
241 to 300 541 16,844,306.60 29.45
301 + 2 52,000.00 0.09
----- -------------- ------
Total 2,359 $57,191,784.07 100.00%
</TABLE>
o The weighted average months remaining to scheduled maturity of the initial
Group I HELs as of the cut-off date is approximately 207 months.
ORIGINATION YEAR OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
ORIGINATION YEAR GROUP I HELS BALANCE DATE BALANCE
---------------- -------------- ------- ------------
<S> <C> <C> <C>
2000 2,359 $57,191,784.07 100.00%
----- -------------- ------
Total 2,359 $57,191,784.07 100.00%
</TABLE>
LIEN PRIORITY OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
LIEN POSITION GROUP I HELS BALANCE DATE BALANCE
------------ -------------- ------- ------------
<S> <C> <C> <C>
First 106 $2,947,338.50 5.15%
Second 2,253 54,244,445.57 94.85%
----- -------------- ------
Total 2,359 $57,191,784.07 100.00%
</TABLE>
DEBT-TO-INCOME RATIOS OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
RANGE OF DEBT-TO-INCOME RATIOS (%) GROUP I HELS BALANCE DATE BALANCE
---------------------------------- -------------- ------- ------------
<S> <C> <C> <C>
0.000% to 10.000% 4 79,200.00 0.14%
10.001% to 20.000% 56 1,239,393.81 2.17
20.001% to 30.000% 357 7,751,760.08 13.55
30.001% to 40.000% 769 17,972,821.48 31.43
40.001% to 50.000% 1,059 26,802,594.50 46.86
50.001% to 60.000% 99 2,883,383.15 5.04
60.001% + 10 315,200.00 0.55
N/A 5 147,431.05 0.26
----- -------------- ------
Total 2,359 $57,191,784.07 100.00%
</TABLE>
o Of the initial Group I HELs with available debt-to-income ratios, the
weighted average debt-to-income ratio of the initial Group I HELs as of the
cut-off date is approximately 39.36%.
S-49
<PAGE>
DOCUMENTATION TYPE OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
DOCUMENTATION GROUP I HELS BALANCE DATE BALANCE
------------- -------------- ------- ------------
<S> <C> <C> <C>
Standard 2,359 $57,191,784.07 100.00%
----- -------------- ------
TOTAL 2,359 $57,191,784.07 100.00%
</TABLE>
LOAN PURPOSE OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
LOAN PURPOSE GROUP I HELS BALANCE DATE BALANCE
------------ -------------- ------- ------------
<S> <C> <C> <C>
Debt Consolidation 2,359 $57,191,784.07 100.00%
----- -------------- ------
TOTAL 2,359 $57,191,784.07 100.00%
</TABLE>
CREDIT SCORES AS OF THE DATE OF ORIGINATION OF GROUP I HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP I
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
RANGE OF CREDIT SCORES GROUP I HELS BALANCE DATE BALANCE
---------------------- -------------- ------- ------------
<S> <C> <C> <C>
560 to 579 1 $15,500.00 0.03%
580 to 599 36 991,422.38 1.73
600 to 619 59 1,245,047.65 2.18
620 to 639 330 6,788,913.75 11.87
640 to 659 325 7,725,977.49 13.51
660 to 679 324 8,119,949.21 14.20
680 to 699 336 8,529,897.92 14.91
700 to 719 326 8,051,810.05 14.08
720 to 739 281 7,349,328.30 12.85
740 to 759 186 4,417,239.05 7.72
760 to 779 107 2,754,405.20 4.82
780 to 799 39 976,125.18 1.71
800 to 819 9 226,167.89 0.40
----- -------------- ------
Total 2,359 $57,191,784.07 100.00%
</TABLE>
o The weighted average credit score of the initial Group I HELs as of the
cut-off date is approximately 688.
S-50
<PAGE>
INITIAL HEL CHARACTERISTICS FOR LOAN GROUP II
PROPERTY TYPE OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
PROPERTY TYPE GROUP II HELS BALANCE DATE BALANCE
------------- --------------- ------- ------------
<S> <C> <C> <C>
Single Family 47 4,634,583.25 90.66%
PUD 3 319,882.04 6.26
Condominium 4 157,500.00 3.08
-- ------------- ------
TOTAL 54 $5,111,965.29 100.00%
</TABLE>
OCCUPANCY TYPES OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
OCCUPANCY NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
(AS INDICATED BY BORROWER GROUP II HELS BALANCE DATE BALANCE
------------------------- --------------- ------- ------------
<S> <C> <C> <C>
Owner Occupied 54 $5,111,965.29 100.00%
-- ------------- ------
TOTAL 54 $5,111,965.29 100.00%
</TABLE>
PRINCIPAL BALANCES OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
OCCUPANCY NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
(AS INDICATED BY BORROWER) GROUP II HELS BALANCE DATE BALANCE
-------------------------- --------------- ------- ------------
<S> <C> <C> <C>
$1 to $25,000 7 $132,700.00 2.60%
$25,001 to $50,000 8 301,000.00 5.89
$50,001 to $75,000 9 544,300.00 10.65
$75,001 to $100,000 7 643,000.00 12.58
$100,001 to $125,000 1 125,000.00 2.45
$125,001 to $150,000 19 2,838,915.29 55.53
$150,001 to $175,000 2 327,050.00 6.40
$175,001 to $200,000 1 200,000.00 3.91
-- ------------- ------
Total 54 $5,111,965.29 100.00%
</TABLE>
o The average principal balance of the initial Group II HELs as of the cut-off
date is approximately $94,666.02.
COMBINED LOAN-TO-VALUE RATIOS OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
RANGE OF COMBINED NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
LOAN-TO-VALUE RATIOS (%) GROUP II HELS BALANCE DATE BALANCE
------------------------ --------------- ------- ------------
<S> <C> <C> <C>
50.01% to 60.00% 5 $629,868.90 12.32%
60.01% to 70.00% 9 1,124,764.08 22.00
70.01% to 80.00% 16 1,977,432.31 38.68
80.01% to 90.00% 15 1,038,300.00 20.31
90.01% to 100.00% 9 341,600.00 6.68
-- ------------- ------
Total 54 $5,111,965.29 100.00%
</TABLE>
o The minimum and maximum combined loan-to-value ratios of the initial Group
II HELs as of the cut-off date are approximately 50.43% and 100.00%,
respectively, and the weighted average combined loan-to-value ratio of the
initial Group II HELs as of the cut-off date is approximately 74.07%.
S-51
<PAGE>
GEOGRAPHICAL DISTRIBUTIONS OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
LOCATION GROUP II HELS BALANCE DATE BALANCE
------------ --------------- ------- ------------
<S> <C> <C> <C>
California 28 $2,776,081.38 54.31%
New York 4 520,951.87 10.19
New Jersey 5 320,700.00 6.27
Maryland 4 296,400.00 5.80
Florida 3 270,000.00 5.28
Connecticut 2 176,000.00 3.44
Texas 2 168,000.00 3.29
Massachusetts 1 164,550.00 3.22
Arizona 1 150,000.00 2.93
North Carolina 1 149,882.04 2.93
Other 3 119,400.00 2.34
-- ------------- ------
TOTAL 54 $5,111,965.29 100.00%
</TABLE>
o "Other" includes states and the District of Columbia with under 2.00%
concentrations individually.
JUNIOR RATIOS OF GROUP II HEL LOANS (1)(2)(3)
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
RANGE OF JUNIOR RATIOS (%) GROUP II HELS BALANCE DATE BALANCE
-------------------------- ------------- ------- ------------
<S> <C> <C> <C>
0.001% to 10.000% 6 $250,200.00 4.89%
10.001% to 20.000% 13 594,000.00 11.62
20.001% to 30.000% 14 1,242,682.04 24.31
30.001% to 40.000% 7 946,512.48 18.52
40.001% to 50.000% 11 1,636,170.77 32.01
60.001% to 70.000% 1 150,000.00 2.93
70.001% to 80.000% 1 142,400.00 2.79
80.001% to 90.000% 1 150,000.00 2.93
-- ------------- ------
Total 54 $5,111,965.29 100.00%
</TABLE>
(1) The Junior Ratio of a HEL is the ratio (expressed as a percentage) of the
outstanding balance of such HEL to the sum of such outstanding balance and
the outstanding balance of any senior mortgage computed as of the date such
HEL is underwritten.
(2) The weighted average Junior Ratio of the initial Group II HELs that are
secured by second liens on the mortgaged properties as of the cut-off date
is approximately 36.19%.
(3) Includes only the initial Group II HELs secured by second liens.
LOAN RATES OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
RANGE OF LOAN RATES (%) GROUP II HELS BALANCE DATE BALANCE
------------ --------------- ------- ------------
<S> <C> <C> <C>
9.000% to 9.999% 27 $3,083,115.29 60.31%
10.000% to 10.999% 14 1,498,450.00 29.31
11.000% to 11.999% 8 376,400.00 7.36
12.000% to 12.999% 2 61,500.00 1.20
13.000% to 13.999% 3 92,500.00 1.81
-- ------------- ------
Total 54 $5,111,965.29 100.00%
</TABLE>
o The weighted average loan rate of the initial Group II HELs as of the
cut-off date is approximately 10.008% per annum.
S-52
<PAGE>
MONTHS REMAINING TO SCHEDULED MATURITY OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
RANGE OF MONTHS GROUP II HELS BALANCE DATE BALANCE
--------------- --------------- ------- ------------
<S> <C> <C> <C>
0 to 60 1 $20,000.00 0.39%
61 to 120 7 673,851.87 13.18
121 to 180 20 1,630,030.44 31.89
181 to 240 1 150,000.00 2.93
241 to 300 25 2,638,082.98 51.61
-- ------------- ------
Total 54 $5,111,965.29 100.00%
</TABLE>
o The weighted average months remaining to scheduled maturity of the initial
Group II HELs as of the cut-off date is approximately 235 months.
ORIGINATION YEAR OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
ORIGINATION YEAR GROUP II HELS BALANCE DATE BALANCE
---------------- ------------- ------- ------------
<S> <C> <C> <C>
2000 54 $5,111,965.29 100.00%
-- ------------- ------
Total 54 $5,111,965.29 100.00%
</TABLE>
LIEN PRIORITY OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
LIEN POSITION GROUP II HELS BALANCE DATE BALANCE
------------- --------------- ------- ------------
<S> <C> <C> <C>
Second 54 $5,111,965.29 100.00%
-- ------------- ------
Total 54 $5,111,965.29 100.00%
</TABLE>
DEBT-TO-INCOME RATIOS OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
RANGE OF DEBT-TO-INCOME RATIOS (%) GROUP II HELS BALANCE DATE BALANCE
---------------------------------- ------------- ------- ------------
<S> <C> <C> <C>
10.001% to 20.000% 1 $40,000.00 0.78%
20.001% to 30.000% 4 327,400.00 6.40
30.001% to 40.000% 10 1,042,468.90 20.39
40.001% to 50.000% 32 2,966,714.35 58.03
50.001% to 60.000% 5 435,382.04 8.52
60.001% + 1 150,000.00 2.93
N/A 1 150,000.00 2.93
-- ------------- ------
Total 54 $5,111,965.29 100.00%
</TABLE>
o Of the initial Group II HELs with available debt-to-income ratios, the
weighted average debt-to-income ratio of the initial Group II HELs as of the
cut-off date is approximately 42.72%.
S-53
<PAGE>
DOCUMENTATION TYPE OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
DOCUMENTATION GROUP II HELS BALANCE DATE BALANCE
------------ --------------- ------- ------------
<S> <C> <C> <C>
Standard 54 $5,111,965.29 100.00%
-- ------------- ------
TOTAL 54 $5,111,965.29 100.00%
</TABLE>
LOAN PURPOSE OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
LOAN PURPOSE GROUP II HELS BALANCE DATE BALANCE
------------ --------------- ------- ------------
<S> <C> <C> <C>
Debt Consolidation 54 $5,111,965.29 100.00%
-- ------------- ------
TOTAL 54 $5,111,965.29 100.00%
</TABLE>
CREDIT SCORES AS OF THE DATE OF ORIGINATION OF GROUP II HEL LOANS
<TABLE>
<CAPTION>
PERCENT OF
INITIAL GROUP II
NUMBER OF INITIAL CUT-OFF DATE HELS BY CUT-OFF
RANGE OF CREDIT SCORES GROUP II HELS BALANCE DATE BALANCE
---------------------- ------------- ------- ------------
<S> <C> <C> <C>
600 to 619 1 $50,000.00 0.98%
640 to 659 12 1,312,250.00 25.67
660 to 679 4 326,500.00 6.39
680 to 699 9 849,364.08 16.62
700 to 719 12 917,000.00 17.94
720 to 739 6 517,830.44 10.13
740 to 759 6 781,620.77 15.29
760 to 779 2 65,000.00 1.27
780 to 799 1 150,000.00 2.93
800 to 819 1 142,400.00 2.79
-- ------------- ------
Total 54 $5,111,965.29 100.00%
</TABLE>
o The weighted average credit score of the initial Group II HELs as of the
cut-off date is approximately 700.
S-54
<PAGE>
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 it is expected that subsequent mortgage loans acquired with
amounts withdrawn from the Funding Account will consist primarily of HELOCs.
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. 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) GMACM 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 :
o the subsequent mortgage loan may not be 30 or more days
contractually delinquent as of the related subsequent cut-off
date;
o the original stated term to maturity of the subsequent mortgage
loan will not exceed 360 months;
o the lien securing any subsequent mortgage loan must be a first
or second lien priority;
o the subsequent mortgage loan must have an outstanding principal
balance of at least $1,000 and no more than $750,000 as of the
subsequent cut-off date;
o 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;
S-55
<PAGE>
o the subsequent mortgage loan must have a CLTV Ratio at
origination of no more than 100%;
o the subsequent mortgage loan shall not provide for negative
amortization; and
o 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 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 approximately $82,945,194.67 therein on the
closing date from the net proceeds of the sale of the securities. Approximately
$68,133,622.72 of the initial amount deposited in the Pre-Funding Account will
be allocated to purchasing HELOCs and HELs in Loan Group I and approximately
$14,811,571.95 will be allocated to purchasing HELOCs and HELs in Loan Group II.
Monies in the Pre-Funding Account will be applied during the pre-funding period
to purchase subsequent mortgage loans from the sellers. 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 Note Payment 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 (up to the amount necessary to increase the
overcollateralizaton amount to the overcollateralization target amount) 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 Period, 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 Period.
The notes will be subject to redemption in part on the payment date
immediately succeeding the date on which the Revolving Period 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 ends.
S-56
<PAGE>
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 GMACM and not the
issuer and will not constitute a part of Principal Collections. All additional
balances on the HELOCs that arise prior to the Rapid Amortization Period will be
transferred directly from GMACM.
UNDERWRITING STANDARDS
All of the mortgage loans will be acquired by the depositor from the
sellers. All of the mortgage loans were underwritten generally in accordance
with GMACM's underwriting standards. The following is a brief description of the
various underwriting standards and procedures applicable to the mortgage loans.
GMACM's underwriting standards with respect to the mortgage loans
generally will conform to those published in the GMACM underwriting 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. 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. For both the "Standard" and "Alternative"
programs, the borrower is required to provide 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. 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.
Under the GMACM underwriting guidelines, loans may also be originated
under the "Stated Income 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 in the case
of GM and GM subsidiary employees under the "Family First Direct" program, 90%.
In addition, under the "Family First Direct" program, the borrower is qualified
on his or her stated income in the application and the CLTV Ratio is based on a
Stated Value, except that with respect to CLTV Ratios over 80%, the borrower
must supply evidence of value. The maximum loan amount under the "Family First
Direct" program is generally limited to $250,000. In addition, the
S-57
<PAGE>
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 GMACM. Credit scores are not used to deny
loans. However, credit scores are used as a "to " 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 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.
S-58
<PAGE>
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. GMACM 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 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," "Expanded No Income No Appraisal" and "Express," generally permit
fewer supporting documents to be obtained or waive income, appraisals, asset,
credit score 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.
S-59
<PAGE>
THE SELLERS AND SERVICER
GENERAL
GMAC Mortgage Corporation, or GMACM, is the originator of substantially
all of the mortgage loans. GMACM will be the seller of some of the initial
mortgage loans and most of the subsequent mortgage loans. The remainder of the
initial mortgage loans and some of the subsequent mortgage loans will be sold to
the depositor by a trust established by an affiliate of GMACM, which in turn
acquired the mortgage loans from GMACM. GMACM will also be the servicer of all
the mortgage loans. GMACM is an indirect wholly-owned subsidiary of General
Motors Acceptance Corporation and is one of the nation's largest mortgage
bankers. GMACM 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
sellers or the servicer. The sellers' only obligations with respect to the notes
will be pursuant to certain limited representations and warranties made by the
sellers or as otherwise provided in this prospectus supplement.
GMACM 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 Escrow Bank USA, which is an affiliate
of GMACM and the depositor.
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 collection and other servicing procedures,
including foreclosure procedures, see "The Servicing Agreement--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.
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 and home equity loans originated by GMACM.
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 or HEL
portfolio during the periods shown. Accordingly, loss and delinquency as
percentages of aggregate principal balance of the HELOCs or HELs serviced for
each period would be higher than those shown if certain of the home equity lines
of credit loans or home equity loans were artificially isolated at a point in
time and the information showed the activity only with respect to those HELOCs
or HELs.
S-60
<PAGE>
HELOCS
<TABLE>
<CAPTION>
PORTFOLIO DELINQUENCY EXPERIENCE
===================================================================================================================================
At September 30, 2000 At December 31, 1999 At December 31, 1998
$ Loans % by $ $ Loans % by $ $ Loans % by $
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Number of Loans 51,274 40,566 25,494
Total Portfolio.... $1,377,782,828 100.00% $1,026,843,776 100.00% $656,651,283 100.00%
Period of Delinquency:
30-59 Days...... 10,334,975 0.75% 8,196,006 0.80% 8,640,057 1.32%
60-89 Days...... 2,694,757 0.20% 1,170,808 0.11% 2,193,177 0.33%
90+ Days....... 4,803,593 0.35% 8,703,612 0.85% 2,033,104 0.31%
Total Loans........ 17,833,326 1.29% 18,070,427 1.76% 12,866,339 1.96%
Foreclosure........ 6,119,240 0.44% 3,099,772 0.30% 3,637,492 0.55%
Foreclosed......... 725,538 0.05% 393,033 0.04% 573,533 0.09%
Total Loans in
Foreclosure ....... 6,844,778 0.50% 3,492,805 0.34% 4,211,025 0.64%
Total Delinquent
Loans.............. $24,678,104 1.79% $21,563,232 2.10% $17,077,364 2.60%
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
PORTFOLIO LOSS AND FORECLOSURE EXPERIENCE
===================================================================================================================================
At September 30, 2000 At December 31, 1999 At December 31, 1998
$ Loans % by $ $ Loans % by $ $ Loans % by $
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Number of Loans 51,274 40,566 25,494
Total Portfolio.... $1,377,782,828 100.00% $1,026,843,776 100.00% $656,651,283 100.00%
Total Loans in
Foreclosure........ 6,884,778 0.50% 3,492,805 0.34% 4,211,025 0.64%
Net Chargeoffs
for Period......... $1,823,759 0.13% $1,121,386 0.11% $1,873,593 0.29%
===================================================================================================================================
</TABLE>
o Performing loans in bankruptcy are not included in delinquency statistics.
S-61
<PAGE>
HELS
<TABLE>
<CAPTION>
Portfolio Delinquency Experience
===================================================================================================================================
At September 30, 2000 At December 31, 1999 At December 31, 1998
$ Loans % by $ $ Loans % by $ $ Loans % by $
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Number of Loans .. 53,987 18,013 3,078
Total Portfolio... $1,905,486,085 100.00% $711,629,414 100.00% $72,833,490 100.00%
Period of Delinquency:
30-59 Days..... 8,414,666 0.44% 3,301,730 0.46% 937,133 1.29%
60-89 Days..... 4,086,848 0.21% 2,145,487 0.30% 222,581 0.31%
90+ Days*...... 14,770,940 0.78% 7,833,892 1.10% 277,383 0.38%
Total Delinquent Loans 27,272,454 1.43% 13,281,108 1.87% 1,437,097 1.97%
Foreclosure...... 1,210,868 0.06% 584,369 0.08% 0 0.00%
Foreclosed (REO Property) 543,570 0.03% 113,032 0.02% 0 0.00%
Total Loans in Foreclosure 1,754,438 0.09% 697,402 0.10% 0 0.00%
===================================================================================================================================
</TABLE>
* Includes "Total Loans in Foreclosure."
<TABLE>
<CAPTION>
PORTFOLIO LOSS AND FORECLOSURE EXPERIENCE
===================================================================================================================================
At September 30, 2000 At December 31, 1999 At December 31, 1998
$ Loans % by $ $ Loans % by $ $ Loans % by $
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Number of Loans 53,987 18,013 3,078
Total Portfolio.... $1,905,486,085 100.00% $711,629,414 100.00% $72,833,490 100.00%
Total Loans in Foreclosure 1,754,438 0.09% 697,402 0.10% 0 0.00%
Net Chargeoffs for Period $1,269,521 0.07% $1,442,054 0.20% $685,372 0.94%
===================================================================================================================================
</TABLE>
o Performing loans in bankruptcy are not included in delinquency statistics.
S-62
<PAGE>
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:
o the servicing fee payable to the servicer in respect of its
servicing activities; and
o other related compensation.
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 sellers. If the servicer is not the same person
as, or an affiliate of, a seller, the servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of that seller under certain
limited circumstances. In addition, 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.
THE ISSUER
The GMACM Home Equity Loan Trust 2000-HE4 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:
o acquiring and holding the mortgage loans and the other assets
comprising the trust fund and proceeds therefrom;
o issuing the notes and the certificates;
o making payments on the notes and the certificates; and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or
connected therewith.
The Issuer's principal offices are at Rodney Square North, 1100 North
Market Street, Wilmington, Delaware 19890-0001, 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.
S-63
<PAGE>
The commercial bank or trust company serving as owner trustee may have
normal banking relationships with the depositor, the sellers 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
Wells Fargo Bank Minnesota, N.A., will be the indenture trustee under
the indenture. The principal offices of the indenture trustee are located at
Wells Fargo 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 sellers 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.
THE ENHANCER
The following information has been supplied by the enhancer for
inclusion in this prospectus supplement. Accordingly, the depositor, the
sellers, the servicer and the indenture trustee do not make any representation
as to the accuracy and completeness of this information. The enhancer does not
accept any responsibility for the accuracy or completeness of this prospectus
supplement or any information or disclosure contained herein, or omitted
herefrom, 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" herein. Additionally, the enhancer makes no
representations regarding the term notes or the variable funding notes or the
advisability of investing in the term notes or the variable funding notes.
S-64
<PAGE>
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, 1999 and
December 31, 1998 and for each of the three years in the periods ended December
31, 1999, 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, 1999, and the consolidated financial statements of the enhancer and
its subsidiaries as of September 30, 2000 and for the nine month period ended
September 30, 2000 and September 30, 1999 included in the Quarterly Report on
Form 10-Q of MBIA Inc. for the period ended September 30, 2000, 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, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets...................................................... $7,045 $7,525
Liabilities.......................................................... 4,632 5,101
Capital and Surplus.................................................. 2,413 2,424
</TABLE>
S-65
<PAGE>
<TABLE>
<CAPTION>
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
---------------------------------------------------
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets............................................................. $7,446 $8,124
Liabilities........................................................ 3,218 3,531
Shareholder's Equity.............................................. 4,228 4,593
</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 1999 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, 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 term
notes or the variable funding 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 term notes or the variable funding notes. The enhancer does not
guaranty the market price of the term notes or the variable funding notes nor
does it guaranty that the ratings on the term notes or the variable funding
notes will not be revised or withdrawn.
S-66
<PAGE>
DESCRIPTION OF THE SECURITIES
GENERAL
The 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:
o the mortgage loans, including all additional balances and any
subsequent mortgage loans;
o 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;
o the Policy; and
o all proceeds of the foregoing.
Until the beginning of the Rapid Amortization Period, 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 GMACM and may be
transferred to an affiliate of GMACM. The Variable Funding Balance will be
increased from time to time until the commencement of the Rapid Amortization
Period 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 funds on deposit in
the Funding Account, are insufficient or unavailable to cover the full
consideration therefor. In addition, either seller may, at its option, sell
subsequent mortgage loans to the issuer from time to time during the Revolving
Period. 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 from 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'
S-67
<PAGE>
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 beneficial 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 beneficial owner's ownership of a book-entry note will be recorded on
the records of the Securities Intermediary that maintains that beneficial
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.
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.
S-68
<PAGE>
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:
o 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;
o the indenture trustee elects to terminate the book-entry system
through DTC; or
o 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.
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."
S-69
<PAGE>
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 the 25th day of each month, or if such day is not a business
day, the next business day, commencing in December 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 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.
As to each class of 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 for the related Loan Group, as described below;
and
(3) 14.00% per annum.
S-70
<PAGE>
The margins for the Class A-1 term notes and Class A-2 term notes will be 0.210%
per annum and 0.245% per annum, respectively. Notwithstanding the foregoing, the
margins on the Class A-1 term notes and Class A-2 term notes will increase to
0.420% per annum and 0.490% per annum, respectively, beginning with the first
Interest Period commencing after the Optional Termination Date.
Further, on any payment date for which the related Note Rate 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 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 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
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:
o 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
o the amount of the monthly fees paid to the enhancer;
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.
In addition, the indenture trustee will transfer from the Capitalized
Interest Account to the Note Payment Account, on the first payment date, one
month's interest on the mortgage loans for which the first monthly payment is
due after the Collection Period for that payment date.
On the payment date following the end of the pre-funding period, the
indenture trustee will distribute to GMACM 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.
S-71
<PAGE>
PRINCIPAL PAYMENTS ON THE NOTES
No principal will be payable on any class of term notes during the
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 will be used to purchase additional balances and
subsequent mortgage loans. On the payment date immediately succeeding the
payment date in which the Revolving Period ends, amounts remaining in the
Funding Account for the related Loan Group, exclusive of investment earnings,
will be applied as principal payments on the term notes and the variable funding
notes. On each payment date during the Managed Amortization Period, principal
will be payable on each class of 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 sellers 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 Balances, as applicable, equal to
Liquidation Loss Amounts and amounts required to be paid so that the
Overcollateralization Amount equals the Overcollateralization Target Amount, as
described in this prospectus supplement.
All principal payments due and payable on each class of 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), the following payments
will be made in the following order of priority:
(1) from Principal and Interest 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 Revolving Period, to the Funding Account, Principal
Collections for each Loan Group to the extent not previously
applied to purchase additional balances and/or subsequent
mortgage loans;
(3) during the Revolving Period and the Amortization Periods, to the
Note Payment Account, the Principal Distribution Amount for each
Loan Group for payment to the holders of the related class or
classes of notes;
S-72
<PAGE>
(4) the amount of the premium for the Policy to the enhancer, with
interest thereon, as provided in the Insurance Agreement;
(5) to the enhancer, to reimburse it for prior draws made on the
Policy, with interest thereon, as provided in the Insurance
Agreement;
(6) during the Revolving Period, to the Funding Account, the amount,
but not in excess of the related Group Excess Spread for each
Loan Group, necessary to be applied on that payment date so that
the Overcollateralization Amount for the related Loan Group is
not less than the Overcollateralization Target Amount for such
Loan Group;
(7) 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, 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 is not less than the Overcollateralization Target Amount
for each such Loan Group;
(8) if the aggregate Overcollateralization Amount for both Loan
Groups is less than the aggregate Overcollateralization Target
Amount for both 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 (9) below; and,
at the time, if any, that the aggregate Overcollateralization
Amount for both Loan Groups equals or exceeds the aggregate
Overcollateralization Target Amount for both 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 (10) through (13) below;
(9) 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 (6) or (7)
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;
in each case, based on the amount of unpaid interest or
Liquidation Loss Amounts;
(10) to the enhancer, any other amounts owed the enhancer pursuant to
the Insurance Agreement;
(11) 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 or variable funding
notes, as applicable;
S-73
<PAGE>
(12) 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
(13) 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 (3) 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 Term 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 (6), (7) or (9) 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.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO HOLDERS OF CERTIFICATES
Subject to the conditions specified in the servicing agreement, on any
payment date the issuer may, but will not be obligated to, direct the servicer
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:
o 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;
o 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;
o the enhancer shall have certain approval rights as set forth in the
servicing agreement; and
o 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 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.
S-74
<PAGE>
OVERCOLLATERALIZATION AND CROSS-COLLATERALIZATION
The cashflow mechanics of the trust fund are intended to create
overcollateralization by depositing all or a portion of the Excess Spread for
each Loan Group in the Funding Account during the Revolving Period and applying
it to acquire additional balances and/or subsequent mortgage loans and by using
all or a portion 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 Principal and Interest 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 outstanding 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. The servicer may not exercise this option to purchase the mortgage loans
unless the total purchase price will provide sufficient funds to pay the
outstanding principal balance and accrued and unpaid interest on the notes in
full.
S-75
<PAGE>
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 either Loan Group during the related
Collection Period exceeds the aggregate Principal Collections for such
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:
o the credit limit thereof; and
o 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:
o the initial principal balance of that HEL; and
o 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.
S-76
<PAGE>
"Collection Period" means, with respect to any payment date, the
calendar month preceding the month of that payment date.
"Deficiency Amount" means, with respect to any payment date, an amount
if any, equal to the sum of:
(1) 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
(2) (i) 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
(ii) 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 a
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:
o 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;
o 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;
o have a CLTV Ratio at the time of substitution no higher than that of
the Deleted Loan at the time of substitution;
o 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;
o 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;
S-77
<PAGE>
o be included in the same Loan Group as the Deleted Loan; and
o 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 payment date occurring in November 2030.
"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:
o Interest Collections for the related Collection Period with respect
to mortgage loans in that Loan Group;
over
o the sum of:
(1) 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 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.
"Initial Mortgage Documents" means with respect to the 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
November 1, 2000, among the enhancer, the sellers, 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:
o 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,
S-78
<PAGE>
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
o 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 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 preceding that payment date.
"Interest Shortfall" means, with respect to a class of term notes, the
excess of:
o the amount of interest that would have accrued on that class of 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 14.00% per annum;
over
o the interest actually accrued on that class of term notes during
that Interest Period.
"Junior Ratio" means, with respect to each mortgage loan, the ratio,
expressed as a percentage, of the principal balance as of the cut-off date, with
respect to a HEL, or the credit limit, with respect to a HELOC, to the sum of:
o the principal balance as of the cut-off date, with respect to a HEL,
or the credit limit, with respect to a HELOC, of such HEL or HELOC;
and
o the principal balance of any related senior mortgage loan at
origination of such HEL or 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:
o a Saturday or a Sunday; or
o a day on which banking institutions in the city of London,
England or New York, New York 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 (excluding the pro rata portion thereof
attributable to additional balances not conveyed to the trust during the Rapid
Amortization Period), 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 two loan groups as described in this
prospectus supplement.
S-79
<PAGE>
"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 the period beginning on the first
payment date following the end of the Revolving Period and ending on the earlier
of:
o May 31, 2006; and
o the occurrence of a Rapid Amortization Event.
"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 (excluding the pro
rata portion thereof attributable to additional balances not conveyed to the
trust during the Rapid Amortization Period), but not including the portion, if
any, of the amount that exceeds the portion of the principal balance of, plus
accrued and unpaid interest on, 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 each Loan
Group, the weighted average of the loan rates of the mortgage loans in that 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 the actual
number of days in that Interest Period and a 360-day year.
"Net Principal Collections" means, with respect to any payment date,
the excess, if any, of Principal Collections for each Loan Group for that
payment date over the aggregate amount of additional balances created during the
related Collection Period for that Loan Group and conveyed to the issuer.
"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.
"Optional Termination Date" means the first payment date on which the
aggregate Note Balance of the notes is less than 10% of the initial aggregate
Note Balance.
"Overcollateralization Amount" means, with respect to each Loan Group
and any payment date, the amount, if any, by which the outstanding principal
balance of the mortgage loans in that Loan Group conveyed to the trust fund 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, the portion,
if any, of the variable funding notes related to that Loan Group.
S-80
<PAGE>
"Overcollateralization Target Amount" means, with respect to any Loan
Group and any payment date on or prior to the thirtieth (30th) payment date, an
amount equal to the sum of:
o 1.50% of the Note Balance of the related class of term notes as of
the closing date, together with 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; provided, however, that the percentage
stated herein may increase for any payment date on which the amount
of Excess Spread decreases below the amount specified in the
indenture; and
o 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.
"Participants" means participants in the DTC, Euroclear or Clearstream,
Luxembourg systems.
"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 November 29, 2000.
"Pool Balance" means, with respect to any date, the aggregate of the
sum of the principal balances of all mortgage loans conveyed to the trust fund
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:
o the date on which the amount on deposit in the Pre-Funding Account
is less than $50,000;
o February 27, 2001; or
o the occurrence of a Rapid Amortization Event.
"Principal and Interest Collections" means, with respect to any payment
date, an amount equal to the sum of:
o Interest Collections for that payment date; and
o during the Managed Amortization Period, Net Principal Collections
for that payment date, and during the Rapid Amortization Period,
Principal Collections for that payment date.
"Principal Collections" means, with respect to any payment date, an
amount equal to the sum of:
o 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
S-81
<PAGE>
additional balances not conveyed to the trust fund during the Rapid
Amortization Period; and
o the principal portion of the Repurchase Price for any Deleted Loans,
any amounts required to be deposited in the Custodial Account by the
sellers 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 each Loan Group
and any payment date:
o 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;
o during the Managed Amortization Period, Net Principal Collections
for the mortgage loans in that Loan Group; and
o 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.
"Rapid Amortization Event" means the occurrence of any one of the
following events:
(1) the failure on the part of a seller:
o 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
o 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 such
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 a 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 a 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 a 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;
S-82
<PAGE>
(4) either 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 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 the period beginning on the earlier
of:
o the first payment date following the end of the Managed Amortization
Period; and
o the occurrence of a Rapid Amortization Event;
and ending upon the termination of the issuer.
"Rating Agencies" means Moody's Investors Service, Inc., Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., and
Fitch, Inc.
"Record Date" means, with respect to any payment date, the close of
business on the last business day preceding that payment date; provided however,
if the notes are no longer held in book-entry form, the Record Date shall be the
last day of the calendar month preceding that payment date.
"Reference Bank" means each of Barclays Bank plc, National Westminster
Bank and Deutsche Bank, A.G.
S-83
<PAGE>
"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 (exclusive of the pro rata portion thereof
attributable to additional balances not conveyed to the trust fund during the
Rapid Amortization Period) of that mortgage loan at the time of the removal,
plus accrued and unpaid interest on that principal balance to the date of
removal.
"Reserve Account" means the reserve account established by the
indenture trustee.
"Revolving Period" means the period beginning on the closing date and
ending on the earlier of:
o May 31, 2002; and
o the occurrence of a Managed Amortization Event or 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.
"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.
"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 3 or 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, or, if such service is no longer offered, such other
service for displaying London interbank offered rates or comparable rates as may
be selected by the indenture trustee after consultation with the servicer.
S-84
<PAGE>
"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 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 the
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:
o increased by the Aggregate Balance Differential for that variable
funding note immediately prior to the related payment date; and
o reduced by all distributions of principal thereon prior to that
payment date.
S-85
<PAGE>
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
term notes or the variable funding notes or the advisability of investing in the
term notes or the variable funding 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 paid only at the time set forth in the Policy, and no accelerated Insured
Amounts will be paid 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:
o a certified copy of the order requiring the return of a preference
payment;
o an opinion of counsel satisfactory to the enhancer that the order is
final and not subject to appeal;
o 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
o 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.
S-86
<PAGE>
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 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 indenture, the enhancer will be subrogated
to the rights of each noteholder to receive payments under the term notes and
variable funding 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 A.
S-87
<PAGE>
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 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
S-88
<PAGE>
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 made with respect to the HELOCs associated with a Loan Group
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 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 the issuer, at its option, subject to
the satisfaction of certain conditions specified in the servicing agreement, to
direct the servicer to remove certain mortgage loans from the trust fund at any
time during the life of the trust fund, so long as after giving effect to the
removal of the applicable mortgage loans, the Overcollateralization Amount with
respect to the related Loan Group equals or exceeds 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 Servicing Agreement--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.
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 sellers 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
S-89
<PAGE>
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:
o the rate of principal prepayments of the mortgage loans may be
higher than would otherwise be the case; and
o 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:
o requests an increase in the credit limit on the related HELOC above
the limit stated in the related credit line agreement;
o requests to place a lien on the related mortgaged property senior to
the lien of the related mortgage loan; or
o 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 GMACM, 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:
o will not increase the loan rates over a fixed maximum rate during
the life of any HELOC; and
o 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 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 the 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"
in this prospectus supplement.
S-90
<PAGE>
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 Period to acquire additional balances and subsequent mortgage loans.
In the event that at the end of the Revolving Period 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-91
<PAGE>
The constant prepayment rate, or CPR, model is used in this prospectus
supplement with respect to the mortgage loans. 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.
The tables set forth below are based on a CPR, a constant draw rate, in
the case of the HELOCs, 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>
GROSS WAC NET WAC ORIGINAL TERM REMAINING TERM
BALANCE (%) (%) (MONTHS) (MONTHS)
------- --- --- -------- --------
<S> <C> <C> <C> <C> <C>
GROUP I HELOCS $196,477,068.23 10.955 10.455 201 196
GROUP II HELOCS $52,469,546.15 10.683 10.183 183 179
GROUP I HELS $13,110,184.91 10.669 10.169 105 105
$35,520,797.54 11.054 10.554 180 180
$5,084,497.97 11.154 10.654 240 240
$22,454,133.27 11.124 10.624 300 300
$69,318.08 12.481 11.981 360 360
GROUP II HELS $924,932.25 9.846 9.346 118 118
$2,172,895.66 10.163 9.663 180 180
$199,955.99 10.000 9.500 240 240
$3,516,669.95 9.956 9.456 300 300
</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 December 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 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 November 29, 2000;
S-92
<PAGE>
(11) for each payment date, LIBOR is equal to 6.620% per annum;
(12) the initial Term Note Balance is as set forth on the cover page
of this prospectus supplement; and
(13) all principal payments due and payable on the term notes and the
variable funding notes related to each Loan Group will be
allocated to those classes on a pro rata basis.
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 model 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,
as indicated.
S-93
<PAGE>
PERCENTAGE OF INITIAL CLASS A-1 TERM NOTE BALANCE
PAYMENT DATE
<TABLE>
<CAPTION>
PERCENTAGE OF BALANCE
-------------------------------------------------------------------
GROSS CPR - HELOCS 10% 25% 30% 35% 40% 45% 50%
GROSS CPR - HELS 10% 12% 17% 23% 29% 35% 40%
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL........................................ 100 100 100 100 100 100 100
NOVEMBER 2001.................................. 100 100 100 100 100 100 100
NOVEMBER 2002.................................. 100 92 89 86 82 79 75
NOVEMBER 2003.................................. 99 79 71 63 56 49 42
NOVEMBER 2004.................................. 98 67 57 47 38 30 24
NOVEMBER 2005.................................. 97 57 45 34 26 19 14
NOVEMBER 2006.................................. 92 46 34 24 17 11 7
NOVEMBER 2007.................................. 82 35 24 16 10 6 3
NOVEMBER 2008.................................. 73 26 17 10 6 3 1
NOVEMBER 2009.................................. 65 20 12 7 3 2 1
NOVEMBER 2010.................................. 58 15 8 4 2 1 *
NOVEMBER 2011.................................. 52 11 6 3 1 * 0
NOVEMBER 2012.................................. 46 9 4 2 1 * 0
NOVEMBER 2013.................................. 41 6 3 1 * 0 0
NOVEMBER 2014.................................. 37 5 2 1 * 0 0
NOVEMBER 2015.................................. 33 3 1 * * 0 0
NOVEMBER 2016.................................. 30 3 1 * 0 0 0
NOVEMBER 2017.................................. 0 * 0 0 0 0 0
NOVEMBER 2018.................................. 0 * 0 0 0 0 0
NOVEMBER 2019.................................. 0 0 0 0 0 0 0
NOVEMBER 2020.................................. 0 0 0 0 0 0 0
WEIGHTED AVERAGE LIFE TO 10% CALL (YEARS)...... 11.49 6.04 5.03 4.31 3.79 3.40 3.11
WEIGHTED AVERAGE LIFE TO MATURITY (YEARS)...... 11.49 6.29 5.28 4.52 3.96 3.55 3.23
</TABLE>
(1) ASSUMES (I) EXCEPT WHERE INDICATED, THAT NO OPTIONAL TERMINATION
IS EXERCISED AND (II) IN THE CASE OF THE HELOCS, A GROSS CPR AS
DISCLOSED ABOVE LESS A CONSTANT DRAW RATE OF 10.00%.
(2) ALL PERCENTAGES ARE ROUNDED TO THE NEAREST 1%.
* LESS THAN 0.50% BUT GREATER THAN 0.
S-94
<PAGE>
PERCENTAGE OF INITIAL CLASS A-2 TERM NOTE BALANCE
PAYMENT DATE
<TABLE>
<CAPTION>
PERCENTAGE OF BALANCE
------------------------------------------------------------------
GROSS CPR - HELOCS 10% 25% 30% 35% 40% 45% 50%
GROSS CPR - HELS 10% 12% 17% 23% 29% 35% 40%
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL........................................ 100 100 100 100 100 100 100
NOVEMBER 2001.................................. 100 100 100 100 100 100 100
NOVEMBER 2002.................................. 100 92 89 85 82 78 75
NOVEMBER 2003.................................. 100 77 70 62 55 48 42
NOVEMBER 2004.................................. 99 65 55 45 37 30 23
NOVEMBER 2005.................................. 99 55 43 33 25 18 13
NOVEMBER 2006.................................. 94 43 32 23 16 11 7
NOVEMBER 2007.................................. 84 33 23 15 9 6 3
NOVEMBER 2008.................................. 75 25 16 10 6 3 1
NOVEMBER 2009.................................. 67 19 11 6 3 1 1
NOVEMBER 2010.................................. 60 14 8 4 2 1 *
NOVEMBER 2011.................................. 54 11 5 2 1 * 0
NOVEMBER 2012.................................. 49 8 4 2 * * 0
NOVEMBER 2013.................................. 44 6 3 1 * 0 0
NOVEMBER 2014.................................. 39 4 2 1 * 0 0
NOVEMBER 2015.................................. 0 * 0 0 0 0 0
NOVEMBER 2016.................................. 0 * 0 0 0 0 0
NOVEMBER 2017.................................. 0 0 0 0 0 0 0
NOVEMBER 2018.................................. 0 0 0 0 0 0 0
NOVEMBER 2019.................................. 0 0 0 0 0 0 0
NOVEMBER 2020.................................. 0 0 0 0 0 0 0
WEIGHTED AVERAGE LIFE TO 10% CALL (YEARS)...... 11.32 5.87 4.92 4.24 3.75 3.37 3.09
WEIGHTED AVERAGE LIFE TO MATURITY (YEARS)...... 11.32 6.07 5.13 4.43 3.91 3.51 3.20
</TABLE>
(1) ASSUMES (I) EXCEPT WHERE INDICATED, THAT NO OPTIONAL TERMINATION
IS EXERCISED AND (II) IN THE CASE OF THE HELOCS, A GROSS CPR AS
DISCLOSED ABOVE LESS A CONSTANT DRAW RATE OF 10.00%.
(2) ALL PERCENTAGES ARE ROUNDED TO THE NEAREST 1%.
* LESS THAN 0.50% BUT GREATER THAN 0.
S-95
<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 sellers pursuant
to the mortgage loan purchase agreement, or purchase agreement, dated as of the
cut-off date, among the sellers, the depositor, the issuer and the indenture
trustee. 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.
PURCHASE OF MORTGAGE LOANS
Under the purchase agreement, the sellers have agreed to transfer and
assign, without recourse, to the depositor the initial mortgage loans and
related additional balances, and the Initial Mortgage Documents. 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. 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. Subsequent mortgage loans are
intended to be purchased by the issuer from the sellers on or before February
27, 2001, 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 sellers 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 sellers, see "The Sellers and
Servicer" in this prospectus supplement. 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 GMACM. 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 a specified time
period, GMACM deliver to the indenture trustee, as the issuer's agent for such
purpose, the mortgage loans and the Initial Mortgage Documents, 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
S-96
<PAGE>
(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.
In lieu of delivery of original mortgages, GMACM 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. The assignments may be blanket assignments covering mortgages
secured by mortgaged properties located in the same county, if permitted by law.
REPRESENTATIONS AND WARRANTIES
The respective seller or GMACM, in its capacity as servicer, will
represent and warrant to the depositor, and will represent and warrant 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:
o as of the cut-off date, with respect to the initial mortgage
loans, 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;
o immediately prior to the sale of the initial mortgage loans to
the depositor and the subsequent mortgage loans to the issuer,
the respective seller was the sole owner and holder of the
mortgage loans free and clear of any and all liens and security
interests;
o the purchase agreement constitutes a valid transfer and
assignment of all right, title and interest of the sellers in and
to the initial mortgage loans or the subsequent mortgage loans,
as applicable, and the proceeds thereof;
o to the best of GMACM's knowledge, each mortgage loan complied in
all material respects with all applicable local, state and
federal laws;
o no mortgage loan is 30 days or more delinquent in payment of
principal and interest; and
o to the best of GMACM'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 issuer 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 sellers in respect of the initial
mortgage loans and any remedies provided for with respect to any breach of the
representations and warranties. The representations and warranties of the
sellers will be assigned by the issuer to the indenture trustee for the benefit
of the noteholders and the enhancer, and therefore a breach of the
representations and warranties of the sellers will be enforceable on behalf of
the trust. If a 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, within
90 days after notice from the servicer, such seller will be obligated to
repurchase the mortgage loan at the Repurchase Price.
As to any mortgage loan required to be purchased by a 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.
S-97
<PAGE>
REVIEW OF MORTGAGE LOANS
Escrow Bank USA, an affiliate of GMACM and the depositor, 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. Within 90 days of the
closing date or within 90 days of 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 sellers. Any mortgage loan not so
purchased or substituted for shall remain in the trust fund.
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 Sellers and Servicer--Delinquency and Loss
Experience of the Servicer's Portfolio" in this prospectus supplement.
PRINCIPAL COLLECTIONS AND INTEREST 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.
S-98
<PAGE>
The servicer will make withdrawals from the Custodial Account,
including but not limited to the following, and deposit the withdrawn amounts as
follows:
o to pay to itself or the sellers various reimbursement amounts and
other amounts as provided in the servicing agreement; and
o to the Note Payment Account, an amount equal to the Principal and
Interest Collections on the business day prior to each payment date.
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.
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 have determined in good faith that the release will not adversely affect
the ability to make full and timely
S-99
<PAGE>
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 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.
S-100
<PAGE>
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 a 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.
As described under "--Optional Removal of Mortgage Loans or Repurchase
of Defaulted Mortgage Loans", 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.
NON-RECORDATION OF ASSIGNMENTS
Subject to the conditions described in the servicing agreement, GMACM
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. GMACM 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 not necessary to effect a transfer of the mortgage loans to the
indenture trustee, if GMACM 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 sellers 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.
OPTIONAL REMOVAL OF MORTGAGE LOANS OR REPURCHASE OF DEFAULTED MORTGAGE LOANS
In certain instances in which a mortgagor either:
o requests an increase in the credit limit on the related HELOC above
the limit stated in the related credit line agreement;
o requests to place a lien on the related mortgaged property senior to
the lien of the related mortgage loan; or
S-101
<PAGE>
o 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.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
A servicing default under the servicing agreement generally will
include:
o 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;
o 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;
o 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
o 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, in accordance with the terms
of the servicing agreement, will succeed to all responsibilities, duties and
liabilities of the servicer under the servicing agreement, other than the
obligation to 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.
S-102
<PAGE>
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.
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
S-103
<PAGE>
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
sellers 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;
S-104
<PAGE>
(4) the Principal and Interest Collections for each Loan Group for
the related Collection Period;
(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. The
indenture trustee's internet website shall initially be located at
www.ctslink.com. Assistance in using the website can be obtained by calling the
indenture trustee's customer service desk at (301) 815-6600. Parties that are
unable to use the website 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
S-105
<PAGE>
(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;
(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
S-106
<PAGE>
(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 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:
o all noteholders consent to the sale;
o the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on
the outstanding notes and to reimburse the enhancer at the date
of the sale; or
o 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.
S-107
<PAGE>
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:
o have made written request upon the indenture trustee to
institute the proceeding in its own name as indenture trustee
thereunder; and
o 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:
o complies with the provisions of the trust agreement; and
o will not cause the trust fund to be subject to an entity level
tax.
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;
S-108
<PAGE>
(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:
o 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;
o the Final Payment Date; or
o 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
including, for as long as the notes are outstanding, all amounts payable under
the Policy.
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 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
S-109
<PAGE>
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 variable funding notes and the certificates, 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.
MATERIAL 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:
o 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
o 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.
S-110
<PAGE>
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 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.
S-111
<PAGE>
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.
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 "Material 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
S-112
<PAGE>
in any accrual period will equal the excess, if any, of (1) the sum of (A) the
present value, as of the end of the accrual period, of all of the distributions
remaining to be made on the note, if any, in future periods and (B) the
distributions made on the note during the accrual period of amounts included in
the stated redemption price, over (2) the adjusted issue price of the note at
the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated using a
discount rate equal to the original yield to maturity of the notes, and possibly
assuming that distributions on the note will be received in future periods based
on the trust assets being prepaid at a rate equal to a prepayment assumption.
For these purposes, the original yield to maturity of the note would be
calculated based on its issue price and possibly assuming that distributions on
the note will be made in all accrual periods based on the trust assets being
prepaid at a rate equal to a prepayment assumption. The adjusted issue price of
a note at the beginning of any accrual period will equal the issue price of the
note, increased by the aggregate amount of original issue discount that accrued
on the note in prior accrual periods, and reduced by the amount of any
distributions made on the note in prior accrual periods of amounts included in
its stated redemption price. The original issue discount accruing during any
accrual period, computed as described above, will be allocated ratably to each
day during the accrual period to determine the daily portion of original issue
discount for that day. Although the issuer will calculate original issue
discount, if any, based on its determination of the accrual periods, a
noteholder may, subject to some restrictions, elect other accrual periods.
A subsequent purchaser of a note that purchases the note at a price,
excluding any portion of the price attributable to accrued qualified stated
interest, less than its remaining stated redemption price will also be required
to include in gross income the daily portions of any original issue discount
relating to the note. However, each daily portion will be reduced, if the cost
is in excess of its "adjusted issue price," in proportion to the ratio that
excess bears to the aggregate original issue discount remaining to be accrued on
the note. The adjusted issue price of a note on any given day equals:
o the adjusted issue price, or, in the case of the first accrual
period, the issue price, of the note at the beginning of the
accrual period which includes that day, plus
o the daily portions of original issue discount for all days during
the accrual period prior to that day, less
o any principal payments made during the accrual period relating to
the note.
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
S-113
<PAGE>
owns or acquires. See "Material Federal Income Tax Considerations--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 "Material Federal Income
Tax Considerations--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.
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.
S-114
<PAGE>
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 "Material Federal Income Tax
Considerations--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 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 "Material Federal Income
Tax Considerations--Market Discount" and "--Premium."
S-115
<PAGE>
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.
S-116
<PAGE>
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations referred to as the
"New Withholding Regulations," which make modifications to the withholding,
backup withholding and information reporting rules described above in the three
preceding paragraphs. The New Withholding Regulations attempt to unify
certification requirements and modify reliance standards. The New Withholding
Regulations will generally be effective for payments made after December 31,
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
"Material Federal Income Tax Considerations," 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
section 4975 of 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:
o has investment or administrative discretion with respect to the
Plan assets;
o 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
o 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.
S-117
<PAGE>
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.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, each underwriter has agreed to purchase, and the depositor has agreed
to sell to each underwriter, the principal amount of term notes opposite its
name in the table below:
PRINCIPAL AMOUNT OF TERM NOTES:
-------------------------------
CLASS A-1 CLASS A-2
--------- ---------
Bear, Stearns & Co. Inc. $218,172,800 $47,427,200
Lehman Brothers Inc. $ 54,543,200 $11,856,800
------------ -----------
Total $272,716,000 $59,284,000
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 underwriters intend to make a secondary market in the term notes,
but has 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.
S-118
<PAGE>
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1999 and December 31, 1998 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, 1999,
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 underwriter by Morgan, Lewis & Bockius 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, "AAA" by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard &
Poor's and "AAA" by Fitch, Inc. or Fitch. The depositor has not requested a
rating on the term notes by any rating agency other than Moody's, Standard &
Poor's and Fitch. 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, Standard & Poor's and Fitch. 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 and legal
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-119
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
APPENDIX A
[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 Wells Fargo Bank Minnesota, N.A. 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 paid only at the time set forth in the Policy,
and no accelerated Insured Amounts will be made regardless of any acceleration
of the Obligations, 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.
A-1
<PAGE>
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.
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 November 29, 2000, among
the GMACM Home Equity Loan Trust 2000-HE4, 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 Obligations
(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 Obligations 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.
A-2
<PAGE>
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.
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
A-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-HE4 (the "Obligations"), that:
(a) the Indenture Trustee is the indenture trustee under the
Servicing Agreement, dated as of November [ ], 2000, among GMAC Home Equity Loan
Trust 2000-HE4, 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
A-4
<PAGE>
(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].
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
-----------------------------------
A-5
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
<PAGE>
PROSPECTUS
MORTGAGE ASSET-BACKED PASS-THROUGH CERTIFICATES AND
ASSET-BACKED NOTES
RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
Depositor
The depositor may periodically form separate trusts to issue securities in
series, secured by assets of that trust.
OFFERED SECURITIES The securities in a series will consist of certificates or
notes representing interests in a trust and will be paid only
from the assets of that trust. Each series may include
multiple classes of securities with differing payment terms
and priorities. Credit enhancement will be provided for all
offered securities.
TRUST ASSETS Each trust will consist primarily of:
o mortgage loans secured by first or junior liens on one- to four-family
residential properties;
o mortgage loans secured by first or junior liens on mixed-use properties;
o home equity revolving lines of credit secured by first or junior liens on
one- to four-family residential properties, including partial balances
of those lines of credit;
o home improvement installment sales contracts and installment loan
agreements, either unsecured or secured;
o manufactured housing installment sales contracts and installment loan
agreements; or
o mortgage or asset-backed securities backed by, and whole or partial
participations in, the types of assets listed above.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
September 21, 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:
o this prospectus, which provides general information, some of which may
not apply to your series of securities; and
o the accompanying prospectus supplement, which describes the specific
terms of your series of securities
IF THE DESCRIPTION OF YOUR SECURITIES IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT
DIFFERS FROM THE RELATED DESCRIPTION IN THIS PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THAT PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and
the accompanying prospectus supplement, including the information incorporated
by reference. See "Additional Information", "Reports to Securityholders" and
"Incorporation of Certain Information by Reference" in this prospectus. You can
request information incorporated by reference from Residential Asset Mortgage
Products, Inc. by calling us at (952) 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 131.
----------------
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Introduction............................ 5
The Trusts.............................. 5
General............................... 5
Characteristics of Loans.............. 8
Revolving Credit Loans................ 14
The Contracts......................... 17
Mexico Loans.......................... 17
The Mortgaged Properties.............. 18
The Agency Securities................. 20
Private Securities.................... 21
Trust Asset Program..................... 23
Underwriting Standards................ 23
The Negotiated Conduit Asset Program . 27
Description of the Securities........... 29
General............................... 29
Form of Securities.................... 29
Assignment of Loans................... 32
Representations with Respect to
Loans................................ 34
Repurchases of Loans.................. 35
Limited Right of Substitution......... 37
Certain Insolvency and Bankruptcy
Issues............................... 37
Assignment of Agency or Private
Securities........................... 38
Excess Spread and Excluded Spread .... 38
Payments on Loans..................... 39
Withdrawals from the Custodial
Account.............................. 41
Distributions of Principal and
Interest on the Securities........... 42
Advances.............................. 43
Prepayment Interest Shortfalls ....... 44
Funding Account....................... 45
Reports to Securityholders............ 45
Servicing and Administration of
Loans................................ 46
Description of Credit Enhancement ...... 53
General............................... 53
Letters of Credit..................... 54
Subordination......................... 54
Overcollateralization................. 56
Mortgage Pool Insurance Policies ..... 56
Special Hazard Insurance Policies .... 57
Bankruptcy Bonds...................... 58
Reserve Funds......................... 59
Financial Guaranty Insurance
Policies; Surety Bonds............... 59
Maintenance of Credit Enhancement .... 60
Reduction or Substitution of Credit
Enhancement.......................... 60
Other Financial Obligations Related To
The Securities......................... 61
Swaps and Yield Supplement
Agreements........................... 61
Purchase Obligations.................. 61
Insurance Policies on Loans............. 62
Primary Insurance Policies............ 62
Standard Hazard Insurance on
Mortgaged Properties................. 64
Standard Hazard Insurance on
Manufactured Homes................... 65
Description of FHA Insurance Under
Title I.............................. 65
FHA Mortgage Insurance................ 67
VA Mortgage Guaranty.................. 68
The Depositor........................... 68
Residential Funding Corporation......... 69
The Agreements.......................... 69
Events of Default; Rights Upon Event
of Default........................... 69
Amendment............................. 72
Termination; Retirement of
Securities........................... 73
The Trustee........................... 74
The Owner Trustee..................... 74
The Indenture Trustee................. 74
Yield Considerations.................... 76
Maturity and Prepayment Considerations . 80
Certain Legal Aspects of the Loans ..... 84
The Mortgage Loans.................... 84
The Manufactured Housing Contracts ... 94
The Home Improvement Contracts ....... 96
Enforceability of Certain Provisions . 97
Consumer Protection Laws.............. 98
Applicability of Usury Laws........... 98
Environmental Legislation............. 98
Soldiers' and Sailors' Civil Relief
Act of 1940.......................... 99
Default Interest and Limitations on
Prepayments.......................... 100
Forfeitures in Drug and RICO
Proceedings.......................... 100
Negative Amortization Loans........... 100
Material Federal Income Tax
Consequences........................... 101
General............................... 101
Classification of REMICs and FASITs .. 101
3
<PAGE>
PAGE
------
Taxation of Owners of REMIC and FASIT
Regular Certificates................. 102
Pass-through Entities Holding FASIT
Regular Certificates................. 108
Taxation of Owners of REMIC Residual
Certificates......................... 108
Backup Withholding with Respect to
Securities........................... 117
Foreign Investors in Regular
Certificates......................... 117
State and Other Tax Consequences ....... 118
ERISA Considerations.................... 118
Plan Asset Regulations................ 119
Considerations for ERISA Plans
Regarding the Purchase of
Certificates......................... 120
Representations From Investing ERISA
Plans................................ 123
Considerations for ERISA Plans
Regarding the Purchase of Notes ..... 124
Tax-Exempt Investors.................. 125
Consultation with Counsel............. 125
Legal Investment Matters................ 126
Use of Proceeds......................... 127
Methods of Distribution................. 127
Legal Matters........................... 128
Financial Information................... 128
Additional Information.................. 129
Reports to Securityholders.............. 129
Incorporation of Certain Information by
Reference.............................. 129
Glossary................................ 131
</TABLE>
4
<PAGE>
INTRODUCTION
The securities offered may be sold from time to time in series. Each
series of certificates will represent in the aggregate the entire beneficial
ownership interest in, and each series of notes in the aggregate will represent
indebtedness of, a trust consisting primarily of the trust assets described in
the following section. The trust assets will have been acquired by the
depositor from one or more affiliated or unaffiliated institutions. Each series
of certificates will be issued under a pooling and servicing agreement among
the depositor, the trustee and master servicer or servicer, or a trust
agreement between the depositor and trustee, all as specified in the
accompanying prospectus supplement. Each series of notes will be issued under
an indenture between the related trust and the indenture trustee specified in
the accompanying prospectus supplement. Unless the context indicates otherwise,
references in this prospectus to the trustee refer to the indenture trustee in
the case of a series of notes. The trust assets for each series of notes will
be held in a trust under a trust agreement and pledged under the indenture to
secure a series of notes as described in this prospectus and in the
accompanying prospectus supplement. The ownership of the trust fund for each
series of notes will be evidenced by certificates issued under the trust
agreement, which certificates are not offered by this prospectus.
THE TRUSTS
GENERAL
As specified in the accompanying prospectus supplement, the trust for a
series of securities will consist primarily of a segregated pool of assets. The
trust assets will primarily include any combination of the following:
o one- to four-family first or junior lien mortgage loans, including
closed-end home equity loans, Home Loans and Cooperative Loans;
o one- to four-family first or junior lien home equity revolving lines
of credit, which are referred to in this prospectus as revolving
credit loans;
o home improvement installment sales contracts and installment loan
agreements, which are referred to in this prospectus as home
improvement contracts, that are either unsecured or secured by first
or junior liens on one- to four-family residential properties or by
purchase money security interests in the home improvements financed by
those home improvement contracts;
o manufactured housing installment sales contracts and installment loan
agreements, which are referred to in this prospectus as manufactured
housing contracts, secured by security interests in manufactured
homes;
o partial balances of, or partial interests in, any of the assets
described above;
o Agency Securities and private securities, which as used in this
prospectus, are mortgage-backed or asset-backed securities issued by
entities other than Freddie Mac, Fannie Mae and Ginnie Mae that
represent interests in or are secured by any of the assets described
above, including pass-through certificates, participation certificates
or other instruments that evidence interests in or are secured by
these assets;
o all payments and collections derived from the trust assets described
above after the related cut-off date, other than Excluded Spread or
other interest retained by the depositor or any of its affiliates with
respect to any trust asset, as from time to time are identified as
deposited in the Custodial Account and in the related Payment Account;
o property acquired by foreclosure on the mortgaged properties or other
security for the trust assets or deed in lieu of foreclosure, and
portions of proceeds from the disposition of any related Additional
Collateral or Pledged Assets;
o hazard insurance policies and primary insurance policies, if any; and
5
<PAGE>
o any one or a combination, if applicable and to the extent specified in
the accompanying prospectus supplement, of a letter of credit,
purchase obligation, mortgage pool insurance policy, contract pool
insurance policy, special hazard insurance policy, bankruptcy bond,
financial guaranty insurance policy, derivative products, surety bond
or other type of credit enhancement as described under "Description of
Credit Enhancement."
Unless the context indicates otherwise, as used in this prospectus,
mortgage loans includes:
o mortgage loans or closed-end home equity loans secured by first or
junior liens on one-to four- family residential properties;
o Home Loans;
o Cooperative Loans; and
o mortgage loans secured by first or junior liens on Mixed-Use
Properties.
Unless the context indicates otherwise, as used in this prospectus,
Contracts includes:
o manufactured housing contracts; and
o home improvement contracts.
The mortgage loans, revolving credit loans and, if applicable, the
contracts will be evidenced by mortgage notes secured by mortgages, deeds of
trust or other similar security instruments creating first or junior liens on
one- to four-family residential properties. Unless the context indicates
otherwise, mortgage notes includes Cooperative Notes; mortgages includes
security agreements for Cooperative Notes; and mortgaged properties may include
shares in the related Cooperative and the related proprietary leases or
occupancy agreements securing Cooperative Notes. In addition, if specified in
the accompanying prospectus supplement relating to a series of securities, a
mortgage pool may contain Additional Collateral Loans or Pledged Asset Mortgage
Loans that are secured, in addition to the related mortgaged property, by
Additional Collateral or Pledged Assets.
The mortgage loans, revolving credit loans and the contracts are referred
to in this prospectus collectively as the loans. In connection with a series of
securities backed by revolving credit loans, if the accompanying prospectus
supplement indicates that the pool consists of certain balances of the
revolving credit loans, then the term "revolving credit loans" in this
prospectus refers only to those balances.
If specified in the accompanying prospectus supplement, the trust
underlying a series of securities may include Agency Securities or private
securities. For any series of securities backed by Agency Securities or private
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. 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.
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 the series of securities. This special purpose entity may be
organized in the form of a trust, limited partnership or limited liability
company, and will be structured in a manner that will insulate the holders of
securities from liabilities of the special purpose entity. The provisions
governing the special purpose entity will restrict the special purpose entity
from engaging in or conducting any business other than the holding of trust
assets and any related assets and the issuance of ownership interests in the
trust assets and some incidental activities. Any ownership interest in the
special purpose entity 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.
6
<PAGE>
Each trust asset will be selected by the depositor for inclusion in a pool
from among those purchased by the depositor from any of the following sources:
o directly or through its affiliates, including Residential Funding
Corporation;
o sellers who are affiliates of the depositor including HomeComings
Financial Network, Inc., Residential Money Centers, Inc., and GMAC
Mortgage Corporation; or
o savings banks, savings and loan associations, commercial banks, credit
unions, insurance companies or similar institutions that are
supervised and/or examined by a federal or state authority, lenders
approved by the United States Department of Housing and Urban
Development, known as HUD, mortgage bankers, investment banking firms,
the Federal Deposit Insurance Corporation, known as the FDIC, or other
regulated and unregulated mortgage loan originators or sellers,
including brokers, not affiliated with the depositor, all as described
in the accompanying prospectus supplement.
The sellers may include state or local government housing finance
agencies. If so described in the accompanying prospectus supplement, the
depositor may issue one or more classes of securities to a seller as
consideration for the purchase of the trust assets securing such series of
securities. If a pool is composed of trust assets acquired by the depositor
directly from sellers other than Residential Funding Corporation, the
accompanying prospectus supplement will specify the extent of trust assets so
acquired.
The trust assets may also be delivered to the depositor in a Designated
Seller Transaction. Those securities may be sold in whole or in part to any
designated seller identified in the accompanying prospectus supplement in
exchange for the related trust assets, or may be offered under any of the other
methods described in this prospectus under "Methods of Distribution." The
accompanying prospectus supplement for a Designated Seller Transaction will
include information provided by the designated seller about the designated
seller, the trust assets and the underwriting standards applicable to the
loans. None of the depositor, Residential Funding Corporation, GMAC Mortgage
Corporation or any of their affiliates will make any representation or warranty
with respect to the trust assets sold in a Designated Seller Transaction, or
any representation as to the accuracy or completeness of the information
provided by the designated seller, unless that entity is the designated seller.
GMAC Mortgage Corporation, an affiliate of the depositor, may be a designated
seller.
Any seller, including any designated seller, or Residential Funding
Corporation may retain or acquire any Excluded Balances for any related
revolving credit loans, or any loan secured by a mortgage senior or subordinate
to any loan included in any pool.
The depositor will cause the trust assets constituting each pool to be
assigned without recourse to the trustee named in the accompanying prospectus
supplement, for the benefit of the holders of all of the securities of a
series. The master servicer or servicer, which may be an affiliate of the
depositor, named in the accompanying prospectus supplement will service the
loans, either directly or through subservicers under a servicing agreement and
will receive a fee for its services. See "The Trusts" and "Description of the
Securities." As to those loans serviced by the master servicer or a servicer
through a subservicer, the master servicer or servicer, as applicable, will
remain liable for its servicing obligations under the related servicing
agreement as if the master 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.
7
<PAGE>
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 proceeds of the loans, other than the loans made to finance the
purchase of the mortgaged properties, 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.
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 be of one or more of the following types, and may include one or more
of the following characteristics:
o adjustable rate loans, known as ARM loans;
o negatively amortizing ARM loans;
o Balloon Loans;
o Convertible Mortgage Loans;
o Buy-Down Loans;
o Additional Collateral Loans;
o Pledged Asset Mortgage Loans;
o simple interest loans;
o actuarial loans;
o delinquent loans;
o re-performing loans;
o Mexico Loans;
o Cooperative Loans;
o High Cost Loans;
o GPM Loans;
o GEM Loans;
o fixed rate loans;
o loans that have been modified;
o loans that provide for payment on a bi-weekly or other non-monthly basis
during the term of the loan; and
o loans that provide for the reduction of the interest rate based on the
payment performance of the loans.
The accompanying prospectus supplement will provide information concerning
the types and characteristics of the loans and other assets included in the
related trust. Each prospectus supplement applicable to a series of securities
will include information to the extent then available to the depositor, as of
the related cut-off date, if appropriate, on an approximate basis. No more than
five percent (5%) of the trust assets by aggregate principal balance as of the
cut-off date will have characteristics that deviate
8
<PAGE>
from those characteristics described in the accompanying prospectus supplement.
Other trust assets available for purchase by the depositor may have
characteristics which would make them eligible for inclusion in a pool but were
not selected for inclusion in a pool at that time.
The information in the accompanying prospectus supplement may include, if
applicable:
o the aggregate principal balance of the trust assets;
o the type of property securing the loans and related lien priority, if
any;
o the original or modified and/or remaining terms to maturity of the
loans;
o the range of principal balances of the loans at origination or
modification;
o the aggregate credit limits and the range of credit limits of the
related credit line agreements in the case of revolving credit loans;
o the range of the years of origination of the loans;
o the earliest origination or modification date and latest maturity date
of the loans;
o the loan-to-value ratios, known as LTV ratios, or the combined LTV
ratios of the loans, as applicable;
o the weighted average loan rate and range of loan rates borne by the
loans;
o the applicable index, the range of gross margins, the weighted average
gross margin, the frequency of adjustments and maximum loan rate;
o the geographic distribution of the mortgaged properties;
o the number and percentage of home improvement contracts that are
partially insured by the FHA under Title I;
o the weighted average junior ratio and Credit Utilization Rate;
o the weighted average and range of debt-to-income ratios;
o the distribution of loan purposes; and
o the range of Credit Scores.
A Current Report on Form 8-K will be available on request to holders of
the related series of securities and will be filed, together with the related
pooling and servicing agreement or trust agreement, for each series of
certificates, or the related trust agreement and indenture, for each series of
notes, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the securities. The composition and characteristics of
a pool containing revolving credit loans may change from time to time as a
result of any Draws made after the related cut-off date under the related
credit line agreements that are included in the pool. If trust assets are added
to or deleted from the trust after the date of the accompanying prospectus
supplement but prior to the closing date, other than as a result of any Draws,
the addition or deletion will be noted in the Form 8-K.
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.
9
<PAGE>
Prepayment on the Loans
In some cases, loans may be prepaid by the borrowers at any time without
payment of any prepayment fee or penalty. In addition, the borrower under a
revolving credit loan has the right during the related Draw Period to make a
Draw in the amount of any prepayment made with respect to the loan. 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 unless the prospectus supplement discloses that
those charges will be available for payment. 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.
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:
o the weekly average yield on U.S. Treasury securities adjusted to a
constant maturity of six months, one year or other terms to maturity;
o the weekly auction average investment yield of U.S. Treasury bills of
various maturities;
o the daily bank prime loan rate as quoted by financial industry news
sources;
o the cost of funds of member institutions of any of the regional
Federal Home Loan Banks;
o the interbank offered rates for U.S. dollar deposits in the London
market, each calculated as of a date prior to each scheduled interest
rate adjustment date which will be specified in the accompanying
prospectus supplement; or
o the weekly average of secondary market interest rates on six-month
negotiable certificates of deposit.
ARM loans have features that provide different investment considerations
than fixed-rate loans. Adjustable loan rates can cause payment increases that
may exceed some borrowers' capacity to cover those payments. Some ARM loans,
may be teaser loans, with an introductory rate that is lower than the rate that
would be in effect if the applicable index and gross margin were used to
determine the loan rate. As a result of the introductory rate, interest
collections on the loans may initially be lower than expected. Commencing on
their first adjustment date, the loan rates on the teaser loans will be based
on the applicable index and gross margin, subject to any rate caps applicable
to the first adjustment date. An ARM loan may provide that its loan rate may
not be adjusted to a rate above the applicable maximum loan rate or below the
applicable minimum loan rate, if any, for the ARM loan. In addition, some of
the ARM loans may provide for limitations on the maximum amount by which their
loan rates may adjust for any single adjustment period. Some ARM loans provide
for limitations on the amount of scheduled payments of principal and interest,
or may have other features relating to payment adjustment as described in the
accompanying prospectus supplement.
10
<PAGE>
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
As specified in the prospectus supplement, a pool may include Balloon
Loans. Balloon Loans generally require a monthly payment of a pre-determined
amount that will not fully amortize the loan until the maturity date, at which
time the Balloon Amount will be due and payable. Payment of the Balloon Amount,
which, based on the amortization schedule of those loans, is expected to be a
substantial amount and will typically depend on the mortgagor's ability to
obtain refinancing of the related mortgage loan or to sell the mortgaged
property prior to the maturity of the Balloon Loan. The ability to obtain
refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, including, without limitation, real estate
values, the mortgagor's financial situation, the level of available mortgage
loan interest rates, the mortgagor's equity in the related mortgaged property,
tax laws, prevailing general economic conditions and the terms of any related
first lien mortgage loan. Neither the depositor, the master servicer or
servicer, the trustee, as applicable, nor any of their affiliates will be
obligated to refinance or repurchase any mortgage loan or to sell the mortgaged
property.
Convertible Mortgage Loans
On any conversion of a Convertible Mortgage Loan, the depositor, the
master servicer or servicer or a third party may be obligated to purchase the
converted mortgage loan. Alternatively, if specified in the accompanying
prospectus supplement, the depositor, Residential Funding Corporation or
another party may agree to act as remarketing agent for the converted mortgage
loans and, in that capacity, to use its best efforts to arrange for the sale of
the converted mortgage loans under specified conditions. On the failure of any
party so obligated to purchase any converted mortgage loan, the inability of
any remarketing agent to arrange for the sale of any converted mortgage loan or
the unwillingness of the remarketing agent to exercise any election to purchase
any converted mortgage loan for its own account, the related pool will
thereafter include both fixed rate and adjustable rate mortgage loans. If
specified in the accompanying prospectus supplement, neither the depositor nor
any other party will be obligated to repurchase or remarket any converted
mortgage loan, and, as a result, converted mortgage loans will remain in the
related pool.
Buy-Down Loans
In the case of Buy-Down Loans, the monthly payments made by the borrower
during the Buy-Down Period will be less than the scheduled monthly payments on
the mortgage loan, the resulting difference to be made up from:
o Buy-Down Funds contributed by the seller of the mortgaged property or
another source and placed in the Buy-Down Account;
11
<PAGE>
o if the Buy-Down Funds are contributed on a present value basis,
investment earnings on the Buy-Down Funds; or
o additional buydown funds to be contributed over time by the borrower's
employer or another source.
Additional Collateral Loans
If stated in the accompanying prospectus supplement, a trust will contain
Additional Collateral Loans. The Additional Collateral Requirement will in most
cases terminate when the 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
12
<PAGE>
financed under the loan over a series of equal monthly payments, except, in the
case of a Balloon Loan, the final payment. Each monthly payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of the loan multiplied by the stated loan rate and further
multiplied by a fraction, with the numerator equal to the number of days in the
period elapsed since the preceding payment of interest was made and the
denominator equal to the number of days in the annual period for which interest
accrues on the loan. As payments are received under a simple interest loan, the
amount received is applied first to interest accrued to the date of payment and
then the remaining amount is applied to pay any unpaid fees and then to reduce
the unpaid principal balance. Accordingly, if a borrower pays a fixed monthly
installment on a simple interest loan before its scheduled due date, the
portion of the payment allocable to interest for the period since the preceding
payment was made will be less than it would have been had the payment been made
as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly greater. On the other hand, if a
borrower pays a fixed monthly installment after its scheduled due date, the
portion of the payment allocable to interest for the period since the preceding
payment was made will be greater than it would have been had the payment been
made as scheduled, and the remaining portion, if any, of the payment applied to
reduce the unpaid principal balance will be correspondingly less. If each
scheduled payment under a simple interest loan is made on or prior to its
scheduled due date, the principal balance of the loan will amortize more
quickly than scheduled. However, if the borrower consistently makes scheduled
payments after the scheduled due date, the loan will amortize more slowly than
scheduled. If a simple interest loan is prepaid, the borrower is required to
pay interest only to the date of prepayment. The variable allocations among
principal and interest of a simple interest loan may affect the distributions
of principal and interest on the securities, as described in the accompanying
prospectus supplement.
Delinquent Loans
Some pools may include loans that are one or more months delinquent with
regard to payment of principal or interest at the time of their deposit into a
trust. The accompanying prospectus supplement will set forth the percentage of
loans that are so delinquent. Delinquent loans are more likely to result in
losses than loans that have a current payment status.
Re-Performing Loans
The term "re-performing loans" includes (i) repayment plan loans and
bankruptcy plan loans that had arrearages when the repayment plan was entered
into, and (ii) trial modification loans. These loans may be acquired by a
designated seller or Residential Funding Corporation from a wide variety of
sources through bulk or periodic sales. The re-performing loans were originally
either:
o acquired by the designated seller or Residential Funding Corporation
as a performing loan;
o acquired under Residential Funding Corporation's negotiated conduit
asset program; or
o acquired by the designated seller or Residential Funding Corporation
as a delinquent loan with a view toward establishing a repayment plan.
In the case of loans that are acquired by Residential Funding Corporation
as delinquent loans with a view toward establishing a repayment plan, no
determination is made as to whether the loans complied with the underwriting
criteria of any specific origination program. In each case, however, at the
time of purchase, every loan is evaluated by Residential Funding Corporation.
This includes obtaining an evaluation 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
13
<PAGE>
a schedule, in exchange for the related master servicer or servicer agreeing
not to foreclose on the related mortgaged property or other security. For each
loan subject to a repayment plan, or a confirmed bankruptcy plan, the borrower
shall have made at least an aggregate of its three most recent scheduled
monthly payments prior to the cut-off date.
The right to receive all arrearages payable under the repayment plan will
not be included as part of the trust and, accordingly, payments made on these
arrearages will not be payable to the securityholders. The borrowers under any
confirmed bankruptcy plan will make separate payments for their scheduled
monthly payments and for their arrearages. The borrowers under any repayment
plan will make a single payment, which will be applied first to their scheduled
monthly payment and second to the arrearage. In either case, the master
servicer or servicer may immediately commence foreclosure if, in the case of a
bankruptcy plan, both payments are not received and the bankruptcy court has
authorized that action or, in the case of a repayment plan, the payment is
insufficient to cover both the monthly payment and the arrearage.
Trial Modification Loans. Some of the loans may be loans where the
borrower in the past has failed to pay scheduled monthly payments, and the
borrower has entered into a trial modification agreement. Generally, under this
arrangement:
o the borrower agrees to pay a reduced monthly payment for a specified
trial period typically lasting 3 to 6 months;
o if the borrower makes all required monthly payments during the trial
period, at the end of the trial period, the original loan terms will
be modified to reflect terms stated in the trial modification
agreement. The modifications may include a reduced interest rate, the
forgiveness of some arrearages, the capitalization of some arrearages,
an extension of the maturity, or a provision for a balloon payment at
maturity;
o if the borrower makes all required payments during the trial period,
the monthly payment amount will continue to be the monthly payment in
effect during the trial period, with no additional repayment of
arrearages; and
o if the borrower fails to make any of the required payments during the
trial period, the modified terms will not take effect, and a
foreclosure action may be commenced immediately. None of the
depositor, the seller, the designated seller, the master servicer or
the servicer, as applicable, will have any obligation to repurchase
the related loan under those circumstances unless that repurchase
obligation is described in the related prospectus supplement.
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 (a)
the index on the day specified in the accompanying prospectus supplement, and
(b) the gross margin specified in the related mortgage note, which may vary
under some circumstances, 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
14
<PAGE>
the loans may initially be lower than expected. Commencing on their first
adjustment date, the loan rates on the teaser loans will be based on the
applicable index and gross margin. The index or indices will be specified in
the related prospectus supplement and may include one of the indices mentioned
under "--Characteristics of Loans," in this prospectus.
Unless specified in the accompanying prospectus supplement, each revolving
credit loan will have a term to maturity from the date of origination of not
more than 25 years. The borrower for each revolving credit loan may make a Draw
under the related credit line agreement at any time during the Draw Period.
Unless specified in the accompanying prospectus supplement, the Draw Period
will not be more than 15 years. Unless specified in the accompanying prospectus
supplement, for each revolving credit loan, if the Draw Period is less than the
full term of the revolving credit loan, the related borrower will not be
permitted to make any Draw during the Repayment Period. Prior to the Repayment
Period, or prior to the date of maturity for loans without Repayment Periods,
the borrower for each revolving credit loan will be obligated to make monthly
payments on the revolving credit loan in a minimum amount as specified in the
related mortgage note, which usually will be the finance charge for each
billing cycle as described in the second following paragraph. In addition, if a
revolving credit loan has a Repayment Period, during this period, the borrower
is required to make monthly payments consisting of principal installments that
would substantially amortize the principal balance by the maturity date, and to
pay any current finance charges and additional charges.
The borrower for each revolving credit loan will be obligated to pay off
the remaining account balance on the related maturity date, which may be a
substantial principal amount. The maximum amount of any Draw for any revolving
credit loan is equal to the excess, if any, of the credit limit over the
principal balance outstanding under the mortgage note at the time of the Draw.
Draws will be funded by the seller, designated seller or other entity specified
in the accompanying prospectus supplement.
Unless specified in the accompanying prospectus supplement, for each
revolving credit loan:
o the finance charge for any billing cycle, in most cases, will be an
amount equal to the aggregate of, as calculated for each day in the
billing cycle, the then-applicable loan rate divided by 365 multiplied
by that day's principal balance;
o the account balance on any day in most cases will be the aggregate of
the unpaid principal of the revolving credit loan outstanding at the
beginning of the day, plus all related Draws funded on that day and
outstanding at the beginning of that day, plus the sum of any unpaid
finance charges and any unpaid fees, insurance premiums and other
charges, collectively known as additional charges, that are due on the
revolving credit loan minus the aggregate of all payments and credits
that are applied to the repayment of any Draws on that day; and
o the principal balance on any day usually will be the related account
balance minus the sum of any unpaid finance charges and additional
charges that are due on the revolving credit loan.
Payments made by or on behalf of the borrower for each revolving credit
loan, in most cases, will be applied, first, to any unpaid finance charges that
are due on the revolving credit loan, second, to any unpaid additional charges
that are due thereon, and third, to any related Draws outstanding.
The mortgaged property securing each revolving credit loan will be subject
to the lien created by the related loan in the amount of the outstanding
principal balance of each related Draw or portion thereof, if any, that is not
included in the related pool, whether made on or prior to the related cut-off
date or thereafter. The lien will be the same rank as the lien created by the
mortgage relating to the revolving credit loan, and monthly payments,
collections and other recoveries under the credit line agreement related to the
revolving credit loan will be allocated as described in the related prospectus
supplement among the revolving credit loan and the outstanding principal
balance of each Draw or portion of Draw excluded from the pool. The depositor,
an affiliate of the depositor or an unaffiliated seller may have an interest in
any Draw or portion thereof excluded from the pool. If any entity with an
interest in a Draw or portion thereof excluded from the pool or any other
Excluded Balance were to become a debtor under the Bankruptcy Code and
regardless of whether the transfer of the related revolving credit loan
constitutes an absolute assignment, a bankruptcy trustee or creditor of such
entity or such entity as a
15
<PAGE>
debtor-in-possession could assert that such entity retains rights in the
related revolving credit loan and therefore compel the sale of such revolving
credit loan, including any Trust Balance, over the objection of the trust and
the securityholders. If that occurs, delays and reductions in payments to the
trust and the securityholders could result.
In most cases, each revolving credit loan may be prepaid in full or in
part at any time and without penalty, and the related borrower will have the
right during the related Draw Period to make a Draw in the amount of any
prepayment made for the revolving credit loan. The mortgage note or mortgage
related to each revolving credit loan will usually contain a customary
"due-on-sale" clause.
As to each revolving credit loan, the borrower's rights to receive Draws
during the Draw Period may be suspended, or the credit limit may be reduced,
for cause under a limited number of circumstances, including, but not limited
to:
o a materially adverse change in the borrower's financial circumstances;
o a decline in the value of the mortgaged property significantly below
its appraised value at origination; or
o a payment default by the borrower.
However, as to each revolving credit loan, a suspension or reduction usually
will not affect the payment terms for previously drawn balances. The master
servicer or the servicer, as applicable, will have no obligation to investigate
as to whether any of those circumstances have occurred or may have no knowledge
of their occurrence. Therefore, there can be no assurance that any borrower's
ability to receive Draws will be suspended or reduced if the foregoing
circumstances occur. In the event of default under a revolving credit loan, at
the discretion of the master servicer or servicer, the revolving credit loan
may be terminated and declared immediately due and payable in full. For this
purpose, a default includes but is not limited to:
o the borrower's failure to make any payment as required;
o any action or inaction by the borrower that materially and adversely
affects the mortgaged property or the rights in the mortgaged
property; or
o any fraud or material misrepresentation by a borrower in connection
with the loan.
The master servicer or servicer will have the option to allow an increase
in the credit limit applicable to any revolving credit loan in certain limited
circumstances described in the related agreement.
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 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 after that time. The
accompanying prospectus supplement will describe these provisions as well as
the related allocation provisions that would be applicable.
16
<PAGE>
THE CONTRACTS
Home Improvement Contracts
The trust for a series may include a contract pool evidencing interests in
home improvement contracts. The home improvement contracts may be conventional
home improvement contracts or, to the extent specified in the accompanying
prospectus supplement, the home improvement contracts may be partially insured
by the FHA under Title I.
In most cases, the home improvement contracts will be fully amortizing and
may have fixed loan rates or adjustable loan rates and may provide for other
payment characteristics as described in the accompanying prospectus supplement.
The home improvements securing the home improvement contracts may include,
but are not limited to, replacement windows, house siding, new roofs, swimming
pools, satellite dishes, kitchen and bathroom remodeling goods and solar
heating panels. The proceeds of contracts under the Title I Program may be used
only for permitted purposes, including, but not limited to, the alteration,
repair or improvement of residential property, the purchase of a manufactured
home and/or lot on which to place that home, or cooperative interest in the
home and/or lot.
Home improvements, unlike mortgaged properties, in most cases, depreciate
in value. Consequently, at any time after origination it is possible,
especially in the case of home improvement contracts with high LTV ratios at
origination, that the market value of a home improvement may be lower than the
principal amount outstanding under the related contract.
Manufactured Housing Contracts
The trust for a series may include a contract pool evidencing interests in
manufactured housing contracts originated by one or more manufactured housing
dealers, or the other entity or entities described in the accompanying
prospectus supplement. The manufactured housing contracts may be conventional
manufactured housing contracts or manufactured housing contracts insured by the
FHA or partially guaranteed by the VA. Each manufactured housing contract will
be secured by a manufactured home. The manufactured housing contracts will be
fully amortizing or, if specified in the accompanying prospectus supplement,
Balloon Loans.
The manufactured homes securing the manufactured housing contracts will
consist of "manufactured homes" within the meaning of 42 U.S.C. Section
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 81/2 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
17
<PAGE>
will be held in the name of a Mexican financial institution acting as Mexican
trustee for a Mexican trust under the terms of a trust agreement. The trust
agreement will be governed by Mexican law and will be filed (in Spanish) in the
real property records in the jurisdiction in which the property is located. The
original term of the Mexican trust will be 50 years and will be renewable at
the option of the borrower. To secure the repayment of the Mexico Loan, the
lender is named as a beneficiary of the Mexican trust. The lender's beneficial
interest in the Mexican trust grants to the lender the right to direct the
Mexican trustee to transfer the borrower's beneficial interest in the Mexican
trust or to terminate the Mexican trust and sell the Mexican property. The
borrower's beneficial interest in the Mexican trust grants to the borrower the
right to use, occupy and enjoy the Mexican property so long as it is not in
default of its obligations relating to the Mexico Loan.
As security for repayment of the Mexico Loan, under the loan agreement,
the borrower grants to the lender a security interest in the borrower's
beneficial interest in the Mexican trust. If the borrower is domiciled in the
United States, the borrower's beneficial interest in the Mexican trust should
be considered under applicable state law to be an interest in personal
property, not real property, and, accordingly, the lender will file financing
statements in the appropriate state to perfect the lender's security interest.
Because the lender's security interest in the borrower's beneficial interest in
the Mexican trust is not, for purposes of foreclosing on that collateral, an
interest in real property, the depositor either will rely on its remedies that
are available in the United States under the applicable Uniform Commercial
Code, or UCC, and under the trust agreement and foreclose on the collateral
securing a Mexico Loan under the UCC, or direct the Mexican trustee to conduct
an auction to sell the borrower's beneficial interest or the Mexican property
under the trust agreement. If a borrower is not a resident of the United
States, the lender's security interest in the borrower's beneficial interest in
the Mexican trust may be unperfected under the UCC. If the lender conducts its
principal lending activities in the United States, the loan agreement will
provide that rights and obligations of the borrower and the lender under the
loan agreement will be governed under applicable United States state law. See
"Certain Legal Aspects of the Loans--The Mortgage Loans."
In connection with the assignment of a Mexico Loan into a trust created
under the related pooling and servicing agreement or trust agreement, the
depositor will transfer to the trustee, on behalf of the securityholders, all
of its right, title and interest in the mortgage note, the lender's beneficial
interest in the Mexican trust, the lender's security interest in the borrower's
beneficial interest in the Mexican trust, and its interest in any policies of
insurance on the Mexico Loan or the Mexican property. The percentage of
mortgage loans, if any, that are Mexico Loans will be specified in the
accompanying prospectus supplement.
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, two- to four-family dwellings and Mixed-Use Properties. 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."
18
<PAGE>
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.
Mortgage loans secured by Mixed-Use Property, or mixed-use mortgage loans,
will consist of mortgage loans secured by first or junior mortgages, deeds of
trust or similar security instruments on fee simple or leasehold interests in
Mixed-Use Property. The mixed-use mortgage loans may also be secured by one or
more assignments of leases and rents, management agreements or operating
agreements relating to the mortgaged property and in some cases by certain
letters of credit, personal guarantees or both. Pursuant to an assignment of
leases and rents, the related borrower assigns its right, title and interest as
landlord under each related lease and the income derived from the lease to the
related lender, while retaining a right to collect the rents for so long as
there is no default. If the borrower defaults, the right of the borrower
terminates and the related lender is entitled to collect the rents from tenants
to be applied to the payment obligations of the borrower. State law may limit
or restrict the enforcement of the assignment of leases and rents by a lender
until the lender takes possession of the related mortgaged property and a
receiver is appointed.
Mixed-use real estate lending is generally viewed as exposing the lender
to a greater risk of loss than one- to four-family residential lending.
Mixed-use real estate lending typically involves larger loans to single
borrowers or groups of related borrowers than residential one- to four-family
mortgage loans. Furthermore, the repayment of loans secured by income-producing
properties is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced, for example,
if leases are not obtained or renewed, the borrower's ability to repay the loan
may be impaired. Mixed-use real estate can be affected significantly by supply
and demand in the market for the type of property securing the loan and,
therefore, may be subject to adverse economic conditions. Market values may
vary as a result of economic events or governmental regulations outside the
control of the borrower or lender, such as rent control laws, which impact the
future cash flow of the property. Mortgage loans secured by Mixed-Use
Properties 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 located in any of the fifty states, the
District of Columbia or the Commonwealth of Puerto Rico. In addition, if
specified in the accompanying prospectus supplement, the trust assets may
contain Mexico Loans, which are secured by interests in trusts that own
residential properties located in Mexico. The Mexico Loans will not exceed ten
percent (10%) by aggregate principal balance of the mortgage loans in any
mortgage pool as of the cut-off date specified in the accompanying prospectus
supplement.
The mortgaged properties may be owner occupied or non-owner occupied and
may include vacation homes, second homes and investment properties. The
percentage of loans secured by mortgaged properties that are owner-occupied
will be disclosed in the accompanying prospectus supplement. The basis for any
statement that a given percentage of the loans are secured by mortgaged
properties that are owner-occupied will be one of the following:
o the making of a representation by the borrower at origination of a loan
that the borrower intends to use the mortgaged property as a primary
residence for at least the first six months of occupancy;
o a representation by the originator of the loan, which may be based
solely on the above clause; or
o the fact that the mailing address for the borrower is the same as the
address of the mortgaged property.
19
<PAGE>
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
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.
20
<PAGE>
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. Section 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.
References in this prospectus to Advances to be made and other actions to
be taken by the master servicer or servicer in connection with the loans may
include Advances made and other actions taken under the terms of the private
securities. Each security offered by this prospectus will evidence an interest
in only the related pool and corresponding trust, and not in any other pool or
trust related to securities issued in this prospectus.
In addition, as to any series of securities secured by private securities,
the private securities may consist of an ownership interest in a structuring
entity formed by the depositor for the limited purpose of holding the trust
assets relating to a series of securities. This special purpose entity may be
organized in the form of a trust, limited partnership or limited liability
company, and will be structured in a manner that will insulate the holders of
securities from liabilities of the special purpose entity. The provisions
governing the special purpose entity will restrict the special purpose entity
from engaging in or conducting any business other than the holding of trust
assets and the issuance of ownership interests in the trust assets and some
incidental activities. Any ownership interest will evidence an ownership
interest in the related trust assets as well as the right to receive specified
cash flows derived from the trust assets, as
21
<PAGE>
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.
22
<PAGE>
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 generally in accordance with a given set of
underwriting standards if, based on an overall qualitative evaluation, the loan
is in substantial compliance with the underwriting standards. For example, a
loan may be considered to comply with a set of underwriting standards, even if
one or more specific criteria included in the underwriting standards were not
satisfied, if other factors compensated for the criteria that were not
satisfied or if the loan is considered to be in substantial compliance with the
underwriting standards. In the case of a Designated Seller Transaction, the
applicable underwriting standards will be those of the designated seller or of
the originator of the loans, and will be described in the accompanying
prospectus supplement.
The depositor anticipates that loans, other than the Mexico Loans and some
loans secured by mortgaged properties located in Puerto Rico, included in pools
for certain series of securities will have been originated based on
underwriting standards and documentation requirements that are less restrictive
than for other mortgage loan lending programs. In such cases, borrowers may
have credit histories that contain delinquencies on mortgage and/or consumer
debts. Some borrowers may have initiated bankruptcy proceedings within a few
years of the time of origination of the related loan. In addition, some loans
with LTV ratios over 80% will not be required to have and may not have the
benefit of primary mortgage insurance. Loans and contracts that are secured by
junior liens generally will not be required by the depositor to be covered by
primary mortgage insurance. Likewise, loans included in a trust may have been
originated in connection with a governmental program under which underwriting
standards were significantly less stringent and designed to promote home
ownership or the availability of affordable residential rental property
regardless of higher risks of default and losses. As discussed above, in
evaluating seasoned loans, the depositor may place greater weight on payment
history or market and other economic trends and less weight on underwriting
factors usually applied to newly originated loans.
Loan Documentation
In most cases, under a traditional "full documentation" program, each
borrower will have been required to complete an application designed to provide
to the original lender pertinent credit information concerning the borrower. As
part of the description of the borrower's financial condition, the borrower
will have furnished information, which may or may not be verified, describing
the borrower's assets, liabilities, income, credit history and employment
history, and furnished an authorization to apply for a credit report that
summarizes the borrower's available credit history with local merchants and
lenders and any record of bankruptcy. The borrower may also have been required
to authorize verifications of deposits at financial institutions where the
borrower had demand or savings accounts. In the case of investment properties,
only income derived from the mortgaged property may have been
23
<PAGE>
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:
o a statistical valuation;
o a broker's price opinion;
o an automated appraisal, drive by appraisal or other certification of
value; or
o a statement of value by the borrower.
A statistical valuation estimates the value of the property as determined
by a form of appraisal which uses a statistical model to estimate the value of
a property. The stated value will be value of the property as stated by the
related borrower in his or her application. Unless otherwise specified in the
accompanying prospectus supplement, an appraisal of any manufactured home will
not be required.
Loan-to-Value and Combined Loan-to-Value Ratios
In the case of each first lien loan made to finance the purchase of a
mortgaged property, the Loan-to-Value Ratio, or LTV ratio, in most cases is the
ratio, expressed as a percentage, of the original principal amount or credit
limit, as applicable, of the related loan to the lesser of (1) the appraised
value determined in an appraisal obtained at origination of the related loan
and (2) the sales price for the related mortgaged property, except that in the
case of some employee or preferred customer loans, the denominator of the ratio
may be the sales price.
In the case of some non-purchase first lien mortgage loans including
refinance, modified or converted mortgage loans, the LTV ratio at origination
is defined as the ratio, expressed as a percentage, of the principal amount of
the mortgage loan to either the appraised value determined in an appraisal
obtained at the time of refinancing, modification or conversion or, if no
appraisal has been obtained, the value of the related mortgaged property which
value generally will be supported by either:
24
<PAGE>
o a representation by the related seller as to value;
o an appraisal or other valuation obtained prior to origination; or
o the sales price, if the related mortgaged property was purchased within
the previous twelve months.
In the case of some mortgage loans seasoned for over twelve months, the
LTV ratio may be determined at the time of purchase from the related seller
based on the ratio of the current loan amount to the current value of the
mortgaged property as determined by an appraisal or other valuation.
For any loan secured by a junior lien on the related mortgaged property,
the combined LTV ratio, in most cases, will be the ratio, expressed as a
percentage, of (A) the sum of (1) the original principal balance or the credit
limit, as applicable, and (2) the principal balance of any related senior
mortgage loan at origination of the loan together with any loan subordinate to
it, to (B) the appraised value of the related mortgaged property. The appraised
value for any junior lien loan will be the appraised value of the related
mortgaged property determined in the appraisal used in the origination of the
loan, which may have been obtained at an earlier time. However, if the loan was
originated simultaneously with or not more than 12 months after a senior lien
on the related mortgaged property, the appraised value will in most cases be
the lesser of the appraised value at the origination of the senior lien and the
sales price for the mortgaged property.
As to each loan secured by a junior lien on the mortgaged property, the
junior ratio will be the ratio, expressed as a percentage, of the original
principal balance or the credit limit, as applicable, of the loan to the sum of
(1) the original principal balance or the credit limit, as applicable, of the
loan and (2) the principal balance of any related senior loan at origination of
the loan. The credit utilization rate for any revolving credit loan is
determined by dividing the cut-off date principal balance of the revolving
credit loan by the credit limit of the related credit line agreement.
Some of the loans which are subject to negative amortization will have LTV
ratios that will increase after origination as a result of their negative
amortization. In the case of some seasoned loans, the values used in
calculating LTV ratios may no longer be accurate valuations of the mortgaged
properties. Some mortgaged properties may be located in regions where property
values have declined significantly since the time of origination.
The underwriting standards applied by an originator typically require that
the underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal or other acceptable valuation method as
described above, currently supports, except with respect to Home Loans, and is
anticipated to support in the future the outstanding loan balance. In fact,
some states where the mortgaged properties may be located have
"anti-deficiency" laws requiring, in general, that lenders providing credit on
single family property look solely to the property for repayment in the event
of foreclosure. See "Certain Legal Aspects of the Loans." Any of these factors
could change nationwide or merely could affect a locality or region in which
all or some of the mortgaged properties are located. However, declining values
of real estate, as experienced periodically in certain regions, or increases in
the principal balances of some loans, such as GPM Loans and negative
amortization ARM loans, could cause the principal balance of some or all of
these loans to exceed the value of the mortgaged properties.
Credit Scores
Credit Scores are obtained by some mortgage lenders in connection with
loan applications to help assess a borrower's credit-worthiness. In addition,
Credit Scores may be obtained by Residential Funding Corporation or the
designated seller after the origination of a loan if the seller does not
provide 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
25
<PAGE>
an individual with a lower score. However, a Credit Score purports only to be a
measurement of the relative degree of risk a borrower represents to a lender,
i.e., a borrower with a higher score is statistically expected to be less
likely to default in payment than a borrower with a lower score. In addition,
it should be noted that Credit Scores were developed to indicate a level of
default probability over a two-year period, which in most cases, does not
correspond to the life of a loan. Furthermore, many Credit Scores were not
developed specifically for use in connection with mortgage loans, but for
consumer loans in general, and assess only the borrower's past credit history.
Therefore, in most cases, a Credit Score may not take into consideration the
differences between mortgage loans and consumer loans, or the specific
characteristics of the related loan, including the LTV ratio or combined LTV
ratio, as applicable, the collateral for the loan, or the debt to income ratio.
There can be no assurance that the Credit Scores of the borrowers will be an
accurate predictor of the likelihood of repayment of the related loans or that
any borrower's Credit Score would not be lower if obtained as of the date of
the accompanying prospectus supplement.
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 loans that are subject to negative
amortization, the principal balances of those loans are more likely to equal or
exceed the value of the underlying mortgaged properties due to the addition of
deferred interest, 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
26
<PAGE>
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.
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 this prospectus or 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
27
<PAGE>
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: Most
negotiated conduit asset program loans are evaluated by Residential Funding
Corporation to determine whether the characteristics of the loan, the borrower
and the collateral, taken as a whole, represent a prudent lending risk. The
factors considered include:
o the mortgage loan's payment terms and characteristics;
o the borrower's credit score;
o the value of the mortgaged property, which may be estimated using a
broker's price opinion or a statistical valuation;
o the credit and legal documentation associated with the loan;
o the seasoning of the loan;
o an evaluation of the financial capacity, eligibility and experience of
the seller and/or servicer of the loan; and
o the representations and warranties made by the seller.
In most cases, Residential Funding Corporation orders an updated credit
score for each loan reviewed. For seasoned loans, an updated credit score is
ordered for the primary borrower as reported on the tape data or loan file
submitted by the seller. Periodic quality control reviews are performed.
Broker's price opinions are obtained if, among other reasons, the loan is
delinquent or the principal balance of the mortgage loan exceeds $400,000. In
addition, statistical property valuations and drive-by appraisals may be used,
or a review may be done of the original appraisal.
Many of the 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.
28
<PAGE>
DESCRIPTION OF THE SECURITIES
GENERAL
The securities will be issued in series. Each series of certificates or,
in some instances, two or more series of certificates, will be issued under a
pooling and servicing agreement or, in the case of certificates backed by
private securities, a trust agreement, similar to one of the forms filed as an
exhibit to the registration statement under the Securities Act of 1933, as
amended, for the certificates of which this prospectus is a part. Each series
of notes will be issued under an indenture between the related trust and the
entity named in the accompanying prospectus supplement as indenture trustee for
the series. A form of indenture has been filed as an exhibit to the
registration statement under the Securities Act of 1933, as amended, for the
notes of which this prospectus forms a part. In the case of each series of
notes, the depositor, the related trust and the entity named in the
accompanying prospectus supplement as master servicer for the series will enter
into a separate servicing agreement. Each pooling and servicing agreement,
trust agreement, servicing agreement, and indenture will be filed with the
Securities and Exchange Commission as an exhibit to a Form 8-K. The following
summaries (together with additional summaries under "The Agreements" below)
describe all material terms and provisions relating to the securities common to
each agreement. All references to an "agreement" and any discussion of the
provisions of any agreement applies to pooling and servicing agreements, trust
agreements, servicing agreements and indentures, as applicable. The summaries
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of related agreement for each
trust and the accompanying prospectus supplement.
Each series of securities may consist of any one or a combination of the
following:
o a single class of securities;
o one or more classes of senior securities, of which one or more classes
of securities may be senior in right of payment to any other class or
classes of securities subordinate to it, and as to which some classes of
senior securities may be senior to other classes of senior securities, as
described in the respective prospectus supplement;
o one or more classes of mezzanine securities which are subordinate
securities but which are senior to other classes of subordinate
securities relating to such distributions or losses;
o one or more classes of strip securities which will be entitled to (a)
principal distributions, with disproportionate, nominal or no interest
distributions or (b) interest distributions, with disproportionate,
nominal or no principal distributions;
o two or more classes of securities which differ as to the timing,
sequential order, rate, pass-through rate or amount of distributions of
principal or interest or both, or as to which distributions of principal
or interest or both on any class may be made on the occurrence of
specified events, in accordance with a schedule or formula, including
"planned amortization classes" and "targeted amortization classes", or on
the basis of collections from designated portions of the pool, which
series may include one or more classes of accrual securities for which
some accrued interest will not be distributed but rather will be added to
their principal balance on the distribution date, which will be specified
in the accompanying prospectus supplement; or
o other types of classes of securities, as described in the accompanying
prospectus supplement.
Credit support for each series of securities will be provided by a
mortgage pool insurance policy, special hazard insurance policy, bankruptcy
bond, letter of credit, purchase obligation, reserve fund, excess spread,
overcollateralization, financial guaranty insurance policy, derivative
products, surety bond or other credit enhancement as described under
"Description of Credit Enhancement," or by the subordination of one or more
classes of securities as described under "Description of Credit
Enhancement--Subordination" or by any combination of the foregoing.
FORM OF SECURITIES
As specified in the accompanying prospectus supplement, the securities of
each series will be issued either as physical securities or in book-entry form.
If issued as physical securities, the securities will be in
29
<PAGE>
fully registered form only in the denominations specified in the accompanying
prospectus supplement, and will be transferable and exchangeable at the
corporate trust office of the certificate registrar appointed under the related
pooling and servicing agreement or indenture to register the certificates. No
service charge will be made for any registration of exchange or transfer of
securities, but the trustee may require payment of a sum sufficient to cover
any tax or other governmental charge. The term securityholder or holder refers
to the entity whose name appears on the records of the security registrar or,
if applicable, a transfer agent, as the registered holder of the certificate,
except as otherwise indicated in the accompanying prospectus supplement.
If issued in book-entry form, the classes of a series of securities will
be initially issued through the book-entry facilities of The Depository Trust
Company, or DTC, or Clearstream Banking, 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.
30
<PAGE>
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 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.
31
<PAGE>
ASSIGNMENT OF LOANS
At the time of issuance of a series of securities, the depositor will
cause the loans and any other assets included in the related trust to be
assigned without recourse to the trustee or owner trustee or its nominee, which
may be the custodian, together with, unless specified in the accompanying
prospectus supplement, all principal and interest received on the trust assets
after the cut-off date, but not including principal and interest due on or
before the cut-off date or any Excluded Spread. Each loan will be identified in
a schedule appearing as an exhibit to the related agreement. Each schedule of
loans will include, among other things, information as to the principal balance
of each loan as of the cut-off date, as well as information respecting the loan
rate, the currently scheduled monthly payment of principal and interest, the
maturity of the mortgage note and the LTV ratio or combined LTV ratio and
junior mortgage ratio, as applicable, at origination or modification.
If stated in the accompanying prospectus supplement, and in accordance
with the rules of membership of MERSCORP, Inc. and/or Mortgage Electronic
Registration Systems, Inc. or, MERS (Registered Trademark) , assignments of
mortgages for any trust asset in the related trust will be registered
electronically through Mortgage Electronic Registration Systems, Inc., or MERS
(Registered Trademark) System. For trust assets registered through the MERS
(Registered Trademark) System, MERS (Registered Trademark) 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:
o the mortgage note and any modification or amendment thereto endorsed
without recourse either in blank or to the order of the trustee or owner
trustee or a nominee or a lost note affidavit together with a copy of the
related mortgage note;
o the mortgage, except for any mortgage not returned from the public
recording office, with evidence of recording indicated thereon or, in the
case of a Cooperative Loan or a Mexico Loan, the respective security
agreements and any applicable UCC financing statements;
o an assignment in recordable form of the mortgage, except in the case of
a mortgage registered with MERS (Registered Trademark) 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, for a mixed-use mortgage
loan, the assignment of leases, rents and profits, if separate from the
mortgage, and an executed re-assignment of the assignment of leases,
rents and profits and, with respect to a Mexico Loan, an assignment of
the borrower's beneficial interest in the Mexican trust;
o if applicable, any riders or modifications to the mortgage note and
mortgage, together with any other documents at such times as described in
the related agreement; and
o if applicable, the original contract and copies of documents and
instruments related to each contract and, other than in the case of
unsecured contracts, the security interest in the property securing the
related contract.
Assignments of the loans, including contracts secured by liens on
mortgaged property, will be recorded in the appropriate public recording
office, except for mortgages registered with MERS (Registered Trademark) 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
32
<PAGE>
party from whom the loans were purchased. For example, in the case of loans
purchased under Residential Funding Corporation's negotiated conduit asset
program, the depositor will not be required to deliver documentation that was
missing from the files of the seller.
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.
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 or other loans as specified in
the accompanying prospectus supplement, 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.
33
<PAGE>
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 or the date that the trust asset was originated. The
date as of which the representations and warranties were made typically will be
a date prior to the date of issuance of the related series of securities. A
substantial period of time may elapse between the date as of which the
representations and warranties were made and the date of issuance of the
related series of securities. The seller's repurchase obligation if any, or, if
specified in the accompanying prospectus supplement, limited substitution
option, will not arise if, after the sale of the related trust asset, an event
occurs that would have given rise to such an obligation had the event occurred
prior to that period.
Except in the case of a Designated Seller Transaction, loans acquired
under Residential Funding Corporation's negotiated conduit asset program, or
loans underlying any private securities, for any loan, in most cases,
Residential Funding Corporation generally will represent and warrant that:
o as of the cut-off date, the information set forth in a listing of the
related loans was true and correct in all material respects;
o to the best of Residential Funding Corporation's knowledge, if required
by applicable underwriting standards or unless otherwise stated in the
accompanying prospectus supplement, each loan that is secured by a first
lien on the related mortgaged property is the subject of a primary
insurance policy;
o Residential Funding Corporation had good title to the loan and the loan
is not subject to offsets, defenses or counterclaims except as may be
provided under the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended, or Relief Act, and except for any buydown agreement for a
Buy-Down Loan;
o to the best of Residential Funding Corporation's knowledge, each
mortgaged property is free of material damage and is in good repair;
o each loan complied in all material respects with all applicable local,
state and federal laws at the time of origination;
o to the best of Residential Funding Corporation's knowledge, there is no
delinquent tax or assessment lien against the related mortgaged property;
and
o to the best of Residential Funding Corporation's knowledge, any home
improvement contract that is partially insured by the FHA under Title I
was originated in accordance with applicable FHA regulations and is
insured, without set-off, surcharge or defense by the FHA.
To the extent described in the accompanying prospectus supplement,
enforcement of any remedies for a breach of a representation and warranty may
be limited to a specific period of time.
34
<PAGE>
In addition, except in the case of a Designated Seller Transaction, unless
otherwise specified in the accompanying prospectus supplement, Residential
Funding Corporation will be obligated to repurchase or substitute for any loan
as to which it is discovered that the related mortgage does not create a valid
lien having at least the priority represented and warranted in the related
agreement on or, in the case of a Cooperative Loan, a perfected security
interest in, the related mortgaged property, subject only to the following:
o liens of real property taxes and assessments not yet due and payable;
o covenants, conditions and restrictions, rights of way, easements and
other matters of public record as of the date of recording of such
mortgage and certain other permissible title exceptions;
o liens of any senior mortgages, in the case of loans secured by junior
liens on the related mortgaged property; and
o other encumbrances to which like properties are commonly subject that 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 representations and warranties contained in the agreement under which
Residential Funding Corporation purchased loans from a seller are assigned to
the trust, cannot cure a breach of any representation or warranty made by it
relating to any loan within 90 days after notice from the master servicer, the
servicer or the trustee, and the breach materially and adversely affects the
interests of the securityholders in the loan, the designated seller,
Residential Funding Corporation or the seller, as the case may be, will be
obligated to purchase the loan. Unless otherwise specified in the accompanying
prospectus supplement, the purchase price for any loan will be equal to the
principal balance thereof as of the date of purchase plus accrued and unpaid
interest less the amount, expressed as a percentage per annum, payable for
servicing or administrative compensation and the Excluded Spread, if any. In
certain limited cases, a substitution may be made in lieu of such repurchase
obligation. See "--Limited Right of Substitution" below.
In most instances, Residential Funding Corporation will not be required to
repurchase or substitute for any loan if the circumstances giving rise to the
requirement also constitute fraud in the origination of the related loan.
Furthermore, because the listing of the related loan in most cases contains
information for the loan as of the cut-off date, prepayments and, in certain
limited circumstances, modifications to the interest rate and principal and
interest payments may have been made for one or more of the related loans
between the cut-off date and the closing date. No seller will be required to
repurchase or substitute for any loan as a result of any such prepayment or
modification.
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. None of the
depositor, Residential Funding Corporation or the seller will be obligated to
purchase loans acquired under the negotiated conduit asset program, or other
loans as specified in the accompanying prospectus supplement, for missing or
defective documentation. However, in the event of foreclosure on one of these
loans, to the extent those missing documents materially and adversely affect
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 the loan.
35
<PAGE>
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, if applicable, the seller, for the
benefit of the trustee and the securityholders, with respect to breaches of
representations and warranties of which the master servicer or servicer has
knowledge, using practices it would employ in its good faith business judgment
and that are normal and usual in its general servicing activities. The master
servicer is not obligated to review, and will not review, every loan that is in
foreclosure or delinquent to determine if a breach of a representation and
warranty has occurred. The master servicer will maintain policies and
procedures regarding repurchase practices that are consistent with its general
servicing activities. These policies and procedures generally will limit review
of loans that are seasoned and these policies and procedures are subject to
change, in good faith, to reflect the master servicer's current servicing
activities. Application of these policies and procedures may result in losses
being borne by the related credit enhancement and, to the extent not available,
the related securityholders.
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 that 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. This type of default by a seller or designated seller is
not a default by the depositor or by the master servicer or servicer. However,
to the extent that a breach of the representations and warranties of a seller
or designated seller also constitutes a breach of a representation made by
Residential Funding Corporation, Residential Funding Corporation may have a
purchase or substitution obligation. Any loan not so purchased or substituted
for shall remain in the related trust and any losses related to it will 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
36
<PAGE>
repurchase loans for which there has been a breach of representation or
warranty. Moreover, any seller may make no representations or warranties for
loans sold by it. The FDIC, either in its corporate capacity or as receiver or
conservator for a depository institution, may also be a seller, in which event
neither the FDIC nor the related depository institution may make
representations or warranties for the loans sold, or only limited
representations or warranties may be made, for example, that the related legal
documents are enforceable. The FDIC may have no obligation to repurchase any
loan for a breach of a representation or warranty.
LIMITED RIGHT OF SUBSTITUTION
In the case of a loan required to be repurchased from the trust, a
designated seller or Residential Funding Corporation may substitute a new loan
for the repurchased loan that was removed from the trust, during the limited
time period described below. Any such substitution must be effected within 120
days of the date of the issuance of the securities for a trust for which no
REMIC election is to be made. For a trust for which a REMIC election is to be
made, except as otherwise provided in the accompanying prospectus supplement,
the substitution must be effected within two years of the date of the issuance
of the securities, and may not be made if the substitution would cause the
trust to fail to qualify as a REMIC or result in a prohibited transaction tax
under the Internal Revenue Code.
In most cases, any qualified substitute loan will, on the date of
substitution:
o have an outstanding principal balance, after deduction of the principal
portion of the monthly payment due in the month of substitution, not in
excess of the outstanding principal balance of the repurchased loan;
o have a loan rate and a Net Loan Rate not less than, and not more than
one percentage point greater than, the loan rate and Net Loan Rate,
respectively, of the repurchased loan as of the date of substitution;
o have an LTV ratio or combined LTV ratio, as applicable, at the time of
substitution no higher than that of the repurchased loan;
o have a remaining term to maturity not greater than, and not more than
one year less than, that of the repurchased loan;
o be secured by mortgaged property located in the United States, unless
the repurchased loan was a Mexico Loan or a loan secured by mortgaged
property located in Puerto Rico, in which case the qualified substitute
loan may be a Mexico Loan or a loan secured by mortgaged property located
in Puerto Rico, respectively; and
o comply with all of the representations and warranties made with respect
to the repurchased loans as of the date of substitution.
If the outstanding principal balance of a qualified substitute loan is
less than the outstanding principal balance of the related repurchased loan,
the amount of the shortfall shall be deposited into the Custodial Account in
the month of substitution for distribution to the related securityholders.
There may be additional requirements relating to ARM loans, revolving credit
loans, negative amortization loans or other specific types of loans, or
additional provisions relating to meeting the foregoing requirements on an
aggregate basis where a number of substitutions occur contemporaneously. Unless
otherwise specified in the accompanying prospectus supplement, a seller, will
have no option to substitute for a loan that it is obligated to repurchase in
connection with a breach of a representation and warranty.
CERTAIN INSOLVENCY AND BANKRUPTCY ISSUES
Each seller, including a designated seller, and the depositor will
represent and warrant that its respective transfer of trust assets constitutes
a valid sale and assignment of all of its right, title and interest in and to
such trust assets, except to the extent that such seller or the depositor
retains any security. Nevertheless, if a seller were to become a debtor in a
bankruptcy case and a creditor or bankruptcy trustee of such seller, or such
seller as a debtor-in-possession, were to assert that the sale of the trust
assets from
37
<PAGE>
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.
38
<PAGE>
PAYMENTS ON LOANS
Collection of Payments on Loans
The servicer or the master servicer, as applicable, will deposit or will
cause to be deposited into the Custodial Account payments and collections
received by it subsequent to the cut-off date, other than payments due on or
before the cut-off date, as specifically described in the related agreement,
which in most cases, except as otherwise provided, will include the following:
o all payments on account of principal of the loans comprising a trust;
o all payments on account of interest on the loans comprising that trust,
net of the portion of each payment thereof retained by the master
servicer or servicer, if any, as Excess or Excluded Spread, its servicing
or other compensation;
o Liquidation Proceeds;
o all amounts, net of unreimbursed liquidation expenses and insured
expenses incurred, and unreimbursed Servicing Advances made, by the
related subservicer, received and retained, including Insurance Proceeds
or proceeds from any alternative arrangements established in lieu of any
such insurance and described in the applicable prospectus supplement,
other than proceeds to be applied to the restoration of the related
property or released to the borrower in accordance with the master
servicer's or servicer's normal servicing procedures;
o any Buy-Down Funds and, if applicable, investment earnings thereon,
required to be paid to securityholders;
o all proceeds of any loan in the trust purchased or, in the case of a
substitution, amounts representing a principal adjustment, by the
depositor, the designated seller, Residential Funding Corporation, any
seller or any other person under the terms of the related agreement;
o any amount required to be deposited by the master servicer or servicer
in connection with losses realized on investments of funds held in the
Custodial Account; and
o any amounts required to be transferred from the Payment Account to the
Custodial Account.
See "Description of the Securities--Representations with Respect to Loans"
and "--Repurchases of Loans".
In addition to the Custodial Account, the master servicer or servicer will
establish and maintain the Payment Account. Both the Custodial Account and the
Payment Account must be either:
o maintained with a depository institution whose debt obligations at the
time of any deposit therein are rated by any rating agency that rated any
securities of the related series not less than a specified level
comparable to the rating category of the securities;
o an account or accounts the deposits in which are fully insured to the
limits established by the FDIC, provided that any deposits not so insured
shall be otherwise maintained so that, as evidenced by an opinion of
counsel, the securityholders have a claim with respect to the funds in
such accounts or a perfected first priority security interest in any
collateral securing those funds that is superior to the claims of any
other depositors or creditors of the depository institution with which
the accounts are maintained;
o in the case of the Custodial Account, a trust account or accounts
maintained in either the corporate trust department or the corporate
asset services department of a financial institution which has debt
obligations that meet specified rating criteria;
o in the case of the Payment Account, a trust account or accounts
maintained with the trustee; or
o any other Eligible Account.
The collateral that is eligible to secure amounts in an Eligible Account
is limited to some Permitted Investments. A Payment Account may be maintained
as an interest-bearing or a non-interest-bearing
39
<PAGE>
account, or funds therein may be invested in Permitted Investments as described
in this prospectus under "Description of the Securities--Payments on Loans".
The Custodial Account may contain funds relating to more than one series of
securities as well as payments received on other loans and assets serviced or
master serviced by the master servicer or servicer that have been deposited
into the Custodial Account.
Unless otherwise described in the accompanying prospectus supplement, not
later than the business day preceding each distribution date, the master
servicer or servicer, as applicable, will withdraw from the Custodial Account
and deposit into the applicable Payment Account, in immediately available
funds, the amount to be distributed therefrom to securityholders on that
distribution date. The master servicer, the servicer or the trustee will also
deposit or cause to be deposited into the Payment Account:
o the amount of any Advances made by the master servicer or the servicer
as described in this prospectus under "--Advances;"
o any payments under any letter of credit, financial guaranty insurance
policy, derivative product, and any amounts required to be transferred to
the Payment Account from a reserve fund, as described under "Description
of Credit Enhancement" in this prospectus;
o any amounts required to be paid by the master servicer or servicer out
of its own funds due to the operation of a deductible clause in any
blanket policy maintained by the master servicer or servicer to cover
hazard losses on the loans as described under "Insurance Policies on
Loans" below;
o any distributions received on any Agency Securities or private
securities included in the trust; and
o any other amounts as described in the related agreement.
The portion of any payment received by the master servicer or the servicer
relating to a trust asset that is allocable to Excess Spread or Excluded Spread
will typically be deposited into the Custodial Account, but any Excluded Spread
will not be deposited in the Payment Account for the related series of
securities and will be distributed as provided in the related agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next distribution date and funds on deposit in the related Payment Account may
be invested in Permitted Investments maturing, in general, no later than the
distribution date. Except as otherwise specified in the accompanying prospectus
supplement, all income and gain realized from any investment will be for the
account of the servicer or the master servicer as additional servicing
compensation. The amount of any loss incurred in connection with any such
investment must be deposited in the Custodial Account or in the Payment
Account, as the case may be, by the servicer or the master servicer out of its
own funds at the time of the realization of the loss.
For each Buy-Down Loan, the subservicer will deposit the related Buy-Down
Funds provided to it in a Buy-Down Account which will comply with the
requirements described in this prospectus for a Subservicing Account. Unless
otherwise specified in the accompanying prospectus supplement, the terms of all
Buy-Down Loans provide for the contribution of Buy-Down Funds in an amount
equal to or exceeding either (i) the total payments to be made from those funds
under the related buydown plan or (ii) if the Buy-Down Funds are to be
deposited on a discounted basis, that amount of Buy-Down Funds which, together
with investment earnings thereon will support the scheduled level of payments
due under the Buy-Down Loan.
Neither the master servicer nor the servicer nor the depositor will be
obligated to add to any discounted Buy-Down Funds any of its own funds should
investment earnings prove insufficient to maintain the scheduled level of
payments. To the extent that any insufficiency is not recoverable from the
borrower or, in an appropriate case, from the subservicer, distributions to
securityholders may be affected. For each Buy-Down Loan, the subservicer will
withdraw from the Buy-Down Account and remit to the master servicer or servicer
on or before the date specified in the subservicing agreement described in this
prospectus under "Description of the Securities--Payments on Loans" the amount,
if any, of the Buy-Down Funds, and, if applicable, investment earnings thereon,
for each Buy-Down Loan that, when
40
<PAGE>
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 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 buydown agreement. If the
borrower defaults during the Buy-Down Period for a Buy-Down Loan and the
property securing that Buy-Down Loan is sold in liquidation either by the
master servicer, the servicer, the primary insurer, the pool insurer under the
mortgage pool insurance policy or any other insurer, the subservicer will be
required to withdraw from the Buy-Down Account the Buy-Down Funds and all
investment earnings thereon, if any, and remit the same to the master servicer
or servicer or, if instructed by the master servicer, pay the same to the
primary insurer or the pool insurer, as the case may be, if the mortgaged
property is transferred to that insurer and the insurer pays all of the loss
incurred relating to such default.
Collection of Payments on Agency Securities or Private Securities
The trustee will deposit in the Payment Account all payments on the Agency
Securities or private securities as they are received after the cut-off date.
If the trustee has not received a distribution for any Agency Security or
private security by the second business day after the date on which such
distribution was due and payable, the trustee will request the issuer or
guarantor, if any, of such Agency Security or private security to make such
payment as promptly as possible and legally permitted. The trustee may take any
legal action against the related issuer or guarantor as is appropriate under
the circumstances, including the prosecution of any claims in connection
therewith. The reasonable legal fees and expenses incurred by the trustee in
connection with the prosecution of any legal action will be reimbursable to the
trustee out of the proceeds of the action and will be retained by the trustee
prior to the deposit of any remaining proceeds in the Payment Account pending
distribution thereof to the securityholders of the affected series. If the
trustee has reason to believe that the proceeds of the legal action may be
insufficient to cover its projected legal fees and expenses, the trustee will
notify the related securityholders that it is not obligated to pursue any
available remedies unless adequate indemnity for its legal fees and expenses is
provided by the securityholders.
WITHDRAWALS FROM THE CUSTODIAL ACCOUNT
The servicer or the master servicer, as applicable, may, from time to
time, make withdrawals from the Custodial Account for various purposes, as
specifically described in the pooling and servicing agreement or servicing
agreement, which in most cases will include the following:
o to make deposits to the Payment Account as described in this prospectus
under "--Payments on Loans;"
41
<PAGE>
o to reimburse itself or any subservicer for any Advances, or for any
Servicing Advances, out of late payments, Insurance Proceeds, Liquidation
Proceeds, any proceeds relating to any REO Loan or collections on the
loan for which those Advances or Servicing Advances were made;
o to pay to itself or any subservicer unpaid servicing fees and
subservicing fees, out of payments or collections of interest on each
loan;
o to pay to itself as additional servicing compensation any investment
income on funds deposited in the Custodial Account, any amounts remitted
by subservicers as interest on partial prepayments on the loans, and, if
so provided in the related agreement, any profits realized on the
disposition of a mortgaged property acquired by deed in lieu of
foreclosure or repossession or otherwise allowed under the agreement;
o to pay to itself, a subservicer, Residential Funding Corporation, the
depositor or the designated seller all amounts received for each loan
purchased, repurchased or removed under the terms of the related
agreement and not required to be distributed as of the date on which the
related purchase price is determined;
o to pay the depositor or its assignee, or any other party named in the
accompanying prospectus supplement, all amounts allocable to the Excluded
Spread, if any, out of collections or payments which represent interest
on each loan, including any loan as to which title to the underlying
mortgaged property was acquired;
o to reimburse itself or any subservicer for any Nonrecoverable Advance,
limited by the terms of the related agreement as described in the
accompanying prospectus supplement;
o to reimburse itself or the depositor for other expenses incurred for
which it or the depositor is entitled to reimbursement, including
reimbursement in connection with enforcing any repurchase, substitution
or indemnification obligation of any seller, or against which it or the
depositor is indemnified under the related agreement;
o to withdraw any amount deposited in the Custodial Account that was not
required to be deposited in the Custodial Account;
o to reimburse itself or the depositor for payment of FHA insurance
premiums, if applicable, or against which it or the depositor is
indemnified under the related agreement;
o to pay to itself or any subservicer for the funding of any draws made on
the revolving credit loans, if applicable;
o to make deposits to the funding account in the amounts and in the manner
provided in the related agreement, if applicable; and
o to clear the Custodial Account of amounts relating to the corresponding
loans in connection with the termination of the trust under the related
agreement, as described in "The Agreements--Termination; Retirement of
Securities."
DISTRIBUTIONS OF PRINCIPAL AND INTEREST ON THE SECURITIES
Beginning on the distribution date in the month next succeeding the month
in which the cut-off date occurs, or any other date as may be set forth in the
accompanying prospectus supplement, for a series of securities, distribution 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
42
<PAGE>
may be, and the applicable agreement provides for that form of payment, or by
check mailed to the address of the person entitled to such payment as it
appears on the security register. Except as otherwise provided in the related
agreement, the final distribution in retirement of the securities will be made
only on the presentation and surrender of the securities at the office or
agency of the trustee specified in the notice to the securityholders.
Distributions will be made to each securityholder in accordance with that
holder's percentage interest in a particular class.
The method of determining, and the amount of, distributions of principal
and interest, or, where applicable, of principal only or interest only, on a
particular series of securities will be described in the accompanying
prospectus supplement. Distributions of interest on each class of securities
will be made prior to distributions of principal thereon. Each class of
securities, other than classes of strip securities, may have a different
specified interest rate, or pass-through rate, which may be a fixed, variable
or adjustable pass-through rate, or any combination of two or more pass-through
rates. The accompanying prospectus supplement will specify the pass-through
rate or rates for each class, or the initial pass-through rate or rates, the
interest accrual period and the method for determining the pass-through rate or
rates. Unless otherwise specified in the accompanying prospectus supplement,
interest on the securities will accrue during each calendar month and will be
payable on the distribution date in the following calendar month. If stated in
the accompanying prospectus supplement, interest on any class of securities for
any distribution date may be limited to the extent of available funds for that
distribution date. Interest on the securities will be calculated on the basis
of a 360-day year consisting of twelve 30-day months or, if specified in the
accompanying prospectus supplement, the actual number of days in the related
interest period and a 360 or 365/366-day year.
On each distribution date for a series of securities, the trustee or the
master servicer or servicer, as applicable, on behalf of the trustee will
distribute or cause the paying agent to distribute, as the case may be, to each
holder of record on the record date of a class of securities specified in the
accompanying prospectus supplement, an amount equal to the percentage interest
represented by the security held by that holder multiplied by that class's
Distribution Amount.
In the case of a series of securities which includes two or more classes
of securities, the timing, sequential order, priority of payment or amount of
distributions of principal, and any schedule or formula or other provisions
applicable to that determination, including distributions among multiple
classes of senior securities or subordinate securities, shall be described in
the accompanying prospectus supplement. Distributions of principal on any class
of securities will be made on a pro rata basis among all of the securities of
that class unless otherwise set forth in the accompanying prospectus
supplement. In addition, as specified in the accompanying prospectus
supplement, payments of principal on the notes will be limited to monthly
principal payments on the loans, any excess interest, if applicable, applied as
principal payments on the notes and any amount paid as a payment of principal
under the related form of credit enhancement. If stated in the accompanying
prospectus supplement, a series of notes may provide for a revolving period
during which all or a portion 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 in the 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
43
<PAGE>
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 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
44
<PAGE>
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
required to be maintained as an Eligible Account. All amounts in the Funding
Account will be required to be invested in Permitted Investments and the amount
held in the Funding Account shall at no time exceed 25% of the aggregate
outstanding principal balance of the securities. Unless otherwise specified in
the accompanying prospectus supplement, the related agreement providing for the
transfer of additional loans will provide that all transfers must be made
within 90 days, and that amounts set aside to fund the transfers, whether in a
Funding Account or otherwise, and not so applied within the required period of
time will be deemed to be Principal Prepayments and applied in the manner
described in the prospectus supplement.
REPORTS TO SECURITYHOLDERS
On each distribution date, the master servicer or servicer will forward or
cause to be forwarded to each securityholder of record a statement or
statements for the related trust setting forth the information described in the
related agreement. Except as otherwise provided in the related agreement, the
information will in most cases include the following (as applicable):
o the aggregate amount of interest collections and principal collections;
o the amount, if any, of the distribution allocable to principal;
o the amount, if any, of the distribution allocable to interest and the
amount, if any, of any shortfall in the amount of interest and principal;
o the aggregate unpaid principal balance of the trust assets after giving
effect to the distribution of principal on that distribution date;
o the outstanding principal balance or notional amount of each class of
securities after giving effect to the distribution of principal on that
distribution date;
o based on the most recent reports furnished by subservicers, the number
and aggregate principal balances of loans in the related trust that are
delinquent (a) one month, (b) two months and (c) three months, and that
are in foreclosure;
45
<PAGE>
o the book value of any property acquired by the trust through foreclosure
or grant of a deed in lieu of foreclosure;
o the balance of the reserve fund, if any, at the close of business on
that distribution date;
o the percentage of the outstanding principal balances of the senior
securities, if applicable, after giving effect to the distributions on
that distribution date;
o the amount of credit enhancement remaining or credit enhancement
payments made to cover default risk as of the close of business on the
applicable determination date and a description of any substitute credit
enhancement;
o if applicable, the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
distribution date and a description of any change in the calculation of
those amounts, as well as the aggregate amount of each type of loss;
o in the case of securities benefiting from alternative credit enhancement
arrangements described in a prospectus supplement, the amount of coverage
under the alternative arrangements as of the close of business on the
applicable determination date;
o the servicing fee payable to the master servicer or the servicer and the
subservicer;
o the aggregate amount of any Draws;
o the FHA insurance amount, if any; and
o for any series of securities as to which the trust includes Agency
Securities or private securities, any additional information as required
under the related agreement.
In addition to the information described above, reports to securityholders
will contain any other information as is described in the applicable agreement,
which may include, without limitation, information as to Advances,
reimbursements to subservicers, servicers and the master servicer and losses
borne by the related trust.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or servicer will furnish or cause to be
furnished report to each person that was a holder of record of any class of
securities at any time during that calendar year. The report will include
information as to the aggregate of principal and interest distributions for
that calendar year or, if the person was a holder of record of a class of
securities during a portion of that calendar year, for the applicable portion
of that year.
SERVICING AND ADMINISTRATION OF LOANS
General
The master servicer or any servicer, as applicable, that is a party to a
pooling and servicing agreement or servicing agreement, will be required to
perform the services and duties specified in the related agreement. The master
servicer or servicer may be an affiliate of the depositor. As to any series of
securities secured by Agency Securities or private securities the requirements
for servicing the underlying assets will be described in the accompanying
prospectus supplement. The duties to be performed by the master servicer or
servicer will include the customary functions of a servicer, including but not
limited to:
o collection of payments from borrowers and remittance of those
collections to the master servicer or servicer in the case of a
subservicer;
o maintenance of escrow or impoundment accounts of borrowers for payment
of taxes, insurance and other items required to be paid by the borrower,
if applicable;
o processing of assumptions or substitutions, although, as specified in
the accompanying prospectus supplement, the master servicer or servicer
is, in most cases, required to exercise due-on-sale clauses to the extent
that exercise is permitted by law and would not adversely affect
insurance coverage;
o attempting to cure delinquencies;
46
<PAGE>
o supervising foreclosures;
o collections on Additional Collateral;
o inspection and management of mortgaged properties under various
circumstances; and
o maintaining accounting records relating to the trust assets.
Under each servicing agreement, the servicer or the master servicer may
enter into subservicing agreements with one or more subservicers who will agree
to perform certain functions for the servicer or master servicer relating to
the servicing and administration of the loans included in the trust relating to
the subservicing agreement. A subservicer may be an affiliate of the depositor.
Under any subservicing agreement, each subservicer will agree, among other
things, to perform some or all of the servicer's or the master servicer's
servicing obligations, including but not limited to, making Advances to the
related securityholders. The servicer or the master servicer, as applicable,
will remain liable for its servicing obligations that are delegated to a
subservicer as if the servicer or the master servicer alone were servicing such
loans.
In the event of a bankruptcy, receivership or conservatorship of the
master servicer or servicer or any subservicer, the bankruptcy court or the
receiver or conservator may have the power to prevent both the appointment of a
successor to service the trust assets and the transfer of collections
commingled with funds of the master servicer, servicer or subservicer at the
time of its bankruptcy, receivership or conservatorship. In addition, if the
master servicer or servicer or any subservicer were to become a debtor in a
bankruptcy case, its rights under the related agreement, including the right to
service the trust assets, would be property of its bankruptcy estate and
therefore, under the Bankruptcy Code, subject to its right to assume or reject
such agreement.
Collection and Other Servicing Procedures
The servicer or the master servicer, directly or through subservicers, as
the case may be, will make reasonable efforts to collect all payments called
for under the loans and will, consistent with the related servicing agreement
and any applicable insurance policy, FHA insurance or other credit enhancement,
follow the collection procedures that are normal and usual in its general loan
servicing activities for assets that are comparable to the loans. Consistent
with the previous sentence, the servicer or the master servicer may, in its
discretion, waive any prepayment charge in connection with the prepayment of a
loan or extend the due dates for payments due on a mortgage note, provided that
the insurance coverage for the loan or any coverage provided by any alternative
credit enhancement will not be adversely affected by the waiver or extension.
The master servicer or servicer may also waive or modify any term of a loan so
long as the master servicer or servicer has determined that the waiver or
modification is not materially adverse to any securityholders, taking into
account any estimated loss that may result absent that action. For any series
of securities as to which the trust includes private securities, the master
servicer's or servicer's servicing and administration obligations will be under
the terms of those private securities.
Under some circumstances, as to any series of securities, the master
servicer or servicer may have the option to repurchase trust assets from the
trust for cash, or in exchange for other trust assets or Permitted Investments.
All provisions relating to these optional repurchase provisions will be
described in the accompanying prospectus supplement.
In instances in which a loan is in default, or if default is reasonably
foreseeable, and if determined by the master servicer or servicer to be in the
best interests of the related securityholders, the master servicer or servicer
may engage, either directly or through subservicers, in a wide variety of loss
mitigation practices including waivers, modifications, payment forbearances,
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.
47
<PAGE>
Borrowers may, from time to time, request partial releases of the
mortgaged properties, easements, consents to alteration or demolition and other
similar matters. The master servicer or servicer may approve that request if it
has determined, exercising its good faith business judgment in the same manner
as it would if it were the owner of the related loan, that the approval will
not adversely affect the security for, and the timely and full collectability
of, the related loan. Any fee collected by the master servicer or the servicer
for processing that request will be retained by the master servicer or servicer
as additional servicing compensation.
In instances in which a loan is in default or if default is reasonably
foreseeable, and if determined by the master servicer or servicer to be in the
best interests of the related securityholders, the master servicer or servicer
may permit modifications of the loan rather than proceeding with foreclosure.
In making this determination, the estimated Realized Loss that might result if
the loans were liquidated would be taken into account. These modifications may
have the effect of reducing the loan rate or extending the final maturity date
of the loan. Any modified loan may remain in the related trust, and the
reduction in collections resulting from the modification may result in reduced
distributions of interest, or other amounts, on, or may extend the final
maturity of, one or more classes of the related securities.
In connection with any significant partial prepayment of a loan, the
master servicer or servicer, to the extent not inconsistent with the terms of
the mortgage note and local law and practice, may permit the loan to be
re-amortized so that the monthly payment is recalculated as an amount that will
fully amortize its remaining principal amount by the original maturity date
based on the original loan rate, provided that the re-amortization shall not be
permitted if it would constitute a modification of the loan for federal income
tax purposes.
The master servicer or servicer for a given trust may establish and
maintain an escrow account in which borrowers will be required to deposit
amounts sufficient to pay taxes, assessments, certain mortgage and hazard
insurance premiums and other comparable items unless, in the case of loans
secured by junior liens on the related mortgaged property, the borrower is
required to escrow such amounts under the senior mortgage documents.
Withdrawals from any escrow account may be made to effect timely payment of
taxes, assessments, mortgage and hazard insurance, to refund to borrowers
amounts determined to be owed, to pay interest on balances in the escrow
account, if required, to repair or otherwise protect the mortgaged properties
and to clear and terminate such account. The master servicer or any servicer,
as the case may be, will be responsible for the administration of each such
escrow account and will be obligated to make advances to the escrow accounts
when a deficiency exists therein. The master servicer or servicer will be
entitled to reimbursement for any advances from the Custodial Account.
Other duties and responsibilities of each servicer and master servicer are
described above under "--Payments on Loans."
Special Servicing
If provided for in the accompanying prospectus supplement, the related
agreement or servicing agreement for a series of securities may name a Special
Servicer. The Special Servicer will be responsible for the servicing of certain
delinquent loans as described in the prospectus supplement. The Special
Servicer may have certain discretion to extend relief to borrowers whose
payments become delinquent. The Special Servicer may be permitted to grant a
period of temporary indulgence to a borrower or may enter into a liquidating
plan providing for repayment by the borrower, in each case without the prior
approval of the master servicer or the servicer, as applicable. Other types of
forbearance typically will require the approval of the master servicer or
servicer, as applicable.
In addition, the master servicer or servicer may enter into various
agreements with holders of one or more classes of subordinate securities or of
a class of securities representing interests in one or more classes of
subordinate securities. Under the terms of those agreements, the holder may,
for some delinquent loans:
o instruct the master servicer or servicer to commence or delay
foreclosure proceedings, provided that the holder deposits a specified
amount of cash with the master servicer or servicer which will be
available for distribution to securityholders if Liquidation Proceeds are
less than they otherwise may have been had the master servicer or
servicer acted under its normal servicing procedures;
48
<PAGE>
o instruct the master servicer or servicer to purchase the loans from the
trust prior to the commencement of foreclosure proceedings at the
purchase price and to resell the loans to the holder at such purchase
price, in which case any subsequent loss on the loans will not be
allocated to the securityholders;
o become, or designate a third party to become, a subservicer for the
loans so long as (i) the master servicer or servicer has the right to
transfer the subservicing rights and obligations of the loans to another
subservicer at any time or (ii) the holder or its servicing designee is
required to service the loans according to the master servicer's or
servicer's servicing guidelines; or
o the accompanying prospectus supplement may provide for the other types
of special servicing arrangements.
Enforcement of "Due-on-Sale" Clauses
Unless otherwise specified in the accompanying prospectus supplement, when
any mortgaged property relating to a loan, other than an ARM loan, is about to
be conveyed by the borrower, the master servicer or the servicer, as
applicable, directly or through a subservicer, to the extent it has knowledge
of the proposed conveyance, in most cases will be obligated to exercise the
trustee's rights to accelerate the maturity of such loan under any due-on-sale
clause applicable thereto. A due-on-sale clause will be enforced only if the
exercise of such rights is permitted by applicable law and only to the extent
it would not adversely affect or jeopardize coverage under any primary
insurance policy or applicable credit enhancement arrangements. See "Certain
Legal Aspects of the Loans--Enforceability of Certain Provisions."
If the master servicer or servicer is prevented from enforcing a
due-on-sale clause under applicable law or if the master servicer or servicer
determines that it is reasonably likely that a legal action would be instituted
by the related borrower to avoid enforcement of such due-on-sale clause, the
master servicer or servicer will enter into an assumption and modification
agreement with the person to whom such property has been or is about to be
conveyed, under which such person becomes liable under the mortgage note
subject to certain specified conditions. The original borrower may be released
from liability on a loan if the master servicer or servicer shall have
determined in good faith that such release will not adversely affect the
collectability of the loan. An ARM loan may be assumed if it is by its terms
assumable and if, in the reasonable judgment of the master servicer or
servicer, the proposed transferee of the related mortgaged property establishes
its ability to repay the loan and the security for the ARM loan would not be
impaired by the assumption. If a borrower transfers the mortgaged property
subject to an ARM loan without consent, such ARM loan may be declared due and
payable. Any fee collected by the master servicer or servicer for entering into
an assumption or substitution of liability agreement or for processing a
request for partial release of the mortgaged property in most cases will be
retained by the master servicer or servicer as additional servicing
compensation. In connection with any assumption, the loan rate borne by the
related mortgage note may not be altered.
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
49
<PAGE>
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 lien 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.
If a loan is foreclosed upon, brokers may be engaged to sell the related
property and other third party expenses may be incurred. Any fees and expenses
incurred by the master servicer or servicer in pursuing foreclosure and
liquidation of a loan will be reimbursed, resulting in a reduction of
Liquidation Proceeds. The master servicer or servicer may engage affiliates or
may itself perform certain services that might otherwise be performed by third
parties, and may receive fees that it believes in good faith to be reasonable
and consistent with its general servicing activities.
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 with that liquidation have been
received. Any additional liquidation expenses relating to the loan incurred
after the initial liquidation 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.
50
<PAGE>
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."
The market value of any Mixed-Use Property obtained in foreclosure or by
deed in lieu of foreclosure will be based substantially on the operating income
obtained from renting the commercial and dwelling units. Since a default on a
mortgage loan secured by Mixed-Use Property is likely to have occurred because
operating income, net of expenses, is insufficient to make debt service
payments on the related mortgage loan, it can be anticipated that the market
value of that property will be less than was anticipated when the related
mortgage loan was originated. To the extent that the equity in the property
does not absorb the loss in market value and the loss is not covered by other
credit support, a loss may be experienced by the related trust.
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.
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
51
<PAGE>
in the accompanying prospectus supplement of the outstanding balance of such
private securities and may be retained from distributions of interest thereon,
if stated in the accompanying prospectus supplement. In addition, some
reasonable duties of the master servicer or the servicer may be performed by an
affiliate of the master servicer or the servicer who will be entitled to
compensation for performance of those duties.
The master servicer or the servicer will pay or cause to be paid some of
the ongoing expenses associated with each trust and incurred by it in
connection with its responsibilities under the related agreement, including,
without limitation, payment of any fee or other amount payable for some 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 some circumstances. In addition, as indicated in
"--Servicing and Administration of Loans--Collection and Other Servicing
Procedures", 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 depositor, any seller or their affiliates.
52
<PAGE>
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
As described in the accompanying prospectus supplement, credit support
provided for each series of securities may include one or more or any
combination of the following:
o a letter of credit;
o subordination provided by any class of subordinated securities for the
related series;
o overcollateralization;
o a mortgage repurchase bond, mortgage pool insurance policy, special
hazard insurance policy, bankruptcy bond or other types of insurance
policies, or a secured or unsecured corporate guaranty, as described in
the accompanying prospectus supplement;
o a reserve fund;
o a financial guaranty insurance policy or surety bond;
o derivatives products; or
o another form as may be described in the accompanying prospectus
supplement.
If specified in the accompanying prospectus supplement, the loans or home
improvement contracts may be partially insured by the FHA under Title I.
Credit support for each series of securities may be comprised of one or
more of the following components. Each component will have a dollar limit and
will provide coverage for Realized Losses that are:
o Defaulted Mortgage Losses;
o Special Hazard Losses;
o Bankruptcy Losses; and
o Fraud Losses.
Most forms of credit support will not provide protection against all risks
of loss and will not guarantee repayment of the entire outstanding principal
balance of the securities and interest thereon. If losses occur that exceed the
amount covered by credit support or are of a type that is not covered by the
credit support, securityholders will bear their allocable share of
deficiencies. In particular, Defaulted Mortgage Losses, Special Hazard Losses,
Bankruptcy Losses and Fraud Losses in excess of the amount of coverage provided
therefor and Extraordinary Losses will not be covered. To the extent that the
credit enhancement for any series of securities is exhausted, the
securityholders will bear all further risks of loss not otherwise insured
against.
Credit support may also be provided in the form of an insurance policy
covering the risk of collection and adequacy of any Additional Collateral
provided in connection with any Additional Collateral Loan, as limited by that
insurance policy. As described in the related agreement, credit support may
apply to all of the loans or to some loans contained in a pool.
For any series of securities backed by Trust Balances of revolving credit
loans, the credit enhancement provided for the securities will cover any
portion of any Realized Losses allocated to the Trust Balances, subject to any
limitations described in this prospectus and in the accompanying prospectus
supplement. See "The Trusts--Revolving Credit Loans" in this prospectus.
Each prospectus supplement will include a description of:
o the amount payable under the credit enhancement arrangement, if any,
provided for a series;
o any conditions to payment thereunder not otherwise described in this
prospectus;
53
<PAGE>
o the conditions under which the amount payable under the credit support
may be reduced and under which the credit support may be terminated or
replaced; and
o the material provisions of any agreement relating to the credit support.
Additionally, each prospectus supplement will contain information for the
issuer of any third-party credit enhancement, if applicable. The related
agreement or other documents may be modified in connection with the provisions
of any credit enhancement arrangement to provide for reimbursement rights,
control rights or other provisions that may be required by the credit enhancer.
To the extent provided in the applicable agreement, the credit enhancement
arrangements may be periodically modified, reduced and substituted for based on
the performance of or on the aggregate outstanding principal balance of the
loans covered thereby. See "Description of Credit Enhancement--Reduction or
Substitution of Credit Enhancement." If specified in the applicable prospectus
supplement, credit support for a series of securities may cover one or more
other series of securities.
The descriptions of any insurance policies, bonds or other instruments
described in this prospectus or any prospectus supplement and the coverage
thereunder do not purport to be complete and are qualified in their entirety by
reference to the actual forms of the policies, copies of which typically will
be exhibits to the Form 8-K to be filed with the Securities and Exchange
Commission in connection with the issuance of the related series of securities.
LETTERS OF CREDIT
If any component of credit enhancement as to any series of securities is
to be provided by a letter of credit, a bank will deliver to the trustee an
irrevocable letter of credit. The letter of credit may provide direct coverage
for the loans. The letter of credit bank, the amount available under the letter
of credit for each component of credit enhancement, the expiration date of the
letter of credit, and a more detailed description of the letter of credit will
be specified in the accompanying prospectus supplement. On or before each
distribution date, the letter of credit bank will be required to make payments
after notification from the trustee, to be deposited in the related Payment
Account for the coverage provided thereby. The letter of credit may also
provide for the payment of Advances.
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
54
<PAGE>
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.
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.
55
<PAGE>
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 and other fees and
expenses of the trust 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
aggregate outstanding balance of the loans, 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:
o any required primary insurance policy is in effect for the defaulted
loan and a claim thereunder has been submitted and settled;
o hazard insurance on the property securing the loan has been kept in
force and real estate taxes and other protection and preservation
expenses have been paid by the master servicer or servicer;
o if there has been physical loss or damage to the mortgaged property, it
has been restored to its condition, reasonable wear and tear excepted, at
the cut-off date; and
o the insured has acquired good and merchantable title to the mortgaged
property free and clear of liens except permitted encumbrances.
On satisfaction of these conditions, the pool insurer will have the option
either (a) to purchase the property securing the defaulted loan at a price
equal to its outstanding principal balance plus accrued and unpaid interest at
the applicable loan rate to the date of purchase and some expenses incurred by
the master servicer or servicer on behalf of the trustee and securityholders,
or (b) to pay the amount by which the sum of the outstanding principal balance
of the defaulted loan plus accrued and unpaid interest at the loan rate to the
date of payment of the claim and the aforementioned expenses exceeds the
proceeds received from an approved sale of the mortgaged property, in either
case net of some amounts paid or assumed to have been paid under any related
primary insurance policy.
Securityholders may experience a shortfall in the amount of interest
payable on the related securities in connection with the payment of claims
under a mortgage pool insurance policy because the pool insurer is only
required to remit unpaid interest through the date a claim is paid rather than
through the end of the month in which the claim is paid. In addition, the
securityholders may also experience losses for the related securities in
connection with payments made under a mortgage pool insurance policy to the
extent that the master servicer or servicer expends funds to cover unpaid real
estate taxes or to repair the related
56
<PAGE>
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."
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
57
<PAGE>
limitations described in this paragraph and in the accompanying prospectus
supplement, if any, will protect the related securityholders from Special
Hazard Losses. Aggregate claims under a special hazard insurance policy will be
limited to the amount set forth in the related agreement and will be subject to
reduction as described in the related agreement. A special hazard insurance
policy will provide that no claim may be paid unless hazard and, if applicable,
flood insurance on the property securing the loan has been kept in force and
other protection and preservation expenses have been paid by the master
servicer or servicer.
In accordance with the foregoing limitations, a special hazard insurance
policy will provide that, where there has been damage to property securing a
foreclosed loan, title to which has been acquired by the insured, and to the
extent the damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the borrower or the master servicer or
servicer, the insurer will pay the lesser of (i) the cost of repair or
replacement of the related property or (ii) on transfer of the property to the
insurer, the unpaid principal balance of the loan at the time of acquisition of
the related property by foreclosure or deed in lieu of foreclosure, plus
accrued interest at the loan rate to the date of claim settlement and certain
expenses incurred by the master servicer or servicer for the related property.
If the property is transferred to a third party in a sale approved by the
special hazard insurer, the amount that the special hazard insurer will pay
will be the amount under (ii) above reduced by the net proceeds of the sale of
the property. If the unpaid principal balance plus accrued interest and some
expenses is paid by the special hazard insurer, the amount of further coverage
under the related special hazard insurance policy will be reduced by that
amount less any net proceeds from the sale of the property. Any amount paid as
the cost of repair of the property will further reduce coverage by that amount.
Restoration of the property with the proceeds described under (i) above will
satisfy the condition under each mortgage pool insurance policy or contract
pool insurance policy that the property be restored before a claim under the
policy may be validly presented for the defaulted loan secured by the related
property. The payment described under (ii) above will render presentation of a
claim relating to a loan under the related mortgage pool insurance policy or
contract pool insurance policy unnecessary. Therefore, so long as a mortgage
pool insurance policy or contract pool insurance policy remains in effect, the
payment by the insurer under a special hazard insurance policy of the cost of
repair or of the unpaid principal balance of the related loan plus accrued
interest and some expenses will not affect the total Insurance Proceeds paid to
securityholders, but will affect the relative amounts of coverage remaining
under the related special hazard insurance policy and mortgage pool insurance
policy or contract pool insurance policy.
To the extent described in the accompanying prospectus supplement,
coverage of Special Hazard Losses for a series of securities may be provided,
in whole or in part, by a type of special hazard coverage other than a special
hazard insurance policy or by means of a representation of the depositor or
Residential Funding Corporation.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a borrower, a bankruptcy court
may establish the value of the mortgaged property of the borrower, and, if
specified in the accompanying prospectus supplement, any related Additional
Collateral, at a Deficient Valuation. The amount of the secured debt could then
be reduced to that value, and, thus, the holder of the loan would become an
unsecured creditor to the extent the outstanding principal balance of the loan,
together with any senior loan in the case of a loan secured by a junior lien on
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.
58
<PAGE>
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 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.
59
<PAGE>
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 from each applicable rating
agency that the then-current rating of the related series of securities will
not be adversely affected thereby.
60
<PAGE>
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
61
<PAGE>
supplement, each purchase obligation for loans will be payable solely to the
trustee for the benefit of the securityholders of the related series. Other
purchase obligations may be payable to the trustee or directly to the holders
of the securities to which the obligations relate.
INSURANCE POLICIES ON LOANS
The mortgaged property related to each loan (other than a Cooperative
Loan) will be required to be covered by a hazard insurance policy (as described
under "--Standard Hazard Insurance on Mortgaged Properties," 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
62
<PAGE>
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.
Mortgage loans which are subject to negative amortization will only be
covered by a primary insurance policy if that coverage was required on their
origination, regardless that subsequent negative amortization may cause that
mortgage loan's LTV ratio based on the then-current balance, to subsequently
exceed the limits which would have required coverage on their origination.
Primary insurance policies may be required to be obtained and paid for by
the borrower, or may be paid for by the master servicer, the servicer, the
seller or a third party.
While the terms and conditions of the primary insurance policies issued by
one primary mortgage guaranty insurer will usually differ from those in primary
insurance policies issued by other primary insurers, each primary insurance
policy generally will pay either:
o the insured percentage of the loss on the related mortgaged property;
o the entire amount of the loss, after receipt by the primary insurer of
good and merchantable title to, and possession of, the mortgaged
property; or
o at the option of the primary insurer under certain primary insurance
policies, the sum of the delinquent monthly payments plus any Advances
made by the insured, both to the date of the claim payment and,
thereafter, monthly payments in the amount that would have become due
under the mortgage loan if it had not been discharged plus any Advances
made by the insured until the earlier of (a) the date the mortgage loan
would have been discharged in full if the default had not occurred or (b)
an approved sale.
The amount of the loss as calculated under a primary insurance policy
covering a mortgage loan will in most cases consist of the unpaid principal
amount of such mortgage loan and accrued and unpaid interest thereon and
reimbursement of some expenses, less:
o rents or other payments received by the insured (other than the proceeds
of hazard insurance) that are derived from the related mortgaged
property;
o hazard insurance proceeds received by the insured in excess of the
amount required to restore the mortgaged property and which have not been
applied to the payment of the mortgage loan;
o amounts expended but not approved by the primary insurer;
o claim payments previously made on the mortgage loan; and
o unpaid premiums and other amounts.
As conditions precedent to the filing or payment of a claim under a
primary insurance policy, in the event of default by the borrower, the insured
will typically be required, among other things, to:
o advance or discharge (a) hazard insurance premiums and (b) as necessary
and approved in advance by the primary insurer, real estate taxes,
protection and preservation expenses and foreclosure and related costs;
o in the event of any physical loss or damage to the mortgaged property,
have the mortgaged property restored to at least its condition at the
effective date of the primary insurance policy (ordinary wear and tear
excepted); and
o tender to the primary insurer good and merchantable title to, and
possession of, the mortgaged property.
63
<PAGE>
For any securities offered under this prospectus, the master servicer or
the servicer will maintain or cause each subservicer to maintain, as the case
may be, in full force and effect and to the extent coverage is available a
primary insurance policy with regard to each mortgage loan for which coverage
is required under the standard described above unless an exception to such
standard applies or alternate credit enhancement is provided as described in
the accompanying prospectus supplement; provided that the primary insurance
policy was in place as of the cut-off date and the depositor had knowledge of
such primary insurance policy.
STANDARD HAZARD INSURANCE ON MORTGAGED PROPERTIES
The terms of the mortgage loans (other than Cooperative Loans) require
each borrower to maintain a hazard insurance policy covering the related
mortgaged property and providing for coverage at least equal to that of the
standard form of fire insurance policy with extended coverage customary in the
state in which the property is located. Most coverage will be in an amount
equal to the lesser of the principal balance of the mortgage loan and, in the
case of loans secured by junior liens on the related mortgaged property, the
principal balance of any senior mortgage loans, or 100% of the insurable value
of the improvements securing the mortgage loan. The pooling and servicing
agreement will provide that the master servicer or the servicer shall cause the
hazard policies to be maintained or shall obtain a blanket policy insuring
against losses on the mortgage loans. If that blanket policy contains a
deductible clause, the master servicer or servicer will deposit in the
Custodial Account or the applicable Payment Account all amounts which would
have been deposited in that account but for that clause. 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.
64
<PAGE>
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.
With respect to mixed-use mortgage loans, some additional insurance
policies may be required, including, but not limited to, loss of rent
endorsements, business interruption insurance, comprehensive public liability
insurance and general liability insurance for bodily injury and property
damage, and the related pooling and servicing agreement or servicing agreement
may require the master servicer or servicer to maintain that insurance with
respect to any related REO Properties.
Hazard insurance on the Mexican properties will usually be provided by
insurers located in Mexico. The depositor may not be able to obtain as much
information about the financial condition of the companies issuing hazard
insurance policies in Mexico as it is able to obtain for companies based in the
United States. The ability of the insurers to pay claims also may be affected
by, among other things, adverse political and economic developments in Mexico.
STANDARD HAZARD INSURANCE ON MANUFACTURED HOMES
The terms of the related agreement will require the servicer or the master
servicer, as applicable, to cause to be maintained for each manufactured
housing contract one or more standard hazard insurance policies that provide,
at a minimum, the same coverage as a standard form fire and extended coverage
insurance policy that is customary for manufactured housing, issued by a
company authorized to issue the policies in the state in which the manufactured
home is located, and in an amount that is not less than the maximum insurable
value of the manufactured home or the principal balance due from the borrower
on the related manufactured housing contract, whichever is less. Coverage may
be provided by one or more blanket insurance policies covering losses on the
manufactured housing contracts resulting from the absence or insufficiency of
individual standard hazard insurance policies. If a manufactured home's
location was, at the time of origination of the related manufactured housing
contract, within a federally designated flood area, the servicer or the master
servicer also will be required to maintain flood insurance.
If the servicer or the master servicer repossesses a manufactured home on
behalf of the trustee, the servicer or the master servicer will either maintain
at its expense hazard insurance for the manufactured home or indemnify the
trustee against any damage to the manufactured home prior to resale or other
disposition.
DESCRIPTION OF FHA INSURANCE UNDER TITLE I
Some of the home improvement contracts contained in a trust may be Title I
loans which are insured under the Title I Program as described in this section
and in the accompanying prospectus supplement. The regulations, rules and
procedures promulgated by the FHA under the Title I, or FHA Regulations,
contain the requirements under which a lender approved for participation in the
Title I 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.
65
<PAGE>
Unlike some other government loan insurance programs, loans under the
Title I Program other than loans in excess of $25,000, are not subject to prior
review by the FHA. Under the Title I Program, the FHA disburses insurance
proceeds for defaulted loans for which insurance claims have been filed by a
Title I lender prior to any review of those loans. A Title I lender is required
to repurchase a Title I loan from the FHA that is determined to be ineligible
for insurance after insurance claim payments for that loan have been paid to
that lender. Under the FHA Regulations, if the Title I lender's obligation to
repurchase the Title I loan is unsatisfied, the FHA is permitted to offset the
unsatisfied obligation against future insurance claim payments owed by the FHA
to that lender. FHA Regulations permit the FHA to disallow an insurance claim
for any loan that does not qualify for insurance for a period of up to two
years after the claim is made and to require the Title I lender that has
submitted the insurance claim to repurchase the loan.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home and/or
lot, or cooperative interest in a manufactured home and/or lot, on which to
place that home.
Subject to the limitations described below, eligible Title I loans are in
most cases insured by the FHA for 90% of an amount equal to the sum of:
o the net unpaid principal amount and the uncollected interest earned to
the date of default,
o interest on the unpaid loan obligation from the date of default to the
date of the initial submission of the insurance claim, plus 15 calendar
days, the total period not to exceed nine months, at a rate of 7% per
annum,
o uncollected court costs,
o amount of attorney's fees on an hourly or other basis for time actually
expended and billed not to exceed $500, and
o amount of expenses for recording the assignment of the security to the
United States.
However, the insurance coverage provided by the FHA is limited to the
extent of the balance in the Title I lender's FHA reserve maintained by the
FHA. Accordingly, if sufficient insurance coverage is available in that FHA
reserve, then the Title I lender bears the risk of losses on a Title I loan for
which a claim for reimbursement is paid by the FHA of at least 10% of the
unpaid principal, uncollected interest earned to the date of default, interest
from the date of default to the date of the initial claim submission and
various expenses. Unlike most other FHA insurance programs, the obligation of
the FHA to reimburse a Title I lender for losses in the portfolio of insured
loans held by that Title I lender is limited to the amount in an FHA reserve
maintained on a lender-by-lender basis and not on a loan-by-loan basis.
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.
66
<PAGE>
Under Title I, the FHA will reduce the insurance coverage available in a
Title I lender's FHA reserve relating to loans insured under that Title I
lender's contract of insurance by:
o the amount of FHA insurance claims approved for payment related to those
loans, and
o the amount of reduction of the Title I lender's FHA reserve by reason of
the sale, assignment or transfer of loans registered under the Title I
lender's contract of insurance.
This insurance coverage also may be reduced for any FHA insurance claims
previously disbursed to the Title I lender that are subsequently rejected by
the FHA.
In most cases, the FHA will insure home improvement contracts up to
$25,000 for a single-family property, with a maximum term of 20 years. The FHA
will insure loans of up to $17,500 for manufactured homes which qualify as real
estate under applicable state law and loans of up to $12,000 per unit for a
$60,000 limit for an apartment house or a dwelling for two or more families. If
the loan amount is $15,000 or more, the FHA requires a drive-by appraisal, the
current tax assessment value, or a full Uniform Residential Appraisal Report
dated within 12 months of the closing to verify the property's value. The
maximum loan amount on transactions requiring an appraisal is the amount of
equity in the property shown by the market value determination of the property.
Following a default on a home improvement contract partially insured by
the FHA, the master servicer or the servicer, either directly or through a
subservicer, may, subject to various conditions, either commence foreclosure
proceedings against the improved property securing the loan, if applicable, or
submit a claim to FHA, but may submit a claim to FHA after proceeding against
the improved property only with the prior approval of the Secretary of HUD. The
availability of FHA insurance following a default on a home improvement
contract is subject to a number of conditions, including strict compliance with
FHA Regulations in originating and servicing the home improvement contract.
Failure to comply with FHA Regulations may result in a denial of or surcharge
on the FHA insurance claim. Prior to declaring a home improvement contract in
default and submitting a claim to FHA, the master servicer or the servicer must
take steps to attempt to cure the default, including personal contact with the
borrower either by telephone or in a meeting and providing the borrower with 30
days' written notice prior to declaration of default. FHA may deny insurance
coverage if the borrower's nonpayment is related to a valid objection to faulty
contractor performance. In that event, the master servicer or the servicer or
other entity as specified in the accompanying prospectus supplement will seek
to obtain payment by or a judgment against the borrower, and may resubmit the
claim to FHA following that judgment.
FHA MORTGAGE INSURANCE
The Housing Act authorizes various FHA mortgage insurance programs. Some
of the mortgage loans may be insured under either Section 203(b), Section 234
or Section 235 of the Housing Act. Under Section 203(b), FHA insures mortgage
loans of up to 30 years' duration for the purchase of one- to four-family
dwelling units. Mortgage loans for the purchase of condominium units are
insured by FHA under Section 234. Trust assets insured under these programs
must bear interest at a rate not exceeding the maximum rate in effect at the
time the loan is made, as established by HUD, and may not exceed specified
percentages of the lesser of the appraised value of the property and the sales
price, less seller-paid closing costs for the property, up to certain specified
maximums. In addition, FHA imposes initial investment minimums and other
requirements on mortgage loans insured under the Section 203(b) and Section 234
programs.
Under Section 235, assistance payments are paid by HUD to the mortgagee on
behalf of eligible borrowers for as long as the borrowers continue to be
eligible for the payments. To be eligible, a borrower must be part of a family,
have income within the limits prescribed by HUD at the time of initial
occupancy, occupy the property and meet requirements for recertification at
least annually.
The regulations governing these programs provide that insurance benefits
are payable either on foreclosure, or other acquisition of possession, and
conveyance of the mortgaged premises to HUD or on assignment of the defaulted
mortgage loan to HUD. The FHA insurance that may be provided under these
programs on the conveyance of the home to HUD is equal to 100% of the
outstanding principal
67
<PAGE>
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.
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 on
November 17, 1999. The depositor was organized for the limited purpose of
acquiring loans and issuing securities backed by such loans. The depositor
anticipates that it will in many cases have acquired loans indirectly through
Residential Funding Corporation, which is an indirect wholly-owned subsidiary
of GMAC Mortgage Group, Inc. The depositor anticipates that it will in many
cases acquire loans from GMAC Mortgage Corporation, which is also an indirect
wholly-owned subsidiary of GMAC Mortgage Group, Inc. The depositor does not
have, nor is it expected in the future to have, any significant assets.
The securities do not represent an interest in or an obligation of the
depositor. The depositor's only obligations for a series of securities will be
the limited representations and warranties made by the depositor or as
otherwise provided in the accompanying prospectus supplement.
The depositor maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(952) 832-7000.
68
<PAGE>
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 (952)
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.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement
Events of default under the related pooling and servicing agreement or
servicing agreement for a series of securities will include:
o any failure by the servicer or master servicer to make a required
deposit to the Custodial Account or the Payment Account or, if the
master servicer or servicer is the paying agent, to distribute to the
holders of any class of securities of that series any required payment
which continues unremedied for five days after the giving of written
notice of the failure to the master servicer or the servicer by the
trustee or the depositor, or to the master servicer or the servicer,
the depositor and the trustee by the holders of securities of such
class evidencing not less than 25% of the aggregate percentage
interests constituting that class or the credit enhancer, if
applicable;
o any failure by the master servicer or servicer duly to observe or
perform in any material respect any other of its covenants or
agreements in the related agreement for that series of securities
which continues unremedied for a period of not more than 45 days, or
15 days in the case of a failure to pay the premium for any insurance
policy which is required to be maintained under the related servicing
agreement, after the giving of written notice of the failure to the
master servicer or the servicer by the trustee or the depositor, or to
the master servicer or servicer, the depositor and the trustee by the
holders of any class of securities of that series evidencing not less
than 25%, 33% in the case of a trust including private securities or a
majority in the case of a series of notes, of the aggregate percentage
interests constituting that class, or the credit enhancer, if
applicable; and
o some events of insolvency, bankruptcy or similar proceedings regarding
the master servicer or servicer and certain actions by the master
servicer or servicer indicating its insolvency or inability to pay its
obligations.
A default under the terms of any private securities included in any trust
will not constitute an event of default under the related agreement.
So long as an event of default remains unremedied, except as otherwise
provided for in the related agreement with respect to any third party credit
enhancer, either the depositor or the trustee may, and, in the case of an event
of default under a pooling and servicing agreement, at the direction of the
holders of securities evidencing not less than 51% of the aggregate voting
rights in the related trust, the trustee
69
<PAGE>
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 to do so, it may appoint
or if it is unable to act as master servicer or servicer, 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 described in the agreement.
Pending appointment, the trustee is obligated to act in that capacity. The
trustee and any 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 under the pooling and servicing agreement
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 under the pooling
and servicing agreement or in relation to the pooling and servicing agreement
at the request, order or direction of any of the securityholders 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.
Indenture
An event of default under the indenture for each series of notes, in most
cases, will include:
o default for five days or more in the distribution of any principal of
or interest on any note of the series;
o failure to perform any other covenant of the depositor or the trust in
the indenture which continues for a period of thirty days after notice
of that failure is given in accordance with the procedures described
in the accompanying prospectus supplement;
o any representation or warranty made by the depositor or the trust in
the indenture or in any certificate or other writing delivered under
or in connection with the indenture relating 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;
o certain bankruptcy, insolvency, or similar events relating to the
depositor or the trust; and
o any other event of default provided for securities of that series.
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
70
<PAGE>
as may be specified in the terms of that series, of all the notes of the series
to be due and payable immediately. That declaration may, under some
circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related notes.
If, following an event of default for any series of notes, the notes of
the series have been declared to be due and payable, the trustee may, in its
discretion, or, if directed in writing by the credit enhancer, will, regardless
of that acceleration, elect to maintain possession of the collateral securing
the notes of that series and to continue to apply payments on that collateral
as if there had been no declaration of acceleration if that collateral
continues to provide sufficient funds for the payment of principal of and
interest on the notes of the series as they would have become due if there had
not been a declaration. In addition, the trustee may not sell or otherwise
liquidate the collateral securing the notes of a series following an event of
default, unless:
o the holders of 100% of the then aggregate outstanding amount of the
notes of the series consent to that sale,
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series, and to reimburse the credit enhancer,
if applicable, at the date of that sale, or
o the trustee determines that the collateral would not be sufficient on
an ongoing basis to make all payments on those notes as those payments
would have become due if those notes had not been declared due and
payable, and the trustee obtains the consent of the holders of 662/3%
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 securityholder will have any right under an indenture to
institute any proceeding in connection with the agreement unless:
o the holder previously has given to the trustee written notice of
default and the continuance of that default,
o the holders of securities of any class evidencing not less than 25% of
the aggregate percentage interests constituting the class (1) have
made written request upon the trustee to institute that proceeding in
its own name as trustee and (2) have offered to the trustee reasonable
indemnity,
o the trustee has neglected or refused to institute that proceeding for
60 days after receipt of that request and indemnity, and
o no direction inconsistent with that written request has been given to
the trustee during that 60 day period by the holders of a majority of
the security balances of that class, except as otherwise provided for
in the related agreement regarding the credit enhancer.
However, the trustee will be under no obligation to exercise any of the
trusts or powers vested in it by the applicable agreement or to institute,
conduct or defend any litigation under the pooling and servicing agreement or
in relation to the pooling and servicing agreement at the request, order or
direction of any of the securityholders 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.
71
<PAGE>
AMENDMENT
In most cases, each agreement may be amended by the parties to the
agreement, except as otherwise provided for in the related agreement with
respect to the credit enhancer, without the consent of the related
securityholders:
o to cure any ambiguity;
o to correct or supplement any provision therein which may be
inconsistent with any other provision therein or to correct any error;
o to change the timing and/or nature of deposits in the Custodial
Account or the Payment Account or to change the name in which the
Custodial Account is maintained, except that (a) deposits to the
Payment Account may not occur later than the related distribution
date, (b) the change may not adversely affect in any material respect
the interests of any securityholder, as evidenced by an opinion of
counsel, and (c) the change may not adversely affect the then-current
rating of any rated classes of securities, as evidenced by a letter
from each applicable rating agency, unless specified in the
accompanying prospectus supplement;
o if an election to treat the related trust as a "real estate mortgage
investment conduit" or, REMIC has been made, to modify, eliminate or
add to any of its provisions (a) to the extent necessary to maintain
the qualification of the trust as a REMIC or to avoid or minimize the
risk of imposition of any tax on the related trust, provided that the
trustee has received an opinion of counsel to the effect that (1) the
action is necessary or desirable to maintain qualification or to avoid
or minimize that risk, and (2) the action will not adversely affect in
any material respect the interests of any related securityholder, or
(b) to modify the provisions regarding the transferability of the
REMIC Residual Certificates, provided that the depositor has
determined that the change would not adversely affect the applicable
ratings of any classes of the certificates, as evidenced by a letter
from each applicable rating agency, and that any such amendment will
not give rise to any tax for the transfer of the REMIC Residual
Certificates to a non-permitted transferee;
o to make any other provisions for matters or questions arising under
the related agreement which are not materially inconsistent with its
provisions, so long as the action will not adversely affect in any
material respect the interests of any securityholder; or
o to amend any provision that is not material to holders of any class of
related securities.
In most cases, each agreement may also be amended by the parties to the
agreement, except as otherwise provided for in the related agreement with
respect to the credit enhancer, with the consent of the holders of securities
of each class affected thereby evidencing not less than 66%, in the case of a
series of securities issued under a pooling and servicing agreement, or a
majority, in the case of a series of securities issued under an indenture, of
the aggregate percentage interests constituting the 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 trust assets which are
required to be distributed on a security of any class without the consent of
the holder of the security, (ii) adversely affect in any material respect the
interests of the holders of any class of securities in a manner other than as
described in the preceding clause, without the consent of the holders of
securities of that class evidencing not less than 66%, in the case of a series
of securities issued under a pooling and servicing agreement, or a majority, in
the case of a series of securities issued under an indenture, of the aggregate
outstanding principal amount of the securities of each class of that series
affected by that amendment or (iii) reduce the percentage of securities of any
class the holders of which are required to consent to any such amendment unless
the holders of all securities of that class have consented to the change in the
percentage.
Regardless of the foregoing, if a REMIC election has been made with
respect to the related trust, the trustee will not be entitled to consent to
any amendment to a pooling and servicing agreement without
72
<PAGE>
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 securities, other than some limited
payment and notice obligations of the applicable trustee and depositor, will
terminate on the distribution 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:
o the final payment or other liquidation or disposition or any related
Advance of the last trust asset subject to that agreement and all
property acquired on foreclosure or deed in lieu of foreclosure of any
loan, and
o the purchase by the master servicer, the servicer or the depositor or,
if specified in the accompanying prospectus supplement, by the holder
of the REMIC Residual Certificates (see "Material Federal Income Tax
Consequences" below) from the trust, or from the special purpose
entity, if applicable for that 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 trust
assets is less than or equal to ten percent (10%) of the initial aggregate
Stated Principal Balance of the trust assets. 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 of loans and property acquired from 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 subject to the criteria, and will be at the price, set forth
in the accompanying prospectus supplement. Early termination in this manner may
adversely affect the yield to holders of some classes of the securities. If a
REMIC election has been made, the termination of the related trust will be
effected in a manner consistent with applicable federal income tax regulations
and its status as a REMIC.
In addition to the optional repurchase of the property in the related
trust, if stated in the accompanying prospectus supplement, a holder of the
Call Class will have the right, solely at its discretion, to terminate the
related trust and thereby effect early retirement of the securities of the
series, on any distribution date after the 12th distribution date following the
date of initial issuance of the related series of securities and until the date
when the optional termination rights of the master servicer or the servicer and
the depositor become exercisable. The Call Class will not be offered under the
prospectus supplement. Any such call will be of the entire trust at one time;
multiple calls for any series of securities will not be permitted. In the case
of a call, the holders of the securities will be paid a price equal to the
73
<PAGE>
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 securities 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 each 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 owner trustee 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
74
<PAGE>
in the indenture, the indenture trustee may also be removed at any time by the
holders of a majority by principal balance of the notes. Any resignation or
removal of the indenture trustee and appointment of a successor indenture
trustee will not become effective until acceptance of the appointment by the
successor indenture trustee.
75
<PAGE>
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 trust assets distributed or accrued in
the case of deferred interest on accrual securities, monthly to holders of a
class of securities entitled to payments of interest will be
76
<PAGE>
calculated, or accrued in the case of deferred interest or accrual securities,
on the basis of a fixed, adjustable or variable pass-through rate payable on
the outstanding principal balance or notional amount of the security, or any
combination of pass-through rates, calculated as described in this prospectus
and in the accompanying prospectus supplement under "Description of the
Securities--Distributions of Principal and Interest on the Securities." Holders
of strip securities or a class of securities having a pass-through rate that
varies based on the weighted average loan 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 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 on that class, 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 most cases, 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 at the time of purchase. 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
77
<PAGE>
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 most cases, the earlier a
prepayment of principal on the loans or a repurchase of loans, the greater will
be the effect on an investor's yield to maturity. As a result, the effect on an
investor's yield of principal payments and repurchases occurring at a rate
higher or lower than the rate anticipated by the investor during the period
immediately following the issuance of a series of securities would not be fully
offset by a subsequent like reduction or increase in the rate of principal
payments.
There can be no assurance as to the rate of principal payments or Draws on
the revolving credit loans. For revolving credit 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 loans.
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 from the sum of the
applicable index and gross margin. 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,
any inability of the borrower to pay off the balance may also 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.
78
<PAGE>
The holder of a loan secured by a junior lien on the related mortgaged
property will be subject to a loss of its mortgage if the holder of a senior
mortgage is successful in foreclosure of its mortgage and its claim, including
any related foreclosure costs, is not paid in full, since no junior liens or
encumbrances survive such a foreclosure. Also, due to the priority of the
senior mortgage, the holder of a loan secured by a junior lien on the related
mortgaged property may not be able to control the timing, method or procedure
of any foreclosure action relating to the mortgaged property. Investors should
be aware that any liquidation, insurance or condemnation proceeds received
relating to any loans secured by junior liens on the related mortgaged property
will be available to satisfy the outstanding balance of such loans only to the
extent that the claims of the holders of the senior mortgages have been
satisfied in full, including any related foreclosure costs. For loans secured
by junior liens that have low junior mortgage ratios, foreclosure costs may be
substantial relative to the outstanding balance of the loan, and therefore the
amount of any Liquidation Proceeds available to securityholders may be smaller
as a percentage of the outstanding balance of the loan than would be the case
in a typical pool of first lien residential loans. In addition, the holder of a
loan secured by a junior lien on the related mortgaged property may only
foreclose on the property securing the related loan subject to any senior
mortgages, in which case the holder must either pay the entire amount due on
the senior mortgages to the senior mortgagees at or prior to the foreclosure
sale or undertake the obligation to make payments on the senior mortgages.
Depending upon the use of the revolving credit line and the payment
patterns, during the repayment period, a borrower may be obligated to make
payments that are higher than the borrower originally qualified for. Some of
the revolving credit loans are not expected to significantly amortize prior to
maturity. As a result, a borrower will, in these cases, be required to pay a
substantial principal amount at the maturity of a revolving credit loan.
Similarly, a borrower of a Balloon Loan will be required to pay the Balloon
Amount at maturity. Those loans pose a greater risk of default than
fully-amortizing loans, because the borrower's ability to make such a
substantial payment at maturity will in most cases depend on the borrower's
ability to obtain refinancing of those loans or to sell the mortgaged property
prior to the maturity of the loan. The ability to obtain refinancing will
depend on a number of factors prevailing at the time refinancing or sale is
required, including, without limitation, the borrower's personal economic
circumstances, the borrower's equity in the related mortgaged property, real
estate values, prevailing market interest rates, tax laws and national and
regional economic 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.
79
<PAGE>
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.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The prospectus supplement for each series of securities may
describe one or more prepayment standard or model and may contain tables
setting forth the projected yields to maturity on each class of securities or
the weighted average life of each class of securities and the percentage of the
original principal amount of each class of securities of that series that would
be outstanding on specified payment dates for the series based on the
assumptions stated in the accompanying prospectus supplement, including
assumptions that prepayments on the loans are made at rates corresponding to
various percentages of the prepayment standard or model. There is no assurance
that prepayment of the loans underlying a series of securities will conform to
any level of the prepayment standard or model specified in the accompanying
prospectus supplement.
The following is a list of factors that may affect prepayment experience:
o homeowner mobility;
o economic conditions;
o changes in borrowers' housing needs;
o job transfers;
o unemployment;
o borrowers' equity in the properties securing the mortgages;
o servicing decisions;
o enforceability of due-on-sale clauses;
o mortgage market interest rates;
o mortgage recording taxes;
o solicitations and the availability of mortgage funds; and
o the obtaining of secondary financing by the borrower.
80
<PAGE>
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
revolving credit loans may be much more volatile than for typical first lien
mortgage loans.
The yield to maturity of the securities of any series, or the rate and
timing of principal payments or Draws, if applicable, on the related loans, may
also be affected by a wide variety of specific terms and conditions applicable
to the respective programs under which the loans were originated. For example,
the revolving credit loans may provide for future Draws to be made only in
specified minimum amounts, or alternatively may permit Draws to be made by
check or through a credit card in any amount. A pool of revolving credit loans
subject to the latter provisions may be likely to remain outstanding longer
with a higher aggregate principal balance than a pool of revolving credit loans
with the former provisions, because of the relative ease of making new Draws.
Furthermore, the loans may provide for interest rate changes on a daily or
monthly basis, or may have gross margins that may vary under some circumstances
over the term of the loan. In extremely high market interest rate scenarios,
securities backed by loans with adjustable rates subject to substantially
higher maximum rates than typically apply to adjustable rate first mortgage
loans may experience rates of default and liquidation substantially higher than
those that have been experienced on other adjustable rate mortgage loan pools.
The yield to maturity of the securities of any series, or the rate and
timing of principal payments on the loans or Draws on the related revolving
credit loans and corresponding payments on the securities, will also be
affected by the specific terms and conditions applicable to the securities. For
example, if the index used to determine the loan rates for a series of
securities is different from the index applicable to the loan rates of the
underlying loans, the yield on the securities may be reduced by application of
a cap on the loan rates based on the weighted average of the loan rates.
Depending on applicable cash flow allocation provisions, changes in the
relationship between the two indexes may also affect the timing of some
principal payments on the securities, or may affect the amount of any
overcollateralization, or the amount on deposit in any reserve fund, which
could in turn accelerate the payment of principal on the securities if so
provided in the prospectus supplement. For any series of securities backed by
revolving credit loans, provisions governing whether future Draws on the
revolving credit loans will be included in the trust will have a significant
effect on the rate and timing of principal payments on the securities. The rate
at which additional balances are generated may be affected by a variety of
factors. The yield to maturity of the securities of any series, or the rate and
timing of principal payments on the loans may also be affected by the risks
associated with other loans.
81
<PAGE>
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 the related agreement and legal
developments that may affect the prepayment rate of loans.
While most manufactured housing contracts will contain "due-on-sale"
provisions permitting the holder of the manufactured housing contract to
accelerate the maturity of the manufactured housing contract on conveyance by
the borrower, the master servicer or servicer, as applicable, may permit
proposed assumptions of manufactured housing contracts where the proposed buyer
of the manufactured home meets the underwriting standards described above. Such
assumption would have the effect of extending the average life of the
manufactured housing contract. FHA loans and VA loans are not permitted to
contain "due-on-sale" clauses, and are freely assumable.
In addition, some private securities included in a pool may be backed by
underlying loans having differing interest rates. Accordingly, the rate at
which principal payments are received on the related securities will, to some
extent, depend on the interest rates on the underlying loans.
Some types of loans included in a trust may have characteristics that make
it more likely to default than collateral provided for mortgage pass-through
securities from other mortgage purchase programs. The depositor anticipates
including "limited documentation" and "no documentation" mortgage loans, loans
acquired under Residential Funding Corporation's 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
82
<PAGE>
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 loans in
any trust by accepting prepayments 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, so 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, the
location of the mortgaged property, or the master servicer's or servicer's
judgment as to the likelihood of refinancing. In addition, servicers or the
master servicer may encourage assumption of loans, including defaulted loans,
under which creditworthy borrowers assume the outstanding indebtedness of the
loans, which may be removed from the related pool. As a result of these
programs, for the pool underlying any trust:
o the rate of Principal Prepayments of the loans in the pool may be
higher than would otherwise be the case;
o in some cases, the average credit or collateral quality of the loans
remaining in the pool may decline; and
o the weighted average interest rate on the loans that remain in the
trust may be lower, thus reducing the rate of prepayments on the loans
in the future.
Although the loan rates on revolving credit loans and ARM loans will be
subject to periodic adjustments, the adjustments in most cases will:
o as to ARM loans, not increase or decrease the loan rates by more than
a fixed percentage amount on each adjustment date;
o not increase the loan rates over a fixed percentage amount during the
life of any revolving credit loan or ARM loan; and
o be based on an index, which may not rise and fall consistently with
mortgage interest rates, plus the related Gross Margin, which may be
different from margins being used at the time for newly originated
adjustable rate loans.
As a result, the loan rates on the revolving credit loans or ARM loans in
a trust at any time may not equal the prevailing rates for similar, newly
originated adjustable rate loans or lines of credit, and accordingly the rate
of principal payments and Draws, if applicable, may be lower or higher that
would 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.
83
<PAGE>
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 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,
84
<PAGE>
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 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
85
<PAGE>
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 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.
86
<PAGE>
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
87
<PAGE>
junior mortgages may occur in the foreclosure action of the senior mortgagee or
may require the institution of separate legal proceedings. See "Description of
the Securities--Servicing and Administration of Loans--Realization Upon
Defaulted Loans" in this prospectus.
Foreclosure on Mexico Loans
Foreclosure on the borrower's beneficial interest in the Mexican trust
typically is expected to be accomplished by public sale in accordance with the
provisions of Article 9 of the UCC and the security agreement relating to that
beneficial interest or by public auction held by the Mexican trustee under the
Mexico trust agreement. Article 9 of the UCC requires that a sale be conducted
in a "commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given
the debtor and the method, manner, time, place and terms of the sale and the
sale price. In most cases, a sale conducted according to the usual practice of
banks selling similar collateral in the same area will be considered reasonably
conducted. Under the trust agreement, the lender may direct the Mexican trustee
to transfer the borrower's beneficial interest in the Mexican trust to the
purchaser on completion of the public sale and notice from the lender. That
purchaser will be entitled to rely on the terms of the Mexico trust agreement
to direct the Mexican trustee to transfer the borrower's beneficial interest in
the Mexican trust into the name of the purchaser or its nominee, or the trust
may be terminated and a new trust may be established.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. If there are proceeds
remaining, the lender must account to the borrower for the surplus. On the
other hand, if a portion of the indebtedness remains unpaid, the borrower is
usually responsible for the deficiency. However, some states limit the rights
of lenders to obtain deficiency judgments. See "--Anti-Deficiency Legislation
and Other Limitations on Lenders" below. The costs of sale may be substantially
higher than the costs associated with foreclosure sales for property located in
the United States, and may include transfer taxes, notary public fees, trustee
fees, capital gains and other taxes on the proceeds of sale, and the cost of
amending or terminating the Mexico trust agreement and preparing a new trust
agreement. 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
88
<PAGE>
Mexico trust agreement. Under the terms of the Mexico trust agreement, the
borrower may avoid foreclosure by paying in full prior to sale the outstanding
principal balance of, together with all accrued and unpaid interest and other
amounts owed on, the Mexico Loan. At the auction, the Mexican trustee may sell
the borrower's beneficial interest in the Mexican trust to a third party, sell
the Mexican property to another trust established to hold title to that
property, or sell the Mexican property directly to a Mexican citizen.
The depositor is not aware of any other mortgage loan programs involving
mortgage loans that are secured in a manner similar to the Mexico Loans. As a
result, there may be uncertainty and delays in the process of attempting to
realize on the mortgage collateral and gaining possession of the mortgaged
property, and the process of marketing the borrower's beneficial interest in
the Mexican trust to persons interested in purchasing a Mexican property may be
difficult.
Foreclosure on Mortgaged Properties Located in the Commonwealth of Puerto
Rico
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a
real estate mortgage usually follows an ordinary "civil action" filed in the
Superior Court for the district where the mortgaged property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three
public places in the municipality where the auction will be held, in the tax
collection office and in the public school of the municipality where the
mortgagor resides, if known. If the residence of the mortgagor is not known,
publication in one of the newspapers of general circulation in the Commonwealth
of Puerto Rico must be made at least once a week for two weeks. There may be as
many as three public sales of the mortgaged property. If the defendant contests
the foreclosure, the case may be tried and judgment rendered based on the
merits of the case.
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
89
<PAGE>
tenant-stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement in most cases provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate the lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under the proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender in most cases cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
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.
90
<PAGE>
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 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
91
<PAGE>
revolving credit loan and final judgment of foreclosure had been entered in
state court. Some courts with federal bankruptcy jurisdiction have approved
plans, based on the particular facts of the reorganization case, that effected
the curing of a mortgage loan or revolving credit loan default by paying
arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan or revolving credit loan secured by property of the
debtor may be modified. These courts have allowed modifications that include
reducing the amount of each monthly payment, changing the rate of interest,
altering the repayment schedule, forgiving all or a portion of the debt and
reducing the lender's security interest to the value of the residence, thus
leaving the lender a general unsecured creditor for the difference between the
value of the residence and the outstanding balance of the mortgage loan or
revolving credit loan. In most cases, however, the terms of a mortgage loan or
revolving credit loan secured only by a mortgage on real property that is the
debtor's principal residence may not be modified under a plan confirmed under
Chapter 13, as opposed to Chapter 11, except for mortgage payment arrearages,
which may be cured within a reasonable time period. Courts with federal
bankruptcy jurisdiction similarly may be able to modify the terms of a
Cooperative Loan.
Certain tax liens arising under the Internal Revenue Code may, in some
circumstances, have priority over the lien of a mortgage, deed to secure debt
or deed of trust. This may have the effect of delaying or interfering with the
enforcement of rights for a defaulted mortgage loan or revolving credit loan.
In addition, substantive requirements are imposed on mortgage lenders in
connection with the origination and the servicing of mortgage loans or
revolving credit loans by numerous federal and some state consumer protection
laws. These laws include the federal Truth-in-Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing
Act, Fair Credit Reporting Act and related statutes. These federal laws impose
specific statutory liabilities on lenders who originate mortgage loans or
revolving credit loans and who fail to comply with the provisions of the law.
In some cases, this liability may affect assignees of the mortgage loans or
revolving credit loans.
Some of the mortgage loans or revolving credit loans may be High Cost
Loans. Purchasers or assignees of any High Cost Loan, including any trust,
could be liable for all claims and subject to all defenses arising under any
applicable law that the borrower could assert against the originator of the
High Cost Loan. Remedies available to the borrower include monetary penalties,
as well as rescission rights if the appropriate disclosures were not given as
required.
Alternative Mortgage Instruments
Alternative mortgage instruments, including ARM loans and early ownership
mortgage loans or revolving credit loans, originated by non-federally chartered
lenders, have historically been subjected to a variety of restrictions. These
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by
a state-chartered lender was in compliance with applicable law. These
difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St Germain Act, or Title VIII. Title VIII provides that,
regardless of any state law to the contrary:
o state-chartered banks may originate alternative mortgage instruments
in accordance with regulations promulgated by the Comptroller of the
Currency for the origination of alternative mortgage instruments by
national banks,
o state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National
Credit Union Administration for origination of alternative mortgage
instruments by federal credit unions, and
o all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings
banks and mutual savings banks and mortgage banking companies, may
originate alternative mortgage instruments in accordance with the
regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the OTS, for origination of alternative mortgage
instruments by federal savings and loan associations.
92
<PAGE>
Title VIII also provides that any state may reject applicability of the
provisions of Title VIII by adopting, prior to October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of these
provisions. Some states have taken this action.
Junior Mortgages; Rights of Senior Mortgagees
The mortgage loans or revolving credit loans included in the trust may be
junior to other mortgages, deeds to secure debt or deeds of trust held by other
lenders. Absent an intercreditor agreement, the rights of the trust, and
therefore the securityholders, as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee under the senior mortgage, including the
prior rights of the senior mortgagee to receive hazard insurance and
condemnation proceeds and to cause the property securing the mortgage loan or
revolving credit loan to be sold on default of the mortgagor. The sale of the
mortgaged property may extinguish the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, in certain cases, either reinstates or satisfies the defaulted
senior mortgage loan or revolving credit loan or mortgage loans or revolving
credit loans. A junior mortgagee may satisfy a defaulted senior mortgage loan
or revolving credit loan in full or, in some states, may cure the default and
bring the senior mortgage loan or revolving credit loan current thereby
reinstating the senior mortgage loan or revolving credit loan, in either event
usually adding the amounts expended to the balance due on the junior mortgage
loan or revolving credit loan. In most states, absent a provision in the
mortgage, deed to secure debt or deed of trust, or an intercreditor agreement,
no notice of default is required to be given to a junior mortgagee. Where
applicable law or the terms of the senior mortgage, deed to secure debt or deed
of trust do not require notice of default to the junior mortgagee, the lack of
any notice may prevent the junior mortgagee from exercising any right to
reinstate the mortgage loan or revolving credit loan which applicable law may
provide.
The standard form of the mortgage, deed to secure debt or deed of trust
used by most institutional lenders confers on the mortgagee the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with condemnation proceedings, and to apply the proceeds and
awards to any indebtedness secured by the mortgage, deed to secure debt or deed
of trust, in the order as the mortgagee may determine. Thus, if improvements on
the property are damaged or destroyed by fire or other casualty, or if the
property is taken by condemnation, the mortgagee or beneficiary under
underlying senior mortgages will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgages. Proceeds in excess of the amount of senior
mortgage indebtedness, in most cases, may be applied to the indebtedness of
junior mortgages in the order of their priority.
Another provision sometimes found in the form of the mortgage, deed to
secure debt or deed of trust used by institutional lenders obligates the
mortgagor to pay before delinquency all taxes and assessments on the property
and, when due, all encumbrances, charges and liens on the property which are
prior to the mortgage, deed to secure debt or deed of trust, to provide and
maintain fire insurance on the property, to maintain and repair the property
and 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
93
<PAGE>
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 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.
94
<PAGE>
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 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.
95
<PAGE>
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
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
96
<PAGE>
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 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
97
<PAGE>
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 contribute to the contamination. Furthermore,
liability
98
<PAGE>
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.
99
<PAGE>
Because the Relief Act applies to borrowers who enter military service,
including reservists who are called to active duty, after origination of the
related loan, no information can be provided as to the number of loans that may
be affected by the Relief Act. For loans included in a trust, application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of the servicer or the master servicer, as applicable, to collect full
amounts of interest on the loans. Any shortfall in interest collections
resulting from the application of the Relief Act or similar legislation or
regulations, which would not be recoverable from the related loans, would
result in a reduction of the amounts distributable to the holders of the
related securities, and would not be covered by Advances or any form of credit
enhancement provided in connection with the related series of securities. In
addition, the Relief Act imposes limitations that would impair the ability of
the servicer or the master servicer, as applicable, to foreclose on an affected
loan during the mortgagor's period of active duty status, and, under some
circumstances, during an additional three month period thereafter. Thus, if the
Relief Act or similar legislation or regulations applies to any loan which goes
into default, there may be delays in payment and losses on the related
securities in connection therewith. Any other interest shortfalls, deferrals or
forgiveness of payments on the loans resulting from similar legislation or
regulations may result in delays in payments or losses to securityholders of
the related series.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments on the borrower's payment of prepayment fees or yield
maintenance penalties. In some states, there are or may be specific limitations
on the late charges which a lender may collect from a borrower for delinquent
payments. Some states also limit the amounts that a lender may collect from a
borrower as an additional charge if the loan is prepaid. In addition, the
enforceability of provisions that provide for prepayment fees or penalties on
an involuntary prepayment is unclear under the laws of many states. Most
conventional single-family mortgage loans may be prepaid in full or in part
without penalty. The regulations of the Federal Home Loan Bank Board, as
succeeded by the OTS, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly for mortgage loans having higher loan rates, may
increase the likelihood of refinancing or other early retirements of the
mortgage loans.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations, or RICO statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
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
100
<PAGE>
court did not address the applicability of the Alternative Mortgage Transaction
Parity Act of 1982, which authorizes a lender to make residential mortgage
loans that provide for negative amortization. As a result, the enforceability
of compound interest on mortgage loans that provide for negative amortization
is unclear. The case, which was decided by the First Circuit Court of Appeals,
is binding authority only on Federal District Courts in Maine, New Hampshire,
Massachusetts, Rhode Island and Puerto Rico.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a discussion of the material (and certain other) federal
income tax consequences of the purchase, ownership and disposition of the
securities. This discussion is directed solely to securityholders that hold the
securities as capital assets within the meaning of Section 1221 of the Internal
Revenue Code and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which, including banks, insurance companies and foreign investors) may be
subject to special rules. In addition, the authorities on which this
discussion, and the opinion referred to below, are based are subject to change
or differing interpretations, which could apply retroactively. This discussion
does not purport to be as detailed and complete as the advice a securityholder
may get from its tax advisor and accordingly, taxpayers should consult their
tax advisors and tax return preparers regarding the consequences to them of
investing in the securities and the preparation of any item on a tax return,
even where the anticipated tax treatment has been discussed in this prospectus
or in a prospectus supplement. In addition to the federal income tax
consequences described in this prospectus, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the securities. See "State and Other Tax Consequences."
Securityholders should consult their tax advisors concerning the federal,
state, local or other tax consequences to them of the purchase, ownership and
disposition of the securities offered hereunder.
The following discussion addresses REMIC and FASIT certificates
representing interests in a trust for which the transaction documents require
the making of an election to have the trust (or a portion thereof) be treated
as one or more REMICs or FASITs. The prospectus supplement for each series of
securities will indicate whether a REMIC or FASIT election or elections will be
made for the related trust and, if that election is to be made, will identify
all "regular interests" and "residual interests" in the REMIC or the "regular
interests" and "high yield regular interests" in the FASIT, as the case may be.
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
101
<PAGE>
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.
The IRS published proposed Treasury regulations, known as the Proposed
FASIT Regulations, supplementing the FASIT provisions of the Code on February
7, 2000, but many issues remain unresolved. The Proposed FASIT Regulations are
subject to change with potentially retroactive effect before being adopted as
final regulations. The Proposed FASIT Regulations contain an "anti-abuse" rule
that, among other things, enables the IRS to disregard a FASIT election, treat
one or more of the assets of a FASIT as held by a person other than the holder
of the ownership interest in the FASIT, treat a FASIT regular interest as other
than a debt instrument or treat a regular interest held by any person as having
the tax characteristics of one or more of the assets held by the FASIT, if a
principal purpose of forming or using the FASIT was to achieve results
inconsistent with the intent of the FASIT provisions and the Proposed FASIT
Regulations based on all the facts and circumstances. Among the requirements
that the Proposed FASIT Regulations state for remaining within the intent of
the FASIT provisions is that no FASIT provision be used to obtain a federal tax
result that could not be obtained without the use of that provision unless the
provision clearly contemplates that result. The only general intent that the
Proposed FASIT Regulations attribute to the FASIT provisions is to promote the
spreading of credit risk on debt instruments by facilitating their
securitization. The "anti-abuse" provisions of the Proposed FASIT Regulations
are proposed to be effective as of February 4, 2000. Although any FASIT whose
certificates are offered pursuant to this prospectus will be structured to
reduce the likelihood that the IRS would recharacterize the tax treatment of
the offered certificates, the anti-abuse provisions of the Proposed FASIT
Regulations are sufficiently broad and vague that the avoidance of
recharacterization cannot be assured. Investors should be cautious in
purchasing any of the certificates and should consult with their tax advisors
in determining the federal, state, local and other tax consequences to them for
the purchase, holding and disposition of the certificates.
In addition, certain FASIT regular interests or FASIT Regular Certificates
may be treated as "high-yield regular interests." Special rules, discussed
below apply to those securities. Although the accompanying prospectus
supplement will indicate which FASIT securities are expected to be treated as
"high-yield regular interests," in many cases it will not be clear as of the
date of the prospectus supplement (and possibly not even after the issuance of
the securities) whether any particular class will actually be so treated.
If an entity electing to be treated as a REMIC or FASIT fails to comply
with one or more of the ongoing requirements of the Internal Revenue Code for
that status during any taxable year, the Internal Revenue Code provides that
the entity will not be treated as a REMIC or FASIT for that year and
thereafter. In that event, the entity may be taxable as a separate corporation
under Treasury regulations, and the related certificates may not be accorded
the status or given the tax treatment described in this prospectus under
"Material Federal Income Tax Consequences". The IRS may, but is not compelled
to provide relief but any relief may be accompanied by sanctions, including the
imposition of a corporate tax on all or a portion of the trust's income for the
period in which the requirements for that status are not satisfied. The pooling
and servicing 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.
102
<PAGE>
Original Issue Discount
Some REMIC or FASIT Regular Certificates may be issued with "original
issue discount" within the meaning of Section 1273(a) of the Internal Revenue
Code. Any holders of Regular Certificates issued with original issue discount
typically will be required to include original issue discount in income as it
accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to that income. In addition, Section
1272(a)(6) of the Internal Revenue Code provides special rules applicable to
Regular Certificates and certain other debt instruments issued with original
issue discount. Regulations have not been issued under that section.
The Internal Revenue Code requires that a prepayment assumption be used
for loans held by a REMIC or FASIT in computing the accrual of original issue
discount on Regular Certificates issued by that issuer, and that adjustments be
made in the amount and rate of accrual of the discount to reflect differences
between the actual prepayment rate and the prepayment assumption. The
prepayment assumption is to be determined in a manner prescribed in Treasury
regulations; as noted above, those regulations have not been issued. The
conference committee report accompanying the Tax Reform Act of 1986 indicates
that the regulations will provide that the prepayment assumption used for a
Regular Certificate must be the same as that used in pricing the initial
offering of the Regular Certificate. The prepayment assumption used by the
master servicer, the servicer, or the REMIC or FASIT administrator, as
applicable, in reporting original issue discount for each series of Regular
Certificates will be consistent with this standard and will be disclosed in the
accompanying prospectus supplement. However, none of the depositor, the REMIC
or FASIT administrator, as applicable, or the master servicer or the servicer
will make any representation that the loans will in fact prepay at a rate
conforming to the prepayment assumption or at any other rate.
The original issue discount, if any, on a REMIC or FASIT Regular
Certificate will be the excess of its stated redemption price at maturity over
its issue price. The issue price of a particular class of Regular Certificates
will be the first cash price at which a substantial amount of Regular
Certificates of that class is sold, excluding sales to bond houses, brokers and
underwriters. If less than a substantial amount of a particular class of
Regular Certificates is sold for cash on or prior to the date of their initial
issuance, or the closing date, the issue price for that class will be treated
as the fair market value of the class on the closing date. Under the OID
regulations, the stated redemption price of a REMIC or FASIT Regular
Certificate is equal to the total of all payments to be made on that
certificate other than "qualified stated interest." Qualified stated interest
includes interest that is unconditionally payable at least annually at a single
fixed rate, or in the case of a variable rate debt instrument, at a "qualified
floating rate," an "objective rate," a combination of a single fixed rate and
one or more "qualified floating rates" or one "qualified inverse floating
rate," or a combination of "qualified floating rates" that in most cases does
not operate in a manner that accelerates or defers interest payments on a
Regular Certificate.
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.
103
<PAGE>
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 remaining 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 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
104
<PAGE>
amount of original issue discount that accrued for that certificate in prior
accrual periods, and reduced by the amount of any distributions made on that
Regular Certificate in prior accrual periods of amounts included in its stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for that day.
The OID regulations suggest that original issue discount for securities
that represent multiple uncertificated regular interests, in which ownership
interests will be issued simultaneously to the same buyer and which may be
required under the related pooling and servicing agreement to be transferred
together, should be computed on an aggregate method. In the absence of further
guidance from the IRS, original issue discount for securities that represent
the ownership of multiple uncertificated regular interests will be reported to
the IRS and the certificateholders on an aggregate method based on a single
overall constant yield and the prepayment assumption stated in the accompanying
prospectus supplement, treating all uncertificated regular interests as a
single debt instrument as set forth in the OID regulations, so long as the
pooling and servicing agreement requires that the uncertificated regular
interests be transferred together.
A subsequent purchaser of a Regular Certificate that purchases the
certificate at a cost, excluding any portion of that cost attributable to
accrued qualified stated interest, less than its remaining stated redemption
price will also be required to include in gross income the daily portions of
any original issue discount for that certificate. However, each daily portion
will be reduced, if the cost is in excess of its "adjusted issue price," in
proportion to the ratio that excess bears to the aggregate original issue
discount remaining to be accrued on the Regular Certificate. The adjusted issue
price of a Regular Certificate on any given day equals (i) the adjusted issue
price or, in the case of the first accrual period, the issue price, of the
certificate at the beginning of the accrual period which includes that day,
plus (ii) the daily portions of original issue discount for all days during the
accrual period prior to that day minus (iii) any principal payments made during
the accrual period prior to that day for the certificate.
Market Discount
A certificateholder that purchases a Regular Certificate at a market
discount, that is, in the case of a Regular Certificate issued without original
issue discount, at a purchase price less than its remaining stated principal
amount, or in the case of a Regular Certificate issued with original issue
discount, at a purchase price less than its adjusted issue price will recognize
income on receipt of each distribution representing stated redemption price. In
particular, under Section 1276 of the Internal Revenue Code such a
certificateholder in most cases will be required to allocate the portion of
each distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent.
A certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, the election will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the election applies. In addition, the OID
regulations permit a certificateholder to elect to accrue all interest,
discount, including de minimis market or original issue discount, and premium
in income as interest, based on a constant yield method. If the election were
made for a Regular Certificate with market discount, the certificateholder
would be deemed to have made an election to include currently market discount
in income for all other debt instruments having market discount that the
certificateholder acquires during the taxable year of the election or
thereafter. Similarly, a certificateholder that made this election for a
certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium for all debt instruments having amortizable
bond premium that the certificateholder owns or acquires. See "--Premium." Each
of these elections to accrue interest, discount and premium for a certificate
on a constant yield method or as interest may not be revoked without the
consent of the IRS.
However, market discount for a Regular Certificate will be considered to
be de minimis for purposes of Section 1276 of the Internal Revenue Code if the
market discount is less than 0.25% of the remaining stated redemption price of
the Regular Certificate multiplied by the number of complete years to maturity
105
<PAGE>
remaining after the date of its purchase. In interpreting a similar rule for
original issue discount on obligations payable in installments, the OID
regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied for market discount, presumably
taking into account the prepayment assumption. If market discount is treated as
de minimis under this rule, it appears that the actual discount would be
treated in a manner similar to original issue discount of a de minimis amount.
See "-- Original Issue Discount." This treatment may result in discount being
included in income at a slower rate than discount would be required to be
included in income using the method described above.
Section 1276(b)(3) of the Internal Revenue Code specifically authorizes
the Treasury Department to issue regulations providing for the method for
accruing market discount on debt instruments, the principal of which is payable
in more than one installment. Until regulations are issued by the Treasury
Department, certain rules described in the Committee Report apply. The
Committee Report indicates that in each accrual period market discount on
Regular Certificates should accrue, at the certificateholder's option:
o on the basis of a constant yield method,
o in the case of a Regular Certificate issued without original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the stated interest paid in the accrual
period bears to the total amount of stated interest remaining to be
paid on the Regular Certificate as of the beginning of the accrual
period, or
o in the case of a Regular Certificate issued with original issue
discount, in an amount that bears the same ratio to the total
remaining market discount as the original issue discount accrued in
the accrual period bears to the total original issue discount
remaining on the Regular Certificate at the beginning of the accrual
period.
Moreover, the prepayment assumption used in calculating the accrual of
original issue discount is to be used in calculating the accrual of market
discount. Because the regulations referred to in this paragraph have not been
issued, it is not possible to predict what effect those regulations might have
on the tax treatment of a Regular Certificate purchased at a discount in the
secondary market.
To the extent that Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which the discount would accrue if it
were original issue discount. Moreover, in any event a holder of a Regular
Certificate in most cases will be required to treat a portion of any gain on
the sale or exchange of that Certificate as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income.
In addition, under Section 1277 of the Internal Revenue Code, a holder of
a Regular Certificate may be required to defer a portion of its interest
deductions for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry a Regular Certificate purchased with market
discount. For these purposes, the de minimis rule referred to above applies.
Any deferred interest expense would not exceed the market discount that accrues
during that taxable year and is, in general, allowed as a deduction not later
than the year in which the market discount is includible in income. If the
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by that holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium
A Regular Certificate purchased at a cost, excluding any portion of that
cost attributable to accrued qualified stated interest, greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of a Regular Certificate may elect under Section 171 of the
Internal Revenue Code to amortize that premium under the constant yield method
over the life of the certificate. If made, this election will apply to all debt
instruments having amortizable bond premium that the holder
106
<PAGE>
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. 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
107
<PAGE>
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--Special Rules for FASIT High-Yield Regular
Interests--Transfer Restrictions". The tax will apply if the original yield to
maturity of the debt or equity interest in the Pass-Through Entity exceeds the
greater of (i) the sum of (a) the applicable federal rate in effect for the
calendar month in which the debt or equity interest is issued) and (b) five
percentage points or (ii) the yield to maturity to such entity on the FASIT
Regular Interest (determined as of the date that such entity acquired such
interest). The Internal Revenue Code provides that Treasury regulations will be
issued to provide the manner in which to determine the yield to maturity of any
equity interest. No such regulations have yet been issued. If such tax did
apply, the tax would equal the product of (i) the highest corporate tax rate
and (ii) the income of the holder of the debt or equity interest that is
properly attributable to the FASIT Regular Interest supporting such interest.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
General
As residual interests, the REMIC Residual Certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the loans or as debt instruments issued by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, in accordance with the
limitations noted in this discussion, the net loss of the REMIC for each day
during a calendar quarter that the holder owned the REMIC Residual Certificate.
For this purpose, the taxable income or net loss of the REMIC will be allocated
to each day in the calendar quarter ratably using a "30 days per month/90 days
per quarter/360 days per year" convention unless otherwise disclosed in the
accompanying prospectus supplement. The daily amounts will then be allocated
among the REMIC residual certificateholders in proportion to their respective
ownership interests on that day. Any amount included in the gross income or
allowed as a loss of any REMIC residual certificateholder by virtue of this
allocation will be treated as ordinary income or loss. The taxable income of
the REMIC will be determined under the rules described in this prospectus in
"--Taxable Income of the REMIC" and will be taxable to the REMIC residual
certificateholders without regard to the timing or amount of cash distributions
by the REMIC. Ordinary income derived from REMIC Residual Certificates will be
"portfolio income" for purposes of the taxation of taxpayers in accordance with
limitations under Section 469 of the Internal Revenue Code on the deductibility
of "passive losses."
108
<PAGE>
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
109
<PAGE>
at a market discount must include the discount in income currently, as it
accrues, on a constant interest basis. See "--Taxation of Owners of REMIC and
FASIT Regular Certificates" above, which describes a method of accruing
discount income that is analogous to that required to be used by a REMIC as to
loans with market discount that it holds.
A loan will be deemed to have been acquired with discount or premium to
the extent that the REMIC's basis therein, determined as described in the
preceding paragraph, is less than or greater than its stated redemption price.
Any discount will be includible in the income of the REMIC as it accrues, in
advance of receipt of the cash attributable to that income, under a method
similar to the method described above for accruing original issue discount on
the Regular Certificates. It is anticipated that each REMIC will elect under
Section 171 of the Internal Revenue Code to amortize any premium on the loans.
Premium on any loan to which the election applies may be amortized under a
constant yield method, presumably taking into account a prepayment assumption.
A REMIC will be allowed deductions for interest, including original issue
discount, on the Regular Certificates, including any other class of REMIC
certificates constituting "regular interests" in the REMIC not offered hereby,
equal to the deductions that would be allowed if the Regular Certificates,
including any other class of REMIC certificates constituting "regular
interests" in the REMIC not offered hereby, were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC and FASIT Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of Regular Certificates, including any other
class of certificates constituting "regular interests" in the REMIC not offered
hereby, described therein will not apply.
If a class of Regular Certificates is issued at an Issue Premium, the net
amount of interest deductions that are allowed the REMIC in each taxable year
for the Regular Certificates of that class will be reduced by an amount equal
to the portion of the Issue Premium that is considered to be amortized or
repaid in that year. Although the matter is not entirely certain, it is likely
that Issue Premium would be amortized under a constant yield method in a manner
analogous to the method of accruing original issue discount described above
under "--Taxation of Owners of REMIC and FASIT Regular Certificates--Original
Issue Discount."
As a general rule, the taxable income of the REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item
of income, gain, loss or deduction allocable to a prohibited transaction will
be taken into account. See "--Prohibited Transactions and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Internal Revenue Code, which allows those
deductions only to the extent they exceed in the aggregate two percent of the
taxpayer's adjusted gross income, will not be applied at the REMIC level so
that the REMIC will be allowed deductions for servicing, administrative and
other non-interest expenses in determining its taxable income. All of these
expenses will be allocated as a separate item to the holders of REMIC Residual
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
110
<PAGE>
indefinitely to future calendar quarters and, in accordance with the same
limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC residual certificateholders to deduct net
losses in accordance with additional limitations under the Internal Revenue
Code, as to which the certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds the adjusted basis, it will be treated
as gain from the sale of the REMIC Residual Certificate. holders of REMIC
Residual Certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC Residual
Certificates will not be sufficiently large that distributions will be treated
as nontaxable returns of capital. Their bases in the REMIC Residual
Certificates will initially equal the amount paid for such REMIC Residual
Certificates and will be increased by their allocable shares of taxable income
of the trust. However, their basis increases may not occur until the end of the
calendar quarter, or perhaps the end of the calendar year, for which the REMIC
taxable income is allocated to the REMIC residual certificateholders. To the
extent the REMIC residual certificateholders initial bases are less than the
distributions to the REMIC residual certificateholders, and increases in the
initial bases either occur after distributions or, together with their initial
bases, are less than the amount of the distributions, gain will be recognized
to the REMIC residual certificateholders on those distributions and will be
treated as gain from the sale of their REMIC Residual Certificates.
The effect of these rules is that a certificateholder may not amortize its
basis in a REMIC Residual Certificate, but may only recover its basis through
distributions, through the deduction of its share of any net losses of the
REMIC or on the sale of its REMIC Residual Certificate. See "--Sales of
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:
o will not be permitted to be offset by deductions, losses or loss
carryovers from other activities,
o will be treated as "unrelated business taxable income" to an otherwise
tax-exempt organization, and
111
<PAGE>
o will not be eligible for any rate reduction or exemption under any
applicable tax treaty for the 30% United States withholding tax
imposed on distributions to REMIC residual certificateholders that are
foreign investors.
See, however, "--Foreign Investors in Regular Certificates."
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions; provided, however, that for
purposes of (ii), alternative minimum taxable income is determined without
regard to the special rule that taxable income cannot be less than excess
inclusions. The latter rule has the effect of preventing nonrefundable tax
credits from reducing the taxpayer's income tax to an amount lower than the
alternative minimum tax on excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions allocated to the REMIC
Residual Certificates, reduced, but not below zero, by the real estate
investment trust taxable income, within the meaning of Section 857(b)(2) of the
Internal Revenue Code, excluding any net capital gain, will be allocated among
the shareholders of the trust in proportion to the dividends received by the
shareholders from the trust, and any amount so allocated will be treated as an
excess inclusion from a REMIC Residual Certificate as if held directly by the
shareholder. Treasury regulations yet to be issued could apply a similar rule
to regulated investment companies, common trust funds and some cooperatives;
the REMIC regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates
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. The IRS has issued proposed changes to the REMIC
regulations that would add to the conditions necessary to assure that a
transfer of a noneconomic residual interest would be respected. The proposed
additional condition would require that the amount received by the transferee
be no less on a present value basis than the present value of the net tax
detriment attributable to holding residual interest reduced by the present
value of the projected payments to be received on the residual interest. The
change is proposed to be effective for transfers of residual interests
occurring after February 4, 2000. 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.
112
<PAGE>
The accompanying prospectus supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC regulations. Any disclosure that a REMIC Residual Certificate will
not be considered "noneconomic" will be based on some assumptions, and the
depositor will make no representation that a REMIC Residual Certificate will
not be considered "noneconomic" for purposes of the above-described rules. See
"--Foreign Investors in Regular Certificates" for additional restrictions
applicable to transfers of certain REMIC Residual Certificates to foreign
persons.
Possible Pass-Through of Miscellaneous Itemized Deductions
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single
class grantor trust, all or a portion of those fees and expenses should be
allocated to the holders of the related Regular Certificates. Unless otherwise
stated in the accompanying prospectus supplement, fees and expenses will be
allocated to holders of the related REMIC Residual Certificates in their
entirety and not to the holders of the related Regular Certificates.
For REMIC Residual Certificates or Regular Certificates the holders of
which receive an allocation of fees and expenses in accordance with the
preceding discussion, if any holder thereof is an individual, estate or trust,
or a Pass-Through Entity beneficially owned by one or more individuals, estates
or trusts, (i) an amount equal to the individual's, estate's or trust's share
of fees and expenses will be added to the gross income of that holder and (ii)
the individual's, estate's or trust's share of fees and expenses will be
treated as a miscellaneous itemized deduction allowable in accordance with the
limitation of Section 67 of the Internal Revenue Code, which permits those
deductions only to the extent they exceed in the aggregate two percent of a
taxpayer's adjusted gross income. In addition, Section 68 of the Internal
Revenue Code provides that the amount of itemized deductions otherwise
allowable for an individual whose 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
113
<PAGE>
Residual Certificate would in no event be liable for the tax on a transfer if
the transferee furnishes to the transferor an affidavit that the transferee is
not a Disqualified Organization and, as of the time of the transfer, the
transferor does not have actual knowledge that the affidavit is false.
Moreover, an entity will not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that:
o residual interests in the entity are not held by Disqualified
Organizations; and
o information necessary for the application of the tax described in this
prospectus will be made available.
Restrictions on the transfer of REMIC Residual Certificates and other
provisions that are intended to meet this requirement will be included in the
pooling and servicing agreement, including provisions:
(1) requiring any transferee of a REMIC Residual Certificate to provide an
affidavit representing that it is not a Disqualified Organization and
is not acquiring the REMIC Residual Certificate on behalf of a
Disqualified Organization, undertaking to maintain that status and
agreeing to obtain a similar affidavit from any person to whom it
shall transfer the REMIC Residual Certificate;
(2) providing that any transfer of a REMIC Residual Certificate to a
Disqualified Organization shall be null and void; and
(3) granting to the master servicer or the servicer the right, without
notice to the holder or any prior holder, to sell to a purchaser of
its choice any REMIC Residual Certificate that shall become owned by a
Disqualified Organization despite (1) and (2) above.
In addition, if a Pass-Through Entity includes in income excess inclusions
on a REMIC Residual Certificate, and a Disqualified Organization is the record
holder of an interest in that entity, then a tax will be imposed on the entity
equal to the product of (i) the amount of excess inclusions on the REMIC
Residual Certificate that are allocable to the interest in the Pass-Through
Entity held by the Disqualified Organization and (ii) the highest marginal
federal income tax rate imposed on corporations. A Pass-Through Entity will not
be subject to this tax for any period, however, if each record holder of an
interest in the Pass-Through Entity furnishes to that Pass-Through Entity (i)
the holder's social security number and a statement under penalties of perjury
that the social security number is that of the record holder or (ii) a
statement under penalties of perjury that the record holder is not a
Disqualified Organization. For taxable years beginning after December 31, 1997,
regardless of the preceding two sentences, in the case of a REMIC Residual
Certificate held by an "electing large partnership," all interests in such
partnership shall be treated as held by Disqualified Organizations, without
regard to whether the record holders of the partnership furnish statements
described in the preceding sentence, and the amount that is subject to tax
under the second preceding sentence is excluded from the gross income of the
partnership allocated to the partners, in lieu of allocating to the partners a
deduction for the tax paid by the partners.
Sales of Certificates
If a certificate is sold, the selling certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale
and its adjusted basis in the Certificate. The adjusted basis of a Regular
Certificate generally will equal the cost of that Regular Certificate to that
certificateholder, increased by income reported by the certificateholder with
respect to that Regular Certificate, including original issue discount and
market discount income, and reduced, but not below zero, by distributions on
the Regular Certificate received by the certificateholder and by any amortized
premium. The adjusted basis of a REMIC Residual Certificate will be determined
as described under "--Taxation of Owners of REMIC Residual Certificates--Basis
Rules, Net Losses and Distributions." Except as described below, any gain or
loss generally will be capital gain or loss.
Gain from the sale of a REMIC Regular Certificate (but not a FASIT regular
interest) that might otherwise be capital gain will be treated as ordinary
income to the extent the gain does not exceed the excess, if any, of (i) the
amount that would have been includible in the seller's income for the Regular
Certificate had income accrued thereon at a rate equal to 110% of the
"applicable federal rate", which is
114
<PAGE>
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.
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.
115
<PAGE>
Unless otherwise stated in the accompanying prospectus supplement, and to
the extent permitted by then applicable laws, any prohibited transactions tax,
contributions tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related master servicer, the servicer, the REMIC administrator or the
trustee in either case out of its own funds, provided that the master servicer,
the servicer, the REMIC administrator or the trustee, as the case may be, has
sufficient assets to do so, and provided further that the tax arises out of a
breach of the master servicer's, the servicer's, the REMIC administrator's or
the trustee's obligations, as the case may be, under the related pooling and
servicing agreement or trust agreement and relating to compliance with
applicable laws and regulations. Any tax not borne by the master servicer, the
servicer or the trustee will be payable out of the related trust resulting in a
reduction in amounts payable to holders of the related REMIC certificates.
In the case of a FASIT, the holder of the ownership interest and not the
FASIT itself will be subject to any prohibited transaction taxes.
Termination
A REMIC will terminate immediately after the distribution date following
receipt by the REMIC of the final payment from the loans or on a sale of the
REMIC's assets following the adoption by the REMIC of a plan of complete
liquidation. The last distribution on a Regular Certificate will be treated as
a payment in retirement of a debt instrument. In the case of a REMIC Residual
Certificate, if the last distribution on the REMIC Residual Certificate is less
than the certificateholder's adjusted basis in the certificate, the
certificateholder should be treated as realizing a loss equal to the amount of
the difference, and the loss may be treated as a capital loss.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Internal
Revenue Code, a REMIC will be treated as a partnership and REMIC residual
certificateholders will be treated as partners. Unless otherwise stated in the
accompanying prospectus supplement, the master servicer, the servicer, or the
REMIC administrator, as applicable, will file REMIC federal income tax returns
on behalf of the related REMIC and will act as the "tax matters person" for the
REMIC in all respects, and may hold a nominal amount of REMIC Residual
Certificates.
As the tax matters person, the master servicer, the servicer, or the REMIC
administrator, as applicable, will have the authority to act on behalf of the
REMIC and the REMIC residual certificateholders in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC, as well as the REMIC's classification. REMIC residual
certificateholders will be required to report the REMIC items consistently with
their treatment on the related REMIC's tax return and may in some circumstances
be bound by a settlement agreement between the master servicer, the servicer,
or the REMIC administrator, as applicable, as tax matters person, and the IRS
concerning any REMIC item.
Adjustments made to the REMIC tax return may require a REMIC residual
certificateholders to make corresponding adjustments on its return, and an
audit of the REMIC's tax return, or the adjustments resulting from an audit,
could result in an audit of the certificateholder's return. No REMIC will be
registered as a tax shelter under Section 6111 of the Internal Revenue Code
because it is not anticipated that any REMIC will have a net loss for any of
the first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of that person and other information.
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
116
<PAGE>
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 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, provided that, for purposes solely of the
restrictions on the transfer of residual interests, no partnership or other
entity treated as a partnership for United States federal income tax purposes
shall be treated as a United States person unless all persons that own an
interest in such partnership either directly or through any entity that is not a
corporation for United States federal income tax purposes are required by the
applicable operating agreement to be United States persons, 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
117
<PAGE>
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 transition 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, as amended, or ERISA, impose fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA and
on various other retirement plans and arrangements, including bank collective
investment funds and insurance company general and separate accounts in which
those employee benefit plans and arrangements are invested. Section 4975 of the
Internal Revenue Code imposes essentially the same prohibited transaction
restrictions on certain tax-favored plans, including tax-qualified retirement
plans described in Section 401(a) of the Internal Revenue Code and individual
retirement accounts described in Section 408 of the Internal Revenue Code.
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(b)
of the Internal Revenue Code.
118
<PAGE>
Section 404 of ERISA imposes 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. In addition, Section 406 of ERISA and Section
4975 of the Internal Revenue Code prohibit a broad range of transactions
involving assets of employee benefit plans and arrangements and tax-favored
plans, which are collectively referred to in this prospectus as "ERISA plans,"
and persons, called "parties in interest" under ERISA or "disqualified persons"
under the Internal Revenue Code, which are collectively referred to in this
prospectus as "parties in interest," who have specified relationships to the
ERISA plans, unless a statutory, regulatory or administrative exemption is
available. Some 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, regulatory or administrative exemption is available for any
transaction of this sort.
PLAN ASSET REGULATIONS
An investment of the assets of an ERISA plan in securities may cause the
underlying loans, private securities or any other assets held in a trust or
other entity to be deemed ERISA plan assets of the ERISA plan. The U.S.
Department of Labor, or DOL, has promulgated regulations at 29 C.F.R. Section
2510.3-101 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 an ERISA plan acquires 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:
o the entity is an operating company;
o 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
o "benefit plan investors" do not own 25% or more in value of any class
of equity interests issued by the entity. For this purpose, "benefit
plan investors" include ERISA plans, as well as any "employee benefit
plan," as defined in Section 3(3) of 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,
that 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."
Under the DOL regulations, depending on the facts and circumstances, ERISA
plan assets may be deemed to include an interest in the assets of an entity,
such as a trust, rather than merely the ERISA plan's interest in the instrument
evidencing the equity interest, such as a certificate. Therefore, unless the
accompanying prospectus supplement indicates otherwise, ERISA plans should not
acquire or hold certificates, or notes which may be deemed in the respective
prospectus supplement to have "substantial equity features," in reliance upon
the availability of any exception under the DOL regulations stated in the
preceding paragraph. For purposes of this section "ERISA Considerations," the
terms "ERISA plan assets" and "assets of an ERISA plan" have the meanings
assigned by the DOL regulations to, respectively, "plan assets" and "assets of
a plan," and include an undivided interest in the underlying assets of entities
in which an ERISA plan invests.
Under the DOL regulations, 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 servicer, any
subservicer, the 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 an ERISA plan holding an interest in an
ERISA-subject investment entity. If so, the acquisition
119
<PAGE>
or holding of securities by or on behalf of the investing ERISA plan could also
give rise to a prohibited transaction under ERISA and Section 4975 of the
Internal Revenue Code, unless some statutory, regulatory or administrative
exemption is available. Securities acquired by an ERISA plan would be assets of
that ERISA 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, with respect to the assets, the depositor, the
master servicer, any servicer, any subservicer, the trustee, the obligor under
any credit enhancement mechanism or an affiliate thereof either:
o has investment discretion for the investment of the ERISA plan assets;
or
o has authority or responsibility to give, or regularly gives,
investment advice with respect to ERISA plan assets for a fee under an
agreement or understanding that this advice will serve as a primary
basis for investment decisions with respect to the ERISA plan assets.
Any person who has discretionary authority or control with respect to the
management or disposition of ERISA plan assets and any person who provides
investment advice with respect to the ERISA plan assets for a fee is a
fiduciary of the investing ERISA plan. If the mortgage loans, the private
securities or any other assets held in a trust were to constitute ERISA plan
assets, then any party exercising management or discretionary control with
respect to those ERISA plan assets may be deemed to be a "fiduciary," and thus
subject to the general fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and Section 4975 of the Internal Revenue Code
with respect to 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 or on behalf of
an ERISA plan 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.
CONSIDERATIONS FOR ERISA PLANS REGARDING THE PURCHASE OF CERTIFICATES
Prohibited Transaction Exemptions
The DOL has issued an individual exemption, Prohibited Transaction
Exemption 94-29, 59 Fed. Reg. 14674 (March 29, 1994), as amended by PTE 97-34,
62 Fed. Reg. 39021 (July 21, 1997), or the RFC exemption, to Residential
Funding Corporation and a number of its affiliates. The RFC exemption exempts
from the application of some 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:
o the depositor or any of its affiliates is the sponsor and 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
o the depositor or an affiliate is the underwriter or placement agent,
provided that the conditions described in the RFC exemption are
satisfied.
For purposes of this section, the term underwriter includes:
o the depositor and a number of its affiliates;
o any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with the depositor
and a number of its affiliates;
o any member of the underwriting syndicate or selling group of which a
person described in the two clauses just above is a manager or
co-manager with respect to a class of certificates; or
120
<PAGE>
o any entity which has received an exemption from the DOL relating to
certificates which is substantially similar to the RFC exemption.
The RFC exemption sets forth six general conditions which must be
satisfied for a transaction involving the purchase, sale and holding of
certificates to be eligible for exemptive relief under the exemption.
o First, the acquisition of certificates by an ERISA plan or with ERISA
plan assets must be on terms that are at least as favorable to the
ERISA plan as they would be in an arm's-length transaction with an
unrelated party.
o Second, the RFC exemption only applies to certificates evidencing
rights and interests that are not subordinated to the rights and
interests evidenced by the other certificates of the same trust.
o Third, at the time of acquisition by an ERISA plan or with ERISA plan
assets, the certificates must be rated in one of the three highest
generic rating categories by Standard & Poor's Ratings Services, a
division of The McGraw Hill Companies, Inc., Moody's Investors
Service, Inc. or Fitch, Inc., which are collectively referred to as
the "exemption rating agencies."
o Fourth, the trustee cannot be an affiliate of any other member of the
"restricted group" which consists of the trustee, any underwriter, the
depositor, the master servicer, any servicer, any subservicer and any
borrower with respect to 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.
o Fifth, the sum of all payments made to and retained by the
underwriters must represent not more than reasonable compensation for
underwriting the certificates; the sum of all payments made to and
retained by the depositor under the assignment of the assets to the
related trust must represent not more than the fair market value of
those obligations; and the sum of all payments made to and retained by
the master servicer, any servicer and any subservicer must represent
not more than reasonable compensation for that person's services under
the related pooling and servicing agreement and reimbursement of that
person's reasonable expenses in connection therewith.
o Sixth, the investing ERISA plan or ERISA plan asset 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 revolving credit loans,
unsecured loans, certain purchase obligations or a swap.
The RFC exemption also requires that each trust meet the following
requirements:
o the trust must consist solely of assets of the type that have been
included in other investment pools;
o certificates evidencing interests in those other investment pools must
have been rated in one of the three highest categories of one of the
exemption rating agencies for at least one year prior to the
acquisition of certificates by or on behalf of an ERISA plan or with
ERISA plan assets; and
o certificates in the other investment pools must have been purchased by
investors other than ERISA plans for at least one year prior to any
acquisition of certificates by or on behalf of an ERISA plan or with
ERISA plan assets in reliance on the RFC exemption.
A fiduciary of or other investor of ERISA plan assets contemplating
purchasing a certificate must make its own determination that the general
conditions described above will be satisfied with respect to 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
121
<PAGE>
secondary market of certificates by an ERISA plan 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 an
excluded ERISA plan or with ERISA plan assets of an excluded ERISA plan by any
person who has discretionary authority or renders investment advice for ERISA
plan assets of the excluded ERISA plan. For purposes of the certificates, an
"excluded ERISA plan" is an 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:
o 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 with respect to the investment
of the relevant ERISA plan assets in the certificates is:
o a borrower with respect to 5% or less of the fair market value of the
assets of a trust; or
o an affiliate of that person,
provided that, if the certificates are acquired in connection with their
initial issuance, the quantitative restrictions described in the RFC
exemption are met;
o the direct or indirect acquisition or disposition in the secondary
market of certificates by an ERISA plan or with ERISA plan assets; and
o 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 mortgage pools.
Unless otherwise described in the accompanying prospectus supplement, the
depositor expects that the specific conditions of the RFC exemption required
for this purpose will be satisfied with respect to 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 mortgage 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 with respect to an investing ERISA plan, or an investing
entity holding ERISA plan assets, by virtue of providing services to the ERISA
plan 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 the certificates constitute
"certificates" for purposes of the RFC exemption and that the specific and
general conditions and the other requirements described 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 asset investor should consider its general
fiduciary obligations under ERISA in determining whether to purchase any
certificates with ERISA plan assets.
Any fiduciary or other ERISA plan asset 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
122
<PAGE>
interest in a pool of single-family residential or mixed-use first or second
mortgage loans or Agency Securities, the fiduciary or other ERISA plan asset
investor should consider the availability of the RFC exemption or PTCE 83-1 for
various transactions involving mortgage pool investment trusts. However, PTCE
83-1 does not provide exemptive relief for certificates evidencing interests in
trust funds which include Cooperative Loans, mixed-use mortgage loans, some
types of private securities or a swap. In addition, the fiduciary or other ERISA
plan asset 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 with respect to any particular ERISA plan's
or other ERISA plan asset 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.
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, Section 401(c) of ERISA 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.
Pursuant to Section 401(c) of ERISA, the DOL published final regulations on
January 5, 2000. These final regulations, the 401(c) regulations, are generally
applicable on July 5, 2001. The 401(c) regulations 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:
o except as otherwise provided by the Secretary of Labor in the 401(c)
regulations to prevent avoidance of the regulations; or
o unless 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 the 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 ERISA PLANS
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 mortgage 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
123
<PAGE>
purchase, sale or holding of any class of subordinate certificates, and may not
apply 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 unless the funding account meets the requirements
stated in the RFC exemption.
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 a funding account which does not meet the requirements of
the RFC exemption, 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:
o is permissible under applicable law;
o will not constitute or result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Internal Revenue Code; and
o will not subject the depositor, the trustee or the master servicer to
any obligation in addition to those undertaken in the pooling and
servicing agreement.
In lieu of an opinion of counsel, except as otherwise specified in the
accompanying prospectus supplement, the transferee may provide a certification
of facts substantially to the effect that the purchase of subordinate
certificates by or on behalf of the ERISA plan or with ERISA plan assets:
o is permissible under applicable law;
o will not constitute or result in a non-exempt prohibited transaction
under ERISA or Section 4975 of the Internal Revenue Code;
o 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
o the following conditions are met:
o 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
o the conditions in Sections I and III of PTCE 95-60 have been
satisfied as of the date of the acquisition of the certificates.
CONSIDERATIONS FOR ERISA PLANS REGARDING THE PURCHASE OF NOTES
Prohibited Transaction Exemptions
An ERISA plan fiduciary or other ERISA plan asset investor considering an
investment in notes 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 95-60; PTCE 84-14, regarding transactions
effected by the "qualified professional asset manager"; PTCE 90-1, regarding
transactions by insurance company pooled separate accounts; PTCE 91-38,
regarding investments by bank collective investment funds; and PTCE 96-23,
regarding transactions effected by an "in-house asset manager." The
accompanying prospectus supplement may contain additional information regarding
the application of PTCE 95-60 or other DOL exemptions for the notes offered by
this prospectus.
124
<PAGE>
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 notes by an insurance company general
account, Section 401(c) of ERISA 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
certain transactions involving an insurance company general account. Insurance
companies contemplating the investment of general account assets in the notes
should consult with their legal counsel with respect to the applicability of
PTCE 95-60 and Section 401(c) of ERISA, including the general account's ability
to continue to hold the notes after July 5, 2001. See "Considerations for ERISA
Plans Regarding the Purchase of Certificates--Insurance Company General
Accounts" above.
Representation from ERISA Plans Investing in Notes with "Substantial Equity
Features"
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:
o is permissible under applicable law;
o will not constitute or result in any non-exempt prohibited transaction
under ERISA or Section 4975 of the Internal Revenue Code; and
o 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:
o the transferee is an insurance company;
o 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
o 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
An ERISA plan that is 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" in this prospectus. In addition, income as to certificates and
other equity interests of a trust that has issued notes would be "debt-financed
income" and therefore would be UBTI.
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 specified conditions were satisfied,
125
<PAGE>
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 DOL 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. Before purchasing a
certificate, an ERISA plan fiduciary should itself confirm that all the
specific and general conditions described in the RFC exemption or other ERISA
plan investor would be satisfied and, in the case of a certificate purchased
under the RFC exemption, that the certificate constitutes a "certificate" for
purposes of the RFC exemption. Before purchasing a note in reliance on any DOL
exemption or Section 401(c) of ERISA, an ERISA plan fiduciary or other ERISA
plan asset investor should itself confirm that all of the specific and general
conditions described in the exemption or Section 401(c) of ERISA 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.
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.
126
<PAGE>
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.
There may be other restrictions on the ability of some investors either to
purchase some classes of securities or to purchase any class of securities
representing more than a specified percentage of the investors' assets. The
depositor will make no representations as to the proper characterization of any
class of securities for legal investment or other purposes, or as to the
ability of particular investors to purchase any class of securities under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of any class of securities. Accordingly, all investors
whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory
authorities should consult with their own legal advisors in determining whether
and to what extent the securities of any class constitute legal investments or
are subject to investment, capital or other restrictions, and, if applicable,
whether SMMEA has been overridden in any jurisdiction relevant to the investor.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
securities will be applied by the depositor to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the loans
underlying the securities or will be used by the depositor for general
corporate purposes. The depositor expects that it will make additional sales of
securities similar to the securities from time to time, but the timing and
amount of any additional offerings will be dependent on a number of factors,
including the volume of loans purchased by the depositor, prevailing interest
rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The securities offered hereby and by the accompanying prospectus
supplements will be offered in series through one or more of the methods
described below. The prospectus supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the depositor from that sale.
The depositor intends that securities will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of securities may be made through a combination of two or more of the
following methods:
o by negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
127
<PAGE>
o by placements by the depositor with institutional investors through
dealers; and
o by direct placements by the depositor with institutional investors.
In addition, if specified in the accompanying prospectus supplement, a
series of securities may be offered in whole or in part in exchange for the
loans, and other assets, if applicable, that would comprise the trust securing
the securities.
If underwriters are used in a sale of any securities, other than in
connection with an underwriting on a best efforts basis, the securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. These underwriters may be
broker-dealers affiliated with the depositor whose identities and relationships
to the depositor will be as described in the accompanying prospectus
supplement. The managing underwriter or underwriters for the offer and sale of
a particular series of securities will be set forth on the cover of the
prospectus supplement relating to that series and the members of the
underwriting syndicate, if any, will be named in the accompanying prospectus
supplement.
In connection with the sale of the securities, underwriters may receive
compensation from the depositor or from purchasers of the securities in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the securities may be deemed to be
underwriters in connection with the securities, and any discounts or
commissions received by them from the depositor and any profit on the resale of
securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale
of any series of securities will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all of the securities if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the depositor will indemnify the
several underwriters and the underwriters will indemnify the depositor against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The prospectus supplement for any series offered by placements through
dealers will contain information regarding the nature of the offering and any
agreements to be entered into between the depositor and purchasers of
securities of that series.
The depositor anticipates that the securities offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of securities, including dealers, may, depending on the
facts and circumstances of the purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection with
reoffers and sales by them of securities. Holders of securities should consult
with their legal advisors in this regard prior to any reoffer or sale.
If and to the extent required by applicable law or regulation, this
prospectus and the applicable prospectus supplement will also be used by
Residential Funding Securities Corporation, an affiliate of the depositor,
after the completion of the offering in connection with offers and sales
related to market-making transactions in the offered securities in which
Residential Funding Securities Corporation may act as principal. Sales will be
made at negotiated prices determined at the time of sales.
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
128
<PAGE>
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.
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.
129
<PAGE>
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 (952) 832-7000.
130
<PAGE>
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 credit enhancement 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.
131
<PAGE>
BUY-DOWN LOAN--A mortgage loan, other than a closed-end home equity loan,
subject to a temporary buydown plan.
BUY-DOWN PERIOD--The early years of the term of or Buy-Down Loan when
payments will be less than the scheduled monthly payments on the mortgage loan,
the resulting difference to be made up from the Buy-Down Funds.
CALL CLASS--A class of securities under which the holder will have the
right, at its sole discretion, to terminate the related trust, resulting in
early retirement of the securities of the series.
CALL PRICE--In the case of a call with respect to a Call Class, a price
equal to 100% of the principal balance of the related securities as of the day
of that purchase plus accrued interest at the applicable pass-through rate.
CALL SECURITY--Any security evidencing an interest in a Call Class.
COMPENSATING INTEREST--For any loan that prepaid in full and, if stated in
the accompanying prospectus supplement, in part, during the related prepayment
period an additional payment made by the master servicer or the servicer, to
the extent funds are available from the servicing fee, equal to the amount of
interest at the loan rate, less the servicing fee and Excluded Spread, if any,
for that loan from the date of the prepayment to the related due date.
CONVERTIBLE MORTGAGE LOAN--ARM loans which allow the borrowers to convert
the adjustable rates on those mortgage loans to a fixed rate at one or more
specified periods during the life of the mortgage loans, in most cases not
later than ten years subsequent to the date of origination.
COOPERATIVE--For a Cooperative Loan, the corporation that owns the related
apartment building.
COOPERATIVE LOANS--Cooperative apartment loans evidenced by Cooperative
Notes secured by security interests in shares issued by Cooperatives and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the related buildings.
COOPERATIVE NOTES--A promissory note with respect to a Cooperative Loan.
CREDIT SCORES--A measurement of the relative degree of risk a borrower
represents to a lender obtained from credit reports utilizing, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience.
CREDIT UTILIZATION RATE--For any revolving credit loan, the cut-off date
principal balance of the revolving credit loan divided by the credit limit of
the related credit line agreement.
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 directly to the depositor by an unaffiliated or affiliated seller
described in the accompanying prospectus supplement.
132
<PAGE>
DIRECT PUERTO RICO MORTGAGE--For any loan secured by mortgaged property
located in Puerto Rico, a Mortgage to secure a specific obligation for the
benefit of a specified person.
DISQUALIFIED ORGANIZATION--As used in this prospectus means:
o the United States, any State or political subdivision thereof, any
foreign government, any international organization, or any agency or
instrumentality of the foregoing (but does not include
instrumentalities described in Section 168(h)(2)(D) of the Internal
Revenue Code the Federal Home Loan Mortgage Corporation),
o any organization (other than a cooperative described in Section 521 of
the Internal Revenue Code) that is exempt from federal income tax,
unless it is subject to the tax imposed by Section 511 of the Internal
Revenue Code, or
o any organization described in Section 1381(a)(2)(C) of the Internal
Revenue Code.
DISTRIBUTION AMOUNT--For a class of securities for any distribution date,
the portion, if any, of the amount to be distributed to that class for that
distribution date of principal, plus, if the class is entitled to payments of
interest on that distribution date, interest accrued during the related
interest accrual period at the applicable pass-through rate on the principal
balance or notional amount of that class specified in the applicable prospectus
supplement, less certain interest shortfalls, which will include:
o any deferred interest added to the principal balance of the mortgage
loans and/or the outstanding balance of one or more classes of
securities on the related due date;
o any other interest shortfalls, including, without limitation,
shortfalls resulting from application of the Relief Act or similar
legislation or regulations as in effect from time to time, allocable
to securityholders which are not covered by advances or the applicable
credit enhancement; and
o Prepayment Interest Shortfalls not covered by Compensating Interest,
in each case in an amount that is allocated to that class on the basis
set forth in the prospectus supplement.
DRAW--Money drawn by the borrower in most cases with either checks or
credit cards, subject to applicable law, on a revolving credit loan under the
related credit line agreement at any time during the Draw Period.
DRAW PERIOD--The period specified in the related credit line agreement
when a borrower on a revolving credit loan may make a Draw.
DUE PERIOD--As to any distribution date, the period starting on the second
day of the month prior to such distribution date, and ending on the first day
of the month of such distribution date or such other period as specified in the
accompanying prospectus supplement.
ELIGIBLE ACCOUNT--An account acceptable to the applicable rating agency.
ENDORSABLE PUERTO RICO MORTGAGE--As to any loan secured by mortgaged
property located in Puerto Rico, a mortgage to secure an instrument
transferable by endorsement.
ENVIRONMENTAL LIEN--A lien imposed by federal or state statute, for any
cleanup costs incurred by a state on the property that is the subject of the
cleanup costs.
EXCESS SPREAD--A portion of interest due on the loans or securities
transferred as part of the assets of the related trust as specified in the
accompanying prospectus supplement.
EXCLUDED BALANCE--That portion of the principal balance of a revolving
credit loan, if any, not included in the Trust Balance at any time, which will
include balances attributable to Draws after the cut-off date and may include a
portion of the principal balance outstanding as of the cut-off date.
EXCLUDED SPREAD--A portion of interest due on the loans or securities,
excluded from the assets transferred to the related trust.
EXTRAORDINARY LOSSES--Realized Losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
133
<PAGE>
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.
FRAUD LOSS AMOUNT--The amount of Fraud Losses that may be borne solely by
the credit enhancement of the related series.
FRAUD LOSSES--A Realized Loss incurred on defaulted loans as to which
there was fraud in the origination of the loans.
FUNDING ACCOUNT--An account established for the purpose of funding the
transfer of additional loans into the related trust.
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 or variable 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.
MIXED-USE PROPERTY--Mortgaged property on which a mixed-use -- residential
and commercial -- structure is located.
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.
134
<PAGE>
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
investments that are rated, at the time of acquisition, in one of the
categories specified in the related pooling and servicing agreement.
PLEDGED ASSET MORTGAGE LOANS--Mortgage loans that have LTV ratios at
origination of up to 100% and are secured, in addition to the related mortgaged
property, by Pledged Assets.
PLEDGED ASSETS--As to a Pledged Asset Mortgage Loan, (1) financial assets
owned by the borrower, which will consist of securities, insurance policies,
annuities, certificates of deposit, cash, accounts or similar assets and/or (2)
a third party guarantee, usually by a relative of the borrower, which in turn
is secured by a security interest in financial assets or residential property
owned by the guarantor.
PREPAYMENT INTEREST SHORTFALL--For a loan that is subject to a borrower
prepayment or liquidation, the amount that equals the difference between a full
month's interest due for that mortgage loan and the amount of interest paid or
recovered with respect thereto.
PRINCIPAL PREPAYMENTS--Any principal payments received for a loan, in
advance of the scheduled due date and not accompanied by a payment of interest
for any period following the date of payment.
QUALIFIED INSURER--As to a mortgage pool insurance policy, special hazard
insurance policy, bankruptcy policy, financial guaranty insurance policy or
surety bond, an insurer qualified under applicable law to transact the
insurance business or coverage as applicable.
REALIZED LOSS--As to any defaulted loan that is finally liquidated, the
amount of loss realized, if any, will equal the portion of the Stated Principal
Balance remaining after application of all amounts recovered, net of amounts
reimbursable to the master servicer or the servicer for related Advances and
expenses, towards interest and principal owing on the loan. For a loan the
principal balance of which has been reduced in connection with bankruptcy
proceedings, the amount of the reduction will be treated as a Realized Loss.
REGULAR CERTIFICATES--FASIT Regular Certificates or REMIC Regular
Certificates.
REMIC--A real estate mortgage investment conduit as described in section
860D of the Internal Revenue Code.
REMIC REGULAR CERTIFICATES--Certificates or notes representing ownership
of one or more regular interests in a REMIC.
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.
135
<PAGE>
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 credit enhancement 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.
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.
136
<PAGE>
$332,000,000
GMAC MORTGAGE CORPORATION
SELLER AND SERVICER
GMACM HOME EQUITY LOAN TRUST 2000-HE4
ISSUER
RESIDENTIAL ASSET MORTGAGE PRODUCTS, INC.
DEPOSITOR
GMACM HOME EQUITY LOAN-BACKED TERM NOTES, SERIES 2000-HE4
---------------------
PROSPECTUS SUPPLEMENT
---------------------
UNDERWRITERS
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
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 February 20, 2001, 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 underwriter and with respect to their unsold allotments or
subscriptions.
