<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 20, 1995)
$447,941,596
RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
COMPANY
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1995-S11
<TABLE>
<S> <C> <C> <C> <C> <C>
$ 11,300,000 7.65% CLASS A-1 CERTIFICATES $ 3,544,000 7.40% CLASS A-13 CERTIFICATES
$105,000,000 7.50% CLASS A-2 CERTIFICATES $ 4,741,000 8.00% CLASS A-14 CERTIFICATES
$ 47,939,000 7.25% CLASS A-3 CERTIFICATES $100,000,000 7.50% CLASS A-15 CERTIFICATES
$ 27,875,000 7.65% CLASS A-4 CERTIFICATES $ 32,887,000 7.50% CLASS A-16 CERTIFICATES
$ 30,655,000 7.65% CLASS A-5 CERTIFICATES $ 1,348,796 0.00%(1) CLASS A-17 CERTIFICATES
$ 20,568,000 7.65% CLASS A-6 CERTIFICATES $ 0 VARIABLE RATE(2) CLASS A-18 CERTIFICATES
$ 5,000,000 7.50% CLASS A-7 CERTIFICATES $ 9,500,000 7.50% CLASS A-19 CERTIFICATES
$ 2,100,000 7.65% CLASS A-8 CERTIFICATES $ 100 7.50% CLASS R-I CERTIFICATES
$ 12,900,000 7.40% CLASS A-9 CERTIFICATES $ 100 7.50% CLASS R-II CERTIFICATES
$ 6,000,000 7.75% CLASS A-10 CERTIFICATES $ 11,340,300 7.50% CLASS M-1 CERTIFICATES
$ 2,581,000 6.00% CLASS A-11 CERTIFICATES $ 5,670,200 7.50% CLASS M-2 CERTIFICATES
$ 2,456,000 7.40% CLASS A-12 CERTIFICATES $ 4,536,100 7.50% CLASS M-3 CERTIFICATES
</TABLE>
------------
(1) The Class A-17 Certificates will be Principal Only Certificates and will
not be entitled to receive distributions of interest.
(2) Based on the Notional Amount as described herein.
------------------------
The Series 1995-S11 Mortgage Pass-Through Certificates will include the
following twenty-one classes (the 'Senior Certificates'): (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, Class A-6 Certificates, Class A-8 Certificates and Class A-9
Certificates; (ii) Class A-7 Certificates, Class A-10 Certificates, Class A-11
Certificates, Class A-12 Certificates, Class A-13 Certificates and Class A-14
Certificates (collectively, the 'Super Senior I Certificates'); (iii) Class A-5
Certificates, Class A-15 Certificates and Class A-19 Certificates (collectively,
the 'Super Senior II Certificates'); (iv) Class A-16 Certificates (the 'Senior
Support Certificates'); (v) Class A-17 Certificates (the 'Principal Only
Certificates'); (vi) Class A-18 Certificates (the 'Stripped Interests
Certificates') and (vii) Class R-I Certificates and Class R-II Certificates
(together, the 'Residual Certificates'). The Super Senior I Certificates and
Super Senior II Certificates are collectively referred to herein as the 'Super
Senior Certificates.' In addition to the Senior Certificates, the Series
1995-S11 Mortgage Pass-Through Certificates will also
(Continued on following page)
------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, GMAC MORTGAGE CORPORATION
OR ANY OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY
OR INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER, GMAC
MORTGAGE CORPORATION OR ANY OF THEIR AFFILIATES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
There is currently no secondary market for the Offered Certificates.
PaineWebber Incorporated ('PaineWebber') intends to make a secondary market in
the Senior Certificates other than the Principal Only Certificates and Stripped
Interests Certificates (the 'PaineWebber Underwritten Certificates'), but is not
obligated to do so. Salomon Brothers Inc ('Salomon Brothers') intends to make a
secondary market in the Class M Certificates (the 'Salomon Brothers Underwritten
Certificates'), but is not obligated to do so. There can be no assurance that a
secondary market for the Offered Certificates will develop or, if it does
develop, that it will continue. The Offered Certificates will not be listed on
any securities exchange.
The PaineWebber Underwritten Certificates will be purchased from the Company
by PaineWebber and will be offered by PaineWebber from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale, except that a de minimis portion of each class
of the Residual Certificates will be retained by Residential Funding
Corporation, and such portion is not offered hereby. The proceeds to the Company
from the sale of the PaineWebber Underwritten Certificates, before deducting
expenses payable by the Company, will be equal to approximately 98.80% of the
initial aggregate principal balance of the PaineWebber Underwritten
Certificates, plus accrued interest thereon from August 1, 1995 (the 'Cut-off
Date'). The PaineWebber Underwritten Certificates are offered by PaineWebber
subject to prior sale, when, as and if delivered to and accepted by PaineWebber
and subject to certain other conditions. PaineWebber reserves the right to
withdraw, cancel or modify such offer and to reject any order in whole or in
part. It is expected that delivery of the PaineWebber Underwritten Certificates
(other than the Residual Certificates) will be made only in book-entry form
through the Same Day Funds Settlement System of The Depository Trust Company as
further discussed herein, and that delivery of the Residual Certificates will be
made at the offices of PaineWebber, New York, New York, on or about August 30,
1995 against payment therefor in immediately available funds.
The Salomon Brothers Underwritten Certificates will be purchased from the
Company by Salomon Brothers and will be offered by Salomon Brothers from time to
time to the public in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. The proceeds to the Company from the sale of
the Salomon Brothers Underwritten Certificates, before deducting expenses
payable by the Company, will be equal to approximately 95.05% of the initial
aggregate principal balance of the Salomon Brothers Underwritten Certificates,
plus accrued interest thereon from August 1, 1995 (the 'Cut-off Date'). The
Salomon Brothers Underwritten Certificates are offered by Salomon Brothers
subject to prior sale, when, as and if delivered to and accepted by Salomon
Brothers and subject to certain other conditions. Salomon Brothers reserves the
right to withdraw, cancel or modify such offer and to reject any order in whole
or in part. It is expected that delivery of the Salomon Brothers Underwritten
Certificates will be made at the offices of Salomon Brothers, New York, New
York, on or about August 30, 1995 against payment therefor in immediately
available funds.
The Principal Only Certificates and Stripped Interests Certificates may be
offered by the Company from time to time to the public, directly or through an
underwriter or agent, in negotiated transactions or otherwise at varying prices
to be determined at the time of sale. Proceeds to the Company from any sale of
the Principal Only Certificates and Stripped Interests Certificates will be
equal to the purchase price paid by the purchaser thereof, net of any expenses
payable by the Company and any compensation payable to any such underwriter or
agent.
------------------------
PAINEWEBBER INCORPORATED
------------------------
The date of this Prospectus Supplement is August 24, 1995
<PAGE>
(Continued from previous page)
include six classes of subordinate certificates which are designated as the
Class M-1 Certificates, Class M-2 Certificates and Class M-3 Certificates
(collectively, the 'Class M Certificates') and the Class B-1 Certificates, Class
B-2 Certificates and Class B-3 Certificates (collectively, the 'Class B
Certificates,' and together with the Class M Certificates and Senior
Certificates, the 'Certificates'). Only the Senior Certificates and Class M
Certificates (the 'Offered Certificates') are offered hereby.
It is a condition to the issuance of the Senior Certificates, other than
the Principal Only Certificates and Stripped Interests Certificates, that they
be rated 'AAA' by Standard & Poor's Ratings Services ('Standard & Poor's') and
by Fitch Investors Service, L.P. ('Fitch'). It is a condition to the issuance of
the Principal Only Certificates and Stripped Interests Certificates that they be
rated 'AAAr' by Standard & Poor's and 'AAA' by Fitch. It is a condition to the
issuance of the Class M-1 Certificates that they be rated not lower than 'AA' by
Standard & Poor's. It is a condition to the issuance of the Class M-2
Certificates and Class M-3 Certificates that they be rated not lower than 'A'
and 'BBB,' respectively, by Fitch.
The Senior Certificates in the aggregate and the Class M-1 Certificates,
Class M-2 Certificates and Class M-3 Certificates will evidence initial
undivided interests of approximately 94.00%, 2.50%, 1.25%, and 1.00%,
respectively, in a trust fund (the 'Trust Fund') consisting primarily of a pool
of certain conventional, fixed-rate, one- to four-family first mortgage loans,
with terms to maturity of not more than 30 years (the 'Mortgage Loans'), to be
deposited by Residential Funding Mortgage Securities I, Inc. (the 'Company')
into the Trust Fund for the benefit of the Certificateholders. Certain
characteristics of the Mortgage Loans are described herein under 'Description of
the Mortgage Pool.' The rights of the holders of the Class M Certificates and
Class B Certificates to receive distributions with respect to the Mortgage Loans
will be subordinate to the rights of the holders of the Senior Certificates; the
rights of holders of the Class M-2 Certificates to receive distributions with
respect to the Mortgage Loans will also be subordinate to the rights of the
holders of Class M-1 Certificates; the rights of the holders of the Class M-3
Certificates to receive distributions with respect to the Mortgage Loans will
also be subordinate to the rights of the holders of the other classes of Class M
Certificates; and the rights of the holders of the Class B Certificates to
receive distributions with respect to the Mortgage Loans will also be
subordinate to the rights of the holders of the Class M Certificates, in each
case to the extent described herein and in the Prospectus. In addition, certain
losses otherwise allocable to the Super Senior Certificates will be allocated
first to the Senior Support Certificates as described herein.
The Senior Certificates other than the Stripped Interests, Principal Only
and Residual Certificates (the 'DTC Registered Certificates') will be
represented initially by certificates registered in the name of Cede & Co., as
nominee of The Depository Trust Company ('DTC'), as further described herein.
The interests of beneficial owners of the DTC Registered Certificates will be
represented by book entries on the records of participating members of DTC.
Definitive certificates will be available for the DTC Registered Certificates
only under the limited circumstances described herein. See 'Description of the
Certificates -- Book-Entry Registration of Certain of the Senior Certificates'
herein.
As described herein, two separate 'real estate mortgage investment conduit'
('REMIC') elections will be made in connection with the Trust Fund for federal
income tax purposes. Each class of the Offered Certificates (other than the
Residual Certificates) will represent ownership of 'regular interests' in the
related REMIC and each class of the Residual Certificates will constitute the
sole class of 'residual interests' in the related REMIC. See 'Certain Federal
Income Tax Consequences' herein and in the Prospectus. Transfer of the Residual
Certificates will be prohibited to any non-United States person, and will be
subject to certain additional transfer restrictions described under 'Certain
Federal Income Tax Consequences -- Special Tax Considerations Applicable to
Residual Certificates' herein and in the Prospectus under 'Certain Federal
Income Tax Consequences -- REMICs -- Tax on Transfers of REMIC Residual
Certificates to Certain Organizations' and ' -- Taxation of Owners of REMIC
Residual Certificates -- Noneconomic REMIC Residual Certificates.'
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next business day,
commencing on September 25, 1995 (each, a 'Distribution Date'). As described
herein, interest distributions on the Offered Certificates entitled to interest
distributions will be based on the Certificate Principal Balance thereof (or the
Notional Amount thereof (as defined herein) in the case of the Stripped
Interests Certificates) and the then-applicable Pass-Through Rate thereof, which
will be variable for the Stripped Interests Certificates and fixed for all other
classes of Offered Certificates, in each case as reduced by certain interest
shortfalls. Distributions in respect of principal of the Offered Certificates
will be allocated among the various classes of Offered Certificates entitled to
distributions of principal as described herein under 'Description of the
Certificates -- Principal Distributions on the Senior Certificates' and
' -- Principal Distributions on the Class M Certificates.'
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON THE RATE
AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON THE MORTGAGE LOANS AND THE ALLOCATION THEREOF AMONG THE VARIOUS
CLASSES OF CERTIFICATES ENTITLED TO DISTRIBUTIONS OF PRINCIPAL. THE MORTGAGE
LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME WITHOUT PENALTY.
THE YIELD TO INVESTORS ON THE OFFERED CERTIFICATES MAY BE ADVERSELY AFFECTED BY
ANY SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS,
LIQUIDATIONS OR OTHERWISE. SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE
LOANS DUE TO PREPAYMENTS IN FULL WILL BE OFFSET BY THE MASTER SERVICER TO THE
EXTENT DESCRIBED HEREIN. ADDITIONAL SHORTFALLS IN INTEREST COLLECTED ON THE
MORTGAGE LOANS THAT ARE ALLOCATED TO ANY CLASS OF SUPER SENIOR I CERTIFICATES
WILL BE OFFSET IN SOME INSTANCES BY SUBORDINATION AND ADDITIONALLY, BY AMOUNTS
ON DEPOSIT IN THE RELATED RESERVE FUND (AS DEFINED HEREIN) TO THE EXTENT
DISCUSSED HEREIN. THE YIELD TO MATURITY ON EACH CLASS OF CLASS M CERTIFICATES
WILL BE EXTREMELY SENSITIVE TO LOSSES DUE TO DEFAULTS ON THE MORTGAGE LOANS (AND
THE TIMING THEREOF), TO THE EXTENT THAT SUCH LOSSES ARE NOT COVERED BY THE CLASS
B CERTIFICATES OR BY ANY CLASS OF CLASS M CERTIFICATES HAVING A LOWER PAYMENT
PRIORITY, AS DESCRIBED HEREIN. AFTER THE CREDIT SUPPORT DEPLETION DATE (AS
DEFINED HEREIN), THE YIELD TO MATURITY ON THE SENIOR SUPPORT CERTIFICATES WILL
ALSO BE EXTREMELY SENSITIVE TO LOSSES DUE TO DEFAULTS ON THE MORTGAGE LOANS (AND
THE TIMING THEREOF). THE YIELD TO INVESTORS ON THE STRIPPED INTERESTS
CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL
PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE
LOANS, WHICH RATE MAY FLUCTUATE SIGNIFICANTLY OVER TIME. A RAPID RATE OF
PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS COULD RESULT IN THE FAILURE OF
INVESTORS IN THE STRIPPED INTERESTS CERTIFICATES TO RECOVER THEIR INITIAL
INVESTMENTS. BECAUSE THE AMOUNTS PAYABLE WITH
(Continued on following page)
S-2
<PAGE>
(Continued from previous page)
RESPECT TO THE PRINCIPAL ONLY CERTIFICATES DERIVE ONLY FROM PRINCIPAL PAYMENTS
ON THE MORTGAGE LOANS WITH NET MORTGAGE RATES THAT ARE LOWER THAN 7.50% PER
ANNUM, THE YIELD ON THE PRINCIPAL ONLY CERTIFICATES WILL BE ADVERSELY AFFECTED
BY SLOWER THAN EXPECTED PAYMENTS OF PRINCIPAL ON SUCH MORTGAGE LOANS. SEE
'SUMMARY -- SPECIAL PREPAYMENT CONSIDERATIONS,' ' -- SPECIAL YIELD
CONSIDERATIONS' AND 'CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS' HEREIN AND
'YIELD CONSIDERATIONS' IN THE PROSPECTUS.
THE SUPER SENIOR I CERTIFICATES MAY NOT BE AN APPROPRIATE INVESTMENT FOR
ALL PROSPECTIVE INVESTORS. THE SUPER SENIOR I CERTIFICATES WOULD NOT BE AN
APPROPRIATE INVESTMENT FOR ANY INVESTOR REQUIRING A DISTRIBUTION OF A PARTICULAR
AMOUNT OF PRINCIPAL ON A SPECIFIC DATE OR DATES OR AN OTHERWISE PREDICTABLE
STREAM OF CASH PAYMENTS. PROSPECTIVE INVESTORS IN THE SUPER SENIOR I
CERTIFICATES SHOULD ALSO BE AWARE THAT THE MARKET VALUE OF THE SUPER SENIOR I
CERTIFICATES COULD VARY SIGNIFICANTLY DURING THE PERIOD SUCH SUPER SENIOR I
CERTIFICATES ARE OUTSTANDING. ADDITIONALLY, NO ASSURANCE CAN BE GIVEN THAT ANY
OF THE RESERVE FUNDS WILL BE SUFFICIENT TO COVER ALL INTEREST SHORTFALLS
ALLOCATED TO THE RELATED CLASS OF SUPER SENIOR I CERTIFICATES OR THAT REALIZED
LOSSES WILL NOT BE ALLOCATED TO SUCH CLASSES. THE LENGTH OF TIME THAT ANY CLASS
OF SUPER SENIOR I CERTIFICATES MAY BE OUTSTANDING MAY VARY SIGNIFICANTLY BASED
ON THE AMOUNT AND TIMING OF PREPAYMENTS ON THE MORTGAGE LOANS.
------------------------
THE OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE COMPANY AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED APRIL 20, 1995 OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
------------------------
UNTIL NOVEMBER 22, 1995, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S-3
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
<TABLE>
<S> <C>
Title of Securities.............. Mortgage Pass-Through Certificates, Series 1995-S11.
Company.......................... Residential Funding Mortgage Securities I, Inc. (the 'Company'), an affiliate
of Residential Funding Corporation, and an indirect wholly-owned subsidiary of
GMAC Mortgage Corporation ('GMAC Mortgage'). See 'The Company' in the
Prospectus.
Master Servicer.................. Residential Funding Corporation (the 'Master Servicer' or 'Residential
Funding'), an affiliate of the Company and an indirect wholly-owned subsidiary
of GMAC Mortgage. See 'Pooling and Servicing Agreement -- The Master Servicer'
herein and 'Residential Funding Corporation' in the Prospectus.
Trustee.......................... The First National Bank of Chicago, a national banking association (the
'Trustee').
Cut-off Date..................... August 1, 1995.
Delivery Date.................... On or about August 30, 1995.
Denominations.................... The Senior Certificates (other than the Stripped Interests, Principal Only and
Residual Certificates) (the 'DTC Registered Certificates') will be issued,
maintained and transferred on the book-entry records of DTC (as defined
herein) and its Participants (as defined in the Prospectus). The DTC
Registered Certificates, other than the Super Senior I Certificates, will be
issued in minimum denominations of $25,000 and integral multiples of $1 in
excess thereof. The Super Senior I Certificates will be issued in minimum
denominations of $1,000 and integral multiples of $1,000 in excess thereof.
The Stripped Interests Certificates and Residual Certificates will be offered
in registered, certificated form in minimum denominations of a 20% Percentage
Interest, except, in the case of the Residual Certificates, as otherwise set
forth herein under 'Certain Federal Income Tax Consequences.' The Principal
Only Certificates and Class M-1 Certificates will be offered in registered,
certificated form in minimum denominations of $25,000 and integral multiples
of $1,000 in excess thereof, with one Principal Only Certificate and one Class
M-1 Certificate evidencing the sum of an authorized denomination thereof plus
the remainder of the aggregate initial Certificate Principal Balance of such
class. The Class M-2 Certificates and Class M-3 Certificates will be offered
in registered, certificated form in minimum denominations of $250,000 and
integral multiples of $1,000 in excess thereof, with one Class M-2 Certificate
and one Class M-3 Certificate evidencing the sum of an authorized denomination
thereof plus the remainder of the aggregate initial Certificate Principal
Balance of such class.
The Mortgage Pool................ The Mortgage Pool will consist of a pool of conventional, fixed-rate,
fully-amortizing, level monthly payment first mortgage loans (the 'Mortgage
Loans') with an aggregate principal balance as of the Cut-off Date of
approximately $453,612,335. The Mortgage Loans are secured by first liens on
fee simple interests in one- to four-family residential real properties and,
in the case of six Mortgage Loans, an
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
interest in shares issued by a cooperative apartment corporation and the
related proprietary lease (each, a 'Mortgaged Property'). The Mortgage Loans
had individual principal balances at origination of at least $16,000 but not
more than $1,150,000 with an average principal balance at origination of
approximately $290,170. The Mortgage Loans have terms to maturity from the
date of origination or modification of not more than 30 years, and a weighted
average remaining term to maturity of approximately 358 months as of the
Cut-off Date. The Mortgage Loans will bear interest at Mortgage Rates of at
least 6.750% per annum but not more than 11.375% per annum, with a weighted
average Mortgage Rate of 8.3208% per annum as of the Cut-off Date.
Approximately 18.1% of the Mortgage Loans were purchased from, and are being
subserviced by, Chase Manhattan Mortgage Corporation, an Unaffiliated Seller
(as defined in the Prospectus). Approximately 16.2% of the Mortgage Loans were
purchased from Chemical Bank, an Unaffiliated Seller. Approximately 15.9% of
the Mortgage Loans were purchased from and are being subserviced by
Countrywide Funding Corporation, an Unaffiliated Seller. For a further
description of the Mortgage Loans, see 'Description of the Mortgage Pool'
herein.
The Offered Certificates......... The Senior Certificates in the aggregate and the Class M-1 Certificates, Class
M-2 Certificates and Class M-3 Certificates evidence initial interests of
approximately 94.00%, 2.50%, 1.25%, and 1.00%, respectively, in the Trust Fund
consisting primarily of the Mortgage Pool. The Offered Certificates will be
issued pursuant to a Pooling and Servicing Agreement, to be dated as of the
Cut-off Date, among the Company, the Master Servicer and the Trustee (the
'Pooling and Servicing Agreement'). The Offered Certificates will have the
following Pass-Through Rates, Certificate Principal Balances and other
features as of the Cut-off Date:
</TABLE>
<TABLE>
<S> <C> <C> <C>
Class A-1 Certificates 7.65% $ 11,300,000 Senior
Class A-2 Certificates 7.50% $105,000,000 Senior
Class A-3 Certificates 7.25% $ 47,939,000 Senior
Class A-4 Certificates 7.65% $ 27,875,000 Senior
Class A-5 Certificates 7.65% $ 30,655,000 Super Senior II/Super Senior
Class A-6 Certificates 7.65% $ 20,568,000 Senior
Class A-7 Certificates 7.50% $ 5,000,000 Super Senior I/Super Senior
Class A-8 Certificates 7.65% $ 2,100,000 Senior
Class A-9 Certificates 7.40% $ 12,900,000 Senior
Class A-10 Certificates 7.75% $ 6,000,000 Super Senior I/Super Senior
Class A-11 Certificates 6.00% $ 2,581,000 Super Senior I/Super Senior
Class A-12 Certificates 7.40% $ 2,456,000 Super Senior I/Super Senior
Class A-13 Certificates 7.40% $ 3,544,000 Super Senior I/Super Senior
Class A-14 Certificates 8.00% $ 4,741,000 Super Senior I/Super Senior
Class A-15 Certificates 7.50% $100,000,000 Super Senior II/Super Senior
Class A-16 Certificates 7.50% $ 32,887,000 Senior Support
Class A-17 Certificates 0.00% $ 1,348,796 Principal Only/Senior
Class A-18 Certificates Variable Rate $ 0 Stripped Interests/Senior
Class A-19 Certificates 7.50% $ 9,500,000 Super Senior II/Super Senior
Class R-I Certificates 7.50% $ 100 Residual/Senior
Class R-II Certificates 7.50% $ 100 Residual/Senior
Class M-1 Certificates 7.50% $ 11,340,300 Mezzanine
Class M-2 Certificates 7.50% $ 5,670,200 Mezzanine
Class M-3 Certificates 7.50% $ 4,536,100 Mezzanine
</TABLE>
<TABLE>
<S> <C>
The Offered Certificates are subject to various priorities for payment of
interest and principal as described herein. For a description of the
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
allocation of interest and principal distributions among the Senior
Certificates and on the Class M Certificates, see 'Summary -- Interest
Distributions,' ' -- Principal Distributions,' 'Description of the Certifi-
cates -- Interest Distributions,' ' -- Principal Distributions on the Senior
Certificates' and ' -- Principal Distributions on the Class M Certificates'
herein.
The Super Senior I Certificates: The Super Senior I Certificates evidence an
initial interest of approximately 5.36% in the Trust Fund.
Each class of Super Senior I Certificates will be entitled to the benefit of a
Reserve Fund (as defined herein) that will cover any interest shortfalls
allocated to such class of Super Senior I Certificates to the extent of the
amount on deposit in the related Reserve Fund and to the extent not offset by
the Master Servicer or Subordination (as described herein). Interest
shortfalls allocated to any class of Super Senior I Certificates in excess of
the amount offset by the Master Servicer, Subordination and the related
Reserve Fund will reduce the amount of interest payable on such class of Super
Senior I Certificates.
THE SUPER SENIOR I CERTIFICATES MAY NOT BE AN APPROPRIATE INVESTMENT FOR ALL
PROSPECTIVE INVESTORS. The Super Senior I Certificates would not be an
appropriate investment for any investor requiring a distribution of a
particular amount of principal on a specific date or dates or an otherwise
predictable stream of cash payments. Prospective investors in the Super Senior
I Certificates should also be aware that the market value of the Super Senior
I Certificates could vary significantly during the period such Super Senior I
Certificates are outstanding. Additionally, no assurance can be given that any
of the Reserve Funds will be sufficient to cover all interest shortfalls
allocated to the related class of Super Senior I Certificates or that Realized
Losses will not be allocated to such classes. The length of time that any
class of Super Senior I Certificates may be outstanding may vary significantly
based on the amount and timing of prepayments on the Mortgage Loans.
Furthermore, investors in the Super Senior I Certificates should be aware that
losses on the Mortgage Loans allocable to any class of Super Senior I
Certificates, to the extent not covered by Subordination or (after the Credit
Support Depletion Date (as defined herein)) by the Senior Support
Certificates, will be borne by investors in such class of Super Senior I
Certificates.
Investors in the Super Senior I Certificates should carefully consider the
information set forth under 'Summary -- Special Prepayment Considerations,'
' -- Special Yield Considerations' and 'Certain Yield and Prepayment
Considerations' herein and 'Yield Considerations' in the Prospectus.
Certificate Registration......... The DTC Registered Certificates will be represented by one or more
certificates registered in the name of Cede & Co., as nominee of The
Depository Trust Company ('DTC'). No person acquiring an interest in the DTC
Registered Certificates (a 'Beneficial Owner') will be entitled to receive a
Certificate of such class in fully registered, certificated form (a
'Definitive Certificate'), except under the limited circumstances described
herein. The Stripped Interests, Principal Only, Class M and Residual
Certificates will be offered in fully registered,
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
certificated form. See 'Description of the Certificates -- Book-Entry
Registration of Certain of the Senior Certificates' herein.
Pass-Through Rates on the Offered
Certificates................... The Pass-Through Rates on all classes of the Offered Certificates (other than
the Principal Only Certificates, which are not entitled to distributions of
interest, and the Stripped Interests Certificates) are fixed and are set forth
on the cover hereof. The Pass-Through Rate on the Stripped Interests
Certificates on each Distribution Date will equal the weighted average of the
Pool Strip Rates on each of the Mortgage Loans as of the Due Date (as defined
herein) in the month preceding the month in which such Distribution Date
occurs. The Pool Strip Rate on each Mortgage Loan is equal to the Net Mortgage
Rate thereon minus 7.50% (but not less than 0.00%). The Net Mortgage Rate on
each Mortgage Loan is equal to the Mortgage Rate thereon minus the rate per
annum at which the related master servicing and subservicing fees accrue (the
'Servicing Fee Rate'). The Pool Strip Rates on the Mortgage Loans range
between 0% and 2.67%. The initial Pass-Through Rate on the Stripped Interests
Certificates is 0.5310% per annum. The Stripped Interests Certificates have no
Certificate Principal Balance and will accrue interest at the then applicable
Pass-Through Rate on the Notional Amount thereof (as defined herein).
Interest Distributions........... Holders of each class of Senior Certificates (other than the Principal Only
Certificates) will be entitled to receive interest distributions in an amount
equal to the Accrued Certificate Interest (as defined below) on such class on
each Distribution Date to the extent of the Available Distribution Amount (as
defined herein) for such Distribution Date (in the aggregate, the 'Senior
Interest Distribution Amount'), subject to the priorities described herein
with respect to the Super Senior Certificates and Senior Support Certificates
after the Credit Support Depletion Date. Holders of each class of Class M
Certificates will be entitled to receive interest distributions in an amount
equal to the Accrued Certificate Interest on such class on each Distribution
Date to the extent of the Available Distribution Amount for such Distribution
Date after (a) distributions of interest and principal to the holders of the
Senior Certificates, (b) reimbursement for certain Advances to the Master
Servicer, and (c) distributions of interest and principal to any class of
Class M Certificates having a higher payment priority, as described herein.
With respect to any Distribution Date, Accrued Certificate Interest will be
equal to (a) in the case of each class of Senior Certificates (other than the
Stripped Interests Certificates and Principal Only Certificates) and each
class of Class M Certificates, one month's interest accrued on the Certificate
Principal Balance of the Certificates of such class at the related
Pass-Through Rate on such class for such Distribution Date and (b) in the case
of the Stripped Interests Certificates, one month's interest accrued on the
Notional Amount thereof at the Pass-Through Rate on such class for such
Distribution Date; in each case less any interest shortfalls not covered with
respect to such class by Subordination (as defined herein and allocated as
described herein), by the Master Servicer as described below (or, with respect
to any class of Super Senior I Certificates, by the related Reserve Fund (as
defined below)), including any Prepayment Interest Shortfall (as defined
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
herein) allocated thereto for such Distribution Date. The Principal Only
Certificates are not entitled to distributions of interest.
The Notional Amount of the Stripped Interests Certificates as of any date of
determination will equal the aggregate Certificate Principal Balance of the
Certificates of all classes (including the Class M Certificates and Class B
Certificates) as of such date.
Any Prepayment Interest Shortfalls resulting from prepayments in full in any
calendar month will be offset by the Master Servicer on the Distribution Date
in the following calendar month to the extent such Prepayment Interest
Shortfalls do not exceed the lesser of (a) one-twelfth of 0.125% of the Stated
Principal Balance of the Mortgage Loans immediately preceding such
Distribution Date and (b) certain master servicing compensation as discussed
herein.
Reserve Fund for the Super Senior I Certificates: A separate reserve fund will
be established at the time of the issuance of the Certificates for each class
of Super Senior I Certificates (each, a 'Reserve Fund') by a deposit in the
amount set forth herein. As described herein, a withdrawal will be made on
each Distribution Date from the Reserve Fund established for a class of Super
Senior I Certificates, to the extent of funds remaining therein, only to cover
interest shortfalls not offset by the Master Servicer or Subordination, as
described above, that are allocated to the related class of Super Senior I
Certificates. Investors in the Super Senior I Certificates should be aware
that the amount on deposit in any Reserve Fund is limited and that amounts on
deposit in other Reserve Funds will not be available to cover interest
shortfalls with respect to any class of Super Senior I Certificates after the
related Reserve Fund has been depleted. Interest shortfalls allocated to any
class of Super Senior I Certificates in excess of the amount offset by the
Master Servicer, Subordination and the related Reserve Fund will be borne by
investors in such class of Super Senior I Certificates.
Principal Distributions.......... Holders of the Senior Certificates (other than the Stripped Interests
Certificates, which are not entitled to receive any principal distributions,
and the Principal Only Certificates) will be entitled to receive on each
Distribution Date, in the manner and priority set forth herein, to the extent
of the portion of the Available Distribution Amount remaining after the Senior
Interest Distribution Amount and the Principal Only Distribution Amount (as
defined below) are distributed, a distribution allocable to principal which
will, as described herein, include (i) the Senior Percentage (as defined
below) of scheduled principal payments due on the Mortgage Loans and of the
principal portion of any unscheduled collections (other than Mortgagor prepay-
ments and amounts received in connection with a Final Disposition (as defined
herein) of a Mortgage Loan described in clause (ii) below), including
repurchases of the Mortgage Loans (other than the related Discount Fraction
(as defined below) of the principal portion of such payments and collections
with respect to a Discount Mortgage Loan (as defined below)); (ii) in
connection with the Final Disposition of a Mortgage Loan that did not incur
any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses or Extraordinary Losses (each as defined herein), an amount equal to
the lesser of (a) the Adjusted Senior Percentage (as defined below) of the
Stated
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
Principal Balance of such Mortgage Loan (other than the related Discount
Fraction of such Stated Principal Balance with respect to a Discount Mortgage
Loan) and (b) the Adjusted Senior Accelerated Distribution Percentage (as
defined herein) of the related collections, including any Insurance Proceeds
and Liquidation Proceeds, to the extent applied as recoveries of principal (in
each case other than the portion of such collections with respect to a
Discount Mortgage Loan included in clause (iii) of the definition of the
'Principal Only Distribution Amount' below); (iii) the Adjusted Senior
Accelerated Distribution Percentage of Mortgagor prepayments on each Mortgage
Loan (other than the related Discount Fraction of such Principal Prepayments
with respect to the Discount Mortgage Loans); (iv) the Excess Subordinate
Principal Amount (as defined herein), if any, for such Distribution Date; and
(v) the Senior Support Certificates' pro rata share, based on the Certificate
Principal Balance of the Senior Support Certificates relative to the aggregate
Certificate Principal Balance of the Senior Support Certificates, Class M
Certificates and Class B Certificates then outstanding, of the unscheduled
collections and prepayments described in clauses (ii) and (iii) above to the
extent such receipts are not payable to the other classes of Senior
Certificates.
Holders of the Principal Only Certificates will be entitled to receive on each
Distribution Date prior to the Credit Support Depletion Date (and such amount
will not be available to holders of the other Offered Certificates), in the
manner and priority set forth herein, to the extent of the excess of the
Available Distribution Amount over the Senior Interest Distribution Amount, a
distribution allocable to principal (the 'Principal Only Distribution Amount')
which will, as described herein, include (i) the applicable Discount Fraction
of scheduled principal payments due on each Discount Mortgage Loan, (ii) the
applicable Discount Fraction of the principal portion of any unscheduled
collections (other than those received in connection with a Final Disposition
described in clause (iii) below) on the Discount Mortgage Loans, including
prepayments, repurchases, Liquidation Proceeds and Insurance Proceeds, to the
extent applied as recoveries of principal, and (iii) in connection with the
Final Disposition (as defined herein) of a Discount Mortgage Loan that did not
result in any Excess Special Hazard Losses, Excess Bankruptcy Losses, Excess
Fraud Losses or Extraordinary Losses (each as defined herein), an amount equal
to the lesser of (a) the applicable Discount Fraction of the Stated Principal
Balance of such Discount Mortgage Loan and (b) the aggregate amount of
collections on such Discount Mortgage Loan to the extent applied as recoveries
of principal. On or after the occurrence of the Credit Support Depletion Date,
the holders of the Principal Only Certificates will be entitled to receive an
amount equal to the Discount Fraction of the principal portion of scheduled or
unscheduled payments received or advanced in respect of Discount Mortgage
Loans.
A Discount Mortgage Loan is any Mortgage Loan with a Net Mortgage Rate less
than 7.50% per annum. With respect to each Discount Mortgage Loan, the
Discount Fraction thereof is equal to a fraction, expressed as a percentage,
the numerator of which is 7.50% minus the Net Mortgage Rate for such Mortgage
Loan and the
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
denominator of which is 7.50%. The Mortgage Loans other than the Discount
Mortgage Loans are referred to herein as the Non-Discount Mortgage Loans.
Distributions in respect of principal of the Senior Certificates on any
Distribution Date will be allocated to the classes then entitled to such
distributions, as described herein.
Holders of each class of the Class M Certificates will be entitled to receive
a distribution of principal on each Distribution Date, to the extent of the
portion of the Available Distribution Amount remaining after (i) distributions
in respect of interest and principal to the holders of the Senior
Certificates, (ii) reimbursements for certain Advances to the Master Servicer,
(iii) distributions in respect of interest and principal to the holders of any
class of Class M Certificates having a higher payment priority and (iv)
distributions in respect of interest to the holders of such class of Class M
Certificates. Such principal distributions will be made as to each class of
Class M Certificates in the respective amounts described herein.
The Senior Percentage as of the time of any determination will be the
percentage equal to the aggregate Certificate Principal Balance of the Senior
Certificates (other than the Principal Only Certificates) divided in each case
by the aggregate Stated Principal Balance of all of the Mortgage Loans (other
than the Discount Fraction of the Discount Mortgage Loans) and will be
recalculated after each Distribution Date as described herein to reflect the
entitlement of the holders of the Senior Certificates (other than the
Principal Only Certificates) to subsequent distributions of amounts allocable
to principal.
The Adjusted Senior Percentage as of the time of any determination will be the
percentage equal to the aggregate Certificate Principal Balance of the Senior
Certificates (other than the Principal Only Certificates and Senior Support
Certificates) divided by the aggregate Stated Principal Balance of all of the
Mortgage Loans (other than the Discount Fraction of the Discount Mortgage
Loans) and will be recalculated after each Distribution Date as described
herein to reflect the entitlement of the holders of the Senior Certificates
(other than the Principal Only Certificates and Senior Support Certificates)
to subsequent distributions of amounts allocable to principal.
The Senior Support Percentage as of the time of any determination will be the
percentage equal to the Certificate Principal Balance of the Senior Support
Certificates divided by the aggregate Stated Principal Balance of all of the
Mortgage Loans (other than the Discount Fraction of the Discount Mortgage
Loans) and will be recalculated after each Distribution Date as described
herein to reflect the entitlement of the holders of the Senior Support
Certificates to subsequent distributions of amounts allocable to principal.
For each Distribution Date occurring prior to the Distribution Date in
September 2000, the Adjusted Senior Accelerated Distribution Percentage will
equal 100% and no principal prepayments will be distributed to the Senior
Support Certificates or Class M Certificates. Thereafter, as further described
herein, during certain periods, subject to certain loss and delinquency
criteria described herein, the Adjusted Senior Accelerated Distribution
Percentage may be 100% or otherwise
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
disproportionately large (relative to the Adjusted Senior Percentage), and the
percentage of Mortgagor prepayments payable to the Senior Support Certificates
and each class of Class M Certificates may be 0%, or disproportionately small
or large (relative to the Senior Support Percentage or related Class M
Percentage). In addition, at least until the Distribution Date occurring in
September 2002, the Class M-1 Certificates will be entitled to receive 100% of
the principal prepayments not otherwise distributable to the Senior
Certificates under certain circumstances described herein. See 'Description of
the Certificates -- Principal Distributions on the Senior Certificates' and
' -- Principal Distributions on the Class M Certificates' herein.
Advances......................... The Master Servicer is required to make advances ('Advances') in respect of
delinquent payments of principal and interest on the Mortgage Loans, subject
to the limitations described herein. See 'Description of the
Certificates -- Advances' herein and in the Prospectus.
Allocation of Losses;
Subordination.................. Subject to the limitations set forth below, Realized Losses on the Mortgage
Loans will be allocated as follows: first, to the Class B Certificates;
second, to the Class M-3 Certificates; third, to the Class M-2 Certificates;
fourth, to the Class M-1 Certificates until, in each case, the Certificate
Principal Balance of each such class of Certificates is reduced to zero; and
thereafter, if any such Realized Loss is on a Discount Mortgage Loan, to the
Principal Only Certificates in an amount equal to the related Discount
Fraction of the principal portion of such Realized Loss, and the remainder of
such Realized Losses and the entire amount of such Realized Losses on
Non-Discount Mortgage Loans to the Senior Certificates (other than the
Principal Only Certificates) on a pro rata basis, except that the principal
portion of Defaulted Mortgage Losses otherwise allocable to the Super Senior
Certificates will be allocated to the Senior Support Certificates until the
Certificate Principal Balance thereof is reduced to zero. See 'Description of
the Certificates -- Allocation of Losses; Subordination' herein. The
Subordination provided to the Senior Certificates by the Class B Certificates
and Class M Certificates and the Subordination provided to each class of Class
M Certificates by the Class B Certificates and by any class of Class M
Certificates subordinate thereto will cover Realized Losses on the Mortgage
Loans that are Defaulted Mortgage Losses, Fraud Losses, Bankruptcy Losses and
Special Hazard Losses (as defined herein). The aggregate amounts of Realized
Losses which may be allocated by means of Subordination to cover Special
Hazard Losses, Fraud Losses and Bankruptcy Losses are initially limited to
$4,536,123, $9,072,247 and $165,000, respectively. All of the foregoing
amounts are subject to periodic reduction as described herein and may be
further reduced as described in the Prospectus under 'Subordination.'
Any Special Hazard Losses, Fraud Losses and Bankruptcy Losses in excess of the
respective amounts of coverage therefor and any Extraordinary Losses (as
defined herein) on Non-Discount Mortgage Loans will be allocated on a pro rata
basis (as described above) among the Senior Certificates (except that no such
portion will be allocable to
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
the Principal Only Certificates), Class M Certificates and Class B
Certificates without priority among the various classes thereof.
The principal portion of such losses on Discount Mortgage Loans will be
allocated to the Principal Only Certificates in an amount equal to the related
Discount Fraction of such losses, and the remainder of such losses on Discount
Mortgage Loans will be allocated among the remaining Certificates on a pro
rata basis.
Neither the Offered Certificates nor the Mortgage Loans are insured or
guaranteed by any governmental agency or instrumentality or by the Company,
the Master Servicer, the Trustee, GMAC Mortgage or any affiliate thereof.
Class B Certificates............. The Class B-1 Certificates, Class B-2 Certificates and Class B-3 Certificates
have Pass-Through Rates of 7.50% per annum and initial Certificate Principal
Balances of approximately $2,041,300, $1,587,600 and $2,041,839, respectively,
and evidence an initial undivided interest of approximately 1.25% in the Trust
Fund. The Class B Certificates are not being offered hereby.
Optional Termination............. At its option, on any Distribution Date when the aggregate Stated Principal
Balance of the Mortgage Loans is less than 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date, the Master Servicer or
the Company may (i) purchase from the Trust Fund all remaining Mortgage Loans
and other assets thereof, and thereby effect early retirement of the
Certificates or (ii) purchase in whole, but not in part, the Certificates. See
'Pooling and Servicing Agreement -- Termination' herein and 'The Pooling and
Servicing Agreement -- Termination; Retirement of Certificates' in the
Prospectus.
Special Prepayment
Considerations................. The rate and timing of principal payments on the Offered Certificates will
depend, among other things, on the rate and timing of principal payments
(including prepayments, defaults and liquidations) on the Mortgage Loans. As
is the case with mortgage-backed securities generally, the Offered
Certificates are subject to substantial inherent cash-flow uncertainties
because the Mortgage Loans may be prepaid at any time. Generally, when
prevailing interest rates increase, prepayment rates on mortgage loans tend to
decrease, resulting in a slower return of principal to investors at a time
when reinvestment at such higher prevailing rates would be desirable.
Conversely, when prevailing interest rates decline, prepayment rates on
mortgage loans tend to increase, resulting in a faster return of principal to
investors at a time when reinvestment at comparable yields may not be
possible.
The multiple class structure of the Offered Certificates results in the
allocation of prepayments among certain classes as follows:
Sequentially Paying Classes: All classes of Senior Certificates entitled to
payments of principal are subject to various priorities for payment of
principal as described herein. Distributions of principal on classes having an
earlier priority of payment will be affected by the rates of prepayment of the
Mortgage Loans early in the life of the Mortgage Pool. The timing of
commencement of principal distributions and the weighted average lives of
classes of Certificates with a later priority of
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
payment will be affected by the rates of prepayment experienced both before
and after the commencement of principal distributions on such classes.
Super Senior I Certificates: IN ADDITION TO THE CONSIDERATIONS SET FORTH
ABOVE, INVESTORS IN THE SUPER SENIOR I CERTIFICATES SHOULD BE AWARE THAT THE
SUPER SENIOR I CERTIFICATES MAY NOT BE AN APPROPRIATE INVESTMENT FOR ALL
PROSPECTIVE INVESTORS. The Super Senior I Certificates would not be an
appropriate investment for any investor requiring a distribution of a
particular amount of principal or interest on a specific date or dates or an
otherwise predictable stream of cash payments. The timing of such
distributions may have a significant effect on an investor's yield on such
Certificates if the Certificate is purchased at a discount or a premium.
The timing of distributions in reduction of the Certificate Principal Balance
with respect to any particular Super Senior I Certificate is highly uncertain
and may be significantly earlier or later than the date that may be desired by
such Certificateholder. Investors in the Super Senior I Certificates,
especially investors in the Class A-7, Class A-10, Class A-11 and Class A-14
Certificates, should be aware that such Certificates have a later priority of
payment with respect to principal in relation to other classes of Senior
Certificates (other than the Class A-15, Class A-19 and Senior Support
Certificates). This later priority makes such classes of Super Senior I
Certificates particularly sensitive to the rate and timing of principal
prepayments. If prepayments on the Mortgage Loans occur at a higher rate than
anticipated, the weighted average lives of the Super Senior I Certificates,
particularly the Class A-7, Class A-10, Class A-11 and Class A-14
Certificates, may be shortened significantly. Conversely, if prepayments on
the Mortgage Loans occur at a lower rate than anticipated, the weighted
average lives of the Super Senior I Certificates, particularly the Class A-7,
Class A-10, Class A-11 and Class A-14 Certificates, may be extended
significantly.
Certificates with Subordination Features: As described herein, during certain
periods all or a disproportionately large percentage of principal prepayments
on the Mortgage Loans will be allocated among the Senior Certificates (other
than the Senior Support Certificates and Principal Only Certificates), and,
during certain periods, no prepayments or, relative to the Senior Support
Percentage or related Class M Percentage, as applicable, a disproportionately
small or large percentage of such prepayments will be distributed on the
Senior Support Certificates or Class M Certificates. To the extent that no
prepayments or a disproportionately small percentage of such prepayments are
distributed on the Senior Support Certificates and Class M Certificates, the
Subordination afforded the Senior Certificates by the Senior Support
Certificates (solely with respect to the Super Senior Certificates) and Class
M Certificates (together with the Class B Certificates), in the absence of
offsetting Realized Losses allocated thereto, will be increased.
See 'Description of the Certificates -- Principal Distributions on the Senior
Certificates,' ' -- Principal Distributions on the Class M
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
Certificates' and 'Certain Yield and Prepayment Considerations' herein, and
'Maturity and Prepayment Considerations' in the Prospectus. For further
information regarding the effect of principal prepayments on the weighted
average lives of the Offered Certificates (other than the Stripped Interests
Certificates and Residual Certificates), see the table entitled 'Percent of
Initial Certificate Principal Balance Outstanding at the Following Percentages
of SPA' herein.
Special Yield
Considerations................. The yield to maturity on each class of the Offered Certificates will depend
on, among other things, the rate and timing of principal payments (including
prepayments, defaults and liquidations) on the Mortgage Loans and the
allocation thereof to reduce the Certificate Principal Balance or Notional
Amount of such class. The yield to maturity on each class of the Offered
Certificates will also depend on the Pass-Through Rate and the purchase price
for such Certificates. The yield to investors on any class of Offered
Certificates (other than the Principal Only Certificates) will be adversely
affected by any allocation thereto of Prepayment Interest Shortfalls on the
Mortgage Loans (to the extent not offset by the Master Servicer or, solely
with respect to any class of Super Senior I Certificates, the related Reserve
Fund), which are expected to result from the distribution of interest only to
the date of prepayment (rather than a full month's interest) in connection
with prepayments in full and the lack of any distribution of interest on the
amount of any partial prepayments. Prepayment Interest Shortfalls resulting
from principal prepayments in full in any calendar month will not adversely
affect the yield to investors in the Offered Certificates to the extent such
Prepayment Interest Shortfalls do not exceed the lesser of (a) one-twelfth of
0.125% of the Stated Principal Balance of the Mortgage Loans immediately
preceding the related Distribution Date and (b) certain master servicing
compensation as discussed herein. Additionally, any interest shortfalls
allocated to any class of Super Senior I Certificates will affect the yield to
investors in such class of Super Senior I Certificates to the extent such
interest shortfalls exceed the amount offset by the Master Servicer,
Subordination or the related Reserve Fund.
In general, if a class of Offered Certificates is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a class of Offered
Certificates is purchased at a discount and principal distributions thereon
occur at a rate slower than that assumed at the time of purchase, the
investor's actual yield to maturity will be lower than that assumed at the
time of purchase.
The Pass-Through Rates on the Offered Certificates (other than the Stripped
Interests Certificates) are fixed and will not change in response to changes
in market interest rates. Accordingly, if market interest rates or market
yields for securities similar to the Offered Certificates were to rise, the
market value of the Offered Certificates may decline.
The Offered Certificates were structured assuming, among other things, a
prepayment assumption of 300% SPA (as defined herein) and
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
corresponding weighted average lives as described herein. The prepayment,
yield and other assumptions to be used for pricing purposes for the respective
classes that are to be offered hereunder may vary as determined at the time of
sale.
The structure of the Offered Certificates causes the yield of certain classes
to be particularly sensitive to changes in the rates of prepayment of the
Mortgage Loans and other factors, as follows:
Super Senior I Certificates: INVESTORS IN THE SUPER SENIOR I CERTIFICATES
SHOULD BE AWARE THAT THE SUPER SENIOR I CERTIFICATES MAY NOT BE AN APPROPRIATE
INVESTMENT FOR ALL PROSPECTIVE INVESTORS. In addition to the considerations
set forth above, prospective investors in the Super Senior I Certificates
should also be aware that the market value of the Super Senior I Certificates
could vary significantly during the period such Super Senior I Certificates
are outstanding. As a result, an investor in a Super Senior I Certificate
could suffer a significant loss on its investment if the investor sells such
Super Senior I Certificate rather than holding it until it is retired.
Additionally, investors in any class of Super Senior I Certificates should be
aware that the amount on deposit in the related Reserve Fund is limited.
Allocations of interest shortfalls to any class of Super Senior I Certificates
in excess of the amount offset by the Master Servicer, Subordination and the
related Reserve Fund will adversely affect the yield to investors in such
class of Super Senior I Certificates.
Senior Support Certificates: Investors in the Senior Support Certificates
should be aware that because the Senior Support Certificates have a later
priority of payment of principal than any other classes of Senior
Certificates, the effect on the market value of the Senior Support
Certificates of changes in market interest rates or market yields for similar
securities may be greater than would be the effect of such changes on other
classes of Senior Certificates entitled to principal distributions.
Stripped Interests Certificates: The yield to investors on the Stripped
Interests Certificates will be extremely sensitive to the rate and timing of
principal payments on the Mortgage Loans (including prepayments, defaults and
liquidations), which rate may fluctuate significantly over time. A faster than
expected rate of principal payments on the Mortgage Loans will have a negative
effect on the yield to such investors and could result in the failure of
investors in the Stripped Interests Certificates to recover their initial
investments. Because holders of the Stripped Interests Certificates generally
have rights to relatively larger portions of interest payments on Mortgage
Loans with higher Mortgage Rates than on Mortgage Loans with lower Mortgage
Rates, and because such Mortgage Loans having higher Mortgage Rates are
generally likely to prepay at a faster rate than Mortgage Loans with lower
Mortgage Rates, the yield on the Stripped Interests Certificates will be
materially adversely affected to a greater extent than the yields on the other
Offered Certificates if the Mortgage Loans with higher Mortgage Rates prepay
faster than the Mortgage Loans with lower Mortgage Rates. Because the Pool
Strip Rates on the Discount Mortgage Loans equal 0.00%, the yield to investors
on the
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
Stripped Interests Certificates will not be affected by prepayments on the
Discount Mortgage Loans. See 'Certain Yield and Prepayment Considerations,'
especially ' -- Stripped Interests Certificate Yield Considerations' herein.
Principal Only Certificates: The amounts payable with respect to the Principal
Only Certificates derive only from principal payments on the Discount Mortgage
Loans. As a result, the yield on the Principal Only Certificates will be
adversely affected by slower than expected payments of principal (including
prepayments, defaults and liquidations) on the Discount Mortgage Loans.
Because the Discount Mortgage Loans have lower Net Mortgage Rates than the
Non-Discount Mortgage Loans, and because the Mortgage Loans with lower Net
Mortgage Rates are likely to have lower Mortgage Rates, the Discount Mortgage
Loans are generally likely to prepay at a slower rate than the Non-Discount
Mortgage Loans. See 'Certain Yield and Prepayment Considerations,' especially
' -- Principal Only Certificate and Stripped Interests Certificate Yield
Considerations' herein.
Certificates with Subordination Features: The yield to investors on each class
of Class M Certificates, and particularly on those classes of Class M
Certificates with lower payment priorities, will be extremely sensitive to
losses due to defaults on the Mortgage Loans (and the timing thereof), to the
extent such losses are not covered by the Class B Certificates or by any other
class of Class M Certificates having a lower payment priority, because the
entire amount of such losses that are covered by Subordination will be
allocable to such class or classes of Class M Certificates, as described
herein. After the Credit Support Depletion Date, the yield to maturity on the
Senior Support Certificates will also be extremely sensitive to losses due to
defaults on the Mortgage Loans (and the timing thereof) because such losses
otherwise allocable to the Super Senior Certificates will be allocated to the
Senior Support Certificates, as described herein. Furthermore, as described
herein, the timing of receipt of principal and interest by the Senior Support
Certificates (after the Credit Support Depletion Date) and any class of Class
M Certificates may be adversely affected by losses even if such class does not
ultimately bear such loss. See 'Certain Yield and Prepayment Considerations,'
especially ' -- Class M-2 Certificate and Class M-3 Certificate Yield
Considerations' herein and 'Yield Considerations' in the Prospectus.
Residual Certificates: Holders of the Residual Certificates are entitled to
receive distributions of principal and interest as described herein; however,
holders of such Certificates may have tax liabilities with respect to their
Certificates during the early years of the term of the related REMIC (as
defined below) that substantially exceed the principal and interest payable
thereon during such periods. See 'Certain Yield and Prepayment
Considerations,' especially ' -- Additional Yield Considerations Applicable
Solely to the Residual Certificates' herein, 'Certain Federal Income Tax
Consequences' herein and in the Prospectus and 'Yield Considerations' in the
Prospectus.
Certain Federal Income Tax
Consequences................... Two separate REMIC elections will be made with respect to the Trust Fund for
federal income tax purposes. Upon the issuance of the
</TABLE>
S-16
<PAGE>
<TABLE>
<S> <C>
Offered Certificates, Orrick, Herrington & Sutcliffe, counsel to the Company,
will deliver its opinion generally to the effect that, assuming compliance
with all provisions of the Pooling and Servicing Agreement, for federal income
tax purposes, REMIC I and REMIC II (as such terms are defined in the Pooling
and Servicing Agreement) will each qualify as a REMIC under Sections 860A
through 860G of the Code.
For federal income tax purposes, (a) the Class R-I Certificates will be the
sole class of 'residual interests' in REMIC I, (b) each class of the Senior
Certificates (other than the Residual Certificates), Class M Certificates and
Class B Certificates will represent ownership of 'regular interests' in REMIC
II and will generally be treated as representing ownership interests of debt
instruments of REMIC II and (c) the Class R-II Certificates will constitute
the sole class of 'residual interests' in REMIC II.
Under the REMIC Regulations (as defined herein), the Residual Certificates
will not be regarded as having 'significant value' for purposes of applying
the rules relating to 'excess inclusions.' In addition, the Residual
Certificates may constitute 'noneconomic' residual interests for purposes of
the REMIC Regulations. Transfers of the Residual Certificates will be
restricted under the Pooling and Servicing Agreement to United States persons
(as defined in the Prospectus) in a manner designed to prevent a transfer of a
noneconomic residual interest from being disregarded under the REMIC
Regulations. See 'Certain Federal Income Tax Consequences -- Special Tax
Considerations Applicable to Residual Certificates' herein and 'Certain
Federal Income Tax Consequences -- REMICs -- Taxation of Owners of REMIC
Residual Certificates -- Excess Inclusions' and ' -- Noneconomic REMIC
Residual Certificates' in the Prospectus.
The Residual Certificateholders may be required to report an amount of taxable
income with respect to the early years of the related REMIC's term that
significantly exceeds distributions on the Residual Certificates during such
years, with corresponding tax deductions or losses deferred until the later
years of the related REMIC's term. Accordingly, on a present value basis, the
tax detriments occurring in the earlier years may substantially exceed the sum
of any tax benefits in the later years. As a result, the Residual
Certificateholders' after-tax rate of return may be zero or negative, even if
their pre-tax rate of return is positive.
See 'Certain Yield and Prepayment Considerations,' especially ' -- Additional
Yield Considerations Applicable Solely to the Residual Certificates' and
'Certain Federal Income Tax Consequences -- Special Tax Considerations
Applicable to Residual Certificates' herein.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see 'Certain Federal Income Tax
Consequences' herein and in the Prospectus.
Legal Investment................. The Senior Certificates and Class M-1 Certificates will constitute 'mortgage
related securities' for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ('SMMEA') for so long as they are rated in at least the second
highest rating category by one or more
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
nationally recognized statistical rating agencies. The Class M-2 Certificates
and Class M-3 Certificates will not constitute 'mortgage related securities'
for purposes of SMMEA. Institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities may be subject to restrictions on investment
in the Offered Certificates and should consult with their legal advisors. See
'Legal Investment' herein and 'Legal Investment Matters' in the Prospectus.
Ratings.......................... It is a condition to the issuance of the Offered Certificates (other than the
Principal Only Certificates and Stripped Interests Certificates) that they be
rated 'AAA' by each of Standard & Poor's Ratings Services ('Standard &
Poor's') and Fitch Investors Service, L.P. ('Fitch'). It is a condition to the
issuance of the Principal Only Certificates and Stripped Interests
Certificates that they be rated 'AAAr' by Standard & Poor's and 'AAA' by
Fitch. It is a condition to the issuance of the Class M-1 Certificates that
they be rated not lower than 'AA' by Standard & Poor's. It is a condition to
the issuance of the Class M-2 Certificates and Class M-3 Certificates that
they be rated not lower than 'A' and 'BBB,' respectively, by Fitch. 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 Mortgage Loans, or the corresponding effect on yield to investors. The
ratings of the Stripped Interests Certificates do not address the possibility
that the holders of such Certificates may fail to fully recover their initial
investments. See 'Certain Yield and Prepayment Considerations' and 'Ratings'
herein and 'Yield Considerations' in the Prospectus.
</TABLE>
S-18
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date, after deducting payments
of principal due on such date, of $453,612,335. The Mortgage Pool will consist
of conventional, fixed-rate, fully-amortizing, level monthly payment first
Mortgage Loans with terms to maturity of not more than 30 years from the date of
origination or modification. With respect to Mortgage Loans which have been
modified, references herein to the date of origination shall be deemed to be the
date of the most recent modification. All percentages of the Mortgage Loans
described herein are approximate percentages (except as otherwise indicated) by
aggregate principal balance as of the Cut-off Date.
All of the Mortgage Loans were purchased by the Company through its
affiliate Residential Funding from Unaffiliated Sellers as described herein and
in the Prospectus, except in the case of 0.4% of the Mortgage Loans, which were
purchased by the Company through its affiliate Residential Funding from GMAC
Mortgage Corporation of PA (which is an affiliate of the Company). Approximately
18.1% of the Mortgage Loans were purchased from, and are being subserviced by,
Chase Manhattan Mortgage Corporation, an Unaffiliated Seller. Approximately
16.2% of the Mortgage Loans were purchased from Chemical Bank, an Unaffiliated
Seller. Approximately 15.9% of the Mortgage Loans were purchased from, and are
being subserviced by, Countrywide Funding Corporation, an Unaffiliated Seller.
Except as set forth above, no Unaffiliated Seller sold more than 6.6% of the
Mortgage Loans to Residential Funding. 44.2% of the Mortgage Loans are being or
will be subserviced by GMAC Mortgage Corporation of PA.
Pursuant to the terms of the Pooling and Servicing Agreement, the Company
will assign the representations and warranties made by the related Sellers of
the Mortgage Loans to the Trustee for the benefit of the Certificateholders and
will also make certain limited representations and warranties regarding the
Mortgage Loans as of the date of issuance of the Certificates. To the best of
the Company's knowledge, none of the Mortgage Loans were sold to Residential
Funding by Unaffiliated Sellers that are institutions which are currently under
the control of the Resolution Trust Corporation or otherwise in receivership or
conservatorship or involved in other insolvency or bankruptcy proceedings, or
are no longer in existence. To the extent that any Seller of the Mortgage Loans
does not repurchase a Mortgage Loan in the event of a breach of its
representations and warranties with respect to such Mortgage Loan, neither the
Company nor Residential Funding will be required to repurchase such Mortgage
Loan unless such breach also constitutes a breach of one of the Company's or
Residential Funding's representations and warranties with respect to such
Mortgage Loan and such breach materially and adversely affects the interests of
the Certificateholders in any such Mortgage Loan. In addition, neither the
Company nor Residential Funding will be required to repurchase any Mortgage Loan
in the event of a breach of its representations and warranties with respect to
such Mortgage Loan if the substance of any such breach also constitutes fraud in
the origination of such affected Mortgage Loan. A limited amount of losses on
Mortgage Loans as to which there was fraud in the origination of such Mortgage
Loans will be covered by the Subordination (as defined herein) provided by the
Class M Certificates and Class B Certificates as described herein under
'Description of the Certificates -- Allocation of Losses; Subordination.'
None of the Mortgage Loans will have been originated prior to April 29,
1987 or will have a maturity date later than August 1, 2025. No Mortgage Loan
will have a remaining term to maturity as of the Cut-off Date of less than 155
months. The weighted average remaining term to maturity of the Mortgage Loans as
of the Cut-off Date will be approximately 358 months. The weighted average
original term to maturity of the Mortgage Loans as of the Cut-off Date will be
approximately 359 months.
As of the Cut-off Date, no Mortgage Loan will be one month or more
delinquent in payment of principal and interest.
Approximately 0.5% of the Mortgage Loans will be Buydown Mortgage Loans.
No Mortgage Loan provides for deferred interest or negative amortization.
S-19
<PAGE>
Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of the Cut-off Date (except as otherwise indicated). All
percentages of the Mortgage Loans are approximate percentages (except as
otherwise indicated) by aggregate principal balance as of the Cut-off Date.
Unless otherwise specified, all principal balances of the Mortgage Loans are as
of the Cut-off Date and are rounded to the nearest dollar.
MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
---------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
6.750 - 6.874............................................... 1 $ 229,802 0.05%
6.875 - 6.999............................................... 1 490,786 0.11
7.000 - 7.124............................................... 1 379,914 0.08
7.125 - 7.249............................................... 1 299,760 0.07
7.250 - 7.374............................................... 4 867,153 0.19
7.375 - 7.499............................................... 14 5,422,290 1.20
7.500 - 7.624............................................... 25 8,116,801 1.79
7.625 - 7.749............................................... 58 19,353,426 4.27
7.750 - 7.874............................................... 65 20,434,030 4.50
7.875 - 7.999............................................... 160 50,252,960 11.08
8.000 - 8.124............................................... 154 45,888,948 10.12
8.125 - 8.249............................................... 140 43,437,139 9.58
8.250 - 8.374............................................... 185 54,845,173 12.09
8.375 - 8.499............................................... 164 46,502,910 10.25
8.500 - 8.624............................................... 173 47,731,372 10.52
8.625 - 8.749............................................... 93 26,843,167 5.92
8.750 - 8.874............................................... 87 22,945,252 5.06
8.875 - 8.999............................................... 46 13,537,543 2.98
9.000 - 9.124............................................... 48 11,781,015 2.60
9.125 - 9.249............................................... 29 7,207,144 1.59
9.250 - 9.374............................................... 19 4,039,653 0.89
9.375 - 9.499............................................... 19 5,040,689 1.11
9.500 - 9.624............................................... 19 4,078,168 0.90
9.625 - 9.749............................................... 20 3,918,465 0.86
9.750 - 9.874............................................... 13 3,269,338 0.72
9.875 - 9.999............................................... 11 3,146,586 0.69
10.000 - 10.124............................................... 2 470,976 0.10
10.125 - 10.249............................................... 1 239,687 0.05
10.250 - 10.374............................................... 2 516,904 0.11
10.375 - 10.499............................................... 2 379,467 0.08
10.500 - 10.624............................................... 3 692,727 0.15
10.625 - 10.749............................................... 2 490,375 0.11
10.750 - 10.874............................................... 2 484,447 0.11
11.375 - 11.499............................................... 1 278,269 0.06
------ ----------------- -------------
Total.................................................. 1,565 $ 453,612,335 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of the Mortgage
Loans will be approximately 8.3208% per annum.
S-20
<PAGE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE NUMBER OF PERCENT OF
LOAN BALANCE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
--------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
$ 0 - 100,000......................................... 98 $ 6,655,539 1.47%
100,001 - 200,000......................................... 128 18,648,716 4.11
200,001 - 300,000......................................... 822 205,139,632 45.22
300,001 - 400,000......................................... 293 101,466,575 22.37
400,001 - 500,000......................................... 116 52,616,034 11.60
500,001 - 600,000......................................... 55 30,334,304 6.69
600,001 - 700,000......................................... 34 21,865,197 4.82
700,001 - 800,000......................................... 6 4,563,097 1.01
800,001 - 900,000......................................... 5 4,323,458 0.95
900,001 - 1,000,000........................................ 7 6,849,780 1.51
1,100,001 - 1,200,000........................................ 1 1,150,000 0.25
------- ----------------- -------------
Total.................................................. 1,565 $ 453,612,335 100.00%
------- ----------------- -------------
------- ----------------- -------------
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the
Mortgage Loans will be approximately $289,848.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
ORIGINAL NUMBER OF PERCENT OF
LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
-------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
0.01 - 50.00................................................. 77 $ 19,521,834 4.30%
50.01 - 55.00................................................. 34 8,233,753 1.82
55.01 - 60.00................................................. 54 15,721,221 3.47
60.01 - 65.00................................................. 72 23,941,009 5.28
65.01 - 70.00................................................. 162 43,341,351 9.55
70.01 - 75.00................................................. 228 67,945,047 14.98
75.01 - 80.00................................................. 569 180,365,085 39.76
80.01 - 85.00................................................. 24 6,876,806 1.52
85.01 - 90.00................................................. 246 64,340,922 14.18
90.01 - 95.00................................................. 99 23,325,308 5.14
------ ----------------- -------------
Total.................................................. 1,565 $ 453,612,335 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will be approximately 76.27%.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
STATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
-------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
California.................................................... 715 $ 226,196,753 49.87%
New York...................................................... 80 20,969,482 4.62
Texas......................................................... 80 18,618,804 4.10
Massachusetts................................................. 56 16,680,504 3.68
New Jersey.................................................... 56 16,431,657 3.62
Florida....................................................... 68 14,209,966 3.13
Other(1)...................................................... 510 140,505,170 30.97
------ ----------------- -------------
Total.................................................. 1,565 $ 453,612,335 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
------------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
S-21
<PAGE>
No more than 0.8% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than 0.5%
of the Mortgage Loans will be secured by Mortgaged Properties located in any one
zip code area outside California.
MORTGAGE LOAN PURPOSE
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
-------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Purchase...................................................... 1,077 $ 300,306,506 66.20%
Rate/Term Refinance........................................... 358 115,561,690 25.48
Equity Refinance.............................................. 130 37,744,139 8.32
------ ----------------- -------------
Total.................................................. 1,565 $ 453,612,335 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Mortgage Loans will be 73.53%. The weighted average Loan-to-Value
Ratio at origination of equity refinance Mortgage Loans will be 67.95%.
MORTGAGE LOAN DOCUMENTATION TYPES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
-------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Full Documentation............................................ 1,297 $ 398,627,575 87.88%
Reduced Documentation......................................... 268 54,984,759 12.12
------ ----------------- -------------
Total.................................................. 1,565 $ 453,612,335 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans which were underwritten under a reduced loan documentation program will be
65.40%. No more than 38.3% of such reduced loan documentation Mortgage Loans
will be secured by Mortgaged Properties located in California.
OCCUPANCY TYPES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
-------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Primary Residence............................................. 1,536 $ 446,812,593 98.50%
Second/Vacation............................................... 29 6,799,742 1.50
Non Owner-occupied............................................ 0 0 0.00
------ ----------------- -------------
Total.................................................. 1,565 $ 453,612,335 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
-------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Single-family detached........................................ 1,231 $ 361,777,902 79.75%
Planned Unit Developments (detached).......................... 232 67,218,759 14.82
Two- to four-family units..................................... 11 2,491,223 0.55
Condo Low-Rise (less than 5 stories).......................... 51 11,101,560 2.45
Condo Mid-Rise (5 to 8 stories)............................... 1 352,000 0.08
Condo High-Rise (9 stories or more)........................... 4 862,875 0.19
Townhouse..................................................... 4 1,057,502 0.23
Planned Unit Developments (attached).......................... 25 7,086,917 1.56
Cooperative Units............................................. 6 1,663,596 0.37
------ ----------------- -------------
Total.................................................. 1,565 $ 453,612,335 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
Four Mortgage Loans, representing approximately 0.01% of the Mortgage
Loans, were underwritten under a reduced loan documentation program requiring no
income and no asset verification.
S-22
<PAGE>
Certain aspects of the Cooperative Loans included in the Mortgage Pool
differ from those of other types of Mortgage Loans. See 'Certain Legal Aspects
of Mortgage Loans and Related Matters -- Cooperative Loans' in the Prospectus.
NET MORTGAGE RATES OF DISCOUNT MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NET MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
-------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
6.420......................................................... 1 $ 229,802 0.05%
6.620......................................................... 1 490,786 0.11
6.800......................................................... 1 379,914 0.08
6.845......................................................... 1 299,760 0.07
6.920......................................................... 2 525,000 0.12
6.970......................................................... 1 117,825 0.03
7.045......................................................... 4 2,025,019 0.45
7.060......................................................... 1 469,643 0.10
7.070......................................................... 2 766,370 0.17
7.095......................................................... 2 442,398 0.10
7.125......................................................... 1 512,500 0.11
7.145......................................................... 1 224,328 0.05
7.170......................................................... 12 4,029,306 0.89
7.195......................................................... 1 355,730 0.08
7.220......................................................... 6 2,084,119 0.46
7.245......................................................... 4 1,112,629 0.25
7.265......................................................... 1 388,000 0.09
7.295......................................................... 27 10,253,120 2.26
7.300......................................................... 2 742,120 0.16
7.320......................................................... 2 778,106 0.17
7.345......................................................... 21 6,051,578 1.34
7.365......................................................... 1 528,000 0.12
7.370......................................................... 1 312,000 0.07
7.395......................................................... 3 584,447 0.13
7.420......................................................... 17 5,641,753 1.24
7.425......................................................... 1 233,410 0.05
7.445......................................................... 4 1,019,848 0.22
7.470......................................................... 30 9,064,998 2.00
7.495......................................................... 2 603,806 0.13
------ ----------------- ------
Total.................................................. 153 $50,266,314 11.08%
------ ----------------- ------
------ ----------------- ------
</TABLE>
As of the Cut-off Date, the weighted average of the Discount Fractions of
the Discount Mortgage Loans will be approximately 2.7%.
PRIMARY MORTGAGE INSURANCE AND PRIMARY HAZARD INSURANCE
Each Mortgage Loan is required to be covered by a standard hazard insurance
policy (a 'Primary Hazard Insurance Policy'). In addition, to the best of the
Company's knowledge, except with respect to one Mortgage Loan representing
approximately 0.1% of the Mortgage Loans, each Mortgage Loan with a
Loan-to-Value Ratio at origination in excess of 80% will be insured by a primary
mortgage insurance policy (a 'Primary Insurance Policy') covering the amount of
such Mortgage Loan in excess of 75% of the value of the related Mortgaged
Property used in determining such Loan-to-Value Ratio (the 'Appraised Value').
Substantially all of such Primary Insurance Policies were issued by General
Electric Mortgage Insurance Corporation, PMI Mortgage Insurance Company,
Republic Mortgage Insurance Company, Mortgage Guaranty Insurance Corporation,
United Guaranty Residential Insurance Company, Commonwealth Mortgage Assurance
Company or Amerin Guaranty Corporation (collectively, the 'Primary Insurers').
Each Primary Insurer has a claims paying ability currently
S-23
<PAGE>
acceptable to the Rating Agencies that have been requested to rate the
Certificates; however, there is no assurance as to the actual ability of any
Primary Insurer to pay claims. See 'Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder' in the Prospectus.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Offered
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Company deems such removal
necessary or appropriate. A limited number of other mortgage loans may be added
to the Mortgage Pool prior to the issuance of the Offered Certificates. The
Company believes that the information set forth herein will be substantially
representative of the characteristics of the Mortgage Pool as it will be
constituted at the time the Offered Certificates are issued although the range
of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the Offered
Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Offered Certificates. In the event Mortgage Loans
are removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K.
S-24
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1995-S11 Mortgage Pass-Through Certificates will include the
following twenty-one classes (the 'Senior Certificates'): (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, Class A-6 Certificates, Class A-8 Certificates and Class A-9
Certificates; (ii) Class A-7 Certificates, Class A-10 Certificates, Class A-11
Certificates, Class A-12 Certificates, Class A-13 Certificates and Class A-14
Certificates (collectively, the 'Super Senior I Certificates'); (iii) Class A-5
Certificates, Class A-15 Certificates and Class A-19 Certificates (collectively,
the 'Super Senior II Certificates'); (iv) Class A-16 Certificates (the 'Senior
Support Certificates'); (v) Class A-17 Certificates (the 'Principal Only
Certificates'); (vi) Class A-18 Certificates (the 'Stripped Interests
Certificates') and (vii) Class R-I Certificates and Class R-II Certificates
(together, the 'Residual Certificates'). The Super Senior I Certificates and
Super Senior II Certificates are collectively referred to herein as the 'Super
Senior Certificates.' In addition to the Senior Certificates, the Series
1995-S11 Mortgage Pass-Through Certificates will also include six classes of
subordinate certificates which are designated as the Class M-1 Certificates,
Class M-2 Certificates and Class M-3 Certificates (collectively, the 'Class M
Certificates') and the Class B-1 Certificates, Class B-2 Certificates and Class
B-3 Certificates (collectively, the 'Class B Certificates,' and together with
the Class M Certificates and Senior Certificates, the 'Certificates'). Only the
Senior Certificates and Class M Certificates (the 'Offered Certificates') are
offered hereby.
The Certificates will evidence the entire beneficial ownership interest in
the Trust Fund. The Trust Fund will consist of: (i) the Mortgage Loans; (ii)
such assets as from time to time are identified as deposited in respect of the
Mortgage Loans in the Custodial Account and in the Certificate Account and
belonging to the Trust Fund; (iii) property acquired by foreclosure of such
Mortgage Loans or deed in lieu of foreclosure; and (iv) any applicable Primary
Insurance Policies and Primary Hazard Insurance Policies and all proceeds
thereof.
The Principal Only Certificates will be entitled to payments based on the
Discount Fraction of the Discount Mortgage Loans. A Discount Mortgage Loan is
any Mortgage Loan with a Net Mortgage Rate less than 7.50% per annum. With
respect to each Discount Mortgage Loan, the Discount Fraction is equal to a
fraction, expressed as a percentage, the numerator of which is 7.50% minus the
Net Mortgage Rate for such Discount Mortgage Loan and the denominator of which
is 7.50%. The Mortgage Loans other than the Discount Mortgage Loans are referred
to herein as the Non-Discount Mortgage Loans.
The Senior Certificates other than the Stripped Interests, Principal Only
and Residual Certificates (the 'DTC Registered Certificates') will be issued,
maintained and transferred on the book-entry records of The Depository Trust
Company ('DTC') and its Participants (as defined in the Prospectus). The DTC
Registered Certificates, other than the Super Senior I Certificates will be
issued in minimum denominations of $25,000 and integral multiples of $1 in
excess thereof. The Super Senior I Certificates will be issued in minimum
denominations of $1,000 and integral multiples of $1,000 in excess thereof. The
Stripped Interests Certificates and Residual Certificates will be issued in
registered, certificated form in minimum denominations of a 20% Percentage
Interest, except, in the case of the Residual Certificates, as otherwise set
forth herein under 'Certain Federal Income Tax Consequences.' The Principal Only
Certificates and the Class M-1 Certificates will be issued in registered,
certificated form in minimum denominations of $25,000 and integral multiples of
$1,000 in excess thereof, except for one Principal Only Certificate and one
Class M-1 Certificate evidencing the sum of an authorized denomination thereof
and the remainder of the aggregate initial Certificate Principal Balance of such
class of Certificates. The Class M-2 Certificates and Class M-3 Certificates
will be issued in registered, certificated form, in minimum denominations of
$250,000 and integral multiples of $1,000 in excess thereof, except for one
Class M-2 Certificate and one Class M-3 Certificate evidencing the sum of an
authorized denomination thereof and the remainder of the aggregate initial
Certificate Principal Balance of such class of Certificates.
The DTC Registered Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. The Company has been
informed by DTC that DTC's nominee will be
S-25
<PAGE>
Cede & Co. ('Cede'). No person acquiring an interest in the DTC Registered
Certificates (a 'Beneficial Owner') will be entitled to receive a certificate
representing such person's interest (a 'Definitive Certificate'), except as set
forth below under ' -- Book-Entry Registration of Certain of the Senior
Certificates -- Definitive Certificates.' Unless and until Definitive
Certificates are issued for the DTC Registered Certificates under the limited
circumstances described herein, all references to actions by Certificateholders
with respect to the DTC Registered Certificates shall refer to actions taken by
DTC upon instructions from its Participants, and all references herein to
distributions, notices, reports and statements to Certificateholders with
respect to the DTC Registered Certificates shall refer to distributions,
notices, reports and statements to DTC or Cede, as the registered holder of the
DTC Registered Certificates, for distribution to Beneficial Owners by DTC in
accordance with DTC procedures.
BOOK-ENTRY REGISTRATION OF CERTAIN OF THE SENIOR CERTIFICATES
General. Beneficial Owners that are not Participants or Intermediaries (as
defined in the Prospectus) but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, the related DTC Registered Certificates may
do so only through Participants and Intermediaries. In addition, Beneficial
Owners will receive all distributions of principal of and interest on the
related DTC Registered Certificates from the Paying Agent (as defined in the
Prospectus) through DTC and Participants. Accordingly, Beneficial Owners may
experience delays in their receipt of payments. Unless and until Definitive
Certificates are issued for the related DTC Registered Certificates, it is
anticipated that the only registered Certificateholder of such DTC Registered
Certificates will be Cede, as nominee of DTC. Beneficial Owners will not be
recognized by the Trustee or the Master Servicer as Certificateholders, as such
term is used in the Pooling and Servicing Agreement, and Beneficial Owners will
be permitted to receive information furnished to Certificateholders and to
exercise the rights of Certificateholders only indirectly through DTC, its
Participants and Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the 'Rules'), DTC is required to make book-entry transfers of
DTC Registered Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, such DTC Registered
Certificates. Participants and Intermediaries with which Beneficial Owners have
accounts with respect to such DTC Registered Certificates similarly are required
to make book-entry transfers and receive and transmit such distributions on
behalf of their respective Beneficial Owners. Accordingly, although Beneficial
Owners will not possess physical certificates evidencing their interests in the
DTC Registered Certificates, the Rules provide a mechanism by which Beneficial
Owners, through their Participants and Intermediaries, will receive
distributions and will be able to transfer their interests in the DTC Registered
Certificates.
None of the Company, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC Registered Certificates
held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
Definitive Certificates. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
'Description of the Certificates -- Form of Certificates.'
Upon the occurrence of an event described in the Prospectus in the third
paragraph under 'Description of the Certificates -- Form of Certificates,' the
Trustee is required to notify, through DTC, Participants who have ownership of
DTC Registered Certificates as indicated on the records of DTC of the
availability of Definitive Certificates for their DTC Registered Certificates.
Upon surrender by DTC of the definitive certificates representing the DTC
Registered Certificates and upon receipt of instructions from DTC for
re-registration, the Trustee will reissue the DTC Registered Certificates as
Definitive Certificates issued in the respective principal amounts owned by
individual Beneficial Owners, and thereafter the Trustee and the Master Servicer
will recognize the holders of such Definitive Certificates as Certificateholders
under the Pooling and Servicing Agreement.
S-26
<PAGE>
For additional information regarding DTC and the DTC Registered
Certificates, see 'Description of the Certificates -- Form of Certificates' in
the Prospectus.
AVAILABLE DISTRIBUTION AMOUNT
The 'Available Distribution Amount' for any Distribution Date is equal to
(i) the aggregate amount of scheduled payments on the Mortgage Loans due on the
related Due Date and received on or prior to the related Determination Date,
after deduction of the related master servicing fees and any subservicing fees
(collectively, the 'Servicing Fees'), (ii) certain unscheduled payments,
including Mortgagor prepayments on the Mortgage Loans, Insurance Proceeds,
Liquidation Proceeds and proceeds from repurchases of and substitutions for the
Mortgage Loans occurring during the preceding calendar month and (iii) all
Advances made for such Distribution Date, in each case net of amounts
reimbursable therefrom to the Master Servicer and any Subservicer. In addition
to the foregoing amounts, with respect to unscheduled collections, not including
Mortgagor prepayments, the Master Servicer may elect to treat such amounts as
included in the Available Distribution Amount for the Distribution Date in the
month of receipt, but is not obligated to do so. As described herein under
' -- Principal Distributions on the Senior Certificates,' any such amount with
respect to which such election is so made shall be treated as having been
received in the preceding calendar month for the purposes of calculating the
amount of principal and interest distributions to any class of Certificates.
With respect to any Distribution Date, (i) the Due Date is the first day of the
month in which such Distribution Date occurs and (ii) the Determination Date is
the 20th day of the month in which such Distribution Date occurs or, if such day
is not a business day, the immediately succeeding business day.
INTEREST DISTRIBUTIONS
Holders of each class of Senior Certificates (other than the Principal Only
Certificates) will be entitled to receive interest distributions in an amount
equal to the Accrued Certificate Interest on such class on each Distribution
Date, to the extent of the Available Distribution Amount for such Distribution
Date, subject to the priorities described herein with respect to the Super
Senior Certificates and Senior Support Certificates after the Credit Support
Depletion Date. Holders of each class of Class M Certificates will be entitled
to receive interest distributions in an amount equal to the Accrued Certificate
Interest on such class on each Distribution Date, to the extent of the Available
Distribution Amount for such Distribution Date after distributions of interest
and principal to the Senior Certificates, reimbursements for certain Advances to
the Master Servicer and distributions of interest and principal to any class of
Class M Certificates having a higher payment priority.
With respect to any Distribution Date, Accrued Certificate Interest will be
equal to (a) in the case of each class of Senior Certificates (other than the
Stripped Interests Certificates and Principal Only Certificates) and Class M
Certificates, one month's interest accrued on the Certificate Principal Balance
of the Certificates of such class at the related Pass-Through Rate on such class
for such Distribution Date and (b) in the case of the Stripped Interests
Certificates, one month's interest accrued on the related Notional Amount at the
Pass-Through Rate on such class for such Distribution Date in each case less
interest shortfalls, if any, allocated thereto for such Distribution Date to the
extent not covered with respect to the Senior Certificates by the Subordination
provided by the Class B Certificates and Class M Certificates and, solely with
respect to any class of Super Senior I Certificates, the related Reserve Fund
and, with respect to the Class M Certificates to the extent not covered by the
Subordination provided by the Class B Certificates and any class or classes of
Class M Certificates having a lower payment priority, including in each case (i)
any Prepayment Interest Shortfall (as defined below) to the extent not covered
by the Master Servicer as described below, (ii) the interest portions of
Realized Losses (including Special Hazard Losses in excess of the Special Hazard
Amount ('Excess Special Hazard Losses'), Fraud Losses in excess of the Fraud
Loss Amount ('Excess Fraud Losses'), Bankruptcy Losses in excess of the
Bankruptcy Loss Amount ('Excess Bankruptcy Losses') and losses occasioned by
war, civil insurrection, certain governmental actions, nuclear reaction and
certain other risks ('Extraordinary Losses')) not allocated through
Subordination, (iii) the interest portion of any Advances that were made with
respect to delinquencies that were ultimately determined to be Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary
Losses, and
S-27
<PAGE>
(iv) any other interest shortfalls not covered by Subordination, including
interest shortfalls relating to the Relief Act (as defined in the Prospectus) or
similar legislation or regulations, all allocated as described below. In the
case of each class of Class M Certificates, Accrued Certificate Interest on such
class will be further reduced by the allocation of the interest portion of
certain losses thereto, if any, as described below under ' -- Allocation of
Losses; Subordination.' Accrued Certificate Interest is calculated on the basis
of a 360-day year consisting of twelve 30-day months. The Principal Only
Certificates are not entitled to distributions of interest.
The Prepayment Interest Shortfall for any Distribution Date is equal to the
aggregate shortfall, if any, in collections of interest (adjusted to the related
Net Mortgage Rates) resulting from Mortgagor prepayments on the Mortgage Loans
during the preceding calendar month. Such shortfalls will result because
interest on prepayments in full is distributed only to the date of prepayment,
and because no interest is distributed on prepayments in part, as such
prepayments in part are applied to reduce the outstanding principal balance of
the related Mortgage Loans as of the Due Date in the month of prepayment.
However, with respect to any Distribution Date, any Prepayment Interest
Shortfalls resulting from prepayments in full during the preceding calendar
month will be offset by the Master Servicer, but only to the extent such
Prepayment Interest Shortfalls do not exceed an amount equal to the lesser of
(a) one-twelfth of 0.125% of the Stated Principal Balance (as defined herein) of
the Mortgage Loans immediately preceding such Distribution Date and (b) the sum
of the master servicing fee and reinvestment income received by the Master
Servicer on amounts payable with respect to such Distribution Date. Prepayment
Interest Shortfalls resulting from partial prepayments will not be offset by the
Master Servicer from master servicing compensation or otherwise. No assurance
can be given that the master servicing compensation available to cover
Prepayment Interest Shortfalls will be sufficient therefor. See 'Pooling and
Servicing Agreement -- Servicing and Other Compensation and Payment of Expenses'
herein.
A separate reserve fund will be established at the time of the issuance of
the Certificates for each class of Super Senior I Certificates (each, a 'Reserve
Fund') by a deposit into each such Reserve Fund by PaineWebber Incorporated of
approximately $12,500, $17,813, $7,663, $4,605, $6,645 and $14,075 relating to
the Class A-7, Class A-10, Class A-11, Class A-12, Class A-13 and Class A-14
Certificates, respectively. Each Reserve Fund will be in a separate account
maintained by the Trustee. Each Reserve Fund will be beneficially owned by
PaineWebber Incorporated and will not be an asset of the Trust Fund. A
withdrawal will be made on each Distribution Date from amounts on deposit in a
Reserve Fund, to the extent of funds remaining therein, only to cover any
interest shortfalls allocated to the related class of Super Senior I
Certificates that are not offset by Subordination or by the Master Servicer as
described above. Any amount remaining in a Reserve Fund on the Distribution Date
on which the Certificate Principal Balance of the related class of Super Senior
I Certificates is reduced to zero will be distributed to PaineWebber
Incorporated. No amounts in the Reserve Fund established for any class of Super
Senior I Certificates will be available to cover interest shortfalls for any
other class of Super Senior I Certificates.
If on any Distribution Date the Available Distribution Amount is less than
Accrued Certificate Interest on the Senior Certificates for such Distribution
Date, the shortfall will be allocated among the holders of all classes of Senior
Certificates (other than the Super Senior I Certificates to the extent covered
by the related Reserve Fund) in proportion to the respective amounts of Accrued
Certificate Interest for such Distribution Date on each such class, subject to
the priorities described herein with respect to the Super Senior Certificates
and Senior Support Certificates on or after the Credit Support Depletion Date.
In addition, the amount of any interest shortfalls that are covered by
Subordination (specifically, interest shortfalls not described in clauses (i)
through (iv) in the third preceding paragraph) will be unpaid Accrued
Certificate Interest and will be distributable (i) to holders of the
Certificates of such classes entitled to such amounts on subsequent Distribution
Dates and (ii) to the extent that any of the Reserve Funds disbursed amounts to
cover the shortfall described in the previous sentence, to such Reserve Funds,
in each case to the extent of available funds after interest distributions as
required herein. Such shortfalls could occur, for example, if delinquencies on
the Mortgage Loans were exceptionally high and were concentrated in a particular
month and Advances by the Master Servicer did not cover the shortfall. Any such
amounts so carried forward will not bear interest. Any interest
S-28
<PAGE>
shortfalls will not be offset by a reduction in the servicing compensation of
the Master Servicer or otherwise, except to the limited extent described in the
two preceding paragraphs.
The Pass-Through Rates on all classes of Offered Certificates (other than
the Principal Only Certificates, which are not entitled to distributions of
interest, and the Stripped Interests Certificates) are fixed and are set forth
on the cover hereof. The Pass-Through Rate on the Stripped Interests
Certificates on each Distribution Date will equal the weighted average, as of
the Due Date in the month preceding the month in which such Distribution Date
occurs, of the Pool Strip Rates on each of the Mortgage Loans in the Mortgage
Pool. The Pool Strip Rate on any Mortgage Loan is equal to the Net Mortgage Rate
thereon minus 7.50% (but not less than 0.00%). The Net Mortgage Rate on each
Mortgage Loan is equal to the Mortgage Rate thereon minus the Servicing Fee
Rate. The Pool Strip Rates on the Mortgage Loans range between 0% and 2.67%. The
initial Pass-Through Rate on the Stripped Interests Certificates is 0.5310% per
annum.
As described herein, the Accrued Certificate Interest allocable to each
class of Certificates (other than the Principal Only Certificates, which are not
entitled to any distributions in respect of interest, and the Stripped Interests
Certificates) is based on the Certificate Principal Balance thereof or, in the
case of the Stripped Interests Certificates, on the Notional Amount thereof. The
Certificate Principal Balance of any Offered Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof
reduced by the aggregate of (a) all amounts allocable to principal previously
distributed with respect to such Certificate and (b) any reductions in the
Certificate Principal Balance thereof deemed to have occurred in connection with
allocations of Realized Losses to such Certificate thereof, in the manner
described herein, provided that, after the Certificate Principal Balances of the
Class B Certificates have been reduced to zero, the Certificate Principal
Balance of any Certificate of the class of Class M Certificates outstanding with
the lowest payment priority shall equal the percentage interest evidenced
thereby times the excess, if any, of (a) the then aggregate Stated Principal
Balance of all of the Mortgage Loans over (b) the then aggregate Certificate
Principal Balance of all other classes of Certificates then outstanding. The
Notional Amount of the Stripped Interests Certificates as of any date of
determination will equal the aggregate Certificate Principal Balance of the
Certificates of all classes as of such date. Reference to the Notional Amount of
a Stripped Interests Certificate is solely for convenience in certain
calculations and does not represent the right to receive any distributions
allocable to principal.
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Except as provided below, holders of the Senior Certificates (other than
Stripped Interests Certificates, which are not entitled to receive any principal
distributions, and the Principal Only Certificates) will be entitled to receive
on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after the aggregate amount of Accrued Certificate
Interest to be distributed to the holders of the Senior Certificates for such
Distribution Date (the 'Senior Interest Distribution Amount') and the Principal
Only Distribution Amount (as defined below) are distributed, a distribution
allocable to principal equal to the sum of the following:
(i) the product of (A) the then-applicable Senior Percentage (as
defined below) and (B) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on the
Mortgage Loans (other than the related Discount Fraction of the
principal portion of such payments, with respect to each Discount
Mortgage Loan) due on the related Due Date, whether or not received on
or prior to the related Determination Date, less the principal portion
of Debt Service Reductions, as defined below, (other than the related
Discount Fraction of the principal portion of such Debt Service
Reductions with respect to each Discount Mortgage Loan) which together
with other Bankruptcy Losses are in excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of the repurchase of a
Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) (other than the related Discount
Fraction of the principal portion of such proceeds, with respect to each
S-29
<PAGE>
Discount Mortgage Loan) as required by the Pooling and Servicing
Agreement during the preceding calendar month; and
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month (other than full and
partial Principal Prepayments made by the respective Mortgagors and any
amounts received in connection with a Final Disposition (as defined
below) of a Mortgage Loan described in clause (ii) below), to the extent
applied as recoveries of principal (other than the related Discount
Fraction of the principal portion of such unscheduled collections, with
respect to each Discount Mortgage Loan);
(ii) in connection with the Final Disposition of a Mortgage Loan (x)
that occurred in the preceding calendar month and (y) that did not result
in any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses or Extraordinary Losses, an amount equal to the lesser of (a) the
then-applicable Adjusted Senior Percentage (as defined below) of the Stated
Principal Balance of such Mortgage Loan (other than the related Discount
Fraction of such Stated Principal Balance, with respect to a Discount
Mortgage Loan) and (b) the then-applicable Adjusted Senior Accelerated
Distribution Percentage (as defined below) of the related unscheduled
collections, including Insurance Proceeds and Liquidation Proceeds, to the
extent applied as recoveries of principal (in each case other than the
portion of such collections with respect to a Discount Mortgage Loan
included in clause (iii) of the definition of the 'Principal Only
Distribution Amount' below);
(iii) the then-applicable Adjusted Senior Accelerated Distribution
Percentage of the aggregate of all full and partial Principal Prepayments
made by the respective Mortgagors of the Mortgage Loans (other than the
related Discount Fraction of such Principal Prepayments, with respect to
each Discount Mortgage Loan) during the preceding calendar month;
(iv) any Excess Subordinate Principal Amount (as defined below) for
such Distribution Date;
(v) the Senior Support Certificates' pro rata share, based on the
Certificate Principal Balance thereof relative to the aggregate Certificate
Principal Balance of the Senior Support Certificates, Class M Certificates
and Class B Certificates of the unscheduled collections and Principal
Prepayments referred to in clauses (ii) and (iii) above, to the extent such
receipts are not payable to the other classes of Senior Certificates; and
(vi) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to clauses (i) through (iii) and (v) above) that
remain undistributed to the extent that any such amounts are not
attributable to Realized Losses which were allocated to the Class M
Certificates or Class B Certificates.
With respect to any Distribution Date, the lesser of (a) the balance of the
Available Distribution Amount remaining after the Senior Interest Distribution
Amount and the Principal Only Distribution Amount have been distributed and (b)
the sum of the amounts described in clauses (i) through (vi) of the immediately
preceding paragraph is hereinafter referred to as the 'Senior Principal
Distribution Amount.' With respect to any Distribution Date on which the
Certificate Principal Balance of the most subordinate class or classes of
Certificates then outstanding is to be reduced to zero and on which Realized
Losses are to be allocated to such class or classes, the 'Excess Subordinate
Principal Amount' is equal to the excess, if any, of (i) the amount that would
otherwise be distributable in respect of principal on such class or classes of
Certificates on such Distribution Date, over (ii) the excess, if any, of the
aggregate of the Certificate Principal Balance of such class or classes of
Certificates immediately prior to such Distribution Date over the aggregate
amount of Realized Losses to be allocated to such class or classes of
Certificates on such Distribution Date, as reduced by any such amount that is
included in clause (v) of the definition of 'Principal Only Distribution
Amount.'
Holders of the Principal Only Certificates will be entitled to receive on
each Distribution Date, to the extent of the excess of the Available
Distribution Amount over the Senior Interest Distribution Amount, a distribution
allocable to principal equal to the Principal Only Distribution Amount. The
'Principal Only Distribution Amount' is equal to the aggregate of:
(i) the related Discount Fraction of the principal portion of the
scheduled monthly payment on each Discount Mortgage Loan due on the related
Due Date, whether or not received on or prior to
S-30
<PAGE>
the related Determination Date, less the Discount Fraction of the principal
portion of any related Debt Service Reductions which together with other
Bankruptcy Losses are in excess of the Bankruptcy Amount;
(ii) the related Discount Fraction of the principal portion of all
unscheduled collections on each Discount Mortgage Loan received during the
preceding calendar month (other than amounts received in connection with a
Final Disposition of a Discount Mortgage Loan described in clause (iii)
below), including full and partial Principal Prepayments, repurchases of
Discount Mortgage Loans (or, in the case of a substitution, certain amounts
representing a principal adjustment) as required by the Pooling and
Servicing Agreement, Liquidation Proceeds and Insurance Proceeds, to the
extent applied as recoveries of principal;
(iii) in connection with the Final Disposition of a Discount Mortgage
Loan that did not result in any Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses, an amount equal
to the lesser of (a) the related Discount Fraction of the Stated Principal
Balance of such Discount Mortgage Loan immediately prior to such
Distribution Date and (b) the aggregate amount of the collections on such
Discount Mortgage Loan to the extent applied as recoveries of principal;
(iv) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to clauses (i) through (iii) above) that remain
undistributed; and
(v) with respect to each Final Disposition of a Discount Mortgage Loan
in connection with such Distribution Date or any prior Distribution Date,
to the extent that the amount included under clause (iii) above for such
Distribution Date was less than the amount described in (a) under clause
(iii) (each such shortfall, a 'Principal Only Collection Shortfall'), an
amount equal to the aggregate of the Principal Only Collection Shortfalls
until paid in full; provided, that distributions pursuant to this clause
(v) shall only be made to the extent of Eligible Funds (as described below)
on any Distribution Date.
A 'Final Disposition' of a defaulted Mortgage Loan is deemed to have
occurred upon a determination by the Master Servicer that it has received all
Insurance Proceeds, Liquidation Proceeds and other payments or cash recoveries
which the Master Servicer reasonably and in good faith expects to be finally
recoverable with respect to such Mortgage Loan.
'Eligible Funds' on any Distribution Date means the portion, if any, of the
Available Distribution Amount remaining after reduction by the sum of the Senior
Interest Distribution Amount, the Senior Principal Distribution Amount
(determined without regard to clause (iv) thereof), the Principal Only
Distribution Amount (determined without regard to clause (v) thereof) and the
aggregate amount of Accrued Certificate Interest on the Class M, Class B-1 and
Class B-2 Certificates. Notwithstanding any other provision hereof, any
distribution in respect of any Principal Only Collection Shortfall, to the
extent not covered by any amounts otherwise distributable to the Class B-3
Certificates, shall result in a reduction of the amount of principal
distributions on such Distribution Date on (i) first, the Class B-1 Certificates
and Class B-2 Certificates, and (ii) second, the Class M Certificates, in each
case in reverse order of their payment priority.
The 'Stated Principal Balance' of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts allocable to
principal that have been distributed to Certificateholders with respect to such
Mortgage Loan on or before such date, and as further reduced to the extent that
any Realized Loss thereon has been allocated to one or more classes of
Certificates on or before the date of determination.
The Senior Percentage, which initially will equal approximately 93.98% and
will in no event exceed 100%, will be recalculated for each Distribution Date to
be the percentage equal to the aggregate Certificate Principal Balance of the
Senior Certificates (other than the Principal Only Certificates) immediately
prior to such Distribution Date divided by the aggregate Stated Principal
Balance of all of the Mortgage Loans (other than the Discount Fraction of the
Discount Mortgage Loans) immediately prior to such Distribution Date. The
Subordinate Percentage as of any date of determination is equal to 100% minus
the Senior Percentage as of such date. The Adjusted Senior Percentage, which
will initially
S-31
<PAGE>
equal approximately 86.71% and will in no event exceed 100%, will be
recalculated for each Distribution Date to be the percentage equal to the
aggregate Certificate Principal Balance of the Senior Certificates (other than
the Principal Only Certificates and Senior Support Certificates) immediately
prior to such Distribution Date divided by the aggregate Stated Principal
Balance of all of the Mortgage Loans (other than the Discount Fraction of the
Discount Mortgage Loans) immediately prior to such Distribution Date. The Senior
Support Percentage, which will initially equal approximately 7.27% and will in
no event exceed 100%, will be recalculated for each Distribution Date to be the
percentage equal to the aggregate Certificate Principal Balance of the Senior
Support Certificates immediately prior to such Distribution Date divided by the
aggregate Stated Principal Balance of all of the Mortgage Loans (other than the
Discount Fraction of the Discount Mortgage Loans) immediately prior to such
Distribution Date. Each of the initial Senior Percentage, Adjusted Senior
Percentage and Senior Support Percentage is less than the initial percentage
interest in the Trust Fund evidenced by the related classes of Senior
Certificates (including the Principal Only Certificates) in the aggregate,
because each such percentage is calculated without regard to either the
Certificate Principal Balance of the Principal Only Certificates or the Discount
Fraction of the Stated Principal Balance of each Discount Mortgage Loan.
The Adjusted Senior Accelerated Distribution Percentage for any
Distribution Date occurring prior to the Distribution Date in September 2000
will equal 100%. The Adjusted Senior Accelerated Distribution Percentage for any
Distribution Date occurring after the first five years following the Delivery
Date will be as follows: for any Distribution Date during the sixth year after
the Delivery Date, the Adjusted Senior Percentage for such Distribution Date
plus 70% of the sum of the Subordinate Percentage and the Senior Support
Percentage for such Distribution Date; for any Distribution Date during the
seventh year after the Delivery Date, the Adjusted Senior Percentage for such
Distribution Date plus 60% of the sum of the Subordinate Percentage and the
Senior Support Percentage for such Distribution Date; for any Distribution Date
during the eighth year after the Delivery Date, the Adjusted Senior Percentage
for such Distribution Date plus 40% of the sum of the Subordinate Percentage and
the Senior Support Percentage for such Distribution Date; for any Distribution
Date during the ninth year after the Delivery Date, the Adjusted Senior
Percentage for such Distribution Date plus 20% of the sum of the Subordinate
Percentage and the Senior Support Percentage for such Distribution Date; and for
any Distribution Date thereafter, the Adjusted Senior Percentage for such
Distribution Date (unless on any such Distribution Date the Adjusted Senior
Percentage exceeds the initial Adjusted Senior Percentage, in which case the
Adjusted Senior Accelerated Distribution Percentage for such Distribution Date
will once again equal 100%). Any scheduled reduction to the Adjusted Senior
Accelerated Distribution Percentage described above shall not be made as of any
Distribution Date unless either (a)(i) the outstanding principal balance of
Mortgage Loans delinquent 60 days or more averaged over the last six months, as
a percentage of the aggregate outstanding principal balance of all Mortgage
Loans averaged over the last six months, does not exceed 2% and (ii) Realized
Losses on the Mortgage Loans to date for such Distribution Date, if occurring
during the sixth, seventh, eighth, ninth or tenth year (or any year thereafter)
after the Delivery Date, are less than 30%, 35%, 40%, 45% or 50%, respectively,
of the sum of the initial Certificate Principal Balances of the Class M
Certificates and Class B Certificates or (b)(i) the outstanding principal
balance of Mortgage Loans delinquent 60 days or more averaged over the last six
months, as a percentage of the aggregate outstanding principal balance of all
Mortgage Loans averaged over the last six months, does not exceed 4% and (ii)
Realized Losses on the Mortgage Loans to date for such Distribution Date are
less than 10% of the sum of the initial Certificate Principal Balances of the
Class M Certificates and Class B Certificates. Notwithstanding the foregoing,
upon reduction of the Certificate Principal Balances of the Senior Certificates
(other than the Senior Support Certificates and Principal Only Certificates) to
zero, the Adjusted Senior Accelerated Distribution Percentage will equal 0%. See
'Subordination' in the Prospectus.
Distributions of principal on the Senior Certificates (other than the
Stripped Interests Certificates) on each Distribution Date will be made (after
distribution of the Senior Interest Distribution Amount as described under
'Interest Distributions'), as follows:
(a) Prior to the occurrence of the Credit Support Depletion Date (as
defined below),
S-32
<PAGE>
(i) the Principal Only Distribution Amount shall be distributed to
the Principal Only Certificates until the Certificate Principal Balance
thereof is reduced to zero;
(ii) an amount equal to the sum of (A) the Senior Support
Certificates' pro rata portion, based on the Certificate Principal
Balance thereof relative to the aggregate Certificate Principal Balance
of the Senior Certificates (other than the Principal Only Certificates),
of the aggregate of the amounts described in clauses (i), (iv) and (vi)
of the first paragraph under 'Principal Distributions on the Senior
Certificates' and (B) the amount described in clause (v) of the first
paragraph under 'Principal Distributions on the Senior Certificates'
shall be distributed to the Senior Support Certificates, provided that
if the Senior Principal Distribution Amount set forth in clauses (i),
(ii), (iii), (iv), (v) and (vi) of the first paragraph under 'Principal
Distributions on the Senior Certificates' is more than the balance of
the Available Distribution Amount remaining after the Senior Interest
Distribution Amount and the Principal Only Distribution Amount have been
distributed, the amount paid to the Senior Support Certificates pursuant
to this clause (ii) shall be reduced by an amount equal to the Senior
Support Certificates' pro rata share of such difference;
(iii) the balance of the Senior Principal Distribution Amount
remaining after the distribution described in clause (ii) above shall be
distributed to the Class R-I Certificates and Class R-II Certificates,
concurrently, with the amount to be distributed allocated to the Class
R-I Certificates and Class R-II Certificates on a pro rata basis in
proportion to their respective Certificate Principal Balances, in
reduction of the Certificate Principal Balances of such Certificates,
until their respective Certificate Principal Balances are reduced to
zero;
(iv) the balance, if any, of the Senior Principal Distribution
Amount remaining after the distributions described in clauses (ii) and
(iii) above shall be distributed as follows:
(A) first, approximately 15.957515%, 45.095925%, 20.589082%,
11.971895% and 6.385583% of such amount concurrently to the Class
A-1, Class A-2, Class A-3, Class A-4 and Class A-6 Certificates,
respectively, until the Certificate Principal Balance of the Class
A-1 Certificates has been reduced to zero;
(B) second, approximately 45.095925%, 20.589082%, 11.971895%,
15.957515% and 6.385583% of the balance, if any, remaining after the
distributions described in clause (iv)(A) above concurrently to the
Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6
Certificates, respectively, until the Certificate Principal Balances
of the Class A-2, Class A-3 and Class A-4 Certificates have been
reduced to zero;
(C) third, approximately 6.901500%, 5.701239%, 12.902805%,
6.001305% and 68.493151% of the balance, if any, remaining after the
distributions described in clauses (iv)(A) and (B) above concurrently
to the Class A-5, Class A-6, Class A-9, Class A-12 and Class A-15
Certificates, respectively, until the Certificate Principal Balance
of the Class A-12 Certificates has been reduced to zero;
(D) fourth, approximately 6.901500%, 5.701239%, 12.902805%,
6.001305% and 68.493151% of the balance, if any, remaining after the
distributions described in clauses (iv)(A), (B) and (C) above
concurrently to the Class A-5, Class A-6, Class A-9, Class A-13 and
Class A-15 Certificates, respectively, until the Certificate
Principal Balance of the Class A-5 Certificates has been reduced to
zero;
(E) fifth, approximately 5.701239%, 6.901500%, 12.902805%,
6.001305% and 68.493151% of the balance, if any, remaining after the
distributions described in clauses (iv)(A), (B), (C) and (D) above
concurrently to the Class A-6, Class A-8, Class A-9, Class A-13 and
Class A-15 Certificates, respectively, until the Certificate
Principal Balances of the Class A-6, Class A-8, Class A-9 and Class
A-13 Certificates have been reduced to zero;
(F) sixth, the balance, if any, remaining after the
distributions described in clauses (iv)(A), (B), (C), (D) and (E)
above concurrently to the Class A-7 Certificates, Class A-15
Certificates and Class A-19 Certificates, on a pro rata basis based
on their respective
S-33
<PAGE>
Certificate Principal Balances as of such Distribution Date, until
the Certificate Principal Balances thereof have been reduced to zero;
and
(G) seventh, the balance, if any, remaining after the
distributions described in clauses (iv)(A), (B), (C), (D), (E) and
(F) above concurrently to the Class A-10, Class A-11 and Class A-14
Certificates, on a pro rata basis based on their respective
Certificate Principal Balances as of such Distribution Date, until
the Certificate Principal Balances thereof have been reduced to zero;
and
(b) On or after the occurrence of the Credit Support Depletion Date
but prior to the reduction of the Certificate Principal Balance of the
Senior Support Certificates to zero, all priorities relating to
distributions as described above in respect of principal among the various
classes of Senior Certificates (other than the Principal Only Certificates)
will be disregarded and an amount equal to the Discount Fraction of the
principal portion of scheduled or unscheduled payments received or advanced
in respect of Discount Mortgage Loans will be distributed to the Principal
Only Certificates and the Senior Principal Distribution Amount will be
distributed among all classes of Senior Certificates pro rata in accordance
with their respective outstanding Certificate Principal Balances and the
Senior Interest Distribution Amount will be distributed as described under
'Interest Distributions'; provided that the aggregate amount distributable
to the Super Senior Certificates and the Senior Support Certificates in
respect of the aggregate Accrued Certificate Interest thereon and in
respect of their collective pro rata portion of the Senior Principal
Distribution Amount will be distributed among such Certificates in the
following priority: first, to the Super Senior Certificates, on a pro rata
basis in accordance with their respective amounts of Accrued Certificate
Interest, up to an amount equal to the Accrued Certificate Interest
thereon; second, to the Super Senior Certificates, on a pro rata basis in
proportion to the respective Certificate Principal Balances thereof, the
Super Senior Optimal Principal Distribution Amount thereof (as defined
below), in reduction of the Certificate Principal Balances thereof until
such Certificate Principal Balances have been reduced to zero; third, to
the Senior Support Certificates, up to an amount equal to the Accrued
Certificate Interest thereon; and fourth, to the Senior Support
Certificates, the remainder of the amount so distributable among the Super
Senior Certificates and Senior Support Certificates, until the Certificate
Principal Balance thereof is reduced to zero.
(c) On or after the occurrence of the Credit Support Depletion Date
and upon reduction of the Certificate Principal Balance of the Senior
Support Certificates to zero, all priorities relating to distributions as
described above in respect of principal among the various classes of Senior
Certificates (other than the Principal Only Certificates) will be
disregarded and an amount equal to the Discount Fraction of the principal
portion of scheduled or unscheduled payments received or advanced in
respect of Discount Mortgage Loans will be distributed to the Principal
Only Certificates and the Senior Principal Distribution Amount will be
distributed among all classes of Senior Certificates (other than the
Principal Only Certificates) pro rata in accordance with their respective
outstanding Certificate Principal Balances, and the Senior Interest
Distribution Amount will be distributed as described under 'Interest
Distributions.'
(d) After the reduction of the Certificate Principal Balances of the
Senior Certificates (other than the Principal Only Certificates and Senior
Support Certificates) to zero but prior to the occurrence of the Credit
Support Depletion Date, the Senior Certificates (other than the Principal
Only Certificates and Senior Support Certificates) will be entitled to no
further distributions of principal thereon and the Available Distribution
Amount will be paid solely to the holders of the Senior Support, Principal
Only, Stripped Interests, Class M and Class B Certificates, in each case as
described herein.
The 'Credit Support Depletion Date' is the first Distribution Date on which
the Senior Percentage equals 100%. With respect to any Distribution Date, (i)
the 'Super Senior Optimal Principal Distribution Amount' is equal to the sum of
(A) the product of (a) the then-applicable Super Senior Optimal Percentage (as
defined below) for such class and (b) the sum of the amounts described in
clauses (i), (iv) and (vi) of the first paragraph under 'Principal Distributions
on the Senior Certificates' and (B) the product of the then-applicable Super
Senior Class Percentage (as defined below) for such class and the sum of the
amounts described in clauses (ii) and (iii) of the first paragraph under
S-34
<PAGE>
'Principal Distributions on the Senior Certificates.' The 'Super Senior Optimal
Percentage' with respect to any class of Super Senior Certificates is equal to a
fraction, expressed as a percentage, the numerator of which is the aggregate
Certificate Principal Balance of such class immediately prior to such
Distribution Date and the denominator of which is the aggregate Certificate
Principal Balance of all Senior Certificates (other than the Principal Only
Certificates) immediately prior to such Distribution Date and the 'Super Senior
Class Percentage' with respect to any class of Super Senior Certificates is
equal to a fraction, expressed as a percentage, the numerator of which is the
aggregate Certificate Principal Balance of such class immediately prior to such
Distribution Date and the denominator of which is the aggregate Certificate
Principal Balance of all Senior Certificates (other than the Principal Only
Certificates and Senior Support Certificates) immediately prior to such
Distribution Date.
The Master Servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections (not including prepayments by the
Mortgagors) received in any calendar month as included in the Available
Distribution Amount and the Senior Principal Distribution Amount for the
Distribution Date in the month of receipt, but is not obligated to do so. If the
Master Servicer so elects, such amounts will be deemed to have been received
(and any related Realized Loss shall be deemed to have occurred) on the last day
of the month prior to the receipt thereof.
PRINCIPAL DISTRIBUTIONS ON THE CLASS M CERTIFICATES
Holders of each class of the Class M Certificates will be entitled to
receive on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after (a) the sum of the Senior Interest
Distribution Amount, the Principal Only Distribution Amount and the Senior
Principal Distribution Amount is distributed to holders of the Senior
Certificates, (b) reimbursement is made to the Master Servicer for certain
Advances remaining unreimbursed following the final liquidation of the related
Mortgage Loan to the extent described below under 'Advances,' (c) the aggregate
amount of Accrued Certificate Interest and principal required to be distributed
on any class of Class M Certificates having a higher payment priority on such
Distribution Date is distributed to holders of such class of Class M
Certificates and (d) the aggregate amount of Accrued Certificate Interest
required to be distributed on such class of Class M Certificates on such
Distribution Date is distributed to such Class M Certificates, a distribution
allocable to principal in the sum of the following:
(i) the product of (A) the then-applicable related Class M Percentage
and (B) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on the
Mortgage Loans (other than the applicable Discount Fraction of the
principal portion of such payments with respect to a Discount Mortgage
Loan) due on the related Due Date, whether or not received on or prior
to the related Determination Date, less the principal portion of Debt
Service Reductions (other than the applicable Discount Fraction of the
principal portion of such Debt Service Reductions with respect to a
Discount Mortgage Loan) which together with other Bankruptcy Losses are
in excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of the repurchase of a
Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) (other than the applicable Discount
Fraction of the principal portion of such proceeds with respect to a
Discount Mortgage Loan) as required by the Pooling and Servicing
Agreement during the preceding calendar month; and
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month (other than full and
partial Principal Prepayments made by the respective Mortgagors and any
amounts received in connection with a Final Disposition of a Mortgage
Loan described in clause (ii) below), to the extent applied as
recoveries of principal (other than the applicable Discount Fraction of
the principal amount of such unscheduled collections, with respect to a
Discount Mortgage Loan);
(ii) such class's pro rata share, based on the Certificate Principal
Balance of each class of Class M Certificates and Class B Certificates then
outstanding, of all amounts received in connection with
S-35
<PAGE>
the Final Disposition of a Mortgage Loan (other than the applicable
Discount Fraction of such amounts with respect to a Discount Mortgage Loan)
(x) that occurred during the preceding calendar month and (y) that did not
result in any Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses, to the extent applied as
recoveries of principal and to the extent not otherwise payable to the
Senior Certificates;
(iii) the portion of full and partial Principal Prepayments (other
than the Discount Fraction of such Principal Prepayments with respect to a
Discount Mortgage Loan) made by the respective Mortgagors during the
preceding calendar month allocable to such class of Class M Certificates as
described below;
(iv) if such class is the most senior class of Certificates then
outstanding, an amount equal to the Excess Subordinate Principal Amount, if
any; and
(v) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to clauses (i) through (iii) above) that remain
undistributed to the extent that any such amounts are not attributable to
Realized Losses which were allocated to the class or classes of Class M
Certificates with a lower payment priority or the Class B Certificates.
References herein to 'payment priority' of the Class M Certificates refer
to a payment priority among such classes as follows: first, to the Class M-1
Certificates; second, to the Class M-2 Certificates; and third, to the Class M-3
Certificates.
As to each class of Class M Certificates, on any Distribution Date, any
Accrued Certificate Interest thereon remaining unpaid from any previous
Distribution Date will be distributable to the extent of available funds.
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class B Certificates have been reduced to zero, on any Distribution Date, with
respect to the class of Class M Certificates outstanding on such Distribution
Date with the lowest payment priority, Accrued Certificate Interest thereon
remaining unpaid from any previous Distribution Date (except in the limited
circumstances provided in the Pooling and Servicing Agreement) will not be
distributable.
From the Distribution Date occurring in September 2000 (or if the
Certificate Principal Balances of the Senior Certificates (other than the
Principal Only Certificates and Senior Support Certificates) have been reduced
to zero prior to such Distribution Date, the Distribution Date on which such
reduction occurred) to, but not including the later to occur of the Distribution
Date occurring in September 2002 and the Distribution Date in which the sum of
the Class M-2, Class M-3 and Class B Percentages first equals or exceeds 7.02%
(approximately twice the sum of the initial Class M-2, Class M-3 and Class B
Percentages) before giving effect to distributions on such Distribution Date,
the Class M-1 Certificates (if outstanding) will be entitled to receive 100% of
any Principal Prepayments not otherwise distributable to the Senior
Certificates. Thereafter, all Principal Prepayments not otherwise distributable
to the Senior Certificates will be allocated on a pro rata basis among the class
of Class M Certificates with the highest payment priority then outstanding and
each other class of Class M Certificates and Class B Certificates for which
certain loss levels established for such class in the Pooling and Servicing
Agreement have not been exceeded. The related loss level on any Distribution
Date would be satisfied as to any Class M-2, Class M-3 or Class B Certificates,
respectively, only if the sum of the current percentage interests in the
Mortgage Pool evidenced by such class and each class, if any, subordinate
thereto were at least equal to the sum of the initial percentage interests in
the Mortgage Pool evidenced by such class and each class, if any, subordinate
thereto.
The Class M-1, Class M-2 and Class M-3 Percentages, which initially will
equal approximately 2.50%, 1.25% and 1.00%, respectively, and will in no event
exceed 100%, will each be adjusted for each Distribution Date to be the
percentage equal to the Certificate Principal Balance of the related class of
Class M Certificates immediately prior to such Distribution Date divided by the
aggregate Stated Principal Balance of all of the Mortgage Loans (other than the
applicable Discount Fraction of each Discount Mortgage Loan) immediately prior
to such Distribution Date. The initial Class M-1, Class M-2 and Class M-3
Percentages are greater than the initial percentage interests in the Trust Fund
evidenced by the Class M-1, Class M-2 and Class M-3 Certificates, respectively,
because the Class M-1, Class M-2 and Class M-3 Percentages are calculated
without regard to the Discount Fraction of the Stated Principal Balance of each
Discount Mortgage Loan.
S-36
<PAGE>
As stated above under ' -- Principal Distributions on the Senior
Certificates,' the Adjusted Senior Accelerated Distribution Percentage will be
100% during the first five years after the Delivery Date (unless the Certificate
Principal Balances of the Senior Certificates (other than the Principal Only
Certificates and Senior Support Certificates) are reduced to zero before the end
of such period), and will thereafter equal 100% whenever the Adjusted Senior
Percentage exceeds the initial Adjusted Senior Percentage. Furthermore, as set
forth herein, the Adjusted Senior Accelerated Distribution Percentage will
exceed the Adjusted Senior Percentage during the sixth through ninth years
following the Delivery Date, and scheduled reductions to the Adjusted Senior
Accelerated Distribution Percentage are subject to postponement based on the
loss and delinquency experience of the Mortgage Loans. Accordingly, each class
of the Class M Certificates will not be entitled to any prepayments for at least
the first five years after the Delivery Date (unless the Certificate Principal
Balances of the Senior Certificates (other than the Principal Only Certificates
and Senior Support Certificates) have been reduced to zero before the end of
such period), and may receive no prepayments or a disproportionately small or
large portion of prepayments (relative to the related Class M Percentage) during
certain periods thereafter. See 'Principal Distributions on the Senior
Certificates' herein.
ALLOCATION OF LOSSES; SUBORDINATION
The Subordination provided to the Senior Certificates by the Class B
Certificates and Class M Certificates and the Subordination provided to each
class of Class M Certificates by the Class B Certificates and by any class of
Class M Certificates subordinate thereto will cover Realized Losses on the
Mortgage Loans that are Defaulted Mortgage Losses, Fraud Losses, Bankruptcy
Losses (each as defined in the Prospectus) and Special Hazard Losses (as defined
herein). Any such Realized Losses which are not Excess Special Hazard Losses,
Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses will be
allocated as follows: first, to the Class B Certificates; second, to the Class
M-3 Certificates; third, to the Class M-2 Certificates; and fourth, to the Class
M-1 Certificates, in each case until the Certificate Principal Balance of such
class of Certificates has been reduced to zero; and thereafter, if any such
Realized Loss is on a Discount Mortgage Loan, to the Principal Only Certificates
in an amount equal to the related Discount Fraction of the principal portion of
such Realized Loss, and the remainder of such Realized Losses and the entire
amount of such Realized Losses on Non-Discount Mortgage Loans among all the
remaining classes of Senior Certificates (other than the Principal Only
Certificates) on a pro rata basis, except that the principal portion of
Defaulted Mortgage Losses otherwise allocable to the Super Senior Certificates
will be allocated to the Senior Support Certificates until the Certificate
Principal Balance thereof is reduced to zero. Any allocation of a Realized Loss
(other than a Debt Service Reduction) to a Certificate will be made by reducing
the Certificate Principal Balance thereof, in the case of the principal portion
of such Realized Loss, and the Accrued Certificate Interest thereon, in the case
of the interest portion of such Realized Loss, by the amount so allocated as of
the Distribution Date occurring in the month following the calendar month in
which such Realized Loss was incurred. In addition, any such allocation of a
Realized Loss to a Class M Certificate may also be made by operation of the
payment priority to the Senior Certificates set forth under ' -- Principal
Distributions on the Senior Certificates' and any class of Class M Certificates
with a higher payment priority. As used herein, 'Debt Service Reduction' means a
reduction in the amount of the monthly payment due to certain bankruptcy
proceedings, but does not include any permanent forgiveness of principal. As
used herein, 'Subordination' refers to the provisions discussed above for the
sequential allocation of Realized Losses among the various classes, as well as
all provisions effecting such allocations including the priorities for
distribution of cash flows in the amounts described herein.
Allocations of the principal portion of Debt Service Reductions to each
class of Class M Certificates and Class B Certificates will result from the
priority of distributions of the Available Distribution Amount as described
herein, which distributions shall be made first to the Senior Certificates,
second to the Class M Certificates in the order of their payment priority and
third to the Class B Certificates. An allocation of the interest portion of a
Realized Loss as well as the principal portion of Debt Service Reductions will
not reduce the level of Subordination, as such term is defined herein, until an
amount in respect thereof has been actually disbursed to the Senior
Certificateholders or the Class M Certificateholders, as applicable. The holders
of the Offered Certificates will not be entitled to any additional payments with
respect to Realized Losses from amounts otherwise
S-37
<PAGE>
distributable on any classes of Certificates subordinate thereto (except in
limited circumstances in respect of any Excess Subordinate Principal Amount, or
in the case of the Principal Only Collection Shortfalls, to the extent of
Eligible Funds). Accordingly, the Subordination provided to the Senior
Certificates (other than the Principal Only Certificates) and to each class of
Class M Certificates by the respective classes of Certificates subordinate
thereto with respect to Realized Losses allocated on any Distribution Date will
be effected primarily by increasing the Senior Percentage, or the respective
Class M Percentage, of future distributions of principal of the remaining
Mortgage Loans. Because the Discount Fraction of the Discount Mortgage Loans
will not change over time, the protection from losses provided to the Principal
Only Certificates by the Class M Certificates and Class B Certificates is
limited to the prior right of the Principal Only Certificates to receive
distributions in respect of principal as described herein. Furthermore,
principal losses on the Mortgage Loans that are not covered by Subordination
will be allocated to the Principal Only Certificates only to the extent they
occur on a Discount Mortgage Loan and only to the extent of the related Discount
Fraction of such losses. Such allocation of principal losses on the Discount
Mortgage Loans may result in such losses being allocated in an amount that is
greater or less than would have been the case had such losses been allocated in
proportion to the Certificate Principal Balance of the Principal Only
Certificates. Thus, the Senior Certificates (other than the Principal Only
Certificates) will bear the entire amount of losses that are not allocated to
the Class M Certificates and Class B Certificates (other than the amount
allocable to the Principal Only Certificates), which losses will be allocated
among all classes of Senior Certificates (other than the Principal Only
Certificates) on a pro rata basis in proportion to their respective Certificate
Principal Balances, except as described above.
Because the Principal Only Certificates are entitled to receive in
connection with the Final Disposition of Discount Mortgage Loans, on any
Distribution Date, an amount equal to all unpaid Principal Only Collection
Shortfalls to the extent of Eligible Funds on such Distribution Date, shortfalls
in distributions of principal on any class of Class M Certificates could occur
under certain circumstances, even if such class is not the most subordinate
class of Certificates then outstanding.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses, Extraordinary Losses or other losses of a type not covered by
Subordination on Non-Discount Mortgage Loans will be allocated on a pro rata
basis among the Senior Certificates (except that no such portion will be
allocable to the Principal Only Certificates), Class M Certificates and Class B
Certificates (any such Realized Losses so allocated to the Senior Certificates
or Class M Certificates will be allocated without priority among the various
classes of Senior Certificates (other than the Principal Only Certificates) or
Class M Certificates). The principal portion of such losses on Discount Mortgage
Loans will be allocated to the Principal Only Certificates, in an amount equal
to the related Discount Fraction thereof, and the remainder of such losses on
Discount Mortgage Loans will be allocated among the remaining Certificates on a
pro rata basis. An allocation of a Realized Loss on a 'pro rata basis' among two
or more classes of Certificates means an allocation to each such class of
Certificates on the basis of its then outstanding Certificate Principal Balance
prior to giving effect to distributions to be made on such Distribution Date in
the case of an allocation of the principal portion of a Realized Loss or based
on the Accrued Certificate Interest thereon in the case of an allocation of the
interest portion of a Realized Loss.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer or the Subservicer for Advances and expenses, including attorneys'
fees) towards interest and principal owing on the Mortgage Loan. Such amount of
loss realized and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses
are referred to herein as 'Realized Losses.'
In order to maximize the likelihood of distribution in full of the Senior
Interest Distribution Amount, Principal Only Distribution Amount and Senior
Principal Distribution Amount, on each Distribution Date, holders of Senior
Certificates have a right to distributions of the Available
S-38
<PAGE>
Distribution Amount that is prior to the rights of the holders of the Class M
Certificates and Class B Certificates, to the extent necessary to satisfy the
Senior Interest Distribution Amount, Principal Only Distribution Amount and
Senior Principal Distribution Amount. Similarly, holders of the Class M
Certificates have a right to distributions of the Available Distribution Amount
prior to the rights of holders of the Class B Certificates, and holders of any
class of Class M Certificates with a higher payment priority have a right to
distributions of the Available Distribution Amount prior to the rights of
holders of any class of Class M Certificates with a lower payment priority, if
any.
The application of the Adjusted Senior Accelerated Distribution Percentage
(when it exceeds the Adjusted Senior Percentage) to determine the Senior
Principal Distribution Amount will accelerate the amortization of the Senior
Certificates (other than the Senior Support Certificates and Principal Only
Certificates) relative to the actual amortization of the Mortgage Loans. The
Principal Only Certificates will not receive more than the Discount Fraction of
any unscheduled payment relating to a Discount Mortgage Loan. To the extent that
the Senior Certificates (other than the Senior Support Certificates and
Principal Only Certificates) are amortized faster than the Mortgage Loans, in
the absence of offsetting Realized Losses allocated to the Senior Support
Certificates, Class M Certificates and Class B Certificates, the percentage
interest evidenced by the Senior Certificates (other than the Senior Support
Certificates and Principal Only Certificates) in the Trust Fund will be
decreased (with a corresponding increase in the interest in the Trust Fund
evidenced by the Senior Support Certificates, Class M Certificates and Class B
Certificates), thereby increasing, relative to their respective Certificate
Principal Balances, the Subordination afforded the Senior Certificates (other
than the Senior Support Certificates and Principal Only Certificates) by the
Senior Support, Class M and Class B Certificates.
The priority of payments (including principal prepayments) among the Class
M Certificates, as described herein, also has the effect during certain periods,
in the absence of losses, of decreasing the percentage interest evidenced by any
class of Class M Certificates with a higher payment priority, thereby
increasing, relative to its Certificate Principal Balance, the Subordination
afforded to such class of the Class M Certificates by the Class B Certificates
and any class of Class M Certificates with a lower payment priority.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the 'Special Hazard Amount') through
Subordination shall initially be equal to $4,536,123. As of any date of
determination following the Cut-off Date, the Special Hazard Amount shall equal
$4,536,123 less the sum of (A) any amounts allocated through Subordination in
respect of Special Hazard Losses and (B) the Adjustment Amount. The Adjustment
Amount will be equal to an amount calculated pursuant to the terms of the
Pooling and Servicing Agreement. As used in this Prospectus Supplement, 'Special
Hazard Losses' has the same meaning set forth in the Prospectus, except that
Special Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses, and Special Hazard Losses will not exceed the lesser of
the cost of repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the 'Fraud Loss Amount') through Subordination
shall initially be equal to $9,072,247. As of any date of determination after
the Cut-off Date, the Fraud Loss Amount shall equal (X) prior to the first
anniversary of the Cut-off Date an amount equal to 2.00% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date minus the
aggregate amounts allocated through Subordination with respect to Fraud Losses
up to such date of determination and (Y) from the first to the fifth anniversary
of the Cut-off Date, an amount equal to (1) the lesser of (a) the Fraud Loss
Amount as of the most recent anniversary of the Cut-off Date and (b) 1.00% of
the aggregate principal balance of all of the Mortgage Loans as of the most
recent anniversary of the Cut-off Date minus (2) the aggregate amounts allocated
through Subordination with respect to Fraud Losses since the most recent
anniversary of the Cut-off Date up to such date of determination. On and after
the fifth anniversary of the Cut-off Date the Fraud Loss Amount shall be zero
and Fraud Losses shall not be allocated through Subordination.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses (the 'Bankruptcy Amount') through
Subordination will initially be equal to $165,000. As of any date of
determination on or after the first anniversary of the Cut-off Date, the
Bankruptcy Amount will
S-39
<PAGE>
equal the excess, if any, of (1) the lesser of (a) the Bankruptcy Amount as of
the business day next preceding the most recent anniversary of the Cut-off Date
and (b) an amount calculated pursuant to the terms of the Pooling and Servicing
Agreement, which amount as calculated will provide for a reduction in the
Bankruptcy Amount, over (2) the aggregate amount of Bankruptcy Losses allocated
solely to the Class M Certificates or Class B Certificates through Subordination
since such anniversary.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
Master Servicer has notified the Trustee in writing that the Master Servicer is
diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (A) the related Mortgage Loan is not in default with regard to payments
due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer or a
Subservicer.
The Special Hazard Amount, Fraud Amount and Bankruptcy Amount are subject
to further reduction as described in the Prospectus under 'Subordination.'
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to make
Advances (out of its own funds, advances made by a Subservicer, or funds held in
the Custodial Account (as described in the Prospectus) for future distribution
or withdrawal) with respect to any payments of principal and interest (net of
the related Servicing Fees) which were due on the Mortgage Loans on the
immediately preceding Due Date and delinquent on the business day next preceding
the related Determination Date.
Such Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, Insurance
Proceeds, Liquidation Proceeds or amounts otherwise payable to the holders of
the Class B Certificates or Class M Certificates. The purpose of making such
Advances is to maintain a regular cash flow to the Certificateholders, rather
than to guarantee or insure against losses. The Master Servicer will not be
required to make any Advances with respect to reductions in the amount of the
monthly payments on the Mortgage Loans due to Debt Service Reductions or the
application of the Relief Act or similar legislation or regulations. Any failure
by the Master Servicer to make an Advance as required under the Pooling and
Servicing Agreement will constitute an Event of Default thereunder, in which
case the Trustee, as successor Master Servicer, will be obligated to make any
such Advance, in accordance with the terms of the Pooling and Servicing
Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from either (a) late collections, Insurance Proceeds and
Liquidation Proceeds from the Mortgage Loan as to which such unreimbursed
Advance was made or (b) as to any Advance that remains unreimbursed in whole or
in part following the final liquidation of the related Mortgage Loan, from any
amounts otherwise distributable on any of the Class B Certificates or Class M
Certificates; provided, however, that any such Advances that were made with
respect to delinquencies which ultimately were determined to be Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary
Losses are reimbursable to the Master Servicer out of any funds in the Custodial
Account prior to distributions on any of the Certificates and the amount of such
losses will be allocated as described herein. In addition, if the Certificate
Principal Balances of the Class M Certificates and Class B Certificates have
been reduced to zero, any Advances previously made which are deemed by the
Master Servicer to be nonrecoverable from related late collections, Insurance
Proceeds and Liquidation Proceeds may be reimbursed to the Master Servicer out
of any funds in the Custodial Account prior to distributions on the Senior
Certificates. The effect of these provisions on any class of the Class M
Certificates is that, with respect to any Advance which remains unreimbursed
following the final liquidation of the related Mortgage Loan, the entire amount
of the reimbursement for such Advance will be borne first by the holders of the
Class B Certificates or the class or classes of Class M Certificates having a
lower payment priority to the extent that such reimbursement is covered by
amounts otherwise distributable to such classes, and
S-40
<PAGE>
then by the holders of such class of Class M Certificates (except as provided
above) to the extent of the amounts otherwise distributable to them.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of Mortgagor defaults
resulting in Realized Losses. Such yield may be adversely affected by a higher
or lower than anticipated rate of principal payments on the Mortgage Loans in
the Trust Fund. The rate of principal payments on such Mortgage Loans will in
turn be affected by the amortization schedules of the Mortgage Loans, the rate
and timing of principal prepayments thereon by the Mortgagors, liquidations of
defaulted Mortgage Loans and purchases of Mortgage Loans due to certain breaches
of representations and warranties. The timing of changes in the rate of
prepayments, liquidations and repurchases of the Mortgage Loans may, and the
timing of Realized Losses will, significantly affect the yield to an investor,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. Since the rate and timing of
principal payments on the Mortgage Loans will depend on future events and on a
variety of factors (as described herein and in the Prospectus under 'Yield
Considerations' and 'Maturity and Prepayment Considerations'), no assurance can
be given as to such rate or the timing of principal payments on the Offered
Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any time
without payment of any prepayment fee or penalty. The Mortgage Loans generally
contain due-on-sale clauses. As described under 'Description of the
Certificates -- Principal Distributions on the Senior Certificates' herein,
during certain periods all or a disproportionately large percentage of principal
prepayments on the Mortgage Loans will be allocated among the Senior
Certificates (other than the Senior Support Certificates and Principal Only
Certificates), and during certain periods no principal prepayments or, relative
to the Senior Support Percentage or related Class M Percentage, a
disproportionately small or large portion of principal prepayments on the
Mortgage Loans may be distributed on the Senior Support Certificates and each
class of Class M Certificates. In addition to the foregoing, if on any
Distribution Date, the loss levels for the Class M-2 Certificates or Class M-3
Certificates are exceeded and a class of Class M Certificates having a higher
payment priority is then outstanding, the Class M-2 Certificates or Class M-3
Certificates, as the case may be, will not receive distributions in respect of
principal prepayments on such Distribution Date. Prepayments, liquidations and
purchases of the Mortgage Loans will result in distributions to holders of the
Offered Certificates of principal amounts which would otherwise be distributed
over the remaining terms of the Mortgage Loans. Factors affecting prepayment
(including defaults and liquidations) of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates, solicitations and servicing decisions. In
addition, if prevailing mortgage rates fell significantly below the Mortgage
Rates on the Mortgage Loans, the rate of prepayments (including refinancings)
would be expected to increase. Conversely, if prevailing mortgage rates rose
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayments on the Mortgage Loans would be expected to decrease.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the Mortgage Loans
will be affected by the general economic condition of the region of the country
in which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See 'Maturity and Prepayment
Considerations' in the Prospectus.
S-41
<PAGE>
After the Certificate Principal Balances of the Class B Certificates have
been reduced to zero, the yield to maturity on the class of Class M Certificates
then outstanding with the lowest payment priority will be extremely sensitive to
losses on the Mortgage Loans (and the timing thereof) because the entire amount
of losses that are covered by Subordination will be allocated to such Class M
Certificates. See ' -- Class M-2 Certificate and Class M-3 Certificate Yield
Considerations' below. In addition, if the Certificate Principal Balances of the
Class M Certificates and Class B Certificates are reduced to zero, the yield to
maturity on the Senior Support Certificates will be extremely sensitive to the
rate of default and liquidations on the Mortgage Loans and the Senior Support
Certificates will bear a greater risk of losses than the other Senior
Certificates because of the allocation thereto of the portion of Defaulted
Mortgage Losses otherwise allocable to the Super Senior Certificates.
Furthermore, because principal distributions are paid to certain classes of
Senior Certificates and Class M Certificates before other classes, holders of
classes having a later priority of payment bear a greater risk of losses than
holders of classes having earlier priorities for distribution of principal.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through Rates
on the Offered Certificates (other than the Stripped Interests Certificates) are
fixed, such rates will not change in response to changes in market interest
rates. The Pass-Through Rate on the Stripped Interests Certificates is based on
the weighted average of the Pool Strip Rates on the Mortgage Loans and such Pool
Strip Rates will not change in response to changes in market interest rates.
Accordingly, if market interest rates or market yields for securities similar to
the Offered Certificates were to rise, the market value of the Offered
Certificates may decline.
Investors in the Senior Support Certificates should be aware that because
the Senior Support Certificates have a later priority of payment of principal
than any other classes of Senior Certificates, the effect on the market value of
the Senior Support Certificates of changes in market interest rates or market
yields for similar securities will be greater than would be the effect of such
changes on other classes of Senior Certificates entitled to principal
distributions.
As described under 'Description of the Certificates -- Allocation of
Losses; Subordination' and ' -- Advances,' amounts otherwise distributable to
holders of one or more classes of the Class M Certificates may be made available
to protect the holders of the Senior Certificates and holders of any Class M
Certificates with a higher payment priority against interruptions in
distributions due to certain Mortgagor delinquencies, to the extent not covered
by Advances. Such delinquencies may affect the yields to investors on such
classes of the Class M Certificates, and, even if subsequently cured, may affect
the timing of the receipt of distributions by the holders of such classes of
Class M Certificates. Similarly, if the Certificate Principal Balances of the
Class M Certificates and Class B Certificates are reduced to zero, delinquencies
on the Mortgage Loans to the extent not covered by Advances will affect the
yield to investors on the Senior Support Certificates because the amount of any
shortfall resulting from such delinquencies and otherwise allocable to the Super
Senior Certificates would be borne by the Senior Support Certificates to the
extent that such Certificates are then outstanding. In addition, a higher than
expected rate of delinquencies or losses will also affect the rate of principal
payments on the Senior Support Certificates and one or more classes of Class M
Certificates if it delays the scheduled reduction of the Adjusted Senior
Accelerated Distribution Percentage or affects the allocation of prepayments
among the Class M Certificates and Class B Certificates. Furthermore, the
Principal Only Certificates will share in the principal portion of Realized
Losses on the Mortgage Loans only to the extent that they are incurred with
respect to Discount Mortgage Loans and only to the extent of the related
Discount Fraction; thus, after the Class B Certificates and the Class M
Certificates are retired or in the case of Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses and Extraordinary Losses, the Senior
Certificates (other than the Principal Only Certificates) may be affected to a
greater extent by losses on Non-Discount Mortgage Loans than losses on Discount
Mortgage Loans.
The periodic increase in interest paid by the Mortgagor of a Buydown
Mortgage Loan during or at the end of the applicable Buydown Period may create a
greater financial burden for the Mortgagor, who might not have otherwise
qualified for a mortgage under Residential Funding's underwriting guidelines,
and may accordingly increase the risk of default with respect to the related
Mortgage Loan. See 'Mortgage Loan Program -- Underwriting Standards' in the
Prospectus.
S-42
<PAGE>
The amount of interest otherwise payable to holders of the Offered
Certificates will be reduced by any interest shortfalls to the extent not
covered by Subordination, the Master Servicer's compensation (but only in the
case of Prepayment Interest Shortfalls resulting from prepayments in full) or
(solely with respect to any class of Super Senior I Certificates) the related
Reserve Fund, including, in the case of each class of the Class M Certificates,
the interest portions of Realized Losses allocated solely to such class of
Certificates. See 'Yield Considerations' in the Prospectus and 'Description of
the Certificates -- Interest Distributions' herein for a discussion of the
effect of principal prepayments on the Mortgage Loans on the yield to maturity
of the Offered Certificates and certain possible shortfalls in the collection of
interest.
The yield to investors in the Offered Certificates will not be affected by
Prepayment Interest Shortfalls allocable thereto resulting from prepayments in
full in the month preceding any Distribution Date to the extent that such
shortfalls do not exceed the amount offset by the Master Servicer. In addition,
the yield to investors in any class of Super Senior I Certificates will be
affected by interest shortfalls allocable thereto to the extent that such
shortfalls exceed the amount offset by the Master Servicer, Subordination or
amount remaining in the related Reserve Fund. See 'Description of the
Certificates -- Interest Distributions' herein.
In addition, the yield to maturity of the Offered Certificates will depend
on, among other things, the price paid by the holders of the Offered
Certificates and the related Pass-Through Rate. The extent to which the yield to
maturity of an Offered Certificate is sensitive to prepayments will depend, in
part, upon the degree to which it is purchased at a discount or premium. In
general, if a class of Offered Certificates is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if a class of Offered
Certificates is purchased at a discount and principal distributions thereon
occur at a rate slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than that assumed at the time of
purchase. For additional considerations relating to the yield on the
Certificates, see 'Yield Considerations' and 'Maturity and Prepayment
Considerations' in the Prospectus.
All classes of Senior Certificates entitled to payments of principal are
subject to various priorities for payment of principal as described herein.
Distributions of principal on classes having an earlier priority of payment will
be affected by the rates of prepayment of the Mortgage Loans early in the life
of the Mortgage Pool. The timing of commencement of principal distributions and
the weighted average lives of classes of Certificates with a later priority of
payment will be affected by the rates of prepayment experienced both before and
after the commencement of principal distributions on such classes.
Super Senior I Certificates: IN ADDITION TO THE CONSIDERATIONS DESCRIBED
ABOVE, INVESTORS IN THE SUPER SENIOR I CERTIFICATES SHOULD BE AWARE THAT THE
SUPER SENIOR I CERTIFICATES MAY NOT BE AN APPROPRIATE INVESTMENT FOR ALL
PROSPECTIVE INVESTORS. The Super Senior I Certificates would not be an
appropriate investment for any investor requiring a distribution of a particular
amount of principal or interest on a specific date or dates or an otherwise
predictable stream of cash payments. The timing of such distributions may also
have a significant effect on an investor's yield on such Certificates if the
Certificate is purchased at a discount or a premium.
The timing of distributions in reduction of the Certificate Principal
Balance with respect to any particular Super Senior I Certificate is highly
uncertain and may be significantly earlier or later than the date that may be
desired by such Certificateholder. Investors in the Super Senior I Certificates,
especially investors in the Class A-7, Class A-10, Class A-11 and Class A-14
Certificates, should be aware that such Certificates have a later priority of
payment with respect to principal in relation to other classes of Senior
Certificates (other than the Class A-15, Class A-19 and Senior Support
Certificates). This later priority makes such classes of Super Senior I
Certificates particularly sensitive to the rate and timing of principal
prepayments. If prepayments on the Mortgage Loans occur at a higher rate than
anticipated, the weighted average lives of the Super Senior I Certificates,
particularly the Class A-7, Class A-10, Class A-11 and Class A-14 Certificates,
may be shortened significantly. Conversely, if prepayments on the Mortgage Loans
occur at a lower rate than anticipated, the weighted average lives
S-43
<PAGE>
of the Super Senior I Certificates, particularly the Class A-7, Class A-10,
Class A-11 and Class A-14 Certificates, may be extended significantly.
Furthermore, this later priority of payment with respect to principal makes
such classes of Super Senior I Certificates more vulnerable to losses and
interest shortfalls since the Subordination provided by the Senior Support,
Class M and Class B Certificates may have been reduced to zero.
Prospective investors in the Super Senior I Certificates should also be
aware that the market value of the Super Senior I Certificates could vary
significantly during the period such Super Senior I Certificates are
outstanding. As a result, an investor in a Super Senior I Certificate could
suffer a significant loss on its investment if the investor sells such Super
Senior I Certificate rather than holding it until it is retired.
Finally, investors in any class of Super Senior I Certificates should be
aware that the amount on deposit in the related Reserve Fund is limited.
Allocations of interest shortfalls to any class of Super Senior I Certificates
in excess of the amount offset by the Master Servicer, Subordination and the
related Reserve Fund will adversely affect the yield to investors in such class
of Super Senior I Certificates.
Assumed Final Distribution Date: The assumed final Distribution Date with
respect to each class of the Offered Certificates is September 25, 2025, which
is the Distribution Date one month following the latest scheduled maturity date
for any Mortgage Loan.
No event of default, change in the priorities for distribution among the
various classes or other provisions under the Pooling and Servicing Agreement
will arise or become applicable solely by reason of the failure to retire the
entire Certificate Principal Balance of any class of Certificates on or before
its assumed final Distribution Date.
Weighted Average Life: Weighted average life refers to the average amount
of time that will elapse from the date of issuance of a security to the date of
distribution to the investor of each dollar distributed in reduction of
principal of such security (assuming no losses). The weighted average life of
the Offered Certificates will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
standard prepayment assumption ('SPA'), represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per annum
each month. As used in the table below, '0% SPA' assumes prepayment rates equal
to 0% of SPA (no prepayments). Correspondingly, '300% SPA' assumes prepayment
rates equal to 300% of SPA, and so forth. SPA does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are expected to be included in the Trust Fund as
described under 'Description of the Mortgage Pool' herein and the performance
thereof. The table assumes, among other things, that: (i) as of the date of
issuance of the Offered Certificates, the aggregate principal balance of the
Discount Mortgage Loans is $50,266,314 and each Discount Mortgage Loan has a
Mortgage Rate of 7.6038572862% per annum, an original term to maturity of 360
months, a remaining term to maturity of 358 months and a related Servicing Fee
Rate of 0.3051048101% per annum, and the aggregate principal balance of the
Non-Discount Mortgage Loans is $403,346,020 and each Non-Discount Mortgage Loan
has a Mortgage Rate of 8.4101% per annum, an original term to maturity of 360
months, a remaining term to maturity of 358 months and a related Servicing Fee
Rate of 0.3129% per annum; (ii) the scheduled monthly payment for each Mortgage
Loan has been based on its outstanding balance, interest rate and remaining term
to maturity, such that the
S-44
<PAGE>
Mortgage Loan will amortize in amounts sufficient for repayment thereof over its
remaining term to maturity; (iii) none of the Unaffiliated Sellers, the Master
Servicer or the Company will repurchase any Mortgage Loan, as described under
'Mortgage Loan Program -- Representations by Sellers' and 'Description of the
Certificates -- Assignment of the Mortgage Loans' in the Prospectus, and neither
the Master Servicer nor the Company exercises any option to purchase the
Mortgage Loans and thereby cause a termination of the Trust Fund; (iv) there are
no delinquencies or Realized Losses on the Mortgage Loans, and principal
payments on the Mortgage Loans will be timely received together with
prepayments, if any, at the respective constant percentages of SPA set forth in
the table; (v) there is no Prepayment Interest Shortfall or any other interest
shortfall in any month; (vi) payments on the Certificates will be received on
the 25th day of each month, commencing September 25, 1995; (vii) payments on the
Mortgage Loans earn no reinvestment return; (viii) there are no additional
ongoing Trust Fund expenses payable out of the Trust Fund; and (ix) the
Certificates will be purchased on August 30, 1995.
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at a
constant level of SPA until maturity or that all of the Mortgage Loans will
prepay at the same level of SPA. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
SPA specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
lives of the classes of Offered Certificates.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of each class of Offered Certificates (other
than the Stripped Interests Certificates and Residual Certificates), and sets
forth the percentages of the initial Certificate Principal Balance of each such
class of Offered Certificates that would be outstanding after each of the dates
shown at various percentages of SPA.
S-45
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
------------------------------------ ------------------------------------
DISTRIBUTION DATE 0% 150% 300% 450% 600% 0% 150% 300% 450% 600%
---------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100 100 100 100 100 100 100 100 100 100
August 25, 1996................... 96 79 63 47 30 99 94 89 84 79
August 25, 1997................... 91 37 0 0 0 97 81 65 50 35
August 25, 1998................... 86 0 0 0 0 96 64 36 11 0
August 25, 1999................... 80 0 0 0 0 94 49 12 0 0
August 25, 2000................... 74 0 0 0 0 92 35 0 0 0
August 25, 2001................... 67 0 0 0 0 90 23 0 0 0
August 25, 2002................... 60 0 0 0 0 88 12 0 0 0
August 25, 2003................... 52 0 0 0 0 85 3 0 0 0
August 25, 2004................... 43 0 0 0 0 83 0 0 0 0
August 25, 2005................... 34 0 0 0 0 80 0 0 0 0
August 25, 2006................... 24 0 0 0 0 77 0 0 0 0
August 25, 2007................... 13 0 0 0 0 74 0 0 0 0
August 25, 2008................... 1 0 0 0 0 70 0 0 0 0
August 25, 2009................... 0 0 0 0 0 66 0 0 0 0
August 25, 2010................... 0 0 0 0 0 62 0 0 0 0
August 25, 2011................... 0 0 0 0 0 57 0 0 0 0
August 25, 2012................... 0 0 0 0 0 52 0 0 0 0
August 25, 2013................... 0 0 0 0 0 47 0 0 0 0
August 25, 2014................... 0 0 0 0 0 41 0 0 0 0
August 25, 2015................... 0 0 0 0 0 34 0 0 0 0
August 25, 2016................... 0 0 0 0 0 27 0 0 0 0
August 25, 2017................... 0 0 0 0 0 19 0 0 0 0
August 25, 2018................... 0 0 0 0 0 11 0 0 0 0
August 25, 2019................... 0 0 0 0 0 2 0 0 0 0
August 25, 2020................... 0 0 0 0 0 0 0 0 0 0
August 25, 2021................... 0 0 0 0 0 0 0 0 0 0
August 25, 2022................... 0 0 0 0 0 0 0 0 0 0
August 25, 2023................... 0 0 0 0 0 0 0 0 0 0
August 25, 2024................... 0 0 0 0 0 0 0 0 0 0
August 25, 2025................... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**................. 7.7 1.7 1.2 0.9 0.8 15.9 4.1 2.5 2.0 1.7
<CAPTION>
CLASS A-3 CLASS A-4
------------------------------------- ------------------------------------
DISTRIBUTION DATE 0% 150% 300% 450% 600% 0% 150% 300% 450% 600%
---------------------------------- ----- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100 100 100 100 100 100 100 100 100 100
August 25, 1996................... 99 94 89 84 79 99 94 89 84 79
August 25, 1997................... 97 81 65 50 35 97 81 65 50 35
August 25, 1998................... 96 64 36 11 0 96 64 36 11 0
August 25, 1999................... 94 49 12 0 0 94 49 12 0 0
August 25, 2000................... 92 35 0 0 0 92 35 0 0 0
August 25, 2001................... 90 23 0 0 0 90 23 0 0 0
August 25, 2002................... 88 12 0 0 0 88 12 0 0 0
August 25, 2003................... 85 3 0 0 0 85 3 0 0 0
August 25, 2004................... 83 0 0 0 0 83 0 0 0 0
August 25, 2005................... 80 0 0 0 0 80 0 0 0 0
August 25, 2006................... 77 0 0 0 0 77 0 0 0 0
August 25, 2007................... 74 0 0 0 0 74 0 0 0 0
August 25, 2008................... 70 0 0 0 0 70 0 0 0 0
August 25, 2009................... 66 0 0 0 0 66 0 0 0 0
August 25, 2010................... 62 0 0 0 0 62 0 0 0 0
August 25, 2011................... 57 0 0 0 0 57 0 0 0 0
August 25, 2012................... 52 0 0 0 0 52 0 0 0 0
August 25, 2013................... 47 0 0 0 0 47 0 0 0 0
August 25, 2014................... 41 0 0 0 0 41 0 0 0 0
August 25, 2015................... 34 0 0 0 0 34 0 0 0 0
August 25, 2016................... 27 0 0 0 0 27 0 0 0 0
August 25, 2017................... 19 0 0 0 0 19 0 0 0 0
August 25, 2018................... 11 0 0 0 0 11 0 0 0 0
August 25, 2019................... 2 0 0 0 0 2 0 0 0 0
August 25, 2020................... 0 0 0 0 0 0 0 0 0 0
August 25, 2021................... 0 0 0 0 0 0 0 0 0 0
August 25, 2022................... 0 0 0 0 0 0 0 0 0 0
August 25, 2023................... 0 0 0 0 0 0 0 0 0 0
August 25, 2024................... 0 0 0 0 0 0 0 0 0 0
August 25, 2025................... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**................. 15.9 4.1 2.5 2.0 1.7 15.9 4.1 2.5 2.0 1.7
</TABLE>
------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate of any class is determined by (i)
multiplying the net reductions, if any, of the Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to the
related Distribution Date, (ii) adding the results, and (iii) dividing the
sum by the aggregate of the net reductions of the Certificate Principal
Balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE THIRD
PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM HE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
(Table continued on next page.)
S-46
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-6
------------------------------------ ------------------------------------
DISTRIBUTION DATE 0% 150% 300% 450% 600% 0% 150% 300% 450% 600%
---------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100 100 100 100 100 100 100 100 100 100
August 25, 1996................... 100 100 100 100 100 99 95 92 88 85
August 25, 1997................... 100 100 95 76 58 98 86 75 64 53
August 25, 1998................... 100 93 59 29 10 97 74 54 36 21
August 25, 1999................... 100 75 30 6 0 96 63 36 16 1
August 25, 2000................... 100 58 12 0 0 94 53 23 3 0
August 25, 2001................... 100 43 4 0 0 93 44 13 0 0
August 25, 2002................... 100 30 0 0 0 91 36 6 0 0
August 25, 2003................... 100 19 0 0 0 89 30 1 0 0
August 25, 2004................... 100 13 0 0 0 88 25 0 0 0
August 25, 2005................... 100 10 0 0 0 86 20 0 0 0
August 25, 2006................... 100 6 0 0 0 83 16 0 0 0
August 25, 2007................... 100 3 0 0 0 81 13 0 0 0
August 25, 2008................... 100 1 0 0 0 78 9 0 0 0
August 25, 2009................... 96 0 0 0 0 75 6 0 0 0
August 25, 2010................... 90 0 0 0 0 72 4 0 0 0
August 25, 2011................... 85 0 0 0 0 69 1 0 0 0
August 25, 2012................... 79 0 0 0 0 65 0 0 0 0
August 25, 2013................... 72 0 0 0 0 61 0 0 0 0
August 25, 2014................... 65 0 0 0 0 57 0 0 0 0
August 25, 2015................... 57 0 0 0 0 52 0 0 0 0
August 25, 2016................... 48 0 0 0 0 47 0 0 0 0
August 25, 2017................... 39 0 0 0 0 42 0 0 0 0
August 25, 2018................... 29 0 0 0 0 36 0 0 0 0
August 25, 2019................... 18 0 0 0 0 29 0 0 0 0
August 25, 2020................... 12 0 0 0 0 23 0 0 0 0
August 25, 2021................... 6 0 0 0 0 16 0 0 0 0
August 25, 2022................... 0 0 0 0 0 8 0 0 0 0
August 25, 2023................... 0 0 0 0 0 * 0 0 0 0
August 25, 2024................... 0 0 0 0 0 0 0 0 0 0
August 25, 2025................... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**................. 20.5 6.0 3.5 2.6 2.2 18.8 6.3 3.5 2.6 2.1
<CAPTION>
CLASS A-7 AND CLASS A-19 CLASS A-8
------------------------------------- ------------------------------------
DISTRIBUTION DATE 0% 150% 300% 450% 600% 0% 150% 300% 450% 600%
---------------------------------- ----- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100 100 100 100 100 100 100 100 100 100
August 25, 1996................... 100 100 100 100 100 100 100 100 100 100
August 25, 1997................... 100 100 100 100 100 100 100 100 100 100
August 25, 1998................... 100 100 100 100 100 100 100 100 100 100
August 25, 1999................... 100 100 100 100 100 100 100 100 100 15
August 25, 2000................... 100 100 100 100 14 100 100 100 34 0
August 25, 2001................... 100 100 100 58 0 100 100 100 0 0
August 25, 2002................... 100 100 100 17 0 100 100 72 0 0
August 25, 2003................... 100 100 100 0 0 100 100 10 0 0
August 25, 2004................... 100 100 77 0 0 100 100 0 0 0
August 25, 2005................... 100 100 57 0 0 100 100 0 0 0
August 25, 2006................... 100 100 40 0 0 100 100 0 0 0
August 25, 2007................... 100 100 26 0 0 100 100 0 0 0
August 25, 2008................... 100 100 15 0 0 100 100 0 0 0
August 25, 2009................... 100 100 6 0 0 100 75 0 0 0
August 25, 2010................... 100 100 0 0 0 100 43 0 0 0
August 25, 2011................... 100 100 0 0 0 100 13 0 0 0
August 25, 2012................... 100 91 0 0 0 100 0 0 0 0
August 25, 2013................... 100 76 0 0 0 100 0 0 0 0
August 25, 2014................... 100 61 0 0 0 100 0 0 0 0
August 25, 2015................... 100 48 0 0 0 100 0 0 0 0
August 25, 2016................... 100 37 0 0 0 100 0 0 0 0
August 25, 2017................... 100 26 0 0 0 100 0 0 0 0
August 25, 2018................... 100 16 0 0 0 100 0 0 0 0
August 25, 2019................... 100 7 0 0 0 100 0 0 0 0
August 25, 2020................... 100 0 0 0 0 100 0 0 0 0
August 25, 2021................... 100 0 0 0 0 100 0 0 0 0
August 25, 2022................... 100 0 0 0 0 100 0 0 0 0
August 25, 2023................... 100 0 0 0 0 4 0 0 0 0
August 25, 2024................... 33 0 0 0 0 0 0 0 0 0
August 25, 2025................... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**................. 28.8 20.2 10.7 6.3 4.6 27.6 14.8 7.4 4.9 3.8
</TABLE>
------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate of any class is determined by (i)
multiplying the net reductions, if any, of the Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to the
related Distribution Date, (ii) adding the results, and (iii) dividing the
sum by the aggregate of the net reductions of the Certificate Principal
Balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE THIRD
PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM HE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
(Table continued from previous page and continued on next page.)
S-47
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS A-9 CLASS A-10
------------------------------------ ------------------------------------
DISTRIBUTION DATE 0% 150% 300% 450% 600% 0% 150% 300% 450% 600%
---------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100 100 100 100 100 100 100 100 100 100
August 25, 1996................... 100 100 100 100 100 100 100 100 100 100
August 25, 1997................... 100 100 100 100 100 100 100 100 100 100
August 25, 1998................... 100 100 100 100 74 100 100 100 100 100
August 25, 1999................... 100 100 100 59 4 100 100 100 100 100
August 25, 2000................... 100 100 82 10 0 100 100 100 100 100
August 25, 2001................... 100 100 48 0 0 100 100 100 100 0
August 25, 2002................... 100 100 22 0 0 100 100 100 100 0
August 25, 2003................... 100 100 3 0 0 100 100 100 81 0
August 25, 2004................... 100 89 0 0 0 100 100 100 45 0
August 25, 2005................... 100 73 0 0 0 100 100 100 32 0
August 25, 2006................... 100 58 0 0 0 100 100 100 23 0
August 25, 2007................... 100 45 0 0 0 100 100 100 16 0
August 25, 2008................... 100 33 0 0 0 100 100 100 12 0
August 25, 2009................... 100 23 0 0 0 100 100 100 8 0
August 25, 2010................... 100 13 0 0 0 100 100 96 6 0
August 25, 2011................... 100 4 0 0 0 100 100 76 4 0
August 25, 2012................... 100 0 0 0 0 100 100 60 3 0
August 25, 2013................... 100 0 0 0 0 100 100 47 2 0
August 25, 2014................... 100 0 0 0 0 100 100 36 1 0
August 25, 2015................... 100 0 0 0 0 100 100 28 1 0
August 25, 2016................... 100 0 0 0 0 100 100 21 1 0
August 25, 2017................... 100 0 0 0 0 100 100 16 * 0
August 25, 2018................... 100 0 0 0 0 100 100 12 * 0
August 25, 2019................... 100 0 0 0 0 100 100 9 * 0
August 25, 2020................... 82 0 0 0 0 100 99 6 * 0
August 25, 2021................... 57 0 0 0 0 100 74 4 * 0
August 25, 2022................... 30 0 0 0 0 100 52 3 * 0
August 25, 2023................... 1 0 0 0 0 100 32 1 * 0
August 25, 2024................... 0 0 0 0 0 100 14 1 * 0
August 25, 2025................... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**................. 26.3 11.9 6.1 4.2 3.4 29.7 27.2 18.7 9.9 5.6
<CAPTION>
CLASS A-11 CLASS A-12
------------------------------------- ------------------------------------
DISTRIBUTION DATE 0% 150% 300% 450% 600% 0% 150% 300% 450% 600%
---------------------------------- ----- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................ 100 100 100 100 100 100 100 100 100 100
August 25, 1996................... 100 100 100 100 100 100 100 100 100 100
August 25, 1997................... 100 100 100 100 100 100 100 100 100 100
August 25, 1998................... 100 100 100 100 100 100 100 100 100 37
August 25, 1999................... 100 100 100 100 100 100 100 100 0 0
August 25, 2000................... 100 100 100 100 100 100 100 55 0 0
August 25, 2001................... 100 100 100 100 0 100 100 0 0 0
August 25, 2002................... 100 100 100 100 0 100 100 0 0 0
August 25, 2003................... 100 100 100 81 0 100 100 0 0 0
August 25, 2004................... 100 100 100 45 0 100 72 0 0 0
August 25, 2005................... 100 100 100 32 0 100 33 0 0 0
August 25, 2006................... 100 100 100 23 0 100 0 0 0 0
August 25, 2007................... 100 100 100 16 0 100 0 0 0 0
August 25, 2008................... 100 100 100 12 0 100 0 0 0 0
August 25, 2009................... 100 100 100 8 0 100 0 0 0 0
August 25, 2010................... 100 100 96 6 0 100 0 0 0 0
August 25, 2011................... 100 100 76 4 0 100 0 0 0 0
August 25, 2012................... 100 100 60 3 0 100 0 0 0 0
August 25, 2013................... 100 100 47 2 0 100 0 0 0 0
August 25, 2014................... 100 100 36 1 0 100 0 0 0 0
August 25, 2015................... 100 100 28 1 0 100 0 0 0 0
August 25, 2016................... 100 100 21 1 0 100 0 0 0 0
August 25, 2017................... 100 100 16 * 0 100 0 0 0 0
August 25, 2018................... 100 100 12 * 0 100 0 0 0 0
August 25, 2019................... 100 100 9 * 0 100 0 0 0 0
August 25, 2020................... 100 99 6 * 0 56 0 0 0 0
August 25, 2021................... 100 74 4 * 0 0 0 0 0 0
August 25, 2022................... 100 52 3 * 0 0 0 0 0 0
August 25, 2023................... 100 32 1 * 0 0 0 0 0 0
August 25, 2024................... 100 14 1 * 0 0 0 0 0 0
August 25, 2025................... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**................. 29.7 27.2 18.7 9.9 5.6 25.1 9.6 5.1 3.7 3.0
</TABLE>
------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate of any class is determined by (i)
multiplying the net reductions, if any, of the Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to the
related Distribution Date, (ii) adding the results, and (iii) dividing the
sum by the aggregate of the net reductions of the Certificate Principal
Balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE THIRD
PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM HE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
(Table continued from previous page and continued on next page.)
S-48
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS A-13 CLASS A-14
------------------------------------ -------------------------------------
DISTRIBUTION DATE 0% 150% 300% 450% 600% 0% 150% 300% 450% 600%
------------------------------ ---- ---- ---- ---- ---- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............ 100 100 100 100 100 100 100 100 100 100
August 25, 1996............... 100 100 100 100 100 100 100 100 100 100
August 25, 1997............... 100 100 100 100 100 100 100 100 100 100
August 25, 1998............... 100 100 100 100 100 100 100 100 100 100
August 25, 1999............... 100 100 100 99 7 100 100 100 100 100
August 25, 2000............... 100 100 100 17 0 100 100 100 100 100
August 25, 2001............... 100 100 81 0 0 100 100 100 100 0
August 25, 2002............... 100 100 37 0 0 100 100 100 100 0
August 25, 2003............... 100 100 5 0 0 100 100 100 81 0
August 25, 2004............... 100 100 0 0 0 100 100 100 45 0
August 25, 2005............... 100 100 0 0 0 100 100 100 32 0
August 25, 2006............... 100 99 0 0 0 100 100 100 23 0
August 25, 2007............... 100 77 0 0 0 100 100 100 16 0
August 25, 2008............... 100 57 0 0 0 100 100 100 12 0
August 25, 2009............... 100 38 0 0 0 100 100 100 8 0
August 25, 2010............... 100 22 0 0 0 100 100 96 6 0
August 25, 2011............... 100 7 0 0 0 100 100 76 4 0
August 25, 2012............... 100 0 0 0 0 100 100 60 3 0
August 25, 2013............... 100 0 0 0 0 100 100 47 2 0
August 25, 2014............... 100 0 0 0 0 100 100 36 1 0
August 25, 2015............... 100 0 0 0 0 100 100 28 1 0
August 25, 2016............... 100 0 0 0 0 100 100 21 1 0
August 25, 2017............... 100 0 0 0 0 100 100 16 * 0
August 25, 2018............... 100 0 0 0 0 100 100 12 * 0
August 25, 2019............... 100 0 0 0 0 100 100 9 * 0
August 25, 2020............... 100 0 0 0 0 100 99 6 * 0
August 25, 2021............... 97 0 0 0 0 100 74 4 * 0
August 25, 2022............... 51 0 0 0 0 100 52 3 * 0
August 25, 2023............... 2 0 0 0 0 100 32 1 * 0
August 25, 2024............... 0 0 0 0 0 100 14 1 * 0
August 25, 2025............... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**............. 27.0 13.5 6.8 4.6 3.6 29.7 27.2 18.7 9.9 5.6
<CAPTION>
CLASS A-15 CLASS A-16
------------------------------------- ------------------------------------
DISTRIBUTION DATE 0% 150% 300% 450% 600% 0% 150% 300% 450% 600%
------------------------------ ----- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............ 100 100 100 100 100 100 100 100 100 100
August 25, 1996............... 100 100 100 100 100 99 99 99 99 99
August 25, 1997............... 100 100 100 100 100 98 98 98 98 98
August 25, 1998............... 100 100 100 100 82 97 97 97 97 97
August 25, 1999............... 100 100 100 72 35 96 96 96 96 96
August 25, 2000............... 100 100 88 39 4 95 95 95 95 95
August 25, 2001............... 100 100 64 18 0 94 91 89 86 81
August 25, 2002............... 100 100 47 5 0 93 87 81 75 51
August 25, 2003............... 100 100 34 0 0 91 81 71 61 32
August 25, 2004............... 100 92 24 0 0 90 74 59 47 20
August 25, 2005............... 100 81 18 0 0 88 66 48 33 13
August 25, 2006............... 100 72 13 0 0 86 59 38 24 8
August 25, 2007............... 100 63 8 0 0 84 52 31 17 5
August 25, 2008............... 100 54 5 0 0 82 46 25 12 3
August 25, 2009............... 100 47 2 0 0 80 41 20 9 2
August 25, 2010............... 100 40 0 0 0 77 36 16 6 1
August 25, 2011............... 100 34 0 0 0 75 32 12 4 1
August 25, 2012............... 100 29 0 0 0 72 28 10 3 *
August 25, 2013............... 100 24 0 0 0 68 24 8 2 *
August 25, 2014............... 100 19 0 0 0 65 21 6 1 *
August 25, 2015............... 100 15 0 0 0 61 18 5 1 *
August 25, 2016............... 100 12 0 0 0 57 15 3 1 *
August 25, 2017............... 100 8 0 0 0 52 13 3 * *
August 25, 2018............... 100 5 0 0 0 47 10 2 * *
August 25, 2019............... 100 2 0 0 0 42 8 1 * *
August 25, 2020............... 88 0 0 0 0 36 7 1 * *
August 25, 2021............... 71 0 0 0 0 30 5 1 * *
August 25, 2022............... 52 0 0 0 0 23 3 * * *
August 25, 2023............... 32 0 0 0 0 15 2 * * *
August 25, 2024............... 10 0 0 0 0 7 1 * * *
August 25, 2025............... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**............. 27.1 14.5 7.6 4.9 3.8 20.5 13.6 10.7 9.2 7.6
</TABLE>
------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate of any class is determined by (i)
multiplying the net reductions, if any, of the Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to the
related Distribution Date, (ii) adding the results, and (iii) dividing the
sum by the aggregate of the net reductions of the Certificate Principal
Balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE THIRD
PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM HE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
(Table continued from previous page and continued on next page.)
S-49
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS A-17 CLASS M-1
------------------------------------ ------------------------------------
DISTRIBUTION DATE 0% 150% 300% 450% 600% 0% 150% 300% 450% 600%
--------------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............... 100 100 100 100 100 100 100 100 100 100
August 25, 1996.................. 99 97 94 91 89 99 99 99 99 99
August 25, 1997.................. 98 90 82 74 66 98 98 98 98 98
August 25, 1998.................. 97 81 66 54 42 97 97 97 97 97
August 25, 1999.................. 96 73 54 39 27 96 96 96 96 96
August 25, 2000.................. 95 65 44 28 17 95 95 95 95 95
August 25, 2001.................. 93 59 35 20 11 94 88 81 74 63
August 25, 2002.................. 92 53 28 14 7 93 79 64 49 0
August 25, 2003.................. 90 47 23 10 4 91 66 56 40 0
August 25, 2004.................. 89 42 18 7 3 90 56 47 31 0
August 25, 2005.................. 87 37 15 5 2 88 50 38 22 0
August 25, 2006.................. 85 33 12 4 1 86 44 30 16 0
August 25, 2007.................. 83 30 9 3 1 84 39 24 11 0
August 25, 2008.................. 80 26 8 2 * 82 35 19 8 0
August 25, 2009.................. 78 23 6 1 * 80 31 15 6 0
August 25, 2010.................. 75 20 5 1 * 77 27 12 4 0
August 25, 2011.................. 73 18 4 1 * 75 24 10 3 0
August 25, 2012.................. 69 15 3 * * 72 21 8 2 0
August 25, 2013.................. 66 13 2 * * 68 18 6 1 0
August 25, 2014.................. 63 12 2 * * 65 16 5 1 0
August 25, 2015.................. 59 10 1 * * 61 13 4 1 0
August 25, 2016.................. 54 8 1 * * 57 11 3 * 0
August 25, 2017.................. 50 7 1 * * 52 10 2 * 0
August 25, 2018.................. 45 6 1 * * 47 8 2 * 0
August 25, 2019.................. 40 5 * * * 42 6 1 * 0
August 25, 2020.................. 34 4 * * * 36 5 1 * 0
August 25, 2021.................. 28 3 * * * 30 4 1 * 0
August 25, 2022.................. 22 2 * * * 23 3 * * 0
August 25, 2023.................. 14 1 * * * 15 2 * * 0
August 25, 2024.................. 7 * * * 0 7 1 * * 0
August 25, 2025.................. 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**................ 20.1 9.3 5.7 4.1 3.2 20.5 11.9 9.7 8.1 6.0
<CAPTION>
CLASS M-2 AND CLASS M-3
-------------------------------------
DISTRIBUTION DATE 0% 150% 300% 450% 600%
--------------------------------- ----- ---- ---- ---- ----
<S> <<C> <C> <C> <C> <C>
Initial Percentage............... 100 100 100 100 100
August 25, 1996.................. 99 99 99 99 99
August 25, 1997.................. 98 98 98 98 98
August 25, 1998.................. 97 97 97 97 97
August 25, 1999.................. 96 96 96 96 96
August 25, 2000.................. 95 95 95 95 95
August 25, 2001.................. 94 94 94 94 94
August 25, 2002.................. 93 93 93 93 88
August 25, 2003.................. 91 91 81 76 55
August 25, 2004.................. 90 86 68 58 35
August 25, 2005.................. 88 77 55 41 22
August 25, 2006.................. 86 69 44 30 14
August 25, 2007.................. 84 61 35 21 9
August 25, 2008.................. 82 54 28 15 5
August 25, 2009.................. 80 48 22 11 3
August 25, 2010.................. 77 42 18 8 2
August 25, 2011.................. 75 37 14 5 1
August 25, 2012.................. 72 32 11 4 1
August 25, 2013.................. 68 28 9 3 *
August 25, 2014.................. 65 24 7 2 *
August 25, 2015.................. 61 21 5 1 *
August 25, 2016.................. 57 18 4 1 *
August 25, 2017.................. 52 15 3 1 *
August 25, 2018.................. 47 12 2 * *
August 25, 2019.................. 42 10 2 * *
August 25, 2020.................. 36 8 1 * *
August 25, 2021.................. 30 6 1 * *
August 25, 2022.................. 23 4 * * *
August 25, 2023.................. 15 2 * * *
August 25, 2024.................. 7 1 * * *
August 25, 2025.................. 0 0 0 0 0
Weighted Average
Life in Years**................ 20.5 14.7 11.4 10.0 8.7
</TABLE>
------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a Certificate of any class is determined by (i)
multiplying the net reductions, if any, of the Certificate Principal Balance
by the number of years from the date of issuance of the Certificate to the
related Distribution Date, (ii) adding the results, and (iii) dividing the
sum by the aggregate of the net reductions of the Certificate Principal
Balance described in (i) above.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE THIRD
PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE MORTGAGE LOANS WHICH DIFFER FROM HE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
(Table continued from previous page.)
S-50
<PAGE>
PRINCIPAL ONLY CERTIFICATE AND STRIPPED INTERESTS CERTIFICATE YIELD
CONSIDERATIONS
The amounts payable with respect to the Principal Only Certificates derive
only from principal payments on the Discount Mortgage Loans. As a result, the
yield on the Principal Only Certificates will be adversely affected by slower
than expected payments of principal (including prepayments, defaults and
liquidations) on the Discount Mortgage Loans.
The yield to maturity on the Stripped Interests Certificates will be
extremely sensitive to both the timing of receipt of prepayments and the overall
rate of principal prepayments and defaults on the Mortgage Loans, which rate may
fluctuate significantly over time. Investors in the Stripped Interests
Certificates should fully consider the risk that a rapid rate of prepayments on
the Mortgage Loans could result in the failure of such investors to fully
recover their investments. Because the Pool Strip Rates on the Discount Mortgage
Loans equal 0.00%, the yield to investors on the Stripped Interests Certificates
will not be affected by prepayments on the Discount Mortgage Loans.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Principal Only Certificates and Stripped Interests Certificates
to various constant rates of prepayment on the Mortgage Loans by projecting the
monthly aggregate payments on the Principal Only Certificates and Stripped
Interests Certificates and computing the corresponding pre-tax yields to
maturity on a corporate bond equivalent basis, based on the assumptions
described in the third paragraph preceding the table entitled 'Percent of
Initial Certificate Principal Balance Outstanding at the Following Percentages
of SPA' under the heading 'Certain Yield and Prepayment
Considerations -- General' herein, including the assumptions regarding the
characteristics and performance of the Mortgage Loans which differ from the
actual characteristics and performance thereof and assuming the aggregate
purchase prices set forth below. Any differences between such assumptions and
the actual characteristics and performance of the Mortgage Loans and of the
Principal Only Certificates and Stripped Interests Certificates may result in
yields being different from those shown in such tables. Discrepancies between
assumed and actual characteristics and performance underscore the hypothetical
nature of the tables, which are provided only to give a general sense of the
sensitivity of yields in varying prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE PRINCIPAL ONLY
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF SPA
<TABLE>
<CAPTION>
ASSUMED
PURCHASE PRICE 0% 150% 300% 450% 600%
-------------- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
$792,418 ................................ 2.8% 6.8% 11.4% 15.7% 19.7%
</TABLE>
PRE-TAX YIELD TO MATURITY OF THE STRIPPED INTERESTS
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF SPA
<TABLE>
<CAPTION>
ASSUMED
PURCHASE PRICE 0% 150% 300% 450% 600%
-------------- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
$8,098,228 ................................ 30.5% 22.9% 15.0% 6.9% (1.4)%
</TABLE>
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Principal Only Certificates and
Stripped Interests Certificates, would cause the discounted present value of
such assumed stream of cash flows to equal the assumed purchase price listed in
the applicable table. Accrued interest is included in the assumed purchase price
and is used in computing the corporate bond equivalent yields shown. These
yields do not take into account the different interest rates at which investors
may be able to reinvest funds received by them as distributions on the Principal
Only Certificates and Stripped Interests Certificates, and thus do not reflect
the return on any investment in the Principal Only Certificates and Stripped
Interests Certificates when any reinvestment rates other than the discount rates
are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the
S-51
<PAGE>
Principal Only Certificates and Stripped Interests Certificates is likely to
differ from those shown in the tables, even if all of the Mortgage Loans prepay
at the indicated constant percentages of SPA over any given time period or over
the entire life of the Certificates. A lower than anticipated rate of principal
prepayments on the Discount Mortgage Loans will have a material adverse effect
on the yield to maturity of the Principal Only Certificates. The rate and timing
of principal prepayments on the Discount Mortgage Loans may differ from the rate
and timing of principal prepayments on the Mortgage Pool. In addition, because
the Discount Mortgage Loans have Net Mortgage Rates that are lower than the Net
Mortgage Rates of the Non-Discount Mortgage Loans, and because Mortgage Loans
with lower Net Mortgage Rates are likely to have lower Mortgage Rates, the
Discount Mortgage Loans are generally likely to prepay under most circumstances
at a lower rate than the Non-Discount Mortgage Loans. In addition, holders of
the Stripped Interests Certificates generally have rights to relatively larger
portions of interest payments on Mortgage Loans with higher Mortgage Rates;
thus, the yield on the Stripped Interests Certificates will be materially
adversely affected to a greater extent than on the other Offered Certificates if
the Mortgage Loans with higher Mortgage Rates prepay faster than the Mortgage
Loans with lower Mortgage Rates. Because Mortgage Loans having higher Pool Strip
Rates generally have higher Mortgage Rates, such Mortgage Loans are generally
more likely to be prepaid under most circumstances than are Mortgage Loans
having lower Pool Strip Rates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Principal Only Certificates and
Stripped Interests Certificates will conform to the yields described herein.
Moreover, the various remaining terms to maturity of the Mortgage Loans could
produce slower or faster principal distributions than indicated in the preceding
table at the various constant percentages of SPA specified, even if the weighted
average remaining term to maturity of the Mortgage Loans is as assumed.
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment under a variety of
scenarios. Investors in the Stripped Interests Certificates should fully
consider the risk that a rapid rate of prepayments on the Mortgage Loans could
result in the failure of such investors to fully recover their investments.
For additional considerations relating to the yield on the Certificates,
see 'Yield Considerations' and 'Maturity and Prepayment Considerations' in the
Prospectus.
CLASS M-2 AND CLASS M-3 CERTIFICATE YIELD CONSIDERATIONS
If the Certificate Principal Balance of the Class B Certificates has been
reduced to zero, the yield to maturity on the Class M-3 Certificates will become
extremely sensitive to losses on the Mortgage Loans (and the timing thereof)
that are covered by Subordination, because the entire amount of such losses will
be allocated to the Class M-3 Certificates. The aggregate initial Certificate
Principal Balance of the Class B Certificates is equal to approximately 1.25% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date. If
the Certificate Principal Balances of the Class B Certificates and Class M-3
Certificates have been reduced to zero, the yield to maturity on the Class M-2
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by Subordination, because the entire
amount of such losses will be allocated to the Class M-2 Certificates. The
aggregate initial Certificate Principal Balance of the Class M-3 Certificates
and Class B Certificates is equal to approximately 2.25% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date.
Defaults on mortgage loans may be measured relative to a default standard
or model. The model used in this Prospectus Supplement, the standard default
assumption ('SDA'), represents an assumed rate of default each month relative to
the then outstanding performing principal balance of a pool of new mortgage
loans. A default assumption of 100% SDA assumes constant default rates of 0.02%
per annum of the then outstanding principal balance of such mortgage loans in
the first month of the life of the mortgage loans and an additional 0.02% per
annum in each month thereafter until the 30th month. Beginning in the 30th month
and in each month thereafter through the 60th month of the life of the mortgage
loans, 100% SDA assumes a constant default rate of 0.60% per annum each month.
Beginning in the 61st month and in each month thereafter through the 120th month
of the life of the mortgage loans, 100% SDA assumes that the constant default
rate declines each month by 0.0095% per annum, and that the constant default
rate remains at 0.03% per annum in each month after the 120th
S-52
<PAGE>
month. For the purposes of the tables below, it is assumed that there is no
delay between the default and liquidation of the mortgage loans. As used in the
table below, '0% SDA' assumes default rates equal to 0% of SDA (no defaults).
Correspondingly, '100% SDA' assumes default rates equal to 100% of SDA, and so
forth. SDA does not purport to be a historical description of default experience
or a prediction of the anticipated rate of default of any pool of mortgage
loans, including the Mortgage Loans.
The following tables indicate the sensitivity of the yield to maturity on
the Class M-2 Certificates and Class M-3 Certificates to various rates of
prepayment and varying levels of aggregate Realized Losses by projecting the
monthly aggregate cash flows on the Class M-2 Certificates and Class M-3
Certificates and computing the corresponding pre-tax yield to maturity on a
corporate bond equivalent basis. The tables are based on the assumptions
described in clauses (i) through (iii) and (v) through (ix) in the third
paragraph preceding the table entitled 'Percent of Initial Certificate Principal
Balance Outstanding at the Following Percentages of SPA' under the heading
'Certain Yield and Prepayment Considerations -- General' herein, including the
assumptions regarding the characteristics and performance of the Mortgage Loans,
which differ from the actual characteristics and performance thereof, and
assuming further that (i) defaults and final liquidations on the Mortgage Loans
occur on the last day of each month at the respective SDA percentages set forth
in the tables, (ii) each liquidation results in a Realized Loss allocable to
principal equal to the percentage indicated (the 'Loss Severity Percentage')
times the principal balances of the Mortgage Loans assumed to be liquidated,
(iii) there are no delinquencies on the Mortgage Loans, and principal payments
on the Mortgage Loans (other than those on Mortgage Loans assumed to be
liquidated) will be timely received together with prepayments, if any, at the
respective constant percentages of SPA set forth in the tables, before giving
effect to defaults in such periods, (iv) there are no Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses,
(v) the assumptions made in clauses (a)(i), (b)(i) and (b)(ii) in the eighth
paragraph of the section entitled 'Description of the Certificates -- Principal
Distributions on the Senior Certificates' are not applicable and (vi) the
purchase prices of the Class M-2 Certificates and Class M-3 Certificates will be
$5,477,649 and $4,200,618, respectively, including accrued interest. Investors
should also consider the possibility that aggregate losses incurred may not in
fact be materially reduced by higher prepayment speeds because mortgage loans
that would otherwise ultimately default and be liquidated may be less likely to
be prepaid. In addition, investors should be aware that the following tables are
based upon the assumption that the Class M-2 Certificates and Class M-3
Certificates are priced at a discount. Since prepayments will occur at par, the
yield on the Class M-2 Certificates and Class M-3 Certificates may increase due
to such prepayments, even if losses occur. Any differences between such
assumptions and the actual characteristics and performance of the Mortgage Loans
and of the Certificates may result in yields different from those shown in such
tables. Discrepancies between assumed and actual characteristics and performance
underscore the hypothetical nature of the tables, which are provided only to
give a general sense of the sensitivity of yields in varying Realized Loss and
prepayment scenarios.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE CLASS M-2 CERTIFICATES
AND CLASS M-3 CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
CLASS M-2 CERTIFICATES
<TABLE>
<CAPTION>
LOSS PERCENTAGE OF SPA
PERCENTAGE SEVERITY -------------------------------------------
OF SDA PERCENTAGE 0% 150% 300% 450% 600%
---------- ---------- ------ ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
0% N/A ....................................... 7.99% 8.06% 8.12% 8.16% 8.21%
100% 30% ....................................... 7.99% 8.04% 8.13% 8.16% 8.21%
200% 30% ....................................... 7.63% 8.02% 8.13% 8.16% 8.21%
300% 30% ....................................... (6.17)% 6.81% 8.12% 8.16% 8.21%
400% 30% ....................................... (24.33)% (1.33)% 6.71% 8.17% 8.21%
</TABLE>
S-53
<PAGE>
CLASS M-3 CERTIFICATES
<TABLE>
<CAPTION>
LOSS PERCENTAGE OF SPA
PERCENTAGE SEVERITY -----------------------------------------------
OF SDA PERCENTAGE 0% 150% 300% 450% 600%
---------- --------------------------------------------- ------ ------ ------ ----- ----
<S> <C> <C> <C> <C> <C> <C>
0% N/A.......................................... 8.45% 8.59% 8.74% 8.82% 8.92%
100% 30%.......................................... 8.43% 8.55% 8.74% 8.82% 8.92%
200% 30%.......................................... (13.43)% 5.08% 8.58% 8.82% 8.92%
300% 30%.......................................... (32.90)% (23.57)% 1.28% 6.81% 8.93%
400% 30%.......................................... (46.76)% (39.93)% (29.86)% (1.35)% 5.70%
</TABLE>
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class M-2 Certificates or Class
M-3 Certificates, as applicable, would cause the discounted present value of
such assumed stream of cash flows to equal the applicable assumed purchase price
referred to above, and converting such rate to a semi-annual corporate bond
equivalent yield. Accrued interest, if any, is included in the assumed purchase
prices and is used in computing the corporate bond equivalent yields shown.
These yields do not take into account the different interest rates at which
investors may be able to reinvest funds received by them as distributions on the
Class M-2 Certificates or Class M-3 Certificates, and thus do not reflect the
return on any investment in the Class M-2 Certificates or Class M-3 Certificates
when any reinvestment rates other than the discount rates set forth in the
preceding tables are considered.
The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Certificates in the aggregate under each of the
scenarios in the preceding tables, expressed as a percentage of the aggregate
outstanding principal balance of the Mortgage Loans as of the Cut-off Date:
AGGREGATE REALIZED LOSSES
<TABLE>
<CAPTION>
LOSS PERCENTAGE OF SPA
PERCENTAGE SEVERITY ----------------------------------------
OF SDA PERCENTAGE 0% 150% 300% 450% 600%
---------- --------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
100% 30%................................................ 1.18% 0.84% 0.63% 0.48% 0.38%
200% 30%................................................ 2.31% 1.65% 1.24% 0.95% 0.75%
300% 30%................................................ 3.40% 2.43% 1.83% 1.42% 1.12%
400% 30%................................................ 4.46% 3.19% 2.41% 1.87% 1.48%
</TABLE>
Notwithstanding the assumed Percentages of SDA, Loss Severity Percentages
and prepayment rates reflected in the preceding tables, it is highly unlikely
that the Mortgage Loans will be prepaid or that Realized Losses will be incurred
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the pre-tax yields to maturity on
the Class M-2 Certificates and Class M-3 Certificates are likely to differ from
those shown in the tables. There can be no assurance that the Mortgage Loans
will prepay at any particular rate or that Realized Losses will be incurred at
any particular level or that the yields on the Class M-2 Certificates and Class
M-3 Certificates will conform to the yields described herein. Moreover, the
various remaining terms to maturity of the Mortgage Loans could produce slower
or faster principal distributions than indicated in the preceding tables at the
various constant percentages of SPA specified, even if the weighted average
remaining term to maturity of the Mortgage Loans is as assumed.
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment and Realized Losses under a
variety of scenarios. Investors in the Class M-2 Certificates and particularly
in the Class M-3 Certificates should fully consider the risk that Realized
Losses on the Mortgage Loans could result in the failure of such investors to
fully recover their investments. For additional considerations relating to the
yield on the Certificates, see 'Yield Considerations' and 'Maturity and
Prepayment Considerations' in the Prospectus.
S-54
<PAGE>
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
The Residual Certificateholders' after-tax rate of return on their Residual
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their Residual
Certificates during the early years of the Trust Fund's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the Mortgage Pool.
The Residual Certificateholders should consult their tax advisors as to the
effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See 'Certain Federal Income Tax
Consequences' herein and in the Prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the 'Pooling and Servicing Agreement') dated as of August 1, 1995,
among the Company, the Master Servicer, and The First National Bank of Chicago,
as Trustee. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Offered Certificates. The Trustee will
appoint Norwest Bank Minnesota, National Association to serve as Custodian in
connection with the Certificates. The Offered Certificates will be transferable
and exchangeable at the corporate trust office of the Trustee, which will serve
as Certificate Registrar and Paying Agent. The Company will provide a
prospective or actual Certificateholder without charge, on written request, a
copy (without exhibits) of the Pooling and Servicing Agreement. Requests should
be addressed to the President, Residential Funding Mortgage Securities I, Inc.,
8400 Normandale Lake Boulevard, Suite 700, Minneapolis, Minnesota 55437.
Pursuant to the Pooling and Servicing Agreement, transfers of Residual
Certificates are prohibited to any non-United States person. Transfers of
certain of the Certificates, including the Residual Certificates, are also
subject to additional transfer restrictions as set forth in the Pooling and
Servicing Agreement. See 'Certain Federal Income Tax Consequences' herein and
'Certain Federal Income Tax Consequences -- REMICs -- Tax on Transfers of REMIC
Residual Certificates to Certain Organizations' and ' -- Taxation of Owners of
REMIC Residual Certificates -- Noneconomic REMIC Residual Certificates' in the
Prospectus. In addition to the circumstances described in the Prospectus, the
Company may terminate the Trustee for cause under certain circumstances. See
'The Pooling and Servicing Agreement -- The Trustee' in the Prospectus.
THE MASTER SERVICER
Residential Funding, an indirect wholly-owned subsidiary of GMAC Mortgage
and an affiliate of the Company, will act as master servicer for the
Certificates pursuant to the Pooling and Servicing Agreement. For a general
description of Residential Funding and its activities, see 'Residential Funding
Corporation' in the Prospectus.
The following tables set forth certain information concerning the
delinquency experience (including pending foreclosures) on one- to four-family
residential mortgage loans that generally complied with Residential Funding's
published loan purchase criteria at the time of purchase by Residential Funding
and were being master serviced by Residential Funding on December 31, 1993,
December 31, 1994 and June 30, 1995. The tables set forth information for the
total mortgage loan portfolio and for mortgage loans underwritten under a
reduced loan documentation program described under 'Mortgage Loan
Program -- Underwriting Standards' in the Prospectus. The indicated periods of
delinquency are based
S-55
<PAGE>
on the number of days past due on a contractual basis. No mortgage loan is
considered delinquent for these purposes until, in general, it is one month past
due on a contractual basis.
TOTAL LOAN PORTFOLIO DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993 AT DECEMBER 31, 1994 AT JUNE 30, 1995
----------------------- -------------------------- ---------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS LOANS LOANS
-------- ----------- ----------- ----------- ------ -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio.......... 79,293 $21,538,566 90,308 $23,562,318 98,475 $24,374,143
Period of Delinquency
31 to 59 days............ 1,264 316,487 1,373 343,184 1,921 352,282
60 to 89 days............ 299 77,960 431 100,943 563 106,360
90 days or more(1)....... 228 66,045 357 94,041 463 70,605
Foreclosures Pending.......... 1,021 304,070 763 217,244 877 236,708
-------- ----------- ----------- ----------- ------ -----------
Total Delinquent Loans........ 2,812 $ 764,562 2,924 $ 755,412 3,824 $ 765,955
-------- ----------- ----------- ----------- ------ -----------
-------- ----------- ----------- ----------- ------ -----------
Percent of Loan Portfolio..... 3.546% 3.550% 3.238% 3.206% 3.883% 3.142%
</TABLE>
------------
(1) Does not include foreclosures pending.
TOTAL REDUCED LOAN DOCUMENTATION LOAN PORTFOLIO DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AT DECEMBER 31, 1993 AT DECEMBER 31, 1994 AT JUNE 30, 1995
-------------------- -------------------- --------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS LOANS LOANS
------ ---------- ------ ---------- ------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Reduced Loan Documentation
Loan Portfolio....................... 22,104 $5,242,372 23,962 $5,192,295 25,166 $5,230,111
Period of Delinquency
31 to 59 days........................ 496 122,334 442 104,501 456 99,542
60 to 89 days........................ 123 33,508 107 29,184 134 36,763
90 days or more(1)................... 101 30,265 123 34,527 70 18,844
Foreclosures Pending...................... 473 149,380 306 94,399 315 93,508
------ ---------- ------ ---------- ------ ----------
Total Delinquent Loans.................... 1,193 $ 335,487 978 $ 262,611 975 $ 248,657
------ ---------- ------ ---------- ------ ----------
------ ---------- ------ ---------- ------ ----------
Percent of Reduced Loan Documentation Loan
Portfolio............................... 5.397% 6.400% 4.081% 5.058% 3.874% 4.754%
</TABLE>
------------
(1) Does not include foreclosures pending.
The following tables set forth certain information concerning foreclosed
mortgage loans and loan loss experience of Residential Funding as of December
31, 1993, December 31, 1994 and June 30, 1995 with respect to the mortgage loans
referred to above. For purposes of the following tables, Average Portfolio
Balance for the period indicated is based on end of month balances divided by
the number of months in the period indicated, the Foreclosed Loans Ratio is
equal to the aggregate principal balance of Foreclosed Loans divided by the
Total Loan Portfolio at the end of the indicated period, and the Gross Loss
Ratios and Net Loss Ratios are computed by dividing the Gross Loss or Net Loss
respectively during the period indicated by the Average Portfolio Balance during
such period.
S-56
<PAGE>
TOTAL LOAN PORTFOLIO FORECLOSURE EXPERIENCE
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR AT OR FOR
THE YEAR THE YEAR THE THREE-MONTH
ENDED ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995
------------ ------------ ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total Loan Portfolio........................................... $ 21,538,566 $ 23,562,318 $24,374,143
Average Portfolio Balance...................................... $ 21,245,118 $ 23,080,841 $23,941,815
Foreclosed Loans(1)............................................ $ 138,634 $ 149,334 $ 128,270
Liquidated Foreclosed Loans(2)................................. $ 285,323 $ 323,801 $ 130,990
Foreclosed Loans Ratio......................................... 0.644% 0.634% 0.526%
Gross Loss(3).................................................. $ 89,508 $ 98,625 $ 43,218
Gross Loss Ratio............................................... 0.421% 0.427% 0.181%
Covered Loss(4)................................................ $ 82,647 $ 84,869 $ 30,139
Net Loss(5).................................................... $ 6,861 $ 13,756 $ 13,080
Net Loss Ratio................................................. 0.032% 0.060% 0.055%
Excess Recovery(6)............................................. $ 85 $ 221 $ 134
</TABLE>
TOTAL REDUCED LOAN DOCUMENTATION LOAN PORTFOLIO FORECLOSURE EXPERIENCE
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR AT OR FOR
THE YEAR THE YEAR THE THREE-MONTH
ENDED ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1993 1994 1995
------------ ------------ ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total Reduced Loan Documentation
Loan Portfolio............................................ $ 5,242,372 $ 5,192,295 $ 5,230,111
Average Portfolio Balance...................................... $ 5,596,217 $ 5,265,539 $ 5,181,375
Foreclosed Loans(1)............................................ $ 72,547 $ 61,337 $ 45,678
Liquidated Foreclosed Loans(2)................................. $ 152,092 $ 142,353 $ 55,405
Foreclosed Loans Ratio......................................... 1.384% 1.181% 0.873%
Gross Loss(3).................................................. $ 54,323 $ 48,896 $ 20,098
Gross Loss Ratio............................................... 0.971% 0.929% 0.388%
Covered Loss(4)................................................ $ 51,487 $ 42,715 $ 12,369
Net Loss(5).................................................... $ 2,836 $ 6,181 $ 7,730
Net Loss Ratio................................................. 0.051% 0.117% 0.149%
Excess Recovery(6)............................................. $ 10 $ 89 $ 61
</TABLE>
------------
(1) For purposes of these tables, Foreclosed Loans includes the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by Residential Funding, by investors or by an insurer
following foreclosure or delivery of a deed in lieu of foreclosure and which
had not been liquidated by the end of the period indicated.
(2) Liquidated Foreclosed Loans is the sum of the principal balances of the
foreclosed loans liquidated during the period indicated.
(3) Gross Loss is the sum of gross losses less net gains (Excess Recoveries) on
all Mortgage Loans liquidated during the period indicated. Gross Loss for
any Mortgage Loan is equal to the difference between (a) the principal
balance plus accrued interest plus all liquidation expenses related to such
Mortgage Loan and (b) all amounts received in connection with the
liquidation of the related Mortgaged Property, excluding amounts received
from mortgage pool or special hazard insurance or other forms of credit
enhancement, as described in footnote (4) below. Net gains from the
liquidation of mortgage loans are identified in footnote (6) below.
(4) Covered Loss, for the period indicated, is equal to the aggregate of all
proceeds received in connection with liquidated Mortgage Loans from mortgage
pool insurance, special hazard insurance
(footnotes continued on next page)
S-57
<PAGE>
(footnotes continued from previous page)
(but not including primary mortgage insurance, hazard insurance or other
insurance available for specific mortgaged properties) or other insurance as
well as all proceeds received from or losses borne by other credit
enhancement, including subordinate certificates.
(5) Net Loss is determined by subtracting Covered Loss from Gross Loss. As is
the case in footnote (3) above, Net Loss indicated here may reflect Excess
Recovery (see footnote (6) below). Net Loss includes losses on mortgage loan
pools which do not have the benefit of credit enhancement.
(6) Excess Recovery is calculated only with respect to defaulted Mortgage Loans
as to which the liquidation of the related Mortgaged Property resulted in
recoveries in excess of the principal balance plus accrued interest thereon
plus all liquidation expenses related to such Mortgage Loan. Excess
recoveries are not applied to reinstate any credit enhancement, and
generally are not allocated to holders of Certificates.
------------------------
There can be no assurance that the delinquency and foreclosure experience
set forth above will be representative of the results that may be experienced
with respect to the Mortgage Loans.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Mortgage Loan are payable out of the interest
payments on such Mortgage Loan. The Servicing Fees in respect of each Mortgage
Loan will be at least 0.20% per annum and not more than 3.08% per annum of the
outstanding principal balance of such Mortgage Loan, with a weighted average
Servicing Fee of approximately 0.3121% per annum. The Servicing Fees consist of
(a) servicing compensation payable to the Master Servicer in respect of its
master servicing activities and (b) subservicing and other related compensation
payable to the Subservicer (including such compensation paid to the Master
Servicer as the direct servicer of a Mortgage Loan for which there is no
Subservicer). The primary compensation to be paid to the Master Servicer in
respect of its master servicing activities will be (i) 0.08% per annum of the
outstanding principal balance of each Mortgage Loan, with respect to 55.8% of
the Mortgage Loans; (ii) 0.03% per annum of the outstanding principal balance of
each Mortgage Loan, with respect to 44.0% of the Mortgage Loans; and (iii)
0.075% per annum of the outstanding principal balance of each Mortgage Loan,
with respect to 0.1% of the Mortgage Loans. As described more fully in the
Prospectus, a Subservicer is entitled to servicing compensation in a minimum
amount equal to 0.125% per annum of the outstanding principal balance of each
Mortgage Loan serviced by it. The Master Servicer is obligated to pay certain
ongoing expenses associated with the Trust Fund and incurred by the Master
Servicer in connection with its responsibilities under the Pooling and Servicing
Agreement. See 'The Pooling and Servicing Agreement -- Servicing and Other
Compensation and Payment of Expenses; Spread' in the Prospectus for information
regarding other possible compensation to the Master Servicer and Subservicers
and for information regarding expenses payable by the Master Servicer.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by holders of
Certificates evidencing a specified percentage of all undivided interests in the
Trust Fund may be taken by holders of Certificates entitled in the aggregate to
such percentage of the Voting Rights. 98% of all Voting Rights will be allocated
among all holders of the Certificates (other than the Stripped Interests
Certificates and Residual Certificates) in proportion to their then outstanding
Certificate Principal Balances, and 1.0%, 0.5%, and 0.5% of all Voting Rights
will be allocated among holders of the Stripped Interests Certificates, Class
R-I Certificates and Class R-II Certificates, respectively, in proportion to the
Percentage Interests (as defined in the Prospectus) evidenced by their
respective Certificates. The Pooling and Servicing Agreement will be subject to
amendment without the consent of the holders of the Residual Certificates in
certain circumstances.
S-58
<PAGE>
TERMINATION
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the Offered Certificates are
described in 'The Pooling and Servicing Agreement -- Termination; Retirement of
Certificates' in the Prospectus. The Master Servicer or the Company will have
the option, on any Distribution Date on which the aggregate Stated Principal
Balance of the Mortgage Loans is less than 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date, either (i) to purchase all
remaining Mortgage Loans and other assets in the Trust Fund, thereby effecting
early retirement of the Offered Certificates or (ii) to purchase, in whole but
not in part, the Certificates. Any such purchase of Mortgage Loans and other
assets of the Trust Fund shall be made at a price equal to the sum of (a) 100%
of the unpaid principal balance of each Mortgage Loan (or the fair market value
of the related underlying Mortgaged Properties with respect to defaulted
Mortgage Loans as to which title to such Mortgaged Properties has been acquired
if such fair market value is less than such unpaid principal balance) (net of
any unreimbursed Advance attributable to principal) as of the date of repurchase
plus (b) accrued interest thereon at the Net Mortgage Rate to, but not
including, the first day of the month in which such repurchase price is
distributed. Distributions on the Certificates in respect of any such optional
termination will be paid, first, to the Senior Certificates, second, to the
Class M Certificates in the order of their payment priority and, third, to the
Class B Certificates. The proceeds of any such distribution may not be
sufficient to distribute the full amount to each class of Certificates if the
purchase price is based in part on the fair market value of the underlying
Mortgaged Property and such fair market value is less than 100% of the unpaid
principal balance of the related Mortgage Loan. Any such purchase of the
Certificates will be made at a price equal to 100% of the Certificate Principal
Balance thereof plus (except in the case of the Principal Only Certificates) the
sum of one month's interest thereon (or with respect to the Stripped Interests
Certificates, on the Notional Amount thereof) at the applicable Pass-Through
Rate and any previously unpaid Accrued Certificate Interest. Upon the purchase
of such Certificates or at any time thereafter, at the option of the Master
Servicer or the Company, the Mortgage Loans may be sold, thereby effecting a
retirement of the Certificates and the termination of the Trust Fund, or the
Certificates so purchased may be held or resold by the Master Servicer or the
Company.
Upon presentation and surrender of the Offered Certificates in connection
with the termination of the Trust Fund or a purchase of Certificates under the
circumstances described above, the holders of the Offered Certificates will
receive an amount equal to the Certificate Principal Balance of such class plus
one month's interest thereon (or, with respect to the Stripped Interests
Certificates, one month's interest on the Notional Amount thereof) at the
applicable Pass-Through Rate, plus any previously unpaid Accrued Certificate
Interest (reduced, as described above, in the case of the termination of the
Trust Fund resulting from a purchase of all the assets of the Trust Fund).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Orrick, Herrington &
Sutcliffe, counsel to the Company, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the Pooling and
Servicing Agreement, for federal income tax purposes, REMIC I and REMIC II will
each qualify as a REMIC under the Code.
For federal income tax purposes, (a) the Class R-I Certificates will
constitute the sole class of 'residual interests' in REMIC I, (b) each class of
Senior Certificates (other than the Residual Certificates), the Class M
Certificates and Class B Certificates will represent ownership of 'regular
interests' in REMIC II and will generally be treated as representing ownership
interests of debt instruments of REMIC II and (c) the Class R-II Certificates
will constitute the sole class of 'residual interests' in REMIC II. See 'Certain
Federal Income Tax Consequences -- REMICs' in the Prospectus.
For federal income tax reporting purposes, the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6, Class A-7, Class A-10, Class A-11, Class
A-12, Class A-13, Class A-14, Class A-15 and Class A-16 Certificates will not be
treated as having been issued with original issue discount. The Class A-9
Certificates and Class A-19 Certificates may, and the Class A-8, Class A-17,
Class A-18, Class M-1, Class M-2 and Class M-3 Certificates will, be treated as
having been issued with original issue discount for federal income tax reporting
purposes. The prepayment assumption that will be used in determining
S-59
<PAGE>
the rate of accrual of original issue discount, market discount and premium, if
any, for federal income tax purposes will be based on the assumption that
subsequent to the date of any determination the Mortgage Loans will prepay at a
rate equal to 300% SPA. No representation is made that the Mortgage Loans will
prepay at that rate or at any other rate. See 'Certain Federal Income Tax
Consequences -- General' and ' -- REMICs -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount' in the Prospectus.
The OID Regulations suggest that original issue discount with respect to
securities such as the Stripped Interests Certificates that represent multiple
uncertificated REMIC regular interests, in which ownership interests will be
issued simultaneously to the same buyer and which are required under the 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 with respect to the uncertificated regular interests represented
by the Stripped Interests Certificates 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 above, treating all such
uncertificated regular interests as a single debt instrument as set forth in the
OID Regulations.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder (in particular, the Stripped Interests Certificateholders),
the amount of original issue discount allocable to such period would be zero and
such Certificateholder will be permitted to offset such negative amount only
against future original issue discount (if any) attributable to such
Certificates. Although the matter is not free from doubt, a Stripped Interests
Certificateholder may be permitted to deduct a loss to the extent that its
remaining basis in such Certificate exceeds the maximum amount of future
payments to which such Certificateholder is entitled, assuming no further
prepayments of the Mortgage Loans. Any such loss might be treated as a capital
loss.
In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, the holder of a Certificate may be able to
select a method for recognizing original issue discount that differs from that
used by the Master Servicer in preparing reports to the Certificateholders and
the IRS.
Certain classes of Offered Certificates may be treated for federal income
tax purposes as having been issued at a premium. Whether any holder of any such
class of Certificates will be treated as holding a certificate with amortizable
bond premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of Offered Certificates should
consult their tax advisors regarding the possibility of making an election to
amortize such premium. See 'Certain Federal Income Tax Consequences -- REMICs --
Taxation of Owners of REMIC Regular Certificates -- Premium' in the Prospectus.
The Offered Certificates will be treated as 'qualifying real property
loans' under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and 'real estate assets' under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as 'interest on obligations secured by mortgages on real property' under
Section 856(c)(3)(B) of the Code generally to the extent that such Offered
Certificates are treated as 'real estate assets' under Section 856(c)(5)(A) of
the Code. Moreover, the Offered Certificates (other than the Residual
Certificates) will be 'qualified mortgages' within the meaning of Section
860G(a)(3) of the Code. However, prospective investors in Offered Certificates
that will be generally treated as assets described in Section 860G(a)(3) of the
Code should note that, notwithstanding such treatment, any repurchase of such a
Certificate pursuant to the right of the Master Servicer or the Company to
repurchase such Offered Certificates may adversely affect any REMIC that holds
such Offered Certificates if such repurchase is made under circumstances giving
rise to a Prohibited Transaction Tax. See 'Pooling and Servicing
Agreement -- Termination' herein and 'Certain Federal Income Tax
Consequences -- REMICs -- Characterization of Investments in REMIC Certificates'
in the Prospectus.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see 'Certain Federal Income Tax
Consequences -- REMICs' in the Prospectus.
S-60
<PAGE>
SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES
The IRS has issued regulations under the provisions of the Code related to
REMICs (the 'REMIC Regulations') that significantly affect holders of Residual
Certificates. The REMIC Regulations impose restrictions on the transfer or
acquisition of certain residual interests, including the Residual Certificates.
In addition, the REMIC Regulations contain restrictions that apply to: (i)
thrift institutions holding residual interests lacking 'significant value' and
(ii) the transfer of 'noneconomic' residual interests to United States persons.
Pursuant to the Pooling and Servicing Agreement, the Residual Certificates may
not be transferred to non-United States persons.
The REMIC Regulations provide for the determination of whether a residual
interest has 'significant value' for purposes of applying the rules relating to
'excess inclusions' with respect to residual interests. Based on the REMIC
Regulations, the Residual Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Residual Certificates, which will be in an amount equal to
all or virtually all of the taxable income includable by holders of the Residual
Certificates. See 'Certain Federal Income Tax Consequences -- REMICs -- Taxation
of Owners of REMIC Residual Certificates-Excess Inclusions' in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of 'noneconomic' residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of 'noneconomic' residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, if 'a significant purpose of the transfer was
to impede the assessment or collection of tax.' Based on the REMIC Regulations,
the Residual Certificates may constitute noneconomic residual interests during
some or all of their terms for purposes of the REMIC Regulations and,
accordingly, if a significant purpose of a transfer is to impede the assessment
or collection of tax, transfers of the Residual Certificates may be disregarded
and purported transferors may remain liable for any taxes due with respect to
the income on the Residual Certificates. All transfers of the Residual
Certificates will be subject to certain restrictions under the terms of the
Pooling and Servicing Agreement that are intended to reduce the possibility of
any such transfer being disregarded to the extent that the Residual Certificates
constitute noneconomic residual interests. See 'Certain Federal Income Tax
Consequences -- REMICs -- Taxation of Owners of REMIC Residual
Certificates -- Noneconomic REMIC Residual Certificates' in the Prospectus.
The Class R-II Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of REMIC
II that significantly exceeds the amount of cash distributions received by such
Class R-II Certificateholders from the related REMIC with respect to such
periods. Furthermore, the tax on such income may exceed the cash distributions
with respect to such periods. Consequently, Class R-II Certificateholders should
have other sources of funds sufficient to pay any federal income taxes due in
the earlier years of REMIC II's term as a result of their ownership of the Class
R-II Certificates. In addition, the required inclusion of this amount of taxable
income during REMIC II's earlier accrual periods and the deferral of
corresponding tax losses or deductions until later accrual periods or until the
ultimate sale or disposition of a Class R-II Certificate (or possibly later
under the 'wash sale' rules of Section 1091 of the Code) may cause the Class
R-II Certificateholders' after-tax rate of return to be zero or negative even if
the Class R-II Certificateholders' pre-tax rate of return is positive. That is,
on a present value basis, the Class R-II Certificateholders' resulting tax
liabilities could substantially exceed the sum of any tax benefits and the
amount of any cash distributions on such Class R-II Certificates over their
life.
An individual, trust or estate that holds (whether directly or indirectly
through certain pass-through entities) a Residual Certificate, particularly a
Class R-I Certificate, may have significant additional gross income with respect
to, but may be subject to limitations on the deductibility of, servicing and
trustee's fees and other administrative expenses properly allocable to the
related REMIC in computing such Certificateholder's regular tax liability and
will not be able to deduct such fees or expenses to any extent in computing such
Certificateholder's alternative minimum tax liability. Such expenses will be
allocated for federal income tax information reporting purposes entirely to the
Class R-I Certificates and not to the Class R-II Certificates. However, it is
possible that the IRS may require all or some portion of such fees and expenses
to be allocable to the Class R-II Certificates. See 'Certain Federal Income Tax
S-61
<PAGE>
Consequences -- REMICs -- Taxation of Owners of REMIC Residual
Certificates -- Possible Pass-Through of Miscellaneous Itemized Deductions' in
the Prospectus.
Residential Funding will be designated as the 'tax matters person' with
respect to REMIC I and REMIC II as defined in the REMIC Provisions (as defined
in the Prospectus), and in connection therewith will be required to hold not
less than 0.01% of each of the Class R-I Certificates and Class R-II
Certificates.
Purchasers of the Residual Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Residual Certificates.
For further information regarding the federal income tax consequences of
investing in the Residual Certificates, see 'Certain Yield and Prepayment
Considerations -- Additional Yield Considerations Applicable Solely to the
Residual Certificates' herein and 'Certain Federal Income Tax
Consequences -- REMICs -- Taxation of Owners of REMIC Residual Certificates' in
the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated August 24, 1995 (the 'PaineWebber Underwriting Agreement'), PaineWebber
Incorporated ('PaineWebber') has agreed to purchase and the Company has agreed
to sell to PaineWebber the Offered Certificates (other than the Principal Only,
Stripped Interests and Class M Certificates) (the 'PaineWebber Underwritten
Certificates'), except that a de minimis portion of each class of the Residual
Certificates will be retained by Residential Funding, and such portion is not
offered hereby. Subject to the terms and conditions set forth in an Underwriting
Agreement, dated August 24, 1995 (the 'Salomon Brothers Underwriting
Agreement'), Salomon Brothers Inc ('Salomon Brothers') has agreed to purchase
and the Company has agreed to sell to Salomon Brothers the Class M Certificates
(the 'Salomon Brothers Underwritten Certificates'). The PaineWebber Underwriting
Agreement and Salomon Brothers Underwriting Agreement are collectively referred
to herein as the 'Underwriting Agreements'. PaineWebber and Salomon Brothers are
collectively referred to herein as the 'Underwriters'. The PaineWebber
Underwritten Certificates and Salomon Brothers Underwritten Certificates are
collectively referred to herein as the 'Underwritten Certificates'.
It is expected that delivery of the PaineWebber Underwritten Certificates
(other than the Residual Certificates) will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, and that the delivery of
the Residual Certificates will be made at the offices of PaineWebber, New York,
New York, on or about August 30, 1995, against payment therefor in immediately
available funds. It is expected that delivery of the Salomon Brothers
Underwritten Certificates will be made at the offices of Salomon Brothers, New
York, New York, on or about August 30, 1995, against payment therefor in
immediately available funds.
Each Underwriting Agreement provides that the obligation of the related
Underwriter to pay for and accept delivery of its Certificates is subject to,
among other things, the receipt of certain legal opinions and to the conditions,
among others, that no stop order suspending the effectiveness of the Company's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Underwritten Certificates 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 Company from the sale of the PaineWebber Underwritten Certificates, before
deducting expenses payable by the Company, will be approximately 98.80% of the
aggregate Certificate Principal Balance of the PaineWebber Underwritten
Certificates plus accrued interest thereon from the Cut-off Date. Proceeds to
the Company from the sale of the Salomon Brothers Underwritten Certificates,
before deducting expenses payable by the Company, will be approximately 95.05%
of the aggregate Certificate Principal Balance of the Salomon Brothers
Underwritten Certificates plus accrued interest thereon from the Cut-off Date.
The Underwriters may effect such transactions by selling its Certificates to or
through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter for whom
they act as agent. In connection with the sale of the Underwritten Certificates,
each Underwriter may be deemed to have
S-62
<PAGE>
received compensation from the Company in the form of underwriting compensation.
Each Underwriter and any dealers that participate with such Underwriter in the
distribution of the Underwritten Certificates may be deemed to be underwriters
and any profit on the resale of the Underwritten Certificates positioned by them
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933.
Each Underwriting Agreement provides that the Company will indemnify the
related Underwriter, and that under limited circumstances the related
Underwriter will indemnify the Company, against certain civil liabilities under
the Securities Act of 1933, or contribute to payments required to be made in
respect thereof.
The Principal Only Certificates and Stripped Interests Certificates may be
offered by the Company from time to time directly or through an underwriter or
agent in one or more negotiated transactions, or otherwise, at varying prices to
be determined at the time of sale. Proceeds to the Company from any sale of the
Principal Only Certificates and Stripped Interests Certificates will equal the
purchase price paid by the purchaser thereof, net of any expenses payable by the
Company and any compensation payable to any such underwriter or agent.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
'Description of the Certificates -- Reports to Certificateholders,' which will
include information as to the outstanding principal balance of the Offered
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Offered
Certificates will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Offered Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Offered Certificates may
adversely affect the liquidity of the Offered Certificates, even if a secondary
market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon for
the Company by Orrick, Herrington & Sutcliffe, New York, New York and for the
Underwriters by Brown & Wood, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Certificates, other than
the Principal Only Certificates and Stripped Interests Certificates, that they
be rated 'AAA' by Standard & Poor's Ratings Services ('Standard & Poor's') and
Fitch Investors Service, L.P. ('Fitch'). It is a condition to the issuance of
the Principal Only Certificates and Stripped Interests Certificates that they be
rated 'AAAr' by Standard & Poor's and 'AAA' by Fitch. It is a condition to the
issuance of the Class M-1 Certificates that they be rated not lower than 'AA' by
Standard & Poor's. It is a condition to the issuance of the Class M-2
Certificates and Class M-3 Certificates that they be rated not lower than 'A'
and 'BBB,' respectively, by Fitch.
Standard & Poor's ratings on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under the
Pooling and Servicing Agreement. Standard & Poor's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. Standard & Poor's rating on the Certificates does not, however,
constitute a statement regarding frequency of prepayments on the mortgages. See
'Certain Yield and Prepayment Considerations' herein. The 'r' of the 'AAAr'
rating of the Principal Only Certificates and Stripped Interests Certificates by
Standard & Poor's is attached to highlight derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or
S-63
<PAGE>
currencies; certain swaps and options; and interest only and principal only
mortgage securities. The absence of an 'r' symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.
The ratings assigned by Fitch to mortgage pass-through certificates also
address the likelihood of the receipt by Certificateholders of all distributions
to which such Certificateholders are entitled. The rating process addresses the
structural and legal aspects associated with the Certificates, including the
nature of the underlying mortgage loans. The ratings assigned to mortgage
pass-through certificates do not represent any assessment of the likelihood or
rate of principal prepayments. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield or that the
holders of the Stripped Interests Certificates may fail to recoup their initial
investments.
The Company has not requested a rating on the Senior Certificates by any
rating agency other than Standard & Poor's and Fitch, on the Class M-1
Certificates by any rating agency other than Standard & Poor's and on the Class
M-2 Certificates and Class M-3 Certificates by any rating agency other than
Fitch. However, there can be no assurance as to whether any other rating agency
will rate the Senior Certificates or Class M Certificates, or, if it does, what
rating would be assigned by any such other rating agency. A rating on the
Certificates by another rating agency, if assigned at all, may be lower than the
ratings assigned to the Senior Certificates by Standard & Poor's and Fitch, to
the Class M-1 Certificates by Standard & Poor's or to the Class M-2 Certificates
and Class M-3 Certificates by Fitch.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. The ratings of the Stripped Interests Certificates do not
address the possibility that the holders of such Certificates may fail to fully
recover their initial investments. In the event that the ratings initially
assigned to the Offered Certificates are subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to the Offered Certificates.
LEGAL INVESTMENT
The Senior Certificates and Class M-1 Certificates will constitute
'mortgage related securities' for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ('SMMEA') so long as they are rated in at least the
second highest rating category by one of the Rating Agencies, and, as such, are
legal investments for certain entities to the extent provided in SMMEA. SMMEA
provides, however, that states could override its provisions on legal investment
and restrict or condition investment in mortgage related securities by taking
statutory action on or prior to October 3, 1991. Certain states have enacted
legislation which overrides the preemption provisions of SMMEA. The Class M-2
Certificates and Class M-3 Certificates will not constitute 'mortgage related
securities' for purposes of SMMEA.
The Company makes no representations as to the proper characterization of
any class of the Offered Certificates for legal investment or other purposes, or
as to the ability of particular investors to purchase any class of the Offered
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Offered Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any class of the Offered Certificates constitutes a
legal investment or is subject to investment, capital or other restrictions.
See 'Legal Investment Matters' in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
('ERISA'), or Section 4975 of the Code (a 'Plan') or any insurance company
(whether through its general or separate accounts) or other person investing
'plan assets' of any Plan should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. It is not clear whether the exemptive relief
S-64
<PAGE>
afforded by the Exemption, as described under 'ERISA
Considerations -- Prohibited Transaction Exemptions' in the Prospectus, will
apply to the purchase, sale or holding of the Senior Support, Class M or
Residual Certificates. The purchase or holding of the Offered Certificates
(other than the Senior Support, Class M or Residual Certificates) by, on behalf
of or with 'plan assets' of a Plan may qualify for exemptive relief under the
Exemption; however, the Exemption contains a number of conditions including the
requirement that any such Plan must be an 'accredited investor' as defined in
Rule 501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933, as amended. In addition, because it is not clear
that the Senior Support, Class M or Residual Certificates will qualify for
exemptive relief under the Exemption, the similar exemption issued to the
Underwriter or PTCE 83-1, purchases of such Certificates by, on behalf of or
with 'plan assets' of any Plan are not to be registered unless the transferee
provides an opinion of counsel satisfactory to the Master Servicer, the Company
and the Trustee that the purchase of any such Certificate by, on behalf of or
with 'plan assets' of any Plan is permissible under applicable law, will not
result in any non-exempt prohibited transaction under ERISA or Section 4975 of
the Code, and will not subject the Master Servicer, the Company or the Trustee
to any obligation in addition to those undertaken in the Pooling and Servicing
Agreement. In addition, so long as the Senior Support Certificates are DTC
Registered Certificates, any purchaser of a Senior Support Certificate will be
deemed to have represented by such purchase that either (a) such purchaser is
not a Plan and is not purchasing such Certificates on behalf of or with 'plan
assets' of any Plan or (b) the purchase of any such Certificate by, on behalf of
or with 'plan assets' of any Plan is permissible under applicable law, will not
result in any non-exempt prohibited transaction under ERISA or Section 4975 of
the Code, and will not subject the Master Servicer, the Company or the Trustee
to any obligation in addition to those undertaken in the Pooling and Servicing
Agreement. See 'ERISA Considerations' in the Prospectus.
S-65
<PAGE>
MORTGAGE PASS-THROUGH CERTIFICATES
RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
The Mortgage Pass-Through Certificates (the "Certificates") offered hereby may
be sold from time to time in series as described in the related Prospectus
Supplement. Each series of Certificates will represent in the aggregate the
entire beneficial ownership interest, minus any interest retained by
Residential Funding Mortgage Securities I, Inc. (the "Company") or any of its
affiliates, in a trust fund consisting primarily of a segregated pool (a
"Mortgage Pool") of conventional one- to four-family residential first
mortgage loans (the "Mortgage Loans") or interests therein (which may include
Mortgage Securities as defined herein), acquired by the Company from one or
more affiliated or unaffiliated institutions. See "The Mortgage Pools."
The Mortgage Loans in each Mortgage Pool and certain other assets described
herein and in the related Prospectus Supplement will be held in trust
(collectively, a "Trust Fund") for the benefit of the holders of the related
series of Certificates (the "Certificateholders") pursuant to a Pooling and
Servicing Agreement to the extent and as more fully described herein and in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, each Mortgage Pool will consist of one or more types of
the various types of Mortgage Loans described under "The Mortgage Pools."
Information regarding each class of Certificates of a series, and the general
characteristics of the Mortgage Loans to be evidenced by such Certificates,
will be set forth in the related Prospectus Supplement.
Each series of Certificates will include one or more classes. Each class of
Certificates of any series will represent the right, which right may be senior
or subordinate to the rights of one or more of the other classes of the
Certificates, to receive a specified portion of payments of principal or
interest (or both) on the Mortgage Loans in the related Trust Fund in the
manner described herein and in the related Prospectus Supplement. A series may
include one or more classes of Certificates entitled to principal
distributions, with disproportionate, nominal or no interest distributions, or
to interest distributions, with disproportionate, nominal or no principal
distributions. A series may include two or more classes of Certificates which
differ as to the timing, sequential order, priority of payment, pass-through
rate or amount of distributions of principal or interest or both.
THE COMPANY'S ONLY OBLIGATIONS WITH RESPECT TO A SERIES OF CERTIFICATES WILL
BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY THE COMPANY,
EXCEPT AS PROVIDED IN THE RELATED PROSPECTUS SUPPLEMENT. THE MASTER SERVICER
(THE "MASTER SERVICER") FOR EACH SERIES OF CERTIFICATES WILL BE NAMED IN THE
RELATED PROSPECTUS SUPPLEMENT. THE PRINCIPAL OBLIGATIONS OF THE MASTER
SERVICER WILL BE PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH
INCLUDE ITS LIMITED OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF
DELINQUENCIES IN PAYMENTS ON THE MORTGAGE LOANS). SEE "DESCRIPTION OF THE
CERTIFICATES."
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include any one or any combination of a mortgage
pool insurance policy, letter of credit, bankruptcy bond, special hazard
insurance policy, reserve fund or other form of credit support. In addition to
or in lieu of the foregoing, credit enhancement may be provided by means of
subordination. See "Description of Credit Enhancement."
The rate of payment of principal of each class of Certificates entitled to a
portion of principal payments on the Mortgage Loans in the Mortgage Pool will
depend on the priority of payment of such class and the rate and timing of
principal payments (including prepayments, defaults, liquidations and
repurchases of Mortgage Loans) on the Mortgage Loans. A rate of principal
payment lower or higher than that anticipated may affect the yield on each
class of Certificates in the manner described herein and in the related
Prospectus Supplement. See "Yield Considerations."
One or more separate elections may be made to treat a Trust Fund as a real
estate mortgage investment conduit ("REMIC") for federal income tax purposes.
If applicable, the Prospectus Supplement for a series of Certificates will
specify which class or classes of the related series of Certificates will be
considered to be regular interests in the related REMIC and which class of
Certificates or other interests will be designated as the residual interest in
the related REMIC. See "Certain Federal Income Tax Consequences" herein.
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE COMPANY, THE MASTER SERVICER, GENERAL MOTORS ACCEPTANCE
CORPORATION ("GMAC"), GMAC MORTGAGE CORPORATION OR ANY OF THEIR AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS OR MORTGAGE
SECURITIES WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER, GMAC, GMAC MORTGAGE
CORPORATION OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different methods,
including offerings through underwriters, as more fully described under
"Methods of Distribution" and in the related Prospectus Supplement. The
Certificates will not be listed on any securities exchange.
There will be no secondary market for any series of Certificates prior to the
offering thereof. There can be no assurance that a secondary market for any of
the Certificates will develop or, if it does develop, that it will continue.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
--------------
The date of this Prospectus is April 20, 1995.
<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in this
Prospectus or the related Prospectus Supplement and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or any dealer, salesman, or any other person. Neither
the delivery of this Prospectus or the related Prospectus Supplement nor any
sale made hereunder or thereunder shall under any circumstances create an
implication that there has been no change in the information herein or therein
since the date hereof. This Prospectus and the related Prospectus Supplement
are not an offer to sell or a solicitation of an offer to buy any security in
any jurisdiction in which it is unlawful to make such offer or solicitation.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer will cause to be provided monthly reports concerning each
Trust Fund to all registered holders of Certificates of the related series. See
"Description of the Certificates--Reports to Certificateholders."
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of Certificates offered hereby, there are
incorporated herein and in the related Prospectus Supplement by reference all
documents and reports filed or caused to be filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, prior
to the termination of the offering of the related series of Certificates, that
relate specifically to such related series of Certificates. The Company will
provide or cause to be provided without charge to each person to whom this
Prospectus and related Prospectus Supplement is delivered in connection with
the offering of one or more classes of such series of Certificates, upon
written or oral request of such person, a copy of any or all such reports
incorporated herein by reference, in each case to the extent such reports
relate to one or more of such classes of such series of Certificates, other
than the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents. Requests should be directed in
writing to Residential Funding Mortgage Securities I, Inc., 8400 Normandale
Lake Boulevard, Suite 700, Minneapolis, Minnesota 55437, or by telephone at
(612) 832-7000.
2
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Certificates contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of such series. Capitalized terms used in this summary that are not
otherwise defined shall have the meanings ascribed thereto in this Prospectus.
An index indicating where certain terms used herein are defined appears at the
end of this Prospectus.
Securities Offered.......... Mortgage Pass-Through Certificates.
Company..................... Residential Funding Mortgage Securities I, Inc.
See "The Company."
Master Servicer............. The entity named as Master Servicer in the
related Prospectus Supplement, which may be
Residential Funding Corporation, an affiliate of
the Company ("Residential Funding"). See
"Residential Funding Corporation" and "The
Pooling and Servicing Agreement--Certain Matters
Regarding the Master Servicer and the Company."
Trustee..................... The trustee (the "Trustee") for each series of
Certificates will be specified in the related
Prospectus Supplement.
The Certificates............ Each series of Certificates will include one or
more classes of Certificates which will represent
in the aggregate the entire beneficial ownership
interest in a segregated pool (a "Mortgage Pool")
of certain mortgage loans (the "Mortgage Loans")
(exclusive of any portion of interest payments
(the "Spread") relating to each Mortgage Loan
retained by the Company or any of its affiliates)
or interests therein (which may include Mortgage
Securities as defined herein), and certain other
assets as described below (collectively, a "Trust
Fund") and will be issued pursuant to a pooling
and servicing agreement among the Company, the
Trustee and the Master Servicer (each, a "Pooling
and Servicing Agreement"). Unless otherwise
specified in the related Prospectus Supplement,
each series of Certificates, or class of
Certificates in the case of a series consisting
of two or more classes, will have a stated
principal balance and will be entitled to
distributions of interest based on a specified
interest rate or rates (each, a "Pass-Through
Rate"). Each series or class of Certificates may
have a different Pass-Through Rate, which may be
a fixed, variable or adjustable Pass-Through
Rate, or any combination of two or more such
Pass-Through Rates. The related Prospectus
Supplement will specify the Pass-Through Rate or
Rates for each series or class of Certificates,
or the initial Pass-Through Rate or Rates and the
method for determining subsequent changes to the
Pass-Through Rate or Rates.
3
<PAGE>
A series may include one or more classes of
Certificates ("Strip Certificates") entitled (i)
to principal distributions, with
disproportionate, nominal or no interest
distributions, or (ii) to interest distributions,
with disproportionate, nominal or no principal
distributions. In addition, a series may include
two or more classes of Certificates which differ
as to timing, sequential order, priority of
payment, 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 upon
the occurrence of specified events, in accordance
with a schedule or formula, or on the basis of
collections from designated portions of the
Mortgage Pool, which series may include one or
more classes of Certificates ("Accrual
Certificates"), as to which certain accrued
interest will not be distributed but rather will
be added to the principal balance thereof on each
Distribution Date, as hereinafter defined, in the
manner described in the related Prospectus
Supplement.
If so provided in the related Prospectus
Supplement, a series of Certificates may include
one or more classes of Certificates
(collectively, the "Senior Certificates") which
are senior to one or more classes of Certificates
(collectively, the "Subordinate Certificates") in
respect of certain distributions of principal and
interest and allocations of losses on Mortgage
Loans. In addition, certain classes of Senior (or
Subordinate) Certificates may be senior to other
classes of Senior (or Subordinate) Certificates
in respect of such distributions or losses. As to
each series, one or more elections may be made to
treat the related Trust Fund or a designated
portion thereof as a "real estate mortgage
investment conduit" or "REMIC" as defined in the
Internal Revenue Code of 1986, as amended (the
"Code"). See "Description of the Certificates."
Neither the Certificates nor the underlying
Mortgage Loans or Mortgage Securities will be
guaranteed or insured by any governmental agency
or instrumentality or the Company, the Master
Servicer, GMAC, GMAC Mortgage Corporation ("GMAC
Mortgage") or any of their affiliates.
The Mortgage Pools.......... Unless otherwise specified in the related
Prospectus Supplement, each Trust Fund will
consist primarily of Mortgage Loans or interests
therein secured by first liens on one- to four-
family residential properties, located in any one
of the 50 states, the District of Columbia or the
Commonwealth of Puerto Rico (the "Mortgaged
Properties"). All Mortgage Loans will have been
purchased by the Company, either directly or
through Residential Funding, from mortgage loan
originators or sellers not affiliated with the
Company or from GMAC Mortgage, an indirect parent
4
<PAGE>
of the Company, and its affiliates. See "Mortgage
Loan Program." For a description of the types of
Mortgage Loans that may be included in the
Mortgage Pools, see "The Mortgage Pools--The
Mortgage Loans."
If specified in the related Prospectus
Supplement, Mortgage Loans which are converting
or converted from an adjustable-rate to a fixed-
rate or certain Mortgage Loans for which the
Mortgage Rate has been reset may be repurchased
by the Company or purchased by the applicable
Subservicer, Residential Funding or another
party, or a designated remarketing agent will use
its best efforts to arrange the sale thereof as
further described herein.
If specified in the related Prospectus
Supplement, a Trust Fund may include mortgage
pass-through certificates evidencing interests in
Mortgage Loans ("Mortgage Securities"), as
described herein. See "The Mortgage Pools--
General" herein.
A Current Report on Form 8-K will be available
upon request to purchasers of the related series
of Certificates and will be filed, together with
the related Pooling and Servicing Agreement, with
the Securities and Exchange Commission within
fifteen days after such initial issuance.
Interest Distributions...... Except as otherwise specified herein or in the
related Prospectus Supplement, interest on each
class of Certificates of each series, other than
Strip Certificates or Accrual Certificates (prior
to the time when accrued interest becomes payable
thereon), will be remitted at the applicable
Pass-Through Rate (which may be a fixed, variable
or adjustable rate or any combination thereof) on
such class's outstanding principal balance, on
the 25th day (or if such day is not a business
day the next succeeding business day) of each
month, commencing with the month following the
month in which the Cut-off Date (as defined in
the applicable Prospectus Supplement) occurs
(each, a "Distribution Date"). If the Prospectus
Supplement so provides, interest distributions on
any class of Certificates may be reduced on
account of negative amortization on the Mortgage
Loans, with the Deferred Interest allocable to
such class added to the principal balance
thereof, which Deferred Interest will thereafter
bear interest. Distributions, if any, with
respect to interest on Strip Certificates will be
made on each Distribution Date as described
herein and in the related Prospectus Supplement.
Interest that has accrued but is not yet payable
on any Accrual Certificates will be added to the
principal balance of such class on each
Distribution Date, and will thereafter bear
interest. Unless otherwise specified in the
related Prospectus Supplement, distributions of
interest with respect to any series of
Certificates (or accruals thereof in the case of
Accrual Certificates), or with respect to one or
more classes included
5
<PAGE>
therein, may be reduced to the extent of interest
shortfalls not covered by advances or the
applicable form of credit support, including
shortfalls (a "Prepayment Interest Shortfall") in
collections of a full month's interest in
connection with prepayments. See "Yield
Considerations" and "Description of the
Certificates."
Principal Distributions..... Except as otherwise specified in the related
Prospectus Supplement, principal distributions on
the Certificates of each series will be payable
on each Distribution Date, commencing with the
Distribution Date in the month following the
month in which the Cut-off Date occurs, to the
holders of the Certificates of such series, or of
the class or classes of Certificates then
entitled thereto, on a pro rata basis among all
such Certificates or among the Certificates of
any such class, in proportion to their respective
outstanding principal balances, or in the
priority and manner otherwise specified in the
related Prospectus Supplement. Strip Certificates
with no principal balance will not receive
distributions in respect of principal.
Distributions of principal with respect to any
series of Certificates, or with respect to one or
more classes included therein, may be reduced to
the extent of certain delinquencies not covered
by advances or losses not covered by the
applicable form of credit enhancement. See "The
Mortgage Pools," "Maturity and Prepayment
Considerations" and "Description of the
Certificates."
Credit Enhancement.......... If so specified in the Prospectus Supplement, the
Trust Fund with respect to any series of
Certificates may include any one or any
combination of a letter of credit, mortgage pool
insurance policy, special hazard insurance
policy, bankruptcy bond, reserve fund or other
type of credit support to provide partial
coverage for certain defaults and losses relating
to the Mortgage Loans. Credit support also may be
provided in the form of subordination of one or
more classes of Certificates in a series under
which losses are first allocated to any
Subordinate Certificates up to a specified limit.
Unless otherwise specified in the related
Prospectus Supplement, any form of credit
enhancement will have certain limitations and
exclusions from coverage thereunder, which will
be described in the related Prospectus
Supplement. Losses not covered by any form of
credit enhancement will be borne by the holders
of the related Certificates (or certain classes
thereof). To the extent not set forth herein, the
amount and types of coverage, the identification
of any entity providing the coverage, the terms
of any subordination and related information will
be set forth in the Prospectus Supplement
relating to a series of Certificates. See
"Description of Credit Enhancement" and
"Subordination."
Advances.................... Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will
be obligated (pursuant to the terms of the
6
<PAGE>
related Mortgage Securities, if applicable) to
make certain advances with respect to delinquent
scheduled payments on the Mortgage Loans, but
only to the extent that the Master Servicer
believes that such amounts will be recoverable by
it. Any advance made by the Master Servicer with
respect to a Mortgage Loan is recoverable by it
as provided herein under "Description of the
Certificates--Advances" either from recoveries on
the specific Mortgage Loan or, with respect to
any advance subsequently determined to be
nonrecoverable, out of funds otherwise
distributable to the holders of the related
series of Certificates, which may include the
holders of any Senior Certificates of such
series.
Optional Termination........ The Master Servicer, the Company or, if specified
in the related Prospectus Supplement, the holder
of the residual interest in a REMIC may at its
option either (i) effect early retirement of a
series of Certificates through the purchase of
the assets in the related Trust Fund or (ii)
purchase, in whole but not in part, the
Certificates specified in the related Prospectus
Supplement; in each case under the circumstances
and in the manner set forth herein under "The
Pooling and Servicing Agreement--Termination;
Retirement of Certificates" and in the related
Prospectus Supplement.
Legal Investment............ At the date of issuance, as to each series, each
class of Certificates offered hereby will be
rated at the request of the Company in one of the
four highest rating categories by one or more
nationally recognized statistical rating agencies
(each, a "Rating Agency"). Unless otherwise
specified in the related Prospectus Supplement,
each class of Certificates offered hereby and by
the related Prospectus Supplement that is rated
in one of the two highest rating categories by at
least one Rating Agency will constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"). See "Legal Investment Matters" herein.
ERISA Considerations........ A fiduciary of an employee benefit plan and
certain other retirement plans and arrangements,
including individual retirement accounts and
annuities, Keogh plans, and collective investment
funds and separate accounts in which such plans,
accounts, annuities or arrangements are invested,
that is subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code (each, a "Plan") should
carefully review with its legal advisors whether
the purchase or holding of Certificates could
give rise to a transaction that is prohibited or
is not otherwise permissible either under ERISA
or Section 4975 of the Code. Investors are
advised to consult their counsel and to review
"ERISA Considerations" herein.
7
<PAGE>
Certain Federal Income Tax
Consequences............... Certificates of each series offered hereby will
constitute either (i) interests ("Grantor Trust
Certificates") in a Trust Fund treated as a
grantor trust under applicable provisions of the
Code, or (ii) "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC
Residual Certificates") in a Trust Fund, or a
portion thereof, treated as a REMIC under
Sections 860A through 860G of the Code.
Investors are advised to consult their tax
advisors and to review "Certain Federal Income
Tax Consequences" herein and in the related
Prospectus Supplement.
8
<PAGE>
SPECIAL CONSIDERATIONS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates:
Limited Liquidity. There can be no assurance that a secondary market for the
Certificates of any series will develop or, if it does develop, that it will
provide Certificateholders with liquidity of investment or that it will
continue for the life of the Certificates of any series. The Prospectus
Supplement for any series of Certificates may indicate that an underwriter
specified therein intends to establish a secondary market in such Certificates,
however no underwriter will be obligated to do so. The Certificates will not be
listed on any securities exchange.
Limited Obligations. The Certificates will not represent an interest in or
obligation of the Company, the Master Servicer, GMAC, GMAC Mortgage or any of
their affiliates. The only obligations of the foregoing entities with respect
to the Certificates, the Mortgage Loans or any Mortgage Securities will be the
obligations (if any) of the Company and the Master Servicer pursuant to certain
limited representations and warranties made with respect to the Mortgage Loans,
the Master Servicer's servicing obligations under the related Pooling and
Servicing Agreement (including its limited obligation to make certain advances
in the event of delinquencies on the Mortgage Loans, but only to the extent
deemed recoverable) and pursuant to the terms of any Mortgage Securities, and,
if and to the extent expressly described in the related Prospectus Supplement,
certain limited obligations of the Master Servicer in connection with a
Purchase Obligation or an agreement to purchase or act as remarketing agent
with respect to a Convertible Mortgage Loan upon conversion to a fixed rate.
Neither the Certificates nor the underlying Mortgage Loans or Mortgage
Securities will be guaranteed or insured by any governmental agency or
instrumentality, or by the Company, the Master Servicer, GMAC, GMAC Mortgage or
any of their affiliates. Proceeds of the assets included in the related Trust
Fund for each series of Certificates (including the Mortgage Loans or Mortgage
Securities and any form of credit enhancement) will be the sole source of
payments on the Certificates, and there will be no recourse to the Company, the
Master Servicer, GMAC, GMAC Mortgage or any other entity in the event that such
proceeds are insufficient or otherwise unavailable to make all payments
provided for under the Certificates.
Limitations, Reduction and Substitution of Credit Enhancement. With respect
to each series of Certificates, credit enhancement will be provided in limited
amounts to cover certain types of losses on the underlying Mortgage Loans.
Credit enhancement will be provided in one or more of the forms referred to
herein, including, but not limited to: subordination of other classes of
Certificates of the same series; a Letter of Credit; a Purchase Obligation; a
Mortgage Pool Insurance Policy; a Special Hazard Insurance Policy; a Bankruptcy
Bond; a Reserve Fund; or any combination thereof. See "Subordination" and
"Description of Credit Enhancement" herein. Regardless of the form of credit
enhancement provided, the amount of coverage will be limited in amount and in
most cases will be subject to periodic reduction in accordance with a schedule
or formula. Furthermore, such credit enhancements may provide only very limited
coverage as to certain types of losses or risks, and may provide no coverage as
to certain other types of losses or risks. In the event losses exceed the
amount of coverage provided by any credit enhancement or losses of a type not
covered by any credit enhancement occur, such losses will be borne by the
holders of the related Certificates (or certain classes thereof). The Master
Servicer will generally be permitted to reduce, terminate or substitute all or
a portion of the credit enhancement for any series of Certificates, if the
applicable Rating Agency indicates that the then-current rating thereof will
not be adversely affected. The rating of any series of Certificates by any
applicable Rating Agency may be lowered following the initial issuance thereof
as a result of the downgrading of the obligations of any applicable credit
support provider, or as a result of losses on the related Mortgage Loans in
excess of the levels contemplated by such Rating Agency at the time of its
initial rating analysis. Neither the Company, the Master Servicer, GMAC, GMAC
Mortgage nor any of their affiliates will have any obligation to replace or
supplement any credit enhancement, or to take any other action to maintain any
rating of any series of Certificates. See "Description of Credit Enhancement--
Reduction of Credit Enhancement."
9
<PAGE>
Investment in the Mortgage Loans. An investment in securities such as the
Certificates which generally represent interests in mortgage loans may be
affected by, among other things, a decline in real estate values and changes in
the borrowers' financial condition. No assurance can be given that values of
the Mortgaged Properties have remained or will remain at their levels on the
dates of origination of the related Mortgage Loans. If the residential real
estate market should experience an overall decline in property values such that
the outstanding balances of the Mortgage Loans, and any secondary financing on
the Mortgaged Properties, in a particular Mortgage Pool become equal to or
greater than the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. In addition, in the case of
Mortgage Loans that are subject to negative amortization, due to the addition
to principal balance of Deferred Interest, the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are not covered by the applicable
credit enhancement, holders of Certificates of the series evidencing interests
in the related Mortgage Pool will bear all risk of loss resulting from default
by Mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans. Certain of the types of loans which may be included
in the Mortgage Pools may involve additional uncertainties not present in
traditional types of loans. For example, certain of the Mortgage Loans provide
for escalating or variable payments by the borrower under the Mortgage Loan
(the "Mortgagor"), as to which the Mortgagor is generally qualified on the
basis of the initial payment amount. In some instances, the Mortgagors may not
be able to make their loan payments as such payments increase and thus the
likelihood of default will increase. In addition to the foregoing, certain
geographic regions of the United States from time to time will experience
weaker regional economic conditions and housing markets, and, consequently,
will experience higher rates of loss and delinquency than will be experienced
on 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 underlying certain series of Certificates may be
concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar mortgage-
backed securities without such concentration. Moreover, as described below, any
Mortgage Loan for which a breach of a representation or warranty exists will
remain in the related Trust Fund in the event that a Seller is unable, or
disputes its obligation, to repurchase such Mortgage Loan and such a breach
does not also constitute a breach of a representation made by Residential
Funding, the Company or the Master Servicer. In such event, any resulting
losses will be borne by the related form of credit enhancement, to the extent
available.
Yield and Prepayment Considerations. The yield to maturity of the
Certificates of each series will depend on the rate and timing of principal
payments (including prepayments, liquidations due to defaults, and repurchases
due to conversion of ARM Loans to fixed interest rate loans or breaches of
representations and warranties) on the Mortgage Loans and the price paid by
Certificateholders. Such yield may be adversely affected by a higher or lower
than anticipated rate of prepayments on the related Mortgage Loans. The yield
to maturity on Strip Certificates will be extremely sensitive to the rate of
prepayments on the related Mortgage Loans. In addition, the yield to maturity
on certain other types of classes of Certificates, including Accrual
Certificates, Certificates with a Pass-Through Rate which fluctuates inversely
with an index or certain other classes in a series including more than one
class of Certificates, may be relatively more sensitive to the rate of
prepayment on the related Mortgage Loans than other classes of Certificates.
Prepayments are influenced by a number of factors, including prevailing
mortgage market interest rates, local and regional economic conditions and
homeowner mobility. See "Yield Considerations" and "Maturity and Prepayment
Considerations" herein.
10
<PAGE>
THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of conventional Mortgage Loans, minus the
Spread, if any, or any other interest retained by the Company or any affiliate
of the Company, evidenced by promissory notes (the "Mortgage Notes") secured by
first mortgages or first deeds of trust or other similar security instruments
creating a first lien on one- to four-family residential properties, or
interests in such Mortgage Loans (which may include Mortgage Securities). The
Mortgaged Properties will consist primarily of owner-occupied attached or
detached one-family dwelling units, two- to four-family dwelling units,
condominiums, townhouses, row houses, individual units in planned-unit
developments and certain other dwelling units, and the fee, leasehold or other
interests in the underlying real property. The Mortgaged Properties may include
vacation, second and non-owner-occupied homes. If specified in the related
Prospectus Supplement relating to a series of Certificates, a Mortgage Pool may
contain cooperative apartment loans ("Cooperative Loans") evidenced by
promissory notes ("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. As used herein, unless the context indicates otherwise,
"Mortgage Loans" includes Cooperative Loans, "Mortgaged Properties" includes
shares in the related cooperative and the related proprietary leases or
occupancy agreements securing Cooperative Notes, "Mortgage Notes" includes
Cooperative Notes and "Mortgages" includes a security agreement with respect to
a Cooperative Note.
If specified in the related Prospectus Supplement, a Mortgage Pool will
contain Mortgage Loans that, in addition to being secured by the related
Mortgaged Properties, are secured by other collateral owned by the related
Mortgagors or are supported by third-party guarantees secured by collateral
owned by the related guarantors. Such Mortgage Loans are collectively referred
to herein as "Additional Collateral Loans", and such collateral is collectively
referred to herein as "Additional Collateral". Additional Collateral may
consist of marketable securities, insurance policies, annuities, certificates
of deposit, cash, accounts or other personal property and, in the case of
Additional Collateral owned by any guarantor, may consist of real estate.
Unless otherwise specified in the related Prospectus Supplement, the security
agreements and other similar security instruments related to the Additional
Collateral for a Mortgage Pool will, in the case of Additional Collateral
consisting of personal property, create first liens thereon, and, in the case
of Additional Collateral consisting of real estate, create first or second
liens thereon. Additional Collateral, or the liens thereon in favor of the
related Additional Collateral Loans, may be greater or less in value than the
principal balances of such Additional Collateral Loans, the Appraised Values of
the underlying Mortgaged Properties or the differences, if any, between such
principal balances and such Appraised Values, and the requirements that
Additional Collateral be maintained may be terminated upon the reduction of the
Loan-to-Value Ratios or principal balances of the related Additional Collateral
Loans to certain pre-determined amounts. Additional Collateral (including any
related third-party guarantees) may be provided either in addition to or in
lieu of Primary Insurance Policies for the Additional Collateral Loans in a
Mortgage Pool, as specified in the related Prospectus Supplement. Guarantees
supporting Additional Collateral Loans may be guarantees of payment or
guarantees of collectability and may be full guarantees or limited guarantees.
If a Mortgage Pool includes Additional Collateral Loans, the related Prospectus
Supplement will specify the nature and extent of such Additional Collateral
Loans and of the related Additional Collateral. If specified in such Prospectus
Supplement, the Trustee, on behalf of the related Certificateholders, will have
only the right to receive certain proceeds from the disposition of any such
Additional Collateral consisting of personal property and the liens thereon
will not be assigned to the Trustee. No assurance can be given as to the amount
of proceeds, if any, that might be realized from the disposition of the
Additional Collateral for any of the Additional Collateral Loans. See "Certain
Legal Aspects of the Mortgage Loans and Related Matters--Anti-Deficiency
Legislation and Other Limitations on Lenders" herein.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among those purchased by the Company, either directly or
through its affiliates, including Residential Funding, from
11
<PAGE>
banks, savings and loan associations, mortgage bankers, investment banking
firms, the RTC, the FDIC and other mortgage loan originators or sellers not
affiliated with the Company ("Unaffiliated Sellers") or from GMAC Mortgage, the
indirect parent of the Company, and its affiliates ("Affiliated Sellers";
Unaffiliated Sellers and Affiliated Sellers are collectively referred to herein
as "Sellers"), all as described below under "Mortgage Loan Program." If a
Mortgage Pool is composed of Mortgage Loans acquired by the Company directly
from Sellers other than Residential Funding, the related Prospectus Supplement
will specify the extent of Mortgage Loans so acquired. The characteristics of
the Mortgage Loans are as described in the related Prospectus Supplement. Other
mortgage loans available for purchase by the Company may have characteristics
which would make them eligible for inclusion in a Mortgage Pool but were not
selected for inclusion in such Mortgage Pool.
Under certain circumstances, the Mortgage Loans will be delivered either
directly or indirectly to the Company by one or more Sellers identified in the
related Prospectus Supplement, concurrently with the issuance of the related
series of Certificates (a "Designated Seller Transaction"). Such Certificates
may be sold in whole or in part to any such Seller in exchange for the related
Mortgage Loans, or may be offered under any of the other methods described
herein under "Methods of Distribution." The related Prospectus Supplement for a
Mortgage Pool composed of Mortgage Loans acquired by the Company pursuant to a
Designated Seller Transaction will generally include information, provided by
the related Seller, about the Seller, the Mortgage Loans and the underwriting
standards applicable to the Mortgage Loans. None of the Company, Residential
Funding, GMAC Mortgage or any of their affiliates will make any representation
or warranty with respect to such Mortgage Loans, or any representation as to
the accuracy or completeness of such information provided by the Seller.
If specified in the related Prospectus Supplement, the Trust Fund underlying
a series of Certificates may include mortgage pass-through certificates
evidencing interests in Mortgage Loans ("Mortgage Securities"), as described
herein. The Mortgage Securities may have been issued previously by the Company
or an affiliate thereof, a financial institution or other entity engaged
generally in the business of mortgage lending or a limited purpose corporation
organized for the purpose of, among other things, establishing trusts,
acquiring and depositing mortgage loans into such trusts, and selling
beneficial interests in such trusts. Except as otherwise set forth in the
related Prospectus Supplement, such Mortgage Securities will be generally
similar to Certificates offered hereunder. As to any such series of
Certificates, the related Prospectus Supplement will include a description of
such Mortgage Securities and any related credit enhancement, and the Mortgage
Loans underlying such Mortgage Securities will be described together with any
other Mortgage Loans included in the Mortgage Pool relating to such series. As
to any such series of Certificates, as used herein the term "Mortgage Pool"
includes the Mortgage Loans underlying such Mortgage Securities.
Notwithstanding any other reference herein to the Master Servicer, with respect
to a series of Certificates as to which the Trust Fund includes Mortgage
Securities, the entity that services and administers such Mortgage Securities
on behalf of holders of such Certificates may be referred to as the "Manager,"
if so specified in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, Residential Funding initially
will act as Manager with respect to such Mortgage Securities as well as the
related Certificates, and references herein to advances to be made and other
actions to be taken by the Master Servicer in connection with the Mortgage
Loans may include such advances made and other actions taken pursuant to the
terms of such Mortgage Securities.
Each series of Certificates will evidence interests in one Mortgage Pool
including Mortgage Loans having an aggregate principal balance of not less than
approximately $5,000,000 as of, unless otherwise specified in the applicable
Prospectus Supplement, the Cut-off Date. Each Certificate will evidence an
interest in only the related Mortgage Pool and corresponding Trust Fund, and
not in any other Mortgage Pool or Trust Fund.
12
<PAGE>
THE MORTGAGE LOANS
Unless otherwise specified below or in the related Prospectus Supplement, all
of the Mortgage Loans in a Mortgage Pool will (i) have monthly payments due or
deemed to be due on the first of each month, (ii) be secured by Mortgaged
Properties located in any of the 50 states, the District of Columbia or the
Commonwealth of Puerto Rico and (iii) be of only one type of the following
types of mortgage loans described or referred to in paragraphs numbered (1)
through (8):
(1) Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans or otherwise
modified) providing for level monthly payments of principal and interest
and terms at origination or modification of not more than 15 years;
(2) Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans or otherwise
modified) providing for level monthly payments of principal and interest
and terms at origination or modification of more than 15 years, but not
more than 30 years;
(3) Fully-amortizing adjustable-rate mortgage loans ("ARM Loans") having
an original or modified term to maturity of not more than 30 years with a
related interest rate (a "Mortgage Rate") which generally adjusts initially
either six months, one, three, five or seven years subsequent to the
initial payment date, and thereafter at either six-month, one-year or other
intervals (with corresponding adjustments in the amount of monthly
payments) over the term of the mortgage loan to equal the sum of a fixed
percentage set forth in the related Mortgage Note (the "Note Margin") and
an index*. The related Prospectus Supplement will set forth the relevant
index and the highest, lowest and weighted average Note Margin with respect
to the ARM Loans in the related Mortgage Pool. The related Prospectus
Supplement will also indicate any periodic or lifetime limitations on
changes in any per annum Mortgage Rate at the time of any adjustment. If
specified in the related Prospectus Supplement, an ARM Loan may include a
provision that allows the Mortgagor to convert the adjustable Mortgage Rate
to a fixed rate at some point during the term of such ARM Loan generally
not later than six to ten years subsequent to the initial payment date;
(4) Negatively-amortizing adjustable-rate mortgage loans having original
or modified terms to maturity of not more than 30 years with Mortgage Rates
which generally adjust initially on the payment date referred to in the
related Prospectus Supplement, and thereafter monthly on each payment date
to equal the sum of the Note Margin and the index. The scheduled monthly
payment will be adjusted as and when described in the related Prospectus
Supplement to an amount that would fully amortize the Mortgage Loan over
its remaining term on a level debt service basis; provided that increases
in the scheduled monthly payment may be subject to certain limitations as
specified in the related Prospectus Supplement. If an adjustment to the
Mortgage Rate on a Mortgage Loan causes the amount of interest accrued
thereon in any month to exceed the scheduled monthly payment on such
mortgage loan, the resulting amount of interest that has accrued but is not
then payable ("Deferred Interest") will be added to the principal balance
of such Mortgage Loan;
(5) Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of not more than 15 years with monthly payments
during the first year calculated on the basis of an assumed interest rate
which is a specified percentage below the Mortgage Rate on such mortgage
loan.
--------
* The index (the "Index") for a particular Mortgage Pool will be specified in
the related Prospectus Supplement and may include one of the following indexes:
(i) the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of either six months or one year, (ii) the weekly auction average
investment yield of U.S. Treasury bills of six months, (iii) the daily Bank
Prime Loan rate made available by the Federal Reserve Board, (iv) the cost of
funds of member institutions for the Federal Home Loan Bank of San Francisco,
or (v) 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 related Prospectus Supplement.
13
<PAGE>
Such monthly payments increase at the beginning of the second year by a
specified percentage of the monthly payment during the preceding year and
each year thereafter to the extent necessary to amortize the mortgage loan
over the remainder of its 15-year term. Deferred Interest, if any, will be
added to the principal balance of such mortgage loans;
(6) Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of not more than 30 years with monthly payments
during the first year calculated on the basis of an assumed interest rate
which is a specified percentage below the Mortgage Rate. Such monthly
payments increase at the beginning of the second year by a specified
percentage of the monthly payment during the preceding year and each year
thereafter to the extent necessary to fully amortize the mortgage loan
within its 30-year term. Deferred Interest, if any, will be added to the
principal balance of such mortgage loan;
(7) Balloon mortgage loans ("Balloon Loans"), which are fixed-rate
mortgage loans having original or modified terms to maturity of generally 5
or 7 years as described in the related Prospectus Supplement, with level
monthly payments of principal and interest based on a 30-year amortization
schedule. The amount of the monthly payment will remain constant until the
maturity date, upon which date the full outstanding principal balance on
such Balloon Loan will be due and payable (such amount, the "Balloon
Amount"); or
(8) Another type of mortgage loan described in the related Prospectus
Supplement.
Certain information, including information regarding loan-to-value ratios
(each, a "Loan-to-Value Ratio") at origination (unless otherwise specified in
the related Prospectus Supplement) of the Mortgage Loans underlying each series
of Certificates, will be supplied in the related Prospectus Supplement. In the
case of most Mortgage Loans, the Loan-to-Value Ratio at origination is defined
generally as the ratio, expressed as a percentage, of the principal amount of
the Mortgage Loan at origination (or, if appropriate, at the time of an
appraisal subsequent to origination) to the lesser of (x) the appraised value
determined in an appraisal obtained at origination of such Mortgage Loan, if
any, or, if the related Mortgaged Property has been appraised subsequent to
origination, the value determined in such subsequent appraisal and (y) the
sales price for the related Mortgaged Property (except in certain circumstances
in which there has been a subsequent appraisal). In the case of certain
refinanced, modified or converted Mortgage Loans, the Loan-to-Value Ratio at
origination is defined generally as the ratio, expressed as a percentage, of
the principal amount of such Mortgage Loan to the lesser of (x) the appraised
value of the related Mortgaged Property determined at origination or in an
appraisal, if any, obtained at the time of refinancing, modification or
conversion and (y) the sales price of the related Mortgaged Property or, if the
Mortgage Loan is not a rate and term refinance Mortgage Loan and if the
Mortgaged Property was owned for a relatively short period of time prior to
refinancing, modification or conversion, the sum of the sales price of the
related Mortgaged Property plus the added value of any improvements. The lesser
of the items described in (x) and (y) of the preceding sentence or the second
preceding sentence, as the case may be, is hereinafter referred to as the
"Appraised Value." Certain Mortgage Loans which are subject to negative
amortization will have Loan-to-Value Ratios which will increase after
origination as a result of such negative amortization.
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to which a
portion of the proceeds are used to refinance an existing mortgage loan, and
the remaining proceeds may be retained by the Mortgagor or used for purposes
unrelated to the Mortgaged Property. Alternatively, the Mortgage Loans may be
"rate and term refinance" Mortgage Loans, as to which substantially all of the
proceeds (net of related costs incurred by the Mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms thereof. The Mortgage Loans
may be mortgage loans which have been consolidated and/or have had various
terms changed, mortgage loans which have been converted from adjustable rate
mortgage loans to fixed rate mortgage loans, or construction loans which have
been converted to permanent mortgage loans. In addition, a Mortgaged Property
may be subject to secondary financing at the time of origination of the
Mortgage Loan or thereafter.
14
<PAGE>
If provided for in the related Prospectus Supplement, a Mortgage Pool may
contain ARM Loans which allow the Mortgagors to convert the adjustable rates on
such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"),
generally not later than six to ten years subsequent to the date of
origination, depending upon the length of the initial adjustment period. If
specified in the related Prospectus Supplement, upon any conversion, the
Company will repurchase or Residential Funding, the applicable Subservicer or a
third party will purchase the converted Mortgage Loan as and to the extent set
forth in the related Prospectus Supplement. Alternatively, if specified in the
related Prospectus Supplement, the Company or Residential Funding (or another
party specified therein) may agree to act as remarketing agent with respect to
such converted Mortgage Loans and, in such capacity, to use its best efforts to
arrange for the sale of converted Mortgage Loans under specified conditions.
Upon the failure of any party so obligated to purchase any such converted
Mortgage Loan, the inability of any remarketing agent to arrange for the sale
of the converted Mortgage Loan and the unwillingness of such remarketing agent
to exercise any election to purchase the converted Mortgage Loan for its own
account, the related Mortgage Pool will thereafter include both fixed rate and
adjustable rate Mortgage Loans.
If provided for in the related Prospectus Supplement, certain of the Mortgage
Loans may be subject to temporary buydown plans ("Buydown Mortgage Loans")
pursuant to which the monthly payments made by the Mortgagor during the early
years of the Mortgage Loan (the "Buydown Period") will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) an amount (such amount, exclusive of investment earnings
thereon, being hereinafter referred to as "Buydown Funds") contributed by the
seller of the Mortgaged Property or another source and placed in a custodial
account (the "Buydown Account"), (ii) if the Buydown Funds are contributed on a
present value basis, investment earnings on such Buydown Funds or (iii)
additional buydown funds to be contributed over time by the Mortgagor's
employer or another source. See "Description of the Certificates--Payments on
Mortgage Loans; Deposits to Certificate Account." Under Residential Funding's
underwriting standards, the Mortgagor under each Buydown Mortgage Loan will be
qualified based on the initial reduced monthly payment amount. See "Mortgage
Loan Program--Underwriting Standards" for a discussion of loss and delinquency
considerations relating to Buydown Mortgage Loans.
The Prospectus Supplement for each series of Certificates will contain
information as to the type of Mortgage Loans which will be included in the
related Mortgage Pool. Each Prospectus Supplement applicable to a series of
Certificates will include certain information, generally as of the Cut-off Date
and to the extent then available to the Company, on an approximate basis, as to
(i) the aggregate principal balance of the Mortgage Loans, (ii) the type of
property securing the Mortgage Loans, (iii) the original or modified terms to
maturity of the Mortgage Loans, (iv) the range of principal balances of the
Mortgage Loans at origination or modification, (v) the earliest origination or
modification date and latest maturity date of the Mortgage Loans, (vi) the
Loan-to-Value Ratios of the Mortgage Loans, (vii) the Mortgage Rate or range of
Mortgage Rates borne by the Mortgage Loans, (viii) if any of the Mortgage Loans
are ARM Loans, the applicable Index, the range of Note Margins and the weighted
average Note Margin, (ix) the geographical distribution of the Mortgage Loans,
(x) the number of Buydown Mortgage Loans, if applicable, and (xi) the percent
of ARM Loans which are convertible to fixed-rate mortgage loans, if applicable.
A Current Report on Form 8-K will be available upon request to holders of the
related series of Certificates and will be filed, together with the related
Pooling and Servicing Agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of such Certificates. In the
event that Mortgage Loans are added to or deleted from the Trust Fund after the
date of the related Prospectus Supplement, such addition or deletion will be
noted in the Current Report on Form 8-K.
The Company will cause the Mortgage Loans constituting each Mortgage Pool (or
Mortgage Securities evidencing interests therein) to be assigned to the Trustee
named in the related Prospectus Supplement, for the benefit of the holders of
all of the Certificates of a series. The Master Servicer named in the related
Prospectus Supplement will service the Mortgage Loans, generally through other
mortgage servicing
15
<PAGE>
institutions ("Subservicers"), pursuant to a Pooling and Servicing Agreement
and will receive a fee for such services. See "Mortgage Loan Program" and
"Description of the Certificates." With respect to those Mortgage Loans
serviced by the Master Servicer through a Subservicer, the Master Servicer will
remain liable for its servicing obligations under the related Pooling and
Servicing Agreement as if the Master Servicer alone were servicing such
Mortgage Loans. In addition to or in lieu of the Master Servicer for a series
of Certificates, the related Prospectus Supplement may identify a certificate
administrator (the "Certificate Administrator") for the Trust Fund. The
Certificate Administrator may be an affiliate of the Company or the Master
Servicer. All references herein to "Master Servicer" and any discussions of the
servicing and administration functions of the Master Servicer will also apply
to the Certificate Administrator to the extent applicable.
The Company will make certain limited representations and warranties
regarding the Mortgage Loans except as otherwise specified herein, but its
assignment of the Mortgage Loans to the Trustee will be without recourse. See
"Description of the Certificates--Assignment of Mortgage Loans." The Master
Servicer's obligations with respect to the Mortgage Loans will consist
principally of its contractual servicing obligations under the related Pooling
and Servicing Agreement (including its obligation to enforce certain purchase
and other obligations of Subservicers and Sellers, as more fully described
herein under "Mortgage Loan Program--Representations by Sellers," "Subservicing
by Sellers" and "Description of the Certificates--Assignment of Mortgage
Loans," and its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans in amounts
described herein under "Description of the Certificates--Advances") or pursuant
to the terms of any Mortgage Securities. The obligation of the Master Servicer
to make advances will be limited to amounts which the Master Servicer believes
ultimately would be reimbursable out of the proceeds of liquidation of the
Mortgage Loans or any applicable form of credit support. See "Description of
the Certificates--Advances."
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Company, either directly
or indirectly through Residential Funding from Sellers. The Mortgage Loans will
generally have been originated in accordance with the Company's underwriting
standards or alternative underwriting criteria as described below under
"Underwriting Standards" or as described in the related Prospectus Supplement.
UNDERWRITING STANDARDS
General Standards
The Company's underwriting standards with respect to certain Mortgage Loans
will generally conform to those published in Residential Funding's Seller Guide
(together with Residential Funding's Servicer Guide, the "Guide," as modified
from time to time). The underwriting standards as set forth in the Guide are
continuously revised based on opportunities and prevailing conditions in the
residential mortgage market and the market for the Company's mortgage pass-
through certificates. The Mortgage Loans may be underwritten by Residential
Funding or by a designated third party. In certain circumstances, however, the
Mortgage Loans may be underwritten only by the Seller. See "--Guide Standards--
Qualifications of Sellers." Residential Funding may perform only sample quality
assurance reviews to determine whether the Mortgage Loans in any Mortgage Pool
were underwritten in accordance with applicable standards.
In addition, the Company purchases Mortgage Loans which do not conform to the
underwriting standards set forth in the Guide. Certain of the Mortgage Loans
will be purchased in negotiated transactions, and such negotiated transactions
may be governed by agreements ("Master Commitments") relating to ongoing
purchases of Mortgage Loans by Residential Funding, from Sellers who will
represent that the Mortgage Loans have been originated in accordance with
underwriting standards agreed to by Residential Funding. Residential Funding,
on behalf of the Company, will generally review only a limited portion of the
Mortgage Loans in any delivery of such Mortgage Loans from the related Seller
for conformity with the
16
<PAGE>
applicable underwriting standards. Certain other Mortgage Loans will be
purchased from Sellers who will represent that the Mortgage Loans were
originated pursuant to underwriting standards determined by a mortgage
insurance company acceptable to Residential Funding. The Company, or
Residential Funding on behalf of the Company, may accept a certification from
such insurance company as to a Mortgage Loan's insurability in a mortgage pool
as of the date of certification as evidence of a Mortgage Loan conforming to
applicable underwriting standards. Such certifications will likely have been
issued before the purchase of the Mortgage Loan by Residential Funding or the
Company.
The underwriting standards utilized in negotiated transactions and Master
Commitments, the underwriting standards of insurance companies issuing
certificates and the underwriting standards applicable to Mortgage Loans
underlying Mortgage Securities may vary substantially from the underwriting
standards set forth in the Guide. Such underwriting standards are generally
intended to provide an underwriter with information to evaluate the borrower's
repayment ability and the adequacy of the Mortgaged Property as collateral. Due
to the variety of underwriting standards and review procedures that may be
applicable to the Mortgage Loans included in any Mortgage Pool, the related
Prospectus Supplement generally will not distinguish among the various
underwriting standards applicable to the Mortgage Loans nor describe any review
for compliance with applicable underwriting standards performed by the Company
or Residential Funding. Moreover, 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 Mortgage Loans
underwritten pursuant to varying standards as described above will be
equivalent under all circumstances. In the case of a Designated Seller
Transaction, the applicable underwriting standards will be those of the Seller
or of the originator of the Mortgage Loans, and will be described in the
related Prospectus Supplement.
The Company, either directly or indirectly through Residential Funding, will
also purchase Mortgage Loans from its affiliates, including GMAC Mortgage
Corporation of PA and GMAC Mortgage Corporation of Iowa, with underwriting
standards generally in accordance with the Guide or as otherwise agreed to by
the Company. However, certain of the Mortgage Loans may be employee or
preferred customer loans with respect to which, in accordance with such
affiliate's mortgage loan programs, no income, asset or employment
verifications or appraisals were required. Neither the Company nor Residential
Funding will review any affiliate's mortgage loans for conformity with the
underwriting standards set forth in the Guide.
Guide Standards
The following is a brief description of the underwriting standards set forth
in the Guide for full documentation loan programs. Initially, a prospective
borrower (other than a trust if the trust is the borrower) is required to fill
out a detailed application providing pertinent credit information. As part of
the application, the borrower is required to provide a current balance sheet
describing assets and liabilities and a statement of income and expenses, as
well as an authorization to apply for a credit report which summarizes the
borrower's credit history with merchants and lenders and any record of
bankruptcy. In addition, an employment verification is obtained which reports
the borrower's current salary and may contain the length of employment and an
indication as to whether it is expected that the borrower will continue such
employment in the future. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns. The borrower
may also be required to authorize verification of deposits at financial
institutions where the borrower has accounts. In the case of a Mortgage Loan
secured by a property owned by a trust, the foregoing procedures may be waived
where the Mortgage Note is executed on behalf of the Trust.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new, has been completed. The appraisal is based on
various factors, including the market value of comparable homes and the cost of
replacing the improvements.
17
<PAGE>
Once all applicable employment, credit and property information is received,
a determination is made as to whether the prospective borrower has sufficient
monthly income available to meet the borrower's monthly obligations on the
proposed mortgage loan and other expenses related to the home (such as property
taxes and hazard insurance) and other financial obligations and monthly living
expenses. The Company will generally underwrite ARM Loans, Buydown Mortgage
Loans, graduated payment Mortgage Loans and certain other Mortgage Loans on the
basis of the borrower's ability to make monthly payments as determined by
reference to the Mortgage Rates in effect at origination or the reduced initial
monthly payments, as the case may be, and on the basis of an assumption that
the borrowers will likely be able to pay the higher monthly payments that may
result from later increases in the Mortgage Rates or from later increases in
the monthly payments, as the case may be, at the time of such increase even
though the borrowers may not be able to make such higher payments at the time
of origination. The Mortgage Rate in effect from the origination date of an ARM
Loan or certain other types of loans to the first adjustment date generally
will 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 Buydown Mortgage Loans and graduated payment Mortgage Loans will increase
periodically. If the borrowers' incomes do not increase in an amount
commensurate with the increases in monthly payments, the likelihood of default
will increase. In addition, in the case of either ARM Loans or graduated
payment Mortgage Loans that are subject to negative amortization, due to the
addition of Deferred Interest the principal balances of such mortgage loans are
more likely to equal or exceed the value of the underlying mortgaged
properties, thereby increasing the likelihood of defaults and losses. With
respect to Balloon Loans, payment of the Balloon Amount will generally 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 such refinancing will be available to the borrower or that such
a sale will be possible.
The underwriting standards set forth in the Guide may be varied in
appropriate cases, specifically in "limited" or "reduced loan documentation"
mortgage loan programs. Certain reduced loan documentation programs, for
example, do not require income, employment or asset verifications. Generally,
in order to be eligible for a reduced loan documentation program, the Mortgaged
Property must have a Loan-to-Value Ratio which supports the amount of the
Mortgage Loan and the borrower must have a good credit history.
The Mortgage Loans may be originated by Sellers under a "streamlined"
mortgage loan program through which Mortgagors may have refinanced the related
Mortgaged Properties without obtaining new or updated appraisals of such
Mortgaged Properties. With respect to each such Mortgage Loan, the related
Seller generally will represent and warrant that either (i) the current value
of the related Mortgaged Property as of the date that the Mortgage Loan was
originated was not less than the appraised value of such property at the time
of the origination of the refinanced mortgage loan or (ii) the current Loan-to-
Value Ratio of such Mortgage Loan generally meets the Company's underwriting
guidelines. There can be no assurance that the substance of such representation
and warranty will be true. To the extent the Seller fails or is unable to
repurchase any Mortgage Loan due to a breach of such representation and
warranty, neither the Company, Residential Funding nor any other entity will be
so obligated. Furthermore, to the extent that the appraised value of the
related Mortgaged Property has declined, the actual Loan-to-Value Ratio with
respect to such Mortgage Loan will be higher than the Loan-to-Value Ratio set
forth with respect thereto in the related Prospectus Supplement.
In its evaluation of mortgage loans which have 24 or more months of payment
experience, Residential Funding generally places greater weight on payment
history and may take into account market and other economic trends while
placing less weight on underwriting factors generally applied to newly
originated mortgage loans.
The Mortgaged Properties may be located in states where, in general, a lender
providing credit on a single-family property may not seek a deficiency judgment
against the mortgagor but rather must look solely to the property for repayment
in the event of foreclosure. See "Certain Legal Aspects of the Mortgage Loans--
Anti-Deficiency Legislation and Other Limitations on Lenders." The Company's
underwriting standards
18
<PAGE>
applicable to all states (including anti-deficiency states) require that the
value of the property being financed, as indicated by the appraisal, currently
supports and is anticipated to support in the future the outstanding loan
balance, although there can be no assurance that such value will support the
loan balance in the future.
QUALIFICATIONS OF SELLERS
Except with respect to Designated Seller Transactions or unless otherwise
specified in the related Prospectus Supplement, each Seller (other than the
Resolution Trust Corporation (the "RTC"), the Federal Deposit Insurance
Corporation (the "FDIC") and investment banking firms) will possess certain
qualifications as of the date such Seller is approved to sell loans to
Residential Funding. Each Seller from whom a Mortgage Loan is acquired will
have been approved by Residential Funding for participation in Residential
Funding's loan purchase programs. In determining whether to approve a seller
for participation in the loan purchase program, Residential Funding generally
will consider, among other things, the financial status (including the net
worth) of the seller, the previous experience of the seller in originating
mortgage loans, the prior delinquency and loss experience of the seller, the
underwriting standards employed by the seller and the quality control and, if
applicable, the servicing operations established by the seller. There can be no
assurance that any Seller presently meets any qualifications or will continue
to meet any qualifications at the time of inclusion of mortgage loans sold by
it in the Trust Fund for a series of Certificates, or thereafter. Moreover, as
described below, there can be no assurance that any such Seller will honor its
obligation to repurchase any Mortgage Loan as to which a breach of a
representation or warranty occurs.
The RTC was established pursuant to the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), which was enacted in response
to the financial crisis of the thrift industry and the Federal Savings and Loan
Insurance Corporation. Residential Funding monitors the Sellers and the
Servicers under the RTC's or FDIC's control, as well as those Sellers and
Servicers which are insolvent, otherwise in receivership or conservatorship or
financially distressed. Such Sellers may not be able or permitted to repurchase
Mortgage Loans for which there has been a breach of representation and
warranty. Moreover, any such Seller may make no representations and warranties
with respect to Mortgage Loans sold by it. The RTC or FDIC, as applicable
(either in its corporate capacity or as receiver for a depository institution),
may also be a Seller of the Mortgage Loans, in which event neither the RTC nor
the FDIC, as applicable, nor the related depository institution may make
representations and warranties with respect to the Mortgage Loans sold, or only
limited representations and warranties may be made (for example, that the
related legal documents are enforceable). The RTC or FDIC, as applicable, may
have no obligation to repurchase any Mortgage Loan for a breach of a
representation and warranty. If as a result of a breach of representation and
warranty a Seller is required to repurchase a Mortgage Loan but is not
permitted or otherwise fails to do so or if representations and warranties are
not made by a Seller, to the extent that neither the Company nor Residential
Funding has assumed the representations and warranties or made representations
and warranties, neither the Company nor Residential Funding will be required to
repurchase such Mortgage Loan and, consequently, such Mortgage Loan will remain
in the related Mortgage Pool and any related losses will be borne by the
Certificateholders or by the credit enhancement, if any. In addition, loans
which are purchased either directly or indirectly from the RTC may be subject
to a contract right of the RTC to repurchase such loans under certain limited
circumstances.
Unless otherwise specified in the related Prospectus Supplement, the
qualifications required of Sellers for approval by Residential Funding as
participants in its loan purchase programs may not apply to Sellers in
Designated Seller Transactions. To the extent the Seller in a Designated Seller
Transaction fails to or is unable to repurchase any Mortgage Loan due to a
breach of representation and warranty, neither the Company, Residential Funding
nor any other entity will have assumed the representations and warranties and
any related losses will be borne by the Certificateholders or by the credit
enhancement, if any.
A significant portion of the Mortgage Loans in each Mortgage Pool may have
been originated by Sellers who not only possess but exceed the above-mentioned
qualifications. With respect to certain Sellers who
19
<PAGE>
exceed such qualifications and also have delinquency and foreclosure rates with
respect to their conventional loan portfolios acceptable to Residential Funding
in its sole discretion, some of the generally applicable underwriting standards
and program criteria described herein and in the Guide are often modified or
waived with respect to Mortgage Loans originated or sold to the Company by such
Sellers. The extent to which such standards and criteria are modified or waived
depends upon certain factors, including, without limitation, the net worth and
financial performance of such Seller and the performance of such Seller's
mortgage loan portfolio and those mortgage loans previously sold by it to
Residential Funding. Although a Seller's underwriting decisions may not be
reviewed prior to the initial purchase of mortgage loans from it, such
decisions will generally have been reviewed for compliance with the applicable
underwriting standards prior to the inclusion of such mortgage loans in the
Trust Fund for a series of Certificates. However, with respect to certain
Sellers who exhibit strong net worth, excellent financial performance and low
delinquency and foreclosure rates with respect to its mortgage loans, such
Seller's underwriting decisions may not be subject to such a review. If an
institution which is a Seller becomes subject to the direct or indirect control
of RTC or FDIC or if a Seller's net worth, financial performance or delinquency
and foreclosure rates are adversely impacted, such institution may continue to
be treated as a Seller as set forth above. In addition, notwithstanding the
foregoing, there can be no assurance that any such Seller will continue to meet
or exceed the qualifications required of Sellers for approval by Residential
Funding as participants in its loan purchase programs or will continue to meet
or exceed such qualifications at the time of inclusion of mortgage loans sold
by it in the Trust Fund for a series of Certificates, or thereafter.
REPRESENTATIONS BY SELLERS
Unless otherwise specified in the related Prospectus Supplement, each Seller
will have made representations and warranties in respect of the Mortgage Loans
sold by such Seller and evidenced by a series of Certificates. Such
representations and warranties generally include, among other things, that at
the time of the sale by the Seller to Residential Funding of each Mortgage
Loan: (i) except in the case of Cooperative Loans, title insurance (or in the
case of Mortgaged Properties located in areas where such policies are generally
not available, an attorney's certificate of title) and any required hazard and
primary mortgage insurance were effective at the origination of each Mortgage
Loan, and each policy (or certificate of title) remained in effect on the date
of purchase of each Mortgage Loan from the Seller by the Company or Residential
Funding; (ii) the Seller has good title to each such Mortgage Loan and such
Mortgage Loan was subject to no offsets, defenses or counterclaims except as
may be provided under the Relief Act and except to the extent that any buydown
agreement exists for a Buydown Mortgage Loan; (iii) there are no mechanics'
liens or claims for work, labor or material affecting any Mortgaged Property
which are, or may be a lien prior to, or equal with, the lien of the related
Mortgage (subject only to permissible title insurance exceptions); (iv) each
Mortgaged Property is free from damage and in good repair; (v) there are no
delinquent tax or assessment liens against the Mortgaged Property; (vi) each
Mortgage Loan is current as to all required payments; (vii) if a Primary
Insurance Policy is required with respect to a Mortgage Loan, such Mortgage
Loan is the subject of such a policy; and (viii) each Mortgage Loan was made in
compliance with, and is enforceable under, all applicable local, state and
federal laws in all material respects. In the event of a breach of a Seller's
representation or warranty that materially adversely affects the interests of
the Certificateholders in a Mortgage Loan, the related Seller will be obligated
to repurchase such Mortgage Loan as described below. However, there can be no
assurance that a Seller will honor its obligation to repurchase any Mortgage
Loan as to which such a breach of a representation or warranty arises.
Each Seller will have represented with respect to a Mortgage Loan that any
modification agreement was recorded as necessary to preserve the first lien
position in the jurisdiction in which the Mortgaged Property is located. If the
Mortgage Loans include Cooperative Loans, representations and warranties with
respect to title insurance or hazard insurance may not be given. Generally, the
cooperative itself is responsible for the maintenance of hazard insurance for
property owned by the cooperative, and the borrowers (tenant-stockholders) of
the cooperative do not maintain hazard insurance on their individual dwelling
units.
20
<PAGE>
All of the representations and warranties of a Seller in respect of a
Mortgage Loan will have been made as of the date on which such Seller sold the
Mortgage Loan to the Company or Residential Funding; the date as of which such
representations and warranties were made will be a date prior to the date of
initial issuance of the related series of Certificates or, in the case of a
Designated Seller Transaction, will be the date of closing of the related sale
by the applicable Seller. A substantial period of time may have elapsed between
the date as of which the representations and warranties were made and the later
date of initial issuance of the related series of Certificates. Accordingly,
the Seller's purchase obligation (or, if specified in the related Prospectus
Supplement, limited replacement option) described below will not arise if,
during the period commencing on the date of sale of a Mortgage Loan by the
Seller to the Company or Residential Funding, an event occurs that would have
given rise to such an obligation had the event occurred prior to sale of the
affected Mortgage Loan.
In the case of a Mortgage Pool consisting of Mortgage Loans purchased by the
Company from Sellers through Residential Funding, Residential Funding, except
in the case of a Designated Seller Transaction or as to Mortgage Loans
underlying any Mortgage Securities or unless otherwise specified in the related
Prospectus Supplement, will also have made certain limited representations and
warranties regarding the Mortgage Loans to the Company at the time (just prior
to the initial issuance of the related series of Certificates) that they are
sold to the Company. Such representations and warranties will generally
include, among other things, that: (i) as of the Cut-off Date, the information
set forth in a listing of the related Mortgage Loans is true and correct in all
material respects; (ii) a policy of title insurance in the form and amount
required by the Guide was effective at the origination of each Mortgage Loan,
and each policy remained in full force and effect on the date of sale of the
Mortgage Loan to the Company; (iii) if applicable, to the best of Residential
Funding's knowledge, the Mortgage Loans are the subject of a Primary Insurance
Policy; (iv) Residential Funding had good title to each Mortgage Loan and each
Mortgage Loan is subject to no offsets, defenses or counterclaims except as may
be provided under the Relief Act and except with respect to any buydown
agreement for a Buydown Mortgage Loan; (v) each Mortgaged Property is free of
damage and is in good repair; (vi) each Mortgage Loan complied in all material
respects with all applicable local, state and federal laws; (vii) except as
otherwise indicated in the related Prospectus Supplement, no Mortgage Loan is
one month or more delinquent in payment of principal and interest; and (viii)
there is no delinquent tax or assessment lien against any Mortgaged Property.
In the event of a breach of a representation or warranty made by Residential
Funding that materially adversely affects the interests of the
Certificateholders in a Mortgage Loan, Residential Funding will be obligated to
repurchase or substitute for such Mortgage Loan as described below. In
addition, Residential Funding will be obligated to repurchase or substitute for
as described below any Mortgage Loan as to which it is discovered that the
related Mortgage is not a valid first lien on the related Mortgaged Property
subject only to (a) liens of real property taxes and assessments not yet due
and payable, (b) 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 and (c) other
matters to which like properties are commonly subject which do not materially
adversely affect the value, use, enjoyment or marketability of the Mortgaged
Property. In addition, with respect to any Mortgage Loan as to which the
Company delivers to the Trustee or the custodian an affidavit certifying that
the original Mortgage Note has been lost or destroyed, if such Mortgage Loan
subsequently is in default and the enforcement thereof or of the related
Mortgage is materially adversely affected by the absence of the original
Mortgage Note, Residential Funding will be obligated to repurchase or
substitute for such Mortgage Loan in the manner described below. However,
Residential Funding will not be required to repurchase or substitute for any
Mortgage Loan as described above if the circumstances giving rise to such
requirement also constitute fraud in the origination of the related Mortgage
Loan. Furthermore, because the listing of the related Mortgage Loans generally
contains information with respect to the Mortgage Loans 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 with
respect to one or more of the related Mortgage Loans between the Cut-off Date
and the Closing Date. Neither Residential Funding nor any Seller will be
required to purchase or substitute for any Mortgage Loan as a result of such
prepayment or modification.
21
<PAGE>
The Company will assign to the Trustee for the benefit of the holders of the
related series of Certificates all of its right, title and interest in each
agreement by which it purchased a Mortgage Loan from Residential Funding
insofar as such agreement relates to the representations and warranties made by
a Seller or Residential Funding, as the case may be, in respect of such
Mortgage Loan and any remedies provided for with respect to any breach of such
representations and warranties. If a Seller or Residential Funding, as the case
may be, 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 Certificateholders in such Mortgage Loan within 90 days after notice
from the Master Servicer, such Seller or Residential Funding, as the case may
be, will be obligated to purchase such Mortgage Loan at a price (the "Purchase
Price") set forth in the related Pooling and Servicing Agreement which Purchase
Price will be equal to the principal balance thereof as of the date of purchase
plus accrued and unpaid interest to the first day of the month following the
month of repurchase at the Mortgage Rate (less the amount, expressed as a
percentage per annum, payable in respect of master servicing compensation or
subservicing compensation, as applicable, and the Spread, if any).
Unless otherwise specified in the related Prospectus Supplement, as to any
such Mortgage Loan required to be purchased by Residential Funding as provided
above, rather than repurchase the Mortgage Loan, Residential Funding may, at
its sole option, remove such Mortgage Loan (a "Deleted Mortgage Loan") from the
Trust Fund and cause the Company to substitute in its place another Mortgage
Loan of like kind (a "Qualified Substitute Mortgage Loan"); however, such
substitution must be effected within 120 days of the date of the initial
issuance of the Certificates with respect to a Trust Fund for which no REMIC
election is to be made. With respect to a Trust Fund for which a REMIC election
is to be made, except as otherwise provided in the Prospectus Supplement
relating to a series of Certificates, such substitution of a defective Mortgage
Loan must be effected within two years of the date of the initial issuance of
the Certificates, and may not be made if such substitution would cause the
Trust Fund to not qualify as a REMIC or result in a prohibited transaction tax
under the Code. Except as otherwise provided in the related Prospectus
Supplement, any Qualified Substitute Mortgage Loan generally will, on the date
of substitution, (i) 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 Deleted Mortgage Loan
(the amount of any shortfall to be deposited in a custodial account (the
"Custodial Account") in the month of substitution for distribution to the
Certificateholders), (ii) have a Mortgage Rate and a Net Mortgage Rate not less
than (and not more than one percentage point greater than) the Mortgage Rate
and Net Mortgage Rate, respectively, of the Deleted Mortgage Loan as of the
date of substitution, (iii) have a Loan-to-Value Ratio at the time of
substitution no higher than that of the Deleted Mortgage Loan at the time of
substitution, (iv) have a remaining term to maturity not greater than (and not
more than one year less than) that of the Deleted Mortgage Loan, and (v) comply
with all of the representations and warranties set forth in the related Pooling
and Servicing Agreement as of the date of substitution. (Section 2.03) The
related Pooling and Servicing Agreement may include additional requirements
relating to ARM Loans or other specific types of Mortgage 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 related Prospectus Supplement, a Seller (including a Seller in
a Designated Seller Transaction) will have no option to substitute for a
Mortgage Loan that it is obligated to repurchase in connection with a breach of
a representation and warranty.
The Master Servicer will be required under the applicable Pooling and
Servicing Agreement to use its best reasonable efforts to enforce this purchase
or substitution obligation for the benefit of the Trustee and the
Certificateholders, following such practices it would employ in its good faith
business judgment and which are normal and usual in its general mortgage
servicing activities; provided, however, that this purchase or substitution
obligation will not become an obligation of the Master Servicer in the event
the Seller or Residential Funding, as the case may be, fails to honor such
obligation. In instances where a Seller is unable, or disputes its obligation,
to purchase affected Mortgage Loans, the Master Servicer, employing the
standards set forth in the preceding sentence, may negotiate and enter into one
or more settlement agreements with such Seller that could provide for, among
other things, the purchase of only a portion of the affected Mortgage
22
<PAGE>
Loans. Any such settlement could lead to losses on the Mortgage Loans which
would be borne by the related Certificates. In accordance with the above
described practices, the Master Servicer will not be required to enforce any
purchase obligation of a Seller arising from any misrepresentation by the
Seller, if the Master Servicer determines in the reasonable exercise of its
business judgment that the matters related to such misrepresentation did not
directly cause or are not likely to directly cause a loss on the related
Mortgage Loan. If the Seller fails to repurchase and no breach of either the
Company's or Residential Funding's representations has occurred, the Seller's
purchase obligation will not become an obligation of the Company or Residential
Funding. In the case of a Designated Seller Transaction where the Seller fails
to repurchase a Mortgage Loan and neither the Company, Residential Funding nor
any other entity has assumed the representations and warranties, such
repurchase obligation of the Seller will not become an obligation of the
Company or Residential Funding. Unless otherwise specified in the related
Prospectus Supplement, the foregoing obligations will constitute the sole
remedies available to Certificateholders or the Trustee for a breach of any
representation by a Seller or by Residential Funding in its capacity as a
seller of Mortgage Loans to the Company, or for any other event giving rise to
such obligations as described above.
Neither the Company nor the Master Servicer will be obligated to purchase a
Mortgage Loan if a Seller defaults on its obligation to do so, and no assurance
can be given that the Sellers will carry out such obligations with respect to
Mortgage Loans. Such a default by a Seller is not a default by the Company or
by the Master Servicer. However, to the extent that a breach of the
representations and warranties of a Seller also constitutes a breach of a
representation made by Residential Funding, as set forth above, or by the
Company or the Master Servicer, as described below under "Description of the
Certificates--Assignment of Mortgage Loans," Residential Funding, the Company
or the Master Servicer may have a purchase or substitution obligation. Any
Mortgage Loan not so purchased or substituted for shall remain in the related
Trust Fund and any losses related thereto shall be allocated to the related
credit enhancement, to the extent available.
Notwithstanding the foregoing, with respect to any Seller that requests
Residential Funding's consent to the transfer of subservicing rights relating
to any Mortgage Loans to a successor servicer, Residential Funding may release
such Seller from liability under its representations and warranties described
above, upon the assumption of such successor servicer of the Seller's liability
for such representations and warranties as of the date they were made. In that
event, Residential Funding's rights under the instrument by which such
successor servicer assumes the Seller's liability will be assigned to the
Trustee, and such successor servicer shall be deemed to be the "Seller" for
purposes of the foregoing provisions.
SUBSERVICING BY SELLERS
The Seller of a Mortgage Loan will generally act as the Subservicer for such
Mortgage Loan pursuant to an agreement between Residential Funding and the
Subservicer (a "Subservicing Agreement") unless servicing is released to the
Master Servicer or has been transferred to a servicer approved by Residential
Funding. The Master Servicer may, but is not obligated to, assign such
subservicing to designated subservicers which will be qualified Sellers and
which may include GMAC Mortgage or its affiliates. A representative form of
Subservicing Agreement is included as an exhibit to the forms of Pooling and
Servicing Agreements filed as exhibits to the Registration Statement of which
this Prospectus is a part. The Subservicing Agreement executed in connection
with a Designated Seller Transaction or with respect to certain Mortgage Loans
sold in negotiated transactions will generally vary from the form filed
herewith to accommodate the different features of the Mortgage Loans included
in such a Designated Seller Transaction and to vary the parameters constituting
an event of default. The following description does not purport to be complete
and is qualified in its entirety by reference to the form of Subservicing
Agreement and by the discretion of the Master Servicer to modify the
Subservicing Agreement and to enter into different Subservicing Agreements.
While such Subservicing Agreement will be a contract solely between the Master
Servicer and the Subservicer, the Pooling and Servicing Agreement pursuant to
which a series of Certificates is issued will provide that, if for any reason
the Master Servicer for such series of Certificates is no longer the master
servicer of the related
23
<PAGE>
Mortgage Loans, the Trustee or any successor Master Servicer must recognize the
Subservicer's rights and obligations under such Subservicing Agreement.
With the approval of the Master Servicer, a Subservicer may delegate its
servicing obligations to third-party servicers, but such Subservicer will
remain obligated under the related Subservicing Agreement. Each Subservicer
will be required to perform the customary functions of a servicer, including
collection of payments from Mortgagors and remittance of such collections to
the Master Servicer; maintenance of hazard insurance and filing and settlement
of claims thereunder, subject in certain cases to the right of the Master
Servicer to approve in advance any such settlement; maintenance of escrow or
impoundment accounts of Mortgagors for payment of taxes, insurance and other
items required to be paid by the Mortgagor pursuant to the Mortgage Loan;
processing of assumptions or substitutions (although, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer is
generally required to exercise due-on-sale clauses to the extent such exercise
is permitted by law and would not adversely affect insurance coverage);
attempting to cure delinquencies; supervising foreclosures; inspection and
management of Mortgaged Properties under certain circumstances; and maintaining
accounting records relating to the Mortgage Loans. A Subservicer will also be
obligated to make advances to the Master Servicer in respect of delinquent
installments of principal and interest (net of any subservicing or other
compensation) on Mortgage Loans, as described more fully under "Description of
the Certificates--Advances," and in respect of certain taxes and insurance
premiums not paid on a timely basis by Mortgagors. In addition, a Subservicer
is obligated to pay to the Master Servicer interest on the amount of any
partial prepayment of principal received and applied to reduce the outstanding
principal balance of a Mortgage Loan from the date of application of such
payment to the first day of the following month. Any amounts paid by a
Subservicer pursuant to the preceding sentence will be for the benefit of the
Master Servicer as additional servicing compensation. No assurance can be given
that the Subservicers will carry out their advance or payment obligations with
respect to the Mortgage Loans. Unless otherwise specified in the related
Prospectus Supplement, a Subservicer may transfer its servicing obligations to
another entity that has been approved for participation in Residential
Funding's loan purchase programs, but only with the approval of the Master
Servicer.
As compensation for its servicing duties, the Subservicer will be entitled to
a monthly servicing fee (to the extent the related Mortgage Loan payment has
been collected) in a minimum amount set forth in the related Prospectus
Supplement. The Subservicer is also entitled to collect and retain, as part of
its servicing compensation, any late charges provided in the Mortgage Note or
related instruments. The Subservicer will be reimbursed by the Master Servicer
for certain expenditures which it makes, generally to the same extent that the
Master Servicer would be reimbursed under the applicable Pooling and Servicing
Agreement. In some instances, the Subservicer will receive additional
compensation in the form of all or a portion of the interest due and payable on
the applicable Mortgage Loan which is over and above the interest rate that the
Company or Residential Funding, as the case may be, required at the time it
committed to purchase the Mortgage Loan. See "The Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses."
Each Subservicer will be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Subservicer in its servicing capacity.
Each Subservicer is required to maintain a fidelity bond and an errors and
omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the Master Servicer.
Each Subservicer will be required to service each Mortgage Loan pursuant to
the terms of the Subservicing Agreement for the entire term of such Mortgage
Loan, unless the Subservicing Agreement is earlier terminated by the Master
Servicer or unless servicing is released to the Master Servicer. Subject to
applicable law, the Master Servicer may generally terminate a Subservicing
Agreement immediately upon the giving of notice upon certain stated events,
including the violation of such Subservicing Agreement by the Subservicer, or
upon sixty days' notice to the Subservicer without cause upon payment of an
amount equal to 2% of the aggregate outstanding principal balance of all
mortgage loans, including the Mortgage Loans, serviced by such Subservicer
pursuant to a Subservicing Agreement.
24
<PAGE>
The Master Servicer may agree with a Subservicer to amend a Subservicing
Agreement. Upon termination of a Subservicing Agreement, the Master Servicer
may act as servicer of the related Mortgage Loans or enter into one or more new
Subservicing Agreements. If the Master Servicer acts as servicer, it will not
assume liability for the representations and warranties of the Subservicer
which it replaces. If the Master Servicer enters into a new Subservicing
Agreement, each new Subservicer must either be a Seller, meet the standards for
becoming a Seller or have such servicing experience that is otherwise
satisfactory to the Master Servicer. The Master Servicer may make reasonable
efforts to have the new Subservicer assume liability for the representations
and warranties of the terminated Subservicer, but no assurance can be given
that such an assumption will occur and, in any event, if the new Subservicer is
an affiliate of Residential Funding the liability for such representations and
warranties will not be assumed by such new Subservicer. In the event of such an
assumption, the Master Servicer may in the exercise of its business judgment
release the terminated Subservicer from liability in respect of such
representations and warranties. Any amendments to a Subservicing Agreement or
to a new Subservicing Agreement may contain provisions different from those
described above which are in effect in the original Subservicing Agreements.
However, the Pooling and Servicing Agreement for each Trust Fund will provide
that any such amendment or new agreement may not be inconsistent with or
violate such Pooling and Servicing Agreement in a manner which would materially
and adversely affect the interests of the Certificateholders.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued in series. Each series of Certificates (or,
in certain instances, two or more series of Certificates) will be issued
pursuant to a Pooling and Servicing Agreement, similar to one of the forms
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. Each Pooling and Servicing Agreement will be filed with the Securities
and Exchange Commission as an exhibit to a Current Report on Form 8-K. The
following summaries (together with additional summaries under "The Pooling and
Servicing Agreement" below) describe certain provisions relating to the
Certificates common to each Pooling and Servicing Agreement. References in this
Prospectus to the relevant articles, sections and exhibits of the applicable
Pooling and Servicing Agreement appear in parenthesis. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Pooling and Servicing Agreement
for each Trust Fund and the related Prospectus Supplement. Wherever particular
sections or defined terms of the Pooling and Servicing Agreement are referred
to herein, such sections or defined terms are thereby incorporated herein by
reference.
Unless otherwise specified in the Prospectus Supplement with respect to a
series, Certificates of each series covered by a particular Pooling and
Servicing Agreement will evidence specified beneficial ownership interests in a
separate Trust Fund created pursuant to such Pooling and Servicing Agreement.
(Article I and Sections 5.01 and 5.02) A Trust Fund will consist of, to the
extent provided in the Pooling and Servicing Agreement: (i) such Mortgage Loans
(and the related mortgage documents) or interests therein (including any
Mortgage Securities) underlying a particular series of Certificates as from
time to time are subject to the Pooling and Servicing Agreement, exclusive of,
if specified in the related Prospectus Supplement, any Spread or other interest
retained by the Company or any of its affiliates with respect to each such
Mortgage Loan; (ii) such assets including, without limitation, all payments and
collections in respect of the Mortgage Loans or Mortgage Securities due after
the related Cut-off Date, as from time to time are identified as deposited in
respect thereof in the Custodial Account and in the related Certificate
Account; (iii) property acquired by foreclosure of such Mortgage Loans or deed
in lieu of foreclosure and certain proceeds from the disposition of any related
Additional Collateral; (iv) hazard insurance policies and Primary Insurance
Policies, if any, and certain proceeds thereof; and (v) any combination, as and
to the extent specified in the related Prospectus Supplement, of a Letter of
Credit, Purchase Obligation, Mortgage Pool Insurance Policy, Special Hazard
Insurance Policy, Bankruptcy Bond or other type of credit enhancement as
described under "Description of Credit Enhancement." To the extent that any
Trust Fund includes certificates of interest or participations in
25
<PAGE>
Mortgage Loans, the related Prospectus Supplement will describe the material
terms and conditions of such certificates or participations. (Article I)
Each series of Certificates may consist of any one or a combination of the
following: (i) a single class of Certificates; (ii) two or more classes of
Certificates, one or more classes of which will be senior ("Senior
Certificates") in right of payment to one or more of the other classes
("Subordinate Certificates"), and as to which certain classes of Senior (or
Subordinate) Certificates may be senior to other classes of Senior (or
Subordinate) Certificates, as described in the respective Prospectus Supplement
(any such series, a "Senior/Subordinate Series"); (iii) two or more classes of
Certificates, one or more classes ("Strip Certificates") of 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; (iv) two or more classes of Certificates
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 upon
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 Mortgage Pool,
which series may include one or more classes of Certificates ("Accrual
Certificates") with respect to which certain accrued interest will not be
distributed but rather will be added to the principal balance thereof on each
Distribution Date for the period described in the related Prospectus
Supplement; or (v) other types of classes of Certificates, as described in the
related Prospectus Supplement. Credit support for each series of Certificates
will be provided by a Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy, Bankruptcy Bond, Letter of Credit, Purchase Obligation, Reserve Fund or
other credit enhancement as described under "Description of Credit
Enhancement," by the subordination of one or more classes of Certificates as
described under "Subordination" or by any combination of the foregoing.
If so specified in the Prospectus Supplement relating to a series of
Certificates, one or more elections may be made to treat the related Trust
Fund, or designated portion thereof, as a REMIC. If such an election is made
with respect to a series of Certificates, one of the classes of Certificates
will be designated as evidencing the sole class of "residual interests" in each
related REMIC, as defined in the Code; alternatively, a separate class of
ownership interests will evidence such residual interests. All other classes of
Certificates in such series will constitute "regular interests" in the related
REMIC, as defined in the Code and will be designated as such. As to each
series, all Certificates offered hereby will be rated in one of the four
highest rating categories by one or more Rating Agencies. As to each series of
Certificates as to which a REMIC election is to be made, the Master Servicer
will be obligated to take certain specified actions required in order to comply
with applicable laws and regulations.
FORM OF CERTIFICATES
Unless otherwise specified in the related Prospectus Supplement, the
Certificates of each series will be issued as physical certificates in fully
registered form only in the denominations specified in the related Prospectus
Supplement, and will be transferable and exchangeable at the corporate trust
office of the Certificate Registrar named in the related Prospectus Supplement.
(Section 5.02) No service charge will be made for any registration of exchange
or transfer of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge. (Section 5.02) The
term "Certificateholder" or "Holder" as used herein refers to the entity whose
name appears on the records of the Certificate Registrar (or, if applicable,
the Transfer Agent) as the registered holder thereof, except as otherwise
indicated in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, specified classes of a
series of Certificates will be initially issued through the book-entry
facilities of The Depository Trust Company ("DTC"). As to any such class of
Certificates ("DTC Registered Certificates"), the record Holder of such
Certificates will be DTC's nominee. DTC is a limited-purpose trust company
organized under the laws of the State of New York, which holds securities for
its participating organizations ("Participants") and facilitates the clearance
and settlement
26
<PAGE>
of securities transactions between Participants through electronic book-entry
changes in the accounts of Participants. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Other institutions that are not
Participants but clear through or maintain a custodial relationship with
Participants (such institutions, "Intermediaries") have indirect access to
DTC's clearance system.
Unless otherwise specified in the related Prospectus Supplement, no person
acquiring an interest in any DTC Registered Certificates (each such person, a
"Beneficial Owner") will be entitled to receive a Certificate representing such
interest in registered, certificated form, unless either (i) DTC ceases to act
as depository in respect thereof and a successor depository is not obtained, or
(ii) the Company elects in its sole discretion to discontinue the registration
of such Certificates through DTC. Prior to any such event, Beneficial Owners
will not be recognized by the Trustee or the Master Servicer as Holders of the
related Certificates for purposes of the Pooling and Servicing Agreement and
Beneficial Owners will be able to exercise their rights as owners of such
Certificates only indirectly through DTC, Participants and Intermediaries. Any
Beneficial Owner that desires to purchase, sell or otherwise transfer any
interest in DTC Registered Certificates may do so only through DTC, either
directly if such Beneficial Owner is a Participant or indirectly through
Participants and, if applicable, Intermediaries. Pursuant to the procedures of
DTC, transfers of the beneficial ownership of any DTC Registered Certificates
will be required to be made in minimum denominations specified in the related
Prospectus Supplement. The ability of a Beneficial Owner to pledge DTC
Registered Certificates to persons or entities that are not Participants in the
DTC system, or to otherwise act with respect to such Certificates, may be
limited because of the lack of physical certificates evidencing such
Certificates and because DTC may act only on behalf of Participants.
Distributions in respect of the DTC Registered Certificates will be forwarded
by the Trustee to DTC, and DTC will be responsible for forwarding such payments
to Participants, each of which will be responsible for disbursing such payments
to the Beneficial Owners it represents or, if applicable, to Intermediaries.
Accordingly, Beneficial Owners may experience delays in the receipt of payments
in respect of their Certificates. Under DTC's procedures, DTC will take actions
permitted to be taken by Holders of any class of DTC Registered Certificates
under the Pooling and Servicing Agreement only at the direction of one or more
Participants to whose account the DTC Registered Certificates 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 with respect to any action of Holders of Certificates of
any Class to the extent that Participants authorize such actions. None of the
Master Servicer, the Company, 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 DTC Registered
Certificates, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a series of Certificates, the Company will cause
the Mortgage Loans or Mortgage Securities being included in the related Trust
Fund to be assigned to the Trustee (or its nominee) together with, unless
otherwise specified in the related Prospectus Supplement, all principal and
interest received on or with respect to such Mortgage Loans or Mortgage
Securities after the Cut-off Date, other than principal and interest due on or
before the Cut-off Date. If specified in the related Prospectus Supplement, the
Company or any of its affiliates may retain the Spread, if any, for itself or
transfer the same to others. (Sections 2.01 and 3.10) The Trustee will,
concurrently with such assignment, deliver a series of Certificates to the
Company in exchange for the Mortgage Loans or Mortgage Securities. (Section
2.05) Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the related Pooling and Servicing Agreement. Such schedule will
include, among other things, information as to the principal balance of each
Mortgage Loan as of the Cut-off Date, as well as information respecting the
Mortgage Rate, the currently scheduled monthly payment of principal and
interest, the maturity of the Mortgage Note and the Loan-to-Value Ratio at
origination or modification (without regard to any secondary financing).
(Article I)
27
<PAGE>
In addition, the Company will, as to each Mortgage Loan other than Mortgage
Loans underlying any Mortgage Securities, deliver to the Trustee (or to the
custodian described below) the Mortgage Note (and any modification or amendment
thereto) endorsed without recourse either in blank or to the order of the
Trustee (or its nominee), the Mortgage with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office)
or in the case of a Cooperative Loan, on the related financing statement, an
assignment in recordable form of the Mortgage (or with respect to a Cooperative
Loan, an assignment of the related proprietary lease or occupancy agreement)
and, if applicable, any riders or modifications to such Mortgage Note and
Mortgage, together with certain other documents at such times as set forth in
the related Pooling and Servicing Agreement. Such assignments may be blanket
assignments covering Mortgages secured by Mortgaged Properties located in the
same county, if permitted by law. Notwithstanding the foregoing, a Trust Fund
may include Mortgage Loans where the original Mortgage Note is not delivered to
the Trustee if the Company delivers to the Trustee or the custodian a copy or a
duplicate original of the Mortgage Note, together with an affidavit certifying
that the original thereof has been lost or destroyed. With respect to such
Mortgage Loans, the Trustee (or its nominee) may not be able to enforce the
Mortgage Note against the related borrower. Residential Funding will agree to
repurchase or substitute for such a Mortgage Loan in certain circumstances (see
"Mortgage Loan Program--Representations by Sellers"). In the event that, with
respect to any Mortgage Loan, the Company cannot deliver the Mortgage or any
assignment with evidence of recording thereon concurrently with the execution
and delivery of the related Pooling and Servicing Agreement because of a delay
caused by the public recording office, the Company will deliver or cause to be
delivered to the Trustee or the custodian a true and correct photocopy of such
Mortgage or assignment. The Company 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 Subservicer. Assignments of the Mortgage Loans to
the Trustee (or its nominee) will be recorded in the appropriate public
recording office, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's
interests in the Mortgage Loan against the claim of any subsequent transferee
or any successor to or creditor of the Company or the originator of such
Mortgage Loan, or except as otherwise specified in the related Prospectus
Supplement as to any series of Certificates. (Section 2.01)
The Trustee (or the custodian hereinafter referred to) will hold such
documents in trust for the benefit of the Certificateholders, and generally
will review such documents within 45 days after receipt thereof in the case of
documents delivered concurrently with the execution and delivery of the related
Pooling and Servicing Agreement, and within the time period specified in the
related Pooling and Servicing Agreement in the case of all other documents
delivered. Unless otherwise specified in the related Prospectus Supplement, if
any such document is found to be missing or defective in any material respect,
the Trustee (or such custodian) shall promptly so notify the Master Servicer
and the Company, the former of which shall notify the related Subservicer or
Seller, as the case may be. If the Subservicer or Seller does not cure the
omission or defect within 60 days after notice is given to the Master Servicer,
the Subservicer or Seller, as the case may be, will be obligated to purchase
within 90 days of such notice the related Mortgage Loan from the Trustee at its
Purchase Price (or, if specified in the related Prospectus Supplement, will be
permitted to substitute for such Mortgage Loan under the conditions specified
in the related Prospectus Supplement). The Master Servicer will be obligated to
enforce this obligation of the Subservicer or Seller, as the case may be, to
the extent described above under "Mortgage Loan Program--Representations by
Sellers" but subject to the provisions described below under "--Realization
Upon Defaulted Mortgage Loans." There can be no assurance that the applicable
Subservicer or Seller will fulfill its obligation to purchase any Mortgage Loan
as described above. Unless otherwise specified in the related Prospectus
Supplement, neither the Master Servicer nor the Company will be obligated to
purchase or substitute for such Mortgage Loan if the Subservicer or Seller, as
the case may be, defaults on its obligation to do so. Unless otherwise
specified in the related Prospectus Supplement, this purchase obligation
constitutes the sole remedy available to the Certificateholders or the Trustee
for omission of, or a material defect in, a constituent document. Any Mortgage
Loan not so purchased or substituted for shall remain in the related Trust
Fund.
28
<PAGE>
The Trustee will be authorized at any time to appoint one or more custodians
pursuant to a custodial agreement to hold title to the Mortgage Loans, to
maintain possession of and, if applicable, to review the documents relating to
the Mortgage Loans as the agent of the Trustee. The identity of any such
custodian to be appointed on the date of initial issuance of the Certificates
will be set forth in the related Prospectus Supplement. Any such custodian may
be an affiliate of the Company or the Master Servicer. (Section 8.11)
With respect to the Mortgage Loans in a Mortgage Pool, except in the case of
a Designated Seller Transaction or as to Mortgage Loans underlying any Mortgage
Securities or unless otherwise specified in the related Prospectus Supplement,
the Company will make certain limited representations and warranties as to the
types and geographical concentrations of such Mortgage Loans and as to the
accuracy, in all material respects, of certain identifying information
furnished to the Trustee in respect of each such Mortgage Loan (e.g., original
Loan-to-Value Ratio, principal balance as of the Cut-off Date, Mortgage Rate
and maturity). Upon a breach of any such representation which materially and
adversely affects the interests of the Certificateholders in a Mortgage Loan,
the Company will be obligated to cure the breach in all material respects, to
purchase the Mortgage Loan at its Purchase Price or, unless otherwise specified
in the related Prospectus Supplement, to substitute for such Mortgage Loan a
Qualified Substitute Mortgage Loan in accordance with the provisions for such
substitution by Residential Funding as described above under "Mortgage Loan
Program--Representations by Sellers." However, the Company will not be required
to repurchase or substitute for any Mortgage Loan in connection with a breach
of a representation and warranty if the substance of any such breach also
constitutes fraud in the origination of the related Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, this purchase or
substitution obligation constitutes the sole remedy available to
Certificateholders or the Trustee for such a breach of representation by the
Company. Any Mortgage Loan not so purchased or substituted for shall remain in
the related Trust Fund. (Section 2.03)
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Pooling and Servicing Agreement. Upon a breach of any
such representation of the Master Servicer which materially and adversely
affects the interests of the Certificateholders in a Mortgage Loan, the Master
Servicer will be obligated either to cure the breach in all material respects
or to purchase the Mortgage Loan at its Purchase Price (less unreimbursed
advances made by the Master Servicer with respect to such Mortgage Loan) or,
unless otherwise specified in the related Prospectus Supplement, to substitute
for such Mortgage Loan a Qualified Substitute Mortgage Loan in accordance with
the provisions for such substitution described above under "Mortgage Loan
Program--Representations by Sellers." Unless otherwise specified in the related
Prospectus Supplement, this purchase obligation will constitute the sole remedy
available to Certificateholders or the Trustee for such a breach of
representation by the Master Servicer. Any Mortgage Loan not so purchased or
substituted for shall remain in the related Trust Fund. (Section 2.03)
Pursuant to each Pooling and Servicing Agreement, the Master Servicer, either
directly or through Subservicers, will service and administer the Mortgage
Loans assigned to the Trustee as more fully set forth below.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO CERTIFICATE ACCOUNT
Each Subservicer servicing a Mortgage Loan pursuant to a Subservicing
Agreement will establish and maintain an account (the "Subservicing Account")
which generally meets the requirements set forth in the Guide from time to
time, and is otherwise acceptable to the Master Servicer. A Subservicing
Account must be established with a Federal Home Loan Bank or with a depository
institution (including the Subservicer itself) whose accounts are insured by
the National Credit Union Share Insurance Fund or the FDIC, and any such
depository institution must meet certain minimum rating criteria set forth in
the Guide. Except as otherwise permitted by the applicable Rating Agencies, a
Subservicing Account generally must be segregated and may not be established as
a general ledger account, and only principal and interest payments and escrow
payments from mortgage loans serviced for Residential Funding may be held
therein.
29
<PAGE>
A Subservicer is required to deposit into its Subservicing Account on a daily
basis all amounts described above under "Mortgage Loan Program--Subservicing by
Sellers" that are received by it in respect of the Mortgage Loans, less its
servicing or other compensation. On or before the date specified in the
Subservicing Agreement (which date may be no later than the business day prior
to the Determination Date referred to below and is currently the 18th day of
each month or, if such day is not a business day, the preceding business day),
the Subservicer must remit or cause to be remitted to the Master Servicer all
funds held in the Subservicing Account with respect to Mortgage Loans that are
required to be so remitted, with the exception of prepayments in full, certain
partial prepayments and liquidation proceeds which must be remitted to the
Master Servicer within five business days of receipt. The Subservicer is also
required to advance on the scheduled date of remittance any monthly installment
of principal and interest, less its servicing or other compensation, on any
Mortgage Loan for which payment was not received from the Mortgagor. Unless
otherwise specified in the related Prospectus Supplement, this obligation of
the Subservicer to advance continues through the first of the month following
the date on which the related Mortgaged Property is sold at a foreclosure sale
or is acquired by the Trust Fund by deed in lieu of foreclosure. The
Certificateholders are not entitled to any such advances made by a Subservicer.
Each Subservicer may also be required to pay to the Master Servicer, for the
Master Servicer's account, interest (net of its servicing or other
compensation) on any partial prepayment of principal received during a month
and applied by such Subservicer prior to the first day of the following month,
from the date of application of such payment to the first day of the following
month.
The Master Servicer will deposit or will cause to be deposited into the
Custodial Account on a daily basis certain 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 set forth in the related Pooling and Servicing
Agreement, which generally will include the following except as otherwise
provided therein:
(i) all payments on account of principal, including principal payments
received in advance of the date on which the related monthly payment is due
(the "Due Date") ("Principal Prepayments"), on the Mortgage Loans
comprising a Trust Fund;
(ii) all payments on account of interest on the Mortgage Loans comprising
such Trust Fund, net of the portion of each payment thereof retained by the
Subservicer, if any, as its servicing or other compensation;
(iii) all amounts (net of unreimbursed liquidation expenses and insured
expenses incurred, and unreimbursed Servicing Advances made, by the related
Subservicer) received and retained in connection with the liquidation of
any defaulted Mortgage Loan, by foreclosure or otherwise ("Liquidation
Proceeds"), including all proceeds of any Special Hazard Insurance Policy,
Bankruptcy Bond, Mortgage Pool Insurance Policy, Primary Insurance Policy
and any title, hazard or other insurance policy covering any Mortgage Loan
in such Mortgage Pool (together with any payments under any Letter of
Credit, "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 Mortgagor in accordance with the
Master Servicer's normal servicing procedures;
(iv) any Buydown Funds (and, if applicable, investment earnings thereon)
required to be paid to Certificateholders, as described below;
(v) all proceeds of any Mortgage Loan in such Trust Fund purchased (or,
in the case of a substitution, certain amounts representing a principal
adjustment) by the Master Servicer, the Company, Residential Funding, any
Subservicer or Seller or any other person pursuant to the terms of the
Pooling and Servicing Agreement. See "Mortgage Loan Program--
Representations by Sellers," "--Assignment of Mortgage Loans" above and
"Purchase Obligations";
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments of funds held in the
Custodial Account, as described below; and
(vii) any amounts required to be transferred from the Certificate Account
to the Custodial Account.
30
<PAGE>
In addition to the Custodial Account, the Master Servicer will establish and
maintain, in the name of the Trustee for the benefit of the holders of each
series of Certificates, an account for the disbursement of payments on the
Mortgage Loans evidenced by each series of Certificates (the "Certificate
Account"). Both the Custodial Account and the Certificate Account must be
either (i) maintained with a depository institution whose debt obligations at
the time of any deposit therein are rated by the Rating Agency or Agencies that
rated one or more classes of Certificates of the related series not less than a
specified level comparable to the rating category of such Certificates, (ii) 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 such that, as evidenced by an opinion of counsel, the
Certificateholders have a claim with respect to the funds in such accounts or a
perfected first priority security interest in any collateral securing such
funds that is superior to the claims of any other depositors or creditors of
the depository institution with which such accounts are maintained, (iii) 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 The First National Bank of Chicago so long as its debt
obligations meet certain rating criteria, (iv) in the case of the Certificate
Account, a trust account or accounts maintained at the Trustee, or (v) such
other account or accounts acceptable to the Rating Agency or Agencies that
rated one or more classes of Certificates of such series (an "Eligible
Account"). The collateral that is eligible to secure amounts in an Eligible
Account is limited to certain permitted investments, which are generally
limited to United States government securities and other investments that are
rated, at the time of acquisition, in one of the categories permitted by the
related Pooling and Servicing Agreement ("Permitted Investments"). (Article I
and Section 3.07) A Certificate Account may be maintained as an interest-
bearing or a non-interest-bearing account, or funds therein may be invested in
Permitted Investments as described below. The Custodial Account may contain
funds relating to more than one series of Mortgage Pass-Through Certificates as
well as payments received on other mortgage loans serviced or master serviced
by the Master Servicer that have been deposited into the Custodial Account.
Unless otherwise set forth in the related Prospectus Supplement, not later
than the business day preceding each Distribution Date (the "Certificate
Account Deposit Date"), the Master Servicer will withdraw from the Custodial
Account and deposit into the applicable Certificate Account, in immediately
available funds, the amount to be distributed therefrom to Certificateholders
on such Distribution Date. The Master Servicer or the Trustee will also deposit
or cause to be deposited into the Certificate Account the amount of any
advances made by the Master Servicer as described herein under "Advances," any
payments under any Letter of Credit, any amounts required to be transferred to
the Certificate Account from a Reserve Fund, as described under "Credit
Enhancement" below, any amounts required to be paid by the Master Servicer out
of its own funds due to the operation of a deductible clause in any blanket
policy maintained by the Master Servicer to cover hazard losses on the Mortgage
Loans as described under "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder" below, any distributions received on any Mortgage Securities
included in the Trust Fund and any other amounts as specifically set forth in
the related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, the portion
of any payment received by the Master Servicer in respect of a Mortgage Loan
that is allocable to Spread will generally be deposited into the Custodial
Account, but will not be deposited in the Certificate Account for the related
series of Certificates and will be distributed as provided in the related
Pooling and Servicing Agreement.
Funds on deposit in the Custodial Account attributable to Mortgage Loans
underlying a series of Certificates 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 Certificate Account may
be invested in Permitted Investments maturing, in general, no later than the
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, all income and gain realized from any such investment will be for
the account of the Master Servicer. The amount of any loss incurred in
connection with any such investment must be deposited in the Custodial Account
or in the Certificate Account, as the case may be, by the Master Servicer out
of its own funds upon realization of such loss. (Sections 3.07 and 4.01)
31
<PAGE>
With respect to each Buydown Mortgage Loan, the Subservicer will deposit the
related Buydown Funds provided to it in a Buydown Account which will comply
with the requirements set forth herein with respect to a Subservicing Account.
Unless otherwise specified in the related Prospectus Supplement, the terms of
all Buydown Mortgage Loans provide for the contribution of Buydown Funds in an
amount equal to or exceeding either (i) the total payments to be made from such
funds pursuant to the related buydown plan or (ii) if such Buydown Funds are to
be deposited on a discounted basis, that amount of Buydown Funds which,
together with investment earnings thereon at a rate as set forth in the Guide
from time to time will support the scheduled level of payments due under the
Buydown Mortgage Loan. Neither the Master Servicer nor the Company will be
obligated to add to any such discounted Buydown Funds any of its own funds
should investment earnings prove insufficient to maintain the scheduled level
of payments. To the extent that any such insufficiency is not recoverable from
the Mortgagor or, in an appropriate case, from the Subservicer, distributions
to Certificateholders may be affected. With respect to each Buydown Mortgage
Loan, the Subservicer will withdraw from the Buydown Account and remit to the
Master Servicer on or before the date specified in the Subservicing Agreement
described above the amount, if any, of the Buydown Funds (and, if applicable,
investment earnings thereon) for each Buydown Mortgage Loan that, when added to
the amount due from the Mortgagor on such Buydown Mortgage Loan, equals the
full monthly payment which would be due on the Buydown Mortgage Loan if it were
not subject to the buydown plan. The Buydown Funds will in no event be a part
of the related Trust Fund.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan in its
entirety during the Buydown Period, the Subservicer will withdraw from the
Buydown Account and remit to the Mortgagor or such other designated party in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. If a prepayment by a Mortgagor during the Buydown Period
together with Buydown Funds will result in full prepayment of a Buydown
Mortgage Loan, the Subservicer will generally be required to withdraw from the
Buydown Account and remit to the Master Servicer the Buydown Funds and
investment earnings thereon, if any, which together with such prepayment will
result in a prepayment in full; provided that Buydown Funds may not be
available to cover a prepayment under certain Mortgage Loan programs. Any
Buydown Funds so remitted to the Master 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 Mortgagor to repay fully the
related Mortgage Loan if the Mortgage Loan were not subject to the buydown
plan. Any investment earnings remaining in the Buydown Account after prepayment
or after termination of the Buydown Period will be remitted to the related
Mortgagor or such other designated party pursuant to the agreement relating to
each Buydown Mortgage Loan (the "Buydown Agreement"). If the Mortgagor defaults
during the Buydown Period with respect to a Buydown Mortgage Loan and the
property securing such Buydown Mortgage Loan is sold in liquidation (either by
the Master Servicer, the Primary Insurer, the insurer under the Mortgage Pool
Insurance Policy (the "Pool Insurer") or any other insurer), the Subservicer
will be required to withdraw from the Buydown Account the Buydown Funds and all
investment earnings thereon, if any, and remit the same to the Master 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 such insurer and such insurer pays all of the loss incurred in
respect of such default.
WITHDRAWALS FROM THE CUSTODIAL ACCOUNT
The Master Servicer may, from time to time, make withdrawals from the
Custodial Account for certain purposes, as specifically set forth in the
related Pooling and Servicing Agreement, which generally will include the
following except as otherwise provided therein:
(i) to make deposits to the Certificate Account in the amounts and in the
manner provided in the Pooling and Servicing Agreement and described in
"Payments on Mortgage Loans; Deposits to Certificate Account";
(ii) to reimburse itself or any Subservicer for Advances, or for amounts
advanced in respect of taxes, insurance premiums or similar expenses
("Servicing Advances") as to any Mortgaged Property, out of
32
<PAGE>
late payments or collections on the related Mortgage Loan with respect to
which such Advances or Servicing Advances were made;
(iii) to pay to itself or any Subservicer unpaid Servicing Fees and
Subservicing Fees, out of payments or collections of interest on each
Mortgage Loan;
(iv) 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 in respect of partial prepayments on the Mortgage
Loans, and, if so provided in the Pooling and Servicing Agreement, any
profits realized upon disposition of a Mortgaged Property acquired by deed
in lieu of foreclosure or otherwise allowed under the Pooling and Servicing
Agreement;
(v) to pay to itself, a Subservicer, Residential Funding, the Company or
the Seller all amounts received with respect to each Mortgage Loan
purchased, repurchased or removed pursuant to the terms of the Pooling and
Servicing Agreement and not required to be distributed as of the date on
which the related Purchase Price is determined;
(vi) to pay the Company or its assignee all amounts allocable to the
Spread, if any, out of collections or payments which represent interest on
each Mortgage Loan (including any Mortgage Loan as to which title to the
underlying Mortgaged Property was acquired);
(vii) to reimburse itself or any Subservicer for any Advance previously
made which the Master Servicer has determined to not be ultimately
recoverable from Liquidation Proceeds, Insurance Proceeds or otherwise (a
"Nonrecoverable Advance"), subject, in the case of a Senior/Subordinate
Series, to certain limitations set forth in the Pooling and Servicing
Agreement as described in the related Prospectus Supplement;
(viii) to reimburse itself or the Company for certain other expenses
incurred for which it or the Company is entitled to reimbursement or
against which it or the Company is indemnified pursuant to the Pooling and
Servicing Agreement; and
(ix) to clear the Custodial Account of amounts relating to the
corresponding Mortgage Loans in connection with the termination of the
Trust Fund pursuant to the Pooling and Servicing Agreement, as described in
"The Pooling and Servicing Agreement--Termination; Retirement of
Certificates." (Section 3.10)
DISTRIBUTIONS
Beginning on the Distribution Date in the month next succeeding the month in
which the Cut-off Date occurs (or such other date as may be set forth in the
related Prospectus Supplement) for a series of Certificates, distributions of
principal and interest (or, where applicable, of principal only or interest
only) on each class of Certificates entitled thereto will be made either by the
Trustee, the Master Servicer acting on behalf of the Trustee or a paying agent
appointed by the Trustee (the "Paying Agent"), to the persons who are
registered as the Holders of such Certificates at the close of business on the
last business day of the preceding month (the "Record Date") in proportion to
their respective Percentage Interests. Notwithstanding any other reference
herein to a Distribution Date, with respect to a series of Certificates as to
which the Trust Fund includes Mortgage Securities, the date on which
distributions are to be made to the holders of such Certificates may be
referred to as the "Payment Date," if so specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
interest which accrues and is not payable on a class of Certificates will be
added to the principal balance of each Certificate of such class in proportion
to its Percentage Interest. The undivided percentage interest (the "Percentage
Interest") represented by a Certificate of a particular class will be equal to
the percentage obtained by dividing the initial principal balance or notional
amount of such Certificate by the aggregate initial amount or notional balance
of all the Certificates of such class. Distributions will be made in
immediately available funds (by wire transfer or otherwise) to the account of a
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder has so notified the Trustee, the Master
Servicer or the Paying Agent, as the case may be, and the applicable Pooling
and Servicing Agreement provides for such form of payment, or by check
33
<PAGE>
mailed to the address of the person entitled thereto as it appears on the
Certificate Register; provided, however, that the final distribution in
retirement of the Certificates will be made only upon presentation and
surrender of the Certificates at the office or agency of the Trustee specified
in the notice to Certificateholders of such final distribution. (Article I and
Sections 4.01 and 9.01)
PRINCIPAL AND INTEREST ON THE CERTIFICATES
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 Certificates will be described in the related Prospectus
Supplement. Distributions of interest on each class of Certificates will be
made prior to distributions of principal thereon. Each class of Certificates
(other than certain classes of Strip Certificates) may have a different Pass-
Through Rate, which may be a fixed, variable or adjustable Pass-Through Rate,
or any combination of two or more such Pass-Through Rates. The related
Prospectus Supplement will specify the Pass-Through Rate or Rates for each
class, or the initial Pass-Through Rate or Rates and the method for determining
the Pass-Through Rate or Rates. If so specified in the related Prospectus
Supplement, interest on any class of Certificates for any Distribution Date may
be limited to the extent of available funds for such Distribution Date. Unless
otherwise specified in the related Prospectus Supplement, interest on the
Certificates will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
On each Distribution Date for a series of Certificates, the Trustee or the
Master Servicer 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 Certificates, an amount equal to the Percentage Interest
represented by the Certificate held by such holder multiplied by such class's
Distribution Amount. The Distribution Amount for a class of Certificates for
any Distribution Date will be the portion, if any, of the Principal
Distribution Amount (as defined in the related Prospectus Supplement) allocable
to such class for such Distribution Date, as described in the related
Prospectus Supplement, plus, if such class is entitled to payments of interest
on such Distribution Date, one month's interest at the applicable Pass-Through
Rate on the principal balance or notional balance of such class specified in
the applicable Prospectus Supplement, less certain interest shortfalls, as
specified in the Prospectus Supplement, which generally will include (i) any
Deferred Interest added to the principal balance of the Mortgage Loans and/or
the outstanding balance of one or more classes of Certificates on the related
Due Date, (ii) 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 Certificateholders
which are not covered by advances or the applicable credit enhancement and
(iii) unless otherwise specified in the related Prospectus Supplement,
shortfalls (a "Prepayment Interest Shortfall") in collections of interest on
Mortgage Loans resulting from Mortgagor prepayments during the month preceding
the month of distribution, in each case in such amount that is allocated to
such class on the basis set forth in the Prospectus Supplement.
In the case of a series of Certificates which includes two or more classes of
Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple classes of Senior Certificates or Subordinate Certificates) of
each such class shall be as set forth in the related Prospectus Supplement.
Distributions in respect of principal of any class of Certificates will be made
on a pro rata basis among all of the Certificates of such class.
Except as otherwise provided in the related Pooling and Servicing Agreement,
on or prior to the 20th day (or if such day is not a business day, the next
succeeding business day) of the month of distribution (the "Determination
Date"), the Master Servicer will determine the amounts of principal and
interest which will be passed through to Certificateholders on the immediately
succeeding Distribution Date. Prior to the close of business on the business
day next succeeding each Determination Date, the Master Servicer will furnish a
statement to the Trustee (the information in such statement to be made
available to Certificateholders by the Master Servicer on request) setting
forth, among other things, the amount to be distributed on the next succeeding
Distribution Date.
34
<PAGE>
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of the flow of funds as it would
relate to a hypothetical series of Certificates issued, and with a Cut-off Date
occurring, in April 1994:
<TABLE>
<CAPTION>
DATE NOTE DESCRIPTION
---- ---- -----------
<C> <C> <S>
April 1........................ (A) Cut-off Date.
April 2-30..................... (B) Subservicers receive any Principal
Prepayments and applicable interest
thereon.
April 29....................... (C) Record Date.
May 1.......................... (D) Due Date.
May 18......................... (E) Subservicers remit to the Master
Servicer scheduled payments of
principal and interest due on May 1
and received or advanced by them.
May 20......................... (F) Determination Date.
May 25......................... (G) Distribution Date.
</TABLE>
Succeeding months follow the pattern of (B) through (G) except that for
succeeding months, (B) will also include the first day of such month.
--------
(A) The initial principal balance of the Mortgage Pool will be the aggregate
principal balance of the Mortgage Loans at the close of business on April
1, 1994, after deducting principal payments due on or before such date.
Those principal payments due on or before April 1, and the accompanying
interest payments, and any Principal Prepayments received as of the close
of business on April 1, 1994 are not part of the Mortgage Pool and will not
be passed through to Certificateholders.
(B) Principal Prepayments may be received at any time during this period and
will be remitted to the Master Servicer as described in (E) below for
distribution to Certificateholders. When a Mortgage Loan is prepaid in
full, interest on the amount prepaid is collected from the Mortgagor only
to the date of payment. Partial Principal Prepayments are applied so as to
reduce the principal balances of the related Mortgage Loans as of the first
day of the month in which the payments are made; no interest will be paid
to Certificateholders in respect of such prepaid amounts for the month in
which such partial Principal Prepayments were received.
(C) Distributions on May 25 will be made to Certificateholders of record at the
close of business on April 29 (because April 30 is not a business day).
(D) Scheduled principal and interest payments are due from Mortgagors.
(E) Payments due on May 1 from Mortgagors will be deposited by the Subservicers
in Subservicing Accounts (or will be otherwise managed in a manner
acceptable to the Rating Agencies) as received and will include the
scheduled principal payments plus interest on the April balances (with the
exception of interest from the date of prepayment of any Mortgage Loan
prepaid in full during April and interest on the amount of partial
Principal Prepayments in April). Funds required to be remitted from the
Subservicing Accounts to the Master Servicer will be so remitted on May 18
together with any required advances by the Subservicers (except that
Principal Prepayments in full and certain Principal Prepayments in part
received by Subservicers during the month of May will have been remitted to
the Master Servicer within five business days of receipt).
(F) On May 20, the Master Servicer will determine the amounts of principal and
interest which will be passed through on May 25 to the holders of each
class of Certificates. The Master Servicer will be obligated to distribute
those payments due May 1 which have been received from Subservicers prior
to and including May 18, as well as all Principal Prepayments received on
Mortgage Loans in April (with interest adjusted to the Pass-Through Rates
applicable to the respective classes of Certificates and reduced on account
of Principal Prepayments as described above). Distributions to the holders
of Senior Certificates, if any, on May 25 may include certain amounts
otherwise distributable to the holders of the
35
<PAGE>
related Subordinate Certificates, amounts withdrawn from any Reserve Fund
and amounts advanced by the Master Servicer under the circumstances
described in "Subordination" and "Advances."
(G) On May 25 the amounts determined on May 20 will be distributed to
Certificateholders.
If provided in the related Prospectus Supplement, the Distribution Date with
respect to any series of Certificates as to which the Trust Fund includes
Mortgage Securities may be a specified date or dates other than the 25th day of
each month, as necessary in order to allow for the receipt of distributions on
such Mortgage Securities.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will agree to advance (either out of its own funds, funds advanced to
it by Subservicers or funds being held in the Custodial Account for future
distribution to the holders of such Certificates), for the benefit of the
holders of the Certificates of the related series, on or before each
Distribution Date, an amount equal to the aggregate of all scheduled payments
of principal (other than any Balloon Amount in the case of a Balloon Loan) and
interest at the applicable Pass-Through Rate or Net Mortgage Rate, as the case
may be (an "Advance"), which were delinquent as of the close of business on the
business day preceding the related Determination Date on the Mortgage Loans in
the related Mortgage Pool, but only to the extent that such advances would, in
the judgment of the Master Servicer, be recoverable out of late payments by the
Mortgagors, Liquidation Proceeds, Insurance Proceeds or otherwise. (Article I
and Sections 3.07 and 4.04) As specified in the related Prospectus Supplement
with respect to any series of Certificates as to which the Trust Fund includes
Mortgage Securities, the Master Servicer's advancing obligations will be
pursuant to the terms of such Mortgage Securities, as may be supplemented by
the terms of the applicable Pooling and Servicing Agreement, and may differ
from the provisions described above.
The Master Servicer will make such advances in order to maintain a regular
flow of scheduled interest and principal payments to holders of the relevant
classes of Certificates; such advances do not represent an obligation of the
Master Servicer to guarantee or insure against losses. If advances have been
made by the Master Servicer from cash being held for future distribution to
Certificateholders, the Master Servicer will replace such funds on or before
any future Distribution Date to the extent that funds in the applicable
Certificate Account on such Distribution Date would be less than payments
required to be made to Certificateholders on such date. Any Master Servicer
funds advanced as described above will be reimbursable to the Master Servicer
out of recoveries on the related Mortgage Loans for which such amounts were
advanced (e.g., late payments made by the related Mortgagor, any related
Liquidation Proceeds, proceeds of any applicable form of credit enhancement, or
proceeds of any Mortgage Loan purchased by the Company, Residential Funding, a
Subservicer or a Seller under the circumstances described above). Such advances
by the Master Servicer will also be reimbursable to the Master Servicer (or
Subservicer) from cash otherwise distributable to Certificateholders (including
the holders of Senior Certificates, if applicable) to the extent that the
Master Servicer shall determine that any such advances previously made are not
ultimately recoverable as described above. With respect to any
Senior/Subordinate Series, so long as the related Subordinate Certificates
remain outstanding and subject to certain limitations with respect to Special
Hazard Losses, Fraud Losses, Bankruptcy Losses and Extraordinary Losses, such
advances by the Master Servicer will also be reimbursable out of amounts
otherwise distributable to holders of the Subordinate Certificates, if any. The
Master Servicer will also be obligated to make advances, to the extent
recoverable out of Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by Mortgagors on a timely basis. Funds so
advanced are reimbursable to the Master Servicer to the extent permitted by the
Pooling and Servicing Agreement. Notwithstanding the foregoing, if the Master
Servicer exercises its option, if any, to purchase the assets of a Trust Fund
as described under "The Pooling and Servicing Agreement--Termination;
Retirement of Certificates" below, the Master Servicer will be deemed to have
been reimbursed for all related advances previously made by it and not
theretofore reimbursed to it. The Master Servicer's obligation to make advances
may be supported as described in the related Pooling and Servicing Agreement.
In the event that the short-term or long-term obligations of the provider of
such support are downgraded by
36
<PAGE>
a Rating Agency rating the related Certificates or if any collateral supporting
such obligation is not performing or is removed pursuant to the terms of any
agreement described in the related Prospectus Supplement, the Certificates may
also be downgraded. (Article I and Sections 3.08, 3.10 and 4.04)
REPORTS TO CERTIFICATEHOLDERS
With each distribution to Certificateholders of a particular class the Master
Servicer will forward or cause to be forwarded to each holder of record of such
class of Certificates a statement or statements with respect to the related
Trust Fund setting forth the information specifically described in the related
Pooling and Servicing Agreement, which generally will include the following as
applicable except as otherwise provided therein:
(i) the amount, if any, of such distribution allocable to principal;
(ii) the amount, if any, of such distribution allocable to interest, and,
with respect to a Senior/Subordinate Series of Certificates, the amount, if
any, of any shortfall in the amount of interest and principal distributed;
(iii) the aggregate unpaid principal balance of the Mortgage Loans after
giving effect to the distribution of principal on such Distribution Date;
(iv) with respect to a series consisting of two or more classes the
outstanding principal balance or notional amount of each class after giving
effect to the distribution of principal on such Distribution Date;
(v) based on the most recent reports furnished by Subservicers, the
number and aggregate principal balances of Mortgage Loans in the related
Mortgage Pool that are delinquent (a) one month, (b) two months and (c)
three months, and that are in foreclosure;
(vi) the book value of any real estate acquired by such Trust Fund
through foreclosure or grant of a deed in lieu of foreclosure;
(vii) the balance of the Reserve Fund, if any, at the close of business
on such Distribution Date;
(viii) the Senior Percentages and Senior Accelerated Distribution
Percentage, if applicable, after giving effect to the distributions on such
Distribution Date;
(ix) the amount of coverage under any Letter of Credit, Mortgage Pool
Insurance Policy or other form of credit enhancement covering default risk
as of the close of business on the applicable Determination Date and a
description of any credit enhancement substituted therefor;
(x) 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 such amounts;
(xi) in the case of Certificates benefiting from alternative credit
enhancement arrangements described in a Prospectus Supplement, the amount
of coverage under such alternative arrangements as of the close of business
on the applicable Determination Date; and
(xii) with respect to any series of Certificates as to which the Trust
Fund includes Mortgage Securities, certain additional information as
required under the related Pooling and Servicing Agreement.
Each amount set forth pursuant to clause (i) and (ii) above will be expressed
as a dollar amount per Single Certificate. As to a particular class of
Certificates, a "Single Certificate" generally will evidence a Percentage
Interest obtained by dividing $1,000 by the initial principal balance or
notional balance of all the Certificates of such class, except as otherwise
provided in the related Pooling and Servicing Agreement. In addition to the
information described above, reports to Certificateholders will contain such
other information as is set forth in the applicable Pooling and Servicing
Agreement, which may include, without limitation, information as to Advances,
reimbursements to Subservicers and the Master Servicer and losses borne by the
related Trust Fund.
37
<PAGE>
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer will furnish a report to each holder of
record of a class of Certificates at any time during such calendar year which,
among other things, will include information as to the aggregate of amounts
reported pursuant to clauses (i) and (ii) above for such calendar year or, in
the event such person was a holder of record of a class of Certificates during
a portion of such calendar year, for the applicable portion of such a year.
(Section 4.02 or 4.03)
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Subservicers, as the case may be,
will make reasonable efforts to collect all payments required under the
Mortgage Loans and will, consistent with the Pooling and Servicing Agreement
and any Letter of Credit, Purchase Obligation, Mortgage Pool Insurance Policy,
Primary Insurance Policy, Bankruptcy Bond or applicable alternative credit
enhancement arrangements, follow such collection procedures as it would employ
in its good faith business judgment and which are normal and usual in its
general mortgage servicing activities. Consistent with the foregoing, the
Master Servicer may in its discretion (i) waive any late payment charge or any
prepayment charge or penalty interest in connection with the prepayment of a
Mortgage Loan and (ii) extend the Due Date for payments due on a Mortgage Loan,
provided, however, that the Master Servicer shall first determine that any such
waiver or extension will not impair the coverage of any related insurance
policy or materially adversely affect the lien of the related Mortgage or the
lien on any related Additional Collateral. With respect to any series of
Certificates as to which the Trust Fund includes Mortgage Securities, the
Master Servicer's servicing and administration obligations will be pursuant to
the terms of such Mortgage Securities.
Under its Subservicing Agreement, a Subservicer is granted certain discretion
to extend relief to Mortgagors whose payments become delinquent. A Subservicer
may grant a period of temporary indulgence (generally up to three months) to a
Mortgagor or may enter into a liquidating plan providing for repayment by the
Mortgagor of delinquent amounts within six months from the date of execution of
the plan, in each case without the prior approval of the Master Servicer. Other
types of forbearance generally require Master Servicer approval. Neither
indulgence nor forbearance with respect to a Mortgage Loan will affect the
Pass-Through Rate or Rates used in calculating distributions to
Certificateholders. See "Distributions."
In any case in which property subject to a Mortgage Loan (other than an ARM
Loan described below) is being conveyed by the Mortgagor, unless the related
Prospectus Supplement provides otherwise, the Master Servicer, directly or
through a Subservicer, shall in general be obligated, to the extent it has
knowledge of such conveyance, to exercise its rights to accelerate the maturity
of such Mortgage Loan under any due-on-sale clause applicable thereto, but only
if the exercise of such rights is permitted by applicable law and only to the
extent it would not adversely affect or jeopardize coverage under any Primary
Insurance Policy or applicable credit enhancement arrangements. If the Master
Servicer or Subservicer is prevented from enforcing such due-on-sale clause
under applicable law or if the Master Servicer or Subservicer determines that
it is reasonably likely that a legal action would be instituted by the related
Mortgagor to avoid enforcement of such due-on-sale clause, the Master Servicer
or Subservicer will enter into an assumption and modification agreement with
the person to whom such property has been or is about to be conveyed, pursuant
to which such person becomes liable under the Mortgage Note subject to certain
specified conditions. The original Mortgagor may be released from liability on
a Mortgage Loan if the Master Servicer or Subservicer shall have determined in
good faith that such release will not adversely affect the collectability of
the Mortgage Loan. An ARM Loan may be assumed if such ARM Loan is by its terms
assumable and if, in the reasonable judgment of the Master Servicer or the
Subservicer, the proposed transferee of the related Mortgaged Property
establishes its ability to repay the loan and the security for such ARM Loan
would not be impaired by the assumption. If a Mortgagor 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 Subservicer for
entering into an assumption or substitution of liability agreement will be
retained by the Master Servicer or Subservicer as additional servicing
compensation unless otherwise set forth in the related Prospectus Supplement.
See "Certain Legal Aspects of Mortgage Loans and Related Matters--
Enforceability
38
<PAGE>
of Certain Provisions" herein. In connection with any such assumption, the
Mortgage Rate borne by the related Mortgage Note 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
Master Servicer or the related Subservicer 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 such approval
will not adversely affect the security for, and the timely and full
collectability of, the related Mortgage Loan. Any fee collected by the Master
Servicer or the Subservicer for processing such request will be retained by the
Master Servicer or Subservicer as additional servicing compensation. (Section
3.13)
The Master 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 Master Servicer in connection with its activities under
the Pooling and Servicing Agreement. (Section 3.12)
REALIZATION UPON DEFAULTED MORTGAGE LOANS
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 Trustee or to its nominee on behalf of Certificateholders of the
related series. Notwithstanding any such acquisition of title and cancellation
of the related Mortgage Loan, such Mortgage Loan (an "REO Mortgage Loan") will
be considered for most purposes to be an outstanding Mortgage Loan held in the
Trust Fund until such time as the Mortgaged Property is sold and all
recoverable Liquidation Proceeds and Insurance Proceeds have been received with
respect to such defaulted Mortgage Loan (a "Liquidated Mortgage Loan"). For
purposes of calculations of amounts distributable to Certificateholders in
respect of an REO Mortgage Loan, the amortization schedule in effect at the
time of any such acquisition of title (before any adjustment thereto 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, such amortization schedule will be deemed to have adjusted in
accordance with any interest rate changes occurring on any adjustment date
therefor) so long as such REO Mortgage Loan is considered to remain in the
Trust Fund. Any Mortgaged Property so acquired by the Trust Fund must be
disposed of, if a REMIC election has been made, in accordance with applicable
federal income tax regulations and consistent with the status of the Trust Fund
as a REMIC. Any income (net of expenses and other than gains described below)
received by the Subservicer or the Master Servicer on such Mortgaged Property
prior to its disposition will be deposited in the Custodial Account upon such
disposition and will be available at such time to the extent provided in the
related Pooling and Servicing Agreement, for making payments to
Certificateholders. (Section 3.14)
With respect to a Mortgage Loan in default, the Master Servicer may pursue
foreclosure (or similar remedies) concurrently with pursuing any remedy for a
breach of a representation and warranty. However, the Master Servicer is not
required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. If such Mortgage
Loan is an Additional Collateral Loan, the Master Servicer (or the related
Subservicer, if the lien on the Additional Collateral for such Additional
Collateral Loan is not assigned to the Trustee on behalf of the
Certificateholders) may proceed against the related Mortgaged Property or the
related Additional Collateral first or may proceed against both concurrently
(as permitted by applicable law and the terms under which such Additional
Collateral is held, including any third-party guarantee). Upon the first to
occur of final liquidation (by foreclosure or otherwise) and a repurchase or
substitution pursuant to a breach of a representation and warranty, such
Mortgage Loan will be removed from the related Trust Fund if it has not been
removed previously. The Master 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 such Mortgage Loan thereafter incurred will be
reimbursable to the Master Servicer (or any Subservicer) from any amounts
otherwise distributable to holders of Certificates of the related series, or
may be offset by any subsequent recovery related to such Mortgage Loan.
Alternatively, for purposes of determining the
39
<PAGE>
amount of related Liquidation Proceeds to be distributed to Certificateholders,
the amount of any Realized Loss or the amount required to be drawn under any
applicable form of credit support, the Master 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 such defaulted Mortgage Loan. With respect to certain series of
Certificates, if so provided in the related Prospectus Supplement, the
applicable form of credit enhancement may provide, to the extent of coverage
thereunder, that a defaulted Mortgage Loan or REO Mortgage Loan will be removed
from the Trust Fund prior to the final liquidation thereof. In addition, the
Master Servicer will generally have the option to purchase from the Trust Fund
any defaulted Mortgage Loan after a specified period of delinquency. In the
case of a Senior/Subordinate Series, unless otherwise specified in the related
Prospectus Supplement, if a final liquidation of a Mortgage Loan resulted in a
Realized Loss and within two years thereafter the Master Servicer receives a
subsequent recovery specifically related to such Mortgage Loan (in connection
with a related breach of a representation or warranty or otherwise), such
subsequent recovery shall be distributed to current Certificateholders of the
class or classes to which such 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 Certificates of any such class in excess of the total
amounts of principal and interest that would have been distributable thereon if
such Mortgage Loan had been liquidated with no Realized Loss. In the case of a
series of Certificates other than a Senior/Subordinate Series, if so provided
in the related Prospectus Supplement, the applicable form of credit enhancement
may provide for reinstatement subject to certain conditions in the event that,
following the final liquidation of a Mortgage Loan and a draw under such credit
enhancement, subsequent recoveries are received. If a defaulted Mortgage Loan
or REO Mortgage 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
Certificateholders will bear such loss. However, if a gain results from the
final liquidation of an REO Mortgage Loan which is not required by law to be
remitted to the related Mortgagor, the Master Servicer will be entitled to
retain such gain as additional servicing compensation unless the related
Prospectus Supplement provides otherwise. For a description of the Master
Servicer's obligations to maintain and make claims under applicable forms of
credit enhancement and insurance relating to the Mortgage Loans, see
"Description of Credit Enhancement" and "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder."
SUBORDINATION
A Senior/Subordinate Series of Certificates will consist of one or more
classes of Senior Certificates and one or more classes of Subordinate
Certificates, as specified in the related Prospectus Supplement. Except as
otherwise specified in the related Prospectus Supplement, only the Senior
Certificates will be offered hereby. Subordination of the Subordinate
Certificates of any Senior/Subordinate Series of Certificates will be effected
by the following method, unless an alternative method is specified in the
related Prospectus Supplement. In addition, certain classes of Senior (or
Subordinate) Certificates may be senior to other classes of Senior (or
Subordinate) Certificates, as specified in the related Prospectus Supplement,
in which case the following discussion is qualified in its entirety by
reference to the related Prospectus Supplement with respect to the various
priorities and other rights as among the various classes of Senior Certificates
or Subordinate Certificates, as the case may be.
With respect to any Senior/Subordinate Series of Certificates, the total
amount available for distribution on each Distribution Date, as well as the
method for allocating such amount among the various classes of Certificates
included in such series, will be described in the related Prospectus
Supplement. Generally, the amount available for distribution will be allocated
first to interest on the Senior Certificates of such series, and then to
principal of the Senior Certificates up to the amounts determined as specified
in the related Prospectus Supplement, prior to allocation to the Subordinate
Certificates of such series.
40
<PAGE>
In the event of any Realized Losses (as defined below) on Mortgage Loans not
in excess of the limitations described below, other than Extraordinary Losses,
the rights of the Subordinate Certificateholders to receive distributions with
respect to the Mortgage Loans will be subordinate to the rights of the Senior
Certificateholders. With respect to any defaulted Mortgage Loan that is finally
liquidated, through foreclosure sale, disposition of the related Mortgaged
Property if acquired by deed in lieu of foreclosure, or otherwise, the amount
of loss realized, if any (as more fully described in the related Pooling and
Servicing Agreement, a "Realized Loss"), will equal the portion of the Stated
Principal Balance remaining after application of all amounts recovered (net of
amounts reimbursable to the Master Servicer for related Advances and expenses)
towards interest and principal owing on the Mortgage Loan. With respect to a
Mortgage Loan the principal balance of which has been reduced in connection
with bankruptcy proceedings, the amount of such reduction will be treated as a
Realized Loss.
Except as noted below, Realized Losses will be allocated to the Subordinate
Certificates of the related series, until the Certificate Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Certificates
thereof has been reduced to zero. Additional Realized Losses, if any, will be
allocated to the Senior Certificates (or, if such series includes more than one
class of Senior Certificates, either on a pro rata basis among all of the
Senior Certificates in proportion to their respective outstanding Certificate
Principal Balances or as otherwise provided in the related Prospectus
Supplement).
With respect to certain Realized Losses resulting from physical damage to
Mortgaged Properties which are generally of the same type as are covered under
a Special Hazard Insurance Policy, the amount thereof that may be allocated to
the Subordinate Certificates of the related series may be limited to an amount
(the "Special Hazard Amount") specified in the related Prospectus Supplement.
See "Description of Credit Enhancement--Special Hazard Insurance Policies." If
so, any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Certificates of the related series,
either on a pro rata basis in proportion to their outstanding Certificate
Principal Balances, regardless of whether any Subordinate Certificates remain
outstanding, or as otherwise provided in the related Prospectus Supplement. The
respective amounts of other specified types of losses (including Fraud Losses
and Bankruptcy Losses) that may be borne solely by the Subordinate Certificates
may be similarly limited to an amount (with respect to Fraud Losses, the "Fraud
Loss Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Amount"),
and the Subordinate Certificates may provide no coverage with respect to
certain other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro rata basis
among all outstanding classes of Certificates. Each of the Special Hazard
Amount, Fraud Loss Amount and Bankruptcy Amount will be subject to periodic
reductions under provisions described in the related Prospectus Supplement.
Each such amount will be subject to further reduction or termination, without
the consent of the Certificateholders, upon the written confirmation from each
applicable Rating Agency that the then-current rating of the related series of
Certificates will not be adversely affected thereby.
Generally, any allocation of a Realized Loss (including a Special Hazard
Loss) to a Certificate in a Senior/Subordinate Series will be made by reducing
the Certificate Principal Balance thereof as of the Distribution Date following
the calendar month in which such Realized Loss was incurred. If so provided in
the related Prospectus Supplement, in the event of certain Realized Losses, the
Senior Certificateholders may be entitled to receive a distribution of
principal, to be paid from and to the extent of funds otherwise distributable
to the Subordinate Certificateholders, equal to the product of the then
applicable Senior Percentage (as defined below) and the amount, if any, by
which (i) the Stated Principal Balance of the related Mortgage Loan exceeds
(ii) the total amount of the related unscheduled recovery which is allocable to
principal (as more fully described in the related Pooling and Servicing
Agreement, the "Unrecovered Senior Portion"). Payments to the Senior
Certificateholders in respect of any Unrecovered Senior Portion on any
Distribution Date will only be made with respect to Realized Losses incurred in
connection with Mortgage Loans that were finally liquidated during the
preceding calendar month, and will not be made as to any Special Hazard Losses
in excess of the Special Hazard Amount, Fraud Losses in excess of the Fraud
Loss
41
<PAGE>
Amount or Bankruptcy Losses in excess of the Bankruptcy Amount (or other
specified types of losses in excess of any applicable coverage limitations), if
applicable. See "Description of Credit Enhancement--Special Hazard Insurance
Policies." As with any other distribution of principal, any payment to the
holders of Senior Certificates attributable to an Unrecovered Senior Portion
will be applied to reduce the Certificate Principal Balance thereof. At any
given time, the percentage of the Certificate Principal Balances of all of the
Certificates evidenced by the Senior Certificates is the "Senior Percentage,"
determined in the manner set forth in the related Prospectus Supplement. The
"Stated Principal Balance" of any Mortgage Loan as of any date of determination
is equal to the principal balance thereof as of the Cut-off Date, after
application of all scheduled principal payments due on or before the Cut-off
Date whether or not received, reduced by all amounts allocable to principal
that are distributed to Certificateholders on or before the date of
determination, and as further reduced to the extent that any Realized Loss
thereon has been allocated to one or more classes of Certificates on or before
the date of determination.
As set forth above, the rights of holders of the various classes of
Certificates of any series to receive distributions of principal and interest
is determined by the aggregate Certificate Principal Balance of each such class
(or, if applicable, the related notional amount). The Certificate Principal
Balance of any Certificate will be reduced by all amounts previously
distributed on such Certificate in respect of principal, and by any Realized
Losses allocated thereto. If there are no Realized Losses or prepayments of
principal on any of the Mortgage Loans, the respective rights of the holders of
Certificates of any series to future distributions generally would not change.
However, to the extent so provided in the related Prospectus Supplement,
holders of Senior Certificates may be entitled to receive a disproportionately
larger amount of prepayments received during certain specified periods, which
will have the effect (absent offsetting losses) of accelerating the
amortization of the Senior Certificates and increasing the respective
percentage ownership interest evidenced by the Subordinate Certificates in the
related Trust Fund (with a corresponding decrease in the Senior Percentage),
thereby preserving the availability of the subordination provided by the
Subordinate Certificates. In addition, as set forth above, certain Realized
Losses generally will be allocated first to Subordinate Certificates by
reduction of the Certificate Principal Balance thereof, which will have the
effect of increasing the respective ownership interest evidenced by the Senior
Certificates in the related Trust Fund.
If so provided in the related Prospectus Supplement, certain amounts
otherwise payable on any Distribution Date to holders of Subordinate
Certificates 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 related 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 related
Prospectus Supplement. The rights of the holders of Subordinate Certificates to
receive any or a specified portion of distributions with respect to the
Mortgage Loans may be subordinated to the extent of the amount set forth in the
related Prospectus Supplement (the "Subordinate Amount"). As specified in the
related Prospectus Supplement, the Subordinate Amount may be subject to
reduction based upon the amount of losses borne by the holders of the
Subordinate Certificates as a result of such subordination, a specified
schedule or such other method of reduction as such Prospectus Supplement may
specify. If so specified in the related Prospectus Supplement, additional
credit support for this form of subordination may be provided by the
establishment of a reserve fund for the benefit of the holders of the Senior
Certificates (which may, if such Prospectus Supplement so provides, initially
be funded by a cash deposit) into which certain distributions otherwise
allocable to the holders of the Subordinate Certificates may be placed; such
funds would thereafter be available to cure shortfalls in distributions to
holders of the Senior Certificates.
With respect to any Senior/Subordinate Series of Certificates, the terms and
provisions of the subordination may vary from those described above; any such
variation and any related additional credit support will be described in the
related Prospectus Supplement.
42
<PAGE>
DESCRIPTION OF CREDIT ENHANCEMENT
Unless otherwise provided in the applicable Prospectus Supplement, credit
support with respect to each series of Certificates may be comprised of one or
more of the following components. Each component will have a dollar limit and
will provide coverage with respect to Realized Losses that are (i) attributable
to the Mortgagor'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 (any such loss, a "Defaulted
Mortgage Loss"); (ii) of a type generally covered by a Special Hazard Insurance
Policy (as defined below) (any such loss, a "Special Hazard Loss"); (iii)
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 Mortgage Rate on a Mortgage Loan or an
extension of its maturity (any such loss, a "Bankruptcy Loss"); and (iv)
incurred on defaulted Mortgage Loans as to which there was fraud in the
origination of such Mortgage Loans (any such loss, a "Fraud Loss"). Defaulted
Mortgage Losses, Special Hazard Losses, Bankruptcy Losses and Fraud Losses in
excess of the amount of coverage provided therefor and losses occasioned by
war, civil insurrection, certain governmental actions, nuclear reaction and
certain other risks ("Extraordinary Losses") will not be covered. To the extent
that the credit enhancement for any series of Certificates is exhausted, the
Certificateholders will bear all further risks of loss not otherwise insured
against.
As set forth below and in the applicable Prospectus Supplement, (i) coverage
with respect to Defaulted Mortgage Losses may be provided by one or more of a
Letter of Credit or a Mortgage Pool Insurance Policy, (ii) coverage with
respect to Special Hazard Losses may be provided by one or more of a Letter of
Credit or a Special Hazard Insurance Policy (any instrument, to the extent
providing such coverage, a "Special Hazard Instrument"), (iii) coverage with
respect to Bankruptcy Losses may be provided by one or more of a Letter of
Credit or a Bankruptcy Bond and (iv) coverage with respect to Fraud Losses may
be provided by one or more of a Letter of Credit, Mortgage Pool Insurance
Policy or mortgage repurchase bond. In addition, if provided in the applicable
Prospectus Supplement, in lieu of or in addition to any or all of the foregoing
arrangements, credit enhancement may be in the form of a Reserve Fund to cover
such losses, in the form of subordination of one or more classes of Subordinate
Certificates to provide credit support to one or more classes of Senior
Certificates as described under "Subordination," or in the form of the
Company's agreement to repurchase certain mortgage loans or fund certain losses
pursuant to a Purchase Obligation, which obligations may be supported by a
Letter of Credit, surety bonds or other types of insurance policies, certain
other secured or unsecured corporate guarantees or in such other form as may be
described in the related Prospectus Supplement, or in the form of a combination
of two or more of the foregoing. The credit support may be provided by an
assignment of the right to receive certain cash amounts, a deposit of cash into
a Reserve Fund or other pledged assets, or by banks, insurance companies,
guarantees or any combination thereof identified in the applicable Prospectus
Supplement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof (the "Credit Enhancer"), if applicable, with respect to each
series of Certificates will be set forth in the related Prospectus Supplement.
The Pooling and Servicing 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
Prospectus Supplement and the Pooling and Servicing Agreement, the credit
enhancement arrangements may be periodically modified, reduced and substituted
for based on the aggregate outstanding principal balance of the Mortgage 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 Certificates may cover one or more
other series of Certificates.
The descriptions of any insurance policies or bonds 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 such policies, copies of which are available upon request.
43
<PAGE>
LETTER OF CREDIT
If any component of credit enhancement as to any series of Certificates is to
be provided by a letter of credit (the "Letter of Credit"), a bank (the "Letter
of Credit Bank") will deliver to the Trustee an irrevocable Letter of Credit.
The Letter of Credit may provide direct coverage with respect to the Mortgage
Loans or, if specified in the related Prospectus Supplement, support an
entity's obligation pursuant to a Purchase Obligation to make certain payments
to the Trustee with respect to one or more components of credit enhancement.
The Letter of Credit Bank, as well as the amount available under the Letter of
Credit with respect to each component of credit enhancement, will be specified
in the applicable Prospectus Supplement. The Letter of Credit will expire on
the expiration date set forth in the related Prospectus Supplement, unless
earlier terminated or extended in accordance with its terms. On or before each
Distribution Date, the Letter of Credit Bank or obligor under a Purchase
Obligation will be required to make the following payments after notification
from the Trustee, to be deposited in the related Certificate Account, if and to
the extent covered, under the applicable Letter of Credit:
(i) to the extent of the amount available, as to any Mortgage Loan which
became a Liquidated Mortgage Loan during the preceding calendar month
(other than a Mortgage Loan relating to a Mortgaged Property which has
suffered a Fraud Loss and to the extent not covered by a payment made
pursuant to clause (ii) below), the sum of (A) an amount which, together
with all Liquidation Proceeds, Insurance Proceeds and other recoveries
related to such Mortgage Loan received and not yet distributed on or before
such Distribution Date, will be sufficient to pay to Certificateholders the
principal balance of such Mortgage Loan (minus any amount thereof which
constitutes a Bankruptcy Loss) plus accrued interest at the applicable
Pass-Through Rate or Net Mortgage Rate, as the case may be, and (B) the
aggregate amount of related Spread, if any, advances made by the Master
Servicer and reimbursable expenses, if any, not otherwise paid or
reimbursed from Liquidation Proceeds, Insurance Proceeds and other
collections on the Mortgage Loans;
(ii) to the extent of the lesser of the amount available and the amount
available with respect to Special Hazard Losses, as to any Mortgage Loan as
to which liquidation has been completed during the preceding calendar month
and as to which the related Mortgaged Property has suffered a Special
Hazard Loss, an amount equal to the lesser of (a) the sum of (A) an amount
which, together with all Liquidation Proceeds, Insurance Proceeds and other
recoveries related to such Mortgage Loan received and not yet distributed
on or before such Distribution Date, will be sufficient to pay to
Certificateholders the principal balance of such Mortgage Loan (minus any
amount thereof which constitutes a Bankruptcy Loss) plus accrued interest
at the applicable Pass-Through Rate or Net Mortgage Rate, as the case may
be, and (B) the aggregate amount of related Spread, if any, advances made
by the Master Servicer and reimbursable expenses, if any, not otherwise
paid or reimbursed from Liquidation Proceeds, Insurance Proceeds and other
collections on the Mortgage Loans, and (b) an amount equal to the lesser of
the cost of repair or replacement of the related Mortgaged Property;
(iii) to the extent of the lesser of the amount available and the amount
available with respect to Bankruptcy Losses, as to any Mortgage Loan which
has suffered a Bankruptcy Loss during the preceding calendar month, an
aggregate amount equal to the sum of (i) the amount of any Deficient
Valuation, as defined herein, plus accrued interest on such amount at the
applicable Pass-Through Rate or Net Mortgage Rate, as the case may be,
through the last day of the month in which such Deficient Valuation
occurred plus (ii) the amount of any Debt Service Reduction, as defined
herein; and
(iv) to the extent of the lesser of the amount available and the amount
available with respect to Fraud Losses, as to any Mortgage Loan which has
suffered a Fraud Loss, the sum of (A) an amount which, together with all
Liquidation Proceeds, Insurance Proceeds and other recoveries related to
such Mortgage Loan received and not yet distributed on or before such
Distribution Date, will be sufficient to pay to Certificateholders the
principal balance of such Mortgage Loan (minus any amount thereof which
constitutes a Bankruptcy Loss) plus accrued interest at the applicable
Pass-Through Rate or Net Mortgage Rate, as the case may be, and (B) the
aggregate amount of related Spread, if any, advances
44
<PAGE>
made by the Master Servicer and reimbursable expenses, if any, not
otherwise paid or reimbursed from Liquidation Proceeds, Insurance Proceeds
and other collections on the Mortgage Loans.
The Letter of Credit may also provide for the payment of advances which the
Master Servicer would be obligated to make with respect to delinquent monthly
mortgage payments.
If at any time the Letter of Credit Bank makes a payment as described above
in (i), (ii) or (iv) with respect to a Mortgage Loan, the Mortgage Loan will be
released from the Trust Fund and will no longer be subject to the Pooling and
Servicing Agreement. Mortgage Loans which have been subject to bankruptcy
proceedings as described above will remain part of the Mortgage Pool. The
amounts available to cover Defaulted Mortgage Losses, Fraud Losses, Special
Hazard Losses and Bankruptcy Losses under any Letter of Credit will each be
reduced to the extent of related draws thereunder or pursuant to formulas
described in the Prospectus Supplement.
As to any Mortgage Loan which is delinquent in payment by 90 days or more,
the Master Servicer may, at its sole option, purchase such Mortgage Loan at a
price equal to 100% of the unpaid principal balance thereof plus accrued and
unpaid interest thereon at the Pass-Through Rate or Net Mortgage Rate, as the
case may be, which the Certificateholder has not previously received, through
the last day of the month in which such purchase occurs. To the extent that the
Master Servicer subsequently experiences losses with respect to such purchased
Mortgage Loans which would have been covered by draws on the Letter of Credit
had such Mortgage Loans remained in the Trust Fund, the overall amount
available under the Letter of Credit (and the amounts available under the
Letter of Credit to cover Special Hazard Losses, Fraud Losses and Bankruptcy
Losses, to the extent that such losses constitute Special Hazard Losses, Fraud
Losses or Bankruptcy Losses) will be reduced by an amount equal to such losses.
MORTGAGE POOL INSURANCE POLICIES
Any Mortgage Pool Insurance Policy obtained by the Company for each Trust
Fund will be issued by the Pool Insurer named in the applicable Prospectus
Supplement. Each Mortgage Pool Insurance Policy will, subject to the
limitations described below, cover Defaulted Mortgage Losses in an amount equal
to a percentage specified in the applicable Prospectus Supplement of the
aggregate principal balance of the Mortgage Loans on the Cut-off Date. As set
forth under "Maintenance of Credit Enhancement," the Master 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 Certificateholders. The Mortgage Pool Insurance Policies,
however, are not blanket policies against loss, since claims thereunder may
only be made respecting particular defaulted Mortgage Loans and only upon
satisfaction of certain conditions precedent described below. Unless specified
in the related 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, (i) any required
Primary Insurance Policy is in effect for the defaulted Mortgage Loan and a
claim thereunder has been submitted and settled, (ii) hazard insurance on the
property securing such Mortgage Loan has been kept in force and real estate
taxes and other protection and preservation expenses have been paid by the
Master Servicer, (iii) 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 (iv) the insured has acquired good and
merchantable title to the Mortgaged Property free and clear of liens except
certain permitted encumbrances. Upon satisfaction of these conditions, the Pool
Insurer will have the option either (a) to purchase the property securing the
defaulted Mortgage Loan at a price equal to the principal balance thereof plus
accrued and unpaid interest at the applicable Mortgage Rate to the date of
purchase and certain expenses incurred by the Master Servicer or Subservicer on
behalf of the Trustee and Certificateholders, or (b) to pay the amount by which
the sum of the principal balance of the defaulted Mortgage Loan plus accrued
and unpaid interest at the Mortgage Rate to the date of payment of the claim
45
<PAGE>
and the aforementioned expenses exceeds the proceeds received from an approved
sale of the Mortgaged Property, in either case net of certain amounts paid or
assumed to have been paid under any related Primary Insurance Policy.
Certificateholders will experience a shortfall in the amount of interest
payable on the related Certificates 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 such claim is paid. In addition, the
Certificateholders will also experience losses with respect to the related
Certificates in connection with payments made under a Mortgage Pool Insurance
Policy to the extent that the Master Servicer expends funds to cover unpaid
real estate taxes or to repair the related Mortgaged Property in order to make
a claim under a Mortgage Pool Insurance Policy, as those amounts will not be
covered by payments under such policy and will be reimbursable to the Master
Servicer from funds otherwise payable to the Certificateholders. If any
Mortgaged Property securing a defaulted Mortgage Loan is damaged and proceeds,
if any (see "Special Hazard Insurance Policies" below for risks which are not
covered by such policies), from the related hazard insurance policy or
applicable Special Hazard Instrument are insufficient to restore the damaged
property to a condition sufficient to permit recovery under the Mortgage Pool
Insurance Policy, the Master Servicer is not required to expend its own funds
to restore the damaged property unless it determines (x) that such restoration
will increase the proceeds to one or more classes of Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer for
its expenses and (y) that such expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds.
Unless otherwise specified in the related Prospectus Supplement, a Mortgage
Pool Insurance Policy (and certain Primary Insurance Policies) will likely not
insure against loss sustained by reason of a default arising from, among other
things, (i) fraud or negligence in the origination or servicing of a Mortgage
Loan, including misrepresentation by the Mortgagor, the Seller or other persons
involved in the origination thereof, or (ii) failure to construct a Mortgaged
Property in accordance with plans and specifications. Depending upon the nature
of the event, a breach of representation made by a Seller may also have
occurred. Such a breach, if it materially and adversely affects the interests
of Certificateholders and cannot be cured, would give rise to a purchase
obligation on the part of the Seller, as more fully described under "Mortgage
Loan Program--Representations by Sellers." However, such an event would not
give rise to a breach of a representation and warranty or a purchase obligation
on the part of the Company or Residential Funding.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related series of Certificates by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed properties. The
amount of claims paid includes certain expenses incurred by the Master Servicer
or Subservicer as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. See "Certain Legal Aspects of Mortgage Loans and
Related Matters--Foreclosure." 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 holders of the related series of Certificates. In
addition, unless the Master Servicer could determine that an advance in respect
of a delinquent Mortgage Loan would be recoverable to it from the proceeds of
the liquidation of such Mortgage Loan or otherwise, the Master Servicer would
not be obligated to make an advance respecting any such 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
Certificates--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, such policy will not provide
coverage against hazard losses. As set forth under "Primary Mortgage Insurance,
Hazard Insurance; Claims Thereunder," 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 such losses. Further, no
coverage in respect of Special Hazard Losses, Fraud Losses or Bankruptcy Losses
will cover all risks, and the amount of
46
<PAGE>
any such coverage will be limited. See "Mortgage Loan Program--Assignment of
Mortgage Loans" and "Special Hazard Insurance Policies" below. As a result,
certain hazard risks will not be insured against and will therefore be borne by
Certificateholders.
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Company for a Trust Fund will be issued by
the insurer named in the applicable Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to limitations described below, protect holders
of the related series of Certificates from (i) losses due to 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)
losses from partial damage caused by reason of the application of the co-
insurance clauses contained in hazard insurance policies ("Special Hazard
Losses"). See "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder." A Special Hazard Insurance Policy will not cover losses occasioned
by war, civil insurrection, certain governmental actions, errors in design,
faulty workmanship or materials (except under certain circumstances), nuclear
reaction, chemical contamination, waste by the Mortgagor and certain other
risks. Aggregate claims under a Special Hazard Insurance Policy will be limited
to the amount set forth in the related Pooling and Servicing Agreement and will
be subject to reduction as set forth in such related Pooling and Servicing
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 Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid by the Master Servicer.
Subject to the foregoing limitations, a Special Hazard Insurance Policy will
provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer or
the Subservicer, the insurer will pay the lesser of (i) the cost of repair or
replacement of such property or (ii) upon transfer of the property to the
insurer, the unpaid principal balance of such Mortgage Loan at the time of
acquisition of such property by foreclosure or deed in lieu of foreclosure,
plus accrued interest at the Mortgage Rate to the date of claim settlement and
certain expenses incurred by the Master Servicer or the Subservicer with
respect to such property. If the property is transferred to a third party in a
sale approved by the issuer of the Special Hazard Insurance Policy (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. No claim may be validly presented under the Special Hazard
Insurance Policy unless hazard insurance on the property securing a defaulted
Mortgage Loan has been kept in force and other reimbursable protection,
preservation and foreclosure expenses have been paid (all of which must be
approved in advance by the Special Hazard Insurer). If the unpaid principal
balance plus accrued interest and certain expenses is paid by the insurer, the
amount of further coverage under the related Special Hazard Insurance Policy
will be reduced by such amount less any net proceeds from the sale of the
property. Any amount paid as the cost of repair of the property will further
reduce coverage by such amount. Restoration of the property with the proceeds
described under (i) above will satisfy the condition under each Mortgage Pool
Insurance Policy that the property be restored before a claim under such
Mortgage Pool Insurance Policy may be validly presented with respect to the
defaulted Mortgage Loan secured by such property. The payment described under
(ii) above will render presentation of a claim in respect of such Mortgage Loan
under the related Mortgage Pool Insurance Policy unnecessary. Therefore, so
long as a Mortgage 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 Mortgage Loan plus accrued interest and
certain expenses will not affect the total Insurance Proceeds paid to
Certificateholders, but will affect the relative amounts of coverage remaining
under the related Special Hazard Insurance Policy and Mortgage Pool Insurance
Policy.
As indicated under "Description of the Certificates--Assignment of Mortgage
Loans" above and to the extent set forth in the applicable Prospectus
Supplement, coverage in respect of Special Hazard Losses for a
47
<PAGE>
series of Certificates may be provided, in whole or in part, by a type of
Special Hazard Instrument other than a Special Hazard Insurance Policy or by
means of the special hazard representation of the Company.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a Mortgagor, it is possible that the
bankruptcy court may establish the value of the Mortgaged Property of such
Mortgagor (and, if specified in the related Prospectus Supplement, any related
Additional Collateral) at an amount less than the then outstanding principal
balance of the Mortgage Loan secured by such Mortgaged Property (a "Deficient
Valuation"). The amount of the secured debt could then be reduced to such
value, and, thus, the holder of such Mortgage Loan would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value assigned to the Mortgaged Property (and any related
Additional Collateral) by the bankruptcy court. In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including a reduction in the amount of the Monthly Payment on the
related Mortgage Loan (a "Debt Service Reduction"; Debt Service Reductions and
Deficient Valuations, collectively referred to herein as Bankruptcy Losses).
See "Certain Legal Aspects of Mortgage Loans and Related Matters--Anti-
Deficiency Legislation and Other Limitations on Lenders." Any Bankruptcy Bond
to provide coverage for Bankruptcy Losses for proceedings under the federal
Bankruptcy Code obtained by the Company for a Trust Fund will be issued by an
insurer named in the applicable Prospectus Supplement. The level of coverage
under each Bankruptcy Bond will be set forth in the applicable Prospectus
Supplement.
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Company will deposit
or cause to be deposited in an account (a "Reserve Fund") any combination of
cash, one or more irrevocable letters of credit or one or more 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 such Prospectus Supplement. In the
alternative or in addition to such deposit, to the extent described in the
related Prospectus Supplement, a Reserve Fund may be funded through application
of all or a portion of amounts otherwise payable on any related Subordinate
Certificates, from the Spread or otherwise. To the extent that the funding of
the Reserve Fund is dependent on amounts otherwise payable on related
Subordinate Certificates, Spread or other cash flows attributable to the
related Mortgage Loans or on reinvestment income, the Reserve Fund may provide
less coverage than initially expected if the cash flows or reinvestment income
on which such funding is dependent are lower than anticipated. In addition,
with respect to any series of Certificates as to which credit enhancement
includes a Letter of Credit, if so specified in the related Prospectus
Supplement, under certain 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 Certificateholders, or applied to
reimburse the Master Servicer for outstanding advances, or may be used for
other purposes, in the manner and to the extent specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, any such Reserve Fund will not be deemed to be part of the related
Trust Fund. If set forth in the related Prospectus Supplement, a Reserve Fund
may provide coverage to more than one series of Certificates.
In connection with the establishment of any Reserve Fund, unless otherwise
specified in the related Prospectus Supplement, the Reserve Fund will be
structured so that the Trustee will have a perfected security interest for the
benefit of the Certificateholders in the assets in the Reserve Fund. However,
to the extent that the Company, any affiliate thereof or any other entity has
an interest in any Reserve Fund, in the event of the bankruptcy, receivership
or insolvency of such entity, there could be delays in withdrawals from the
Reserve Fund and corresponding payments to the Certificateholders which could
adversely affect the yield to investors on the related Certificates.
48
<PAGE>
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 the
Master Servicer or any other person named in the related Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the applicable Prospectus Supplement does not expressly
provide for alternative credit enhancement arrangements in lieu of some or all
of the arrangements mentioned below, the following paragraphs shall apply.
If a Letter of Credit or alternate form of credit enhancement has been
obtained for a series of Certificates, the Master Servicer will be obligated to
exercise its best reasonable efforts to keep or cause to be kept such Letter of
Credit (or an alternate form of credit support) in full force and effect
throughout the term of the applicable Pooling and Servicing 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." Unless otherwise specified in the
applicable Prospectus Supplement, if a Letter of Credit obtained for a series
of Certificates is scheduled to expire prior to the date the final distribution
on such Certificates is made and coverage under such Letter of Credit has not
been exhausted and no substitution has occurred, the Trustee will draw the
amount available under the Letter of Credit and maintain such amount in trust
for such Certificateholders.
If a Mortgage Pool Insurance Policy has been obtained for a series of
Certificates, the Master Servicer will be obligated to exercise its best
reasonable efforts to keep each Mortgage Pool Insurance Policy (or an alternate
form of credit support) in full force and effect throughout the term of the
applicable Pooling and Servicing Agreement, unless coverage thereunder has been
exhausted through payment of claims or until such Mortgage Pool Insurance
Policy is replaced in accordance with the terms of the applicable Pooling and
Servicing Agreement. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will agree to pay the premiums for each
Mortgage Pool Insurance Policy on a timely basis. In the event the Pool Insurer
ceases to be a Qualified Insurer (such term being defined to mean a private
mortgage guaranty insurance company duly qualified as such under the laws of
the state of its incorporation and each state having jurisdiction over the
insurer in connection with the Mortgage Pool Insurance Policy and approved as
an insurer by FHLMC, FNMA or any successor entity) because it ceases to be
qualified under any such law to transact such insurance business or coverage is
terminated for any reason other than exhaustion of such coverage, the Master
Servicer will use its best reasonable efforts to obtain from another Qualified
Insurer a replacement insurance policy comparable to the Mortgage Pool
Insurance Policy with a total coverage equal to the then outstanding coverage
of such Mortgage Pool Insurance Policy, provided that, if the cost of the
replacement policy is greater than the cost of such Mortgage Pool Insurance
Policy, the coverage of the replacement policy will, unless otherwise agreed to
by the Company, be reduced to a level such that its premium rate does not
exceed the premium rate on such Mortgage Pool Insurance Policy. In the event
that the Pool Insurer ceases to be a Qualified Insurer because it ceases to be
approved as an insurer by FHLMC, FNMA or any successor entity, the Master
Servicer has agreed to 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 are jeopardized for reasons related to
the financial condition of the Pool Insurer. If the Master Servicer determines
that recoveries are so jeopardized, it has agreed to exercise its best
reasonable efforts to obtain from another Qualified Insurer a replacement
insurance policy as described above, subject to the same cost limit. Any losses
associated with any reduction or withdrawal in rating by an applicable Rating
Agency shall be borne by the Certificateholders. (Article I and Section 3.11)
In lieu of the Master Servicer's obligation to maintain a Letter of Credit,
Mortgage Pool Insurance Policy or other form of credit enhancement as provided
above, the Master Servicer may obtain a substitute Letter of Credit, Mortgage
Pool Insurance Policy or an alternate form of credit enhancement. If the Master
Servicer obtains such a substitute Letter of Credit, Mortgage Pool Insurance
Policy or other form of credit enhancement, it will maintain and keep such
Letter of Credit, Mortgage Pool Insurance Policy or alternate form of credit
enhancement in full force and effect as provided herein. Prior to its obtaining
any substitute
49
<PAGE>
Letter of Credit, Mortgage Pool Insurance Policy or alternate form of credit
enhancement, the Master Servicer will obtain written confirmation from the
Rating Agency or Agencies that rated the related series of Certificates that
the substitution of such Mortgage Pool Insurance Policy, Letter of Credit or
alternate form of credit enhancement for the existing credit enhancement will
not adversely affect the then-current ratings assigned to such Certificates by
such Rating Agency or Agencies.
If a Special Hazard Instrument has been obtained for a series of
Certificates, the Master Servicer will also be obligated to exercise its best
reasonable efforts to maintain and keep such Special Hazard Instrument in full
force and effect throughout the term of the applicable Pooling and Servicing
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." If the Special Hazard
Instrument takes the form of a Special Hazard Insurance Policy, such policy
will provide coverage against risks of the type described herein under
"Description of Credit Enhancement--Special Hazard Insurance Policies." The
Master Servicer may obtain a substitute Special Hazard Instrument for the
existing Special Hazard Instrument if prior to such substitution the Master
Servicer obtains written confirmation from the Rating Agency or Agencies that
rated the Certificates that such substitution shall not adversely affect the
then-current ratings assigned to the Certificates by such Rating Agency or
Agencies. (Sections 3.12 and 3.16)
If a Bankruptcy Bond has been obtained for a series of Certificates, the
Master Servicer will be obligated to exercise its best reasonable efforts to
maintain and keep such Bankruptcy Bond in full force and effect throughout the
term of the Pooling and Servicing Agreement, unless coverage thereunder has
been exhausted through payment of claims or substitution therefor is made as
described below under "Reduction or Substitution of Credit Enhancement." The
Master Servicer may obtain a substitute Bankruptcy Bond or other credit
enhancement for the existing Bankruptcy Bond if prior to such substitution the
Master Servicer obtains written confirmation from the Rating Agency or Agencies
that rated the Certificates that such substitution shall not adversely affect
the then-current ratings assigned to the Certificates by such Rating Agency or
Agencies. (Sections 3.16 and 3.21) See "Description of Credit Enhancement--
Bankruptcy Bonds."
The Master Servicer, on behalf of itself, the Trustee and Certificateholders,
will provide the Trustee information required for the Trustee to draw under the
Letter of Credit and will present claims to the provider of any Purchase
Obligation, to each Pool Insurer, to the issuer of each Special Hazard
Insurance Policy or other Special Hazard Instrument, to the issuer of each
Bankruptcy Bond and, in respect of defaulted Mortgage Loans for which there is
no Subservicer, to each Primary Insurer and take such reasonable steps as are
necessary to permit recovery under such Letter of Credit, Purchase Obligation,
insurance policies or comparable coverage respecting defaulted Mortgage Loans
or Mortgage Loans which are the subject of a bankruptcy proceeding.
Additionally, the Master Servicer will present such claims and take such steps
as are reasonably necessary to provide for the performance by the provider of
the Purchase Obligation of its Purchase Obligation. As set forth above, all
collections by the Master Servicer under any Purchase Obligation, any Mortgage
Pool Insurance Policy, any Primary Insurance Policy or any Bankruptcy Bond and,
where the related property has not been restored, any Special Hazard
Instrument, are to be deposited initially in the Custodial Account and
ultimately in the Certificate Account, subject to withdrawal as described
above. All draws under any Letter of Credit will be initially deposited in the
Certificate Account. In those cases in which a Mortgage Loan is serviced by a
Subservicer, the Subservicer, on behalf of itself, the Trustee and the
Certificateholders will present claims to the Primary Insurer, and all
collections thereunder shall initially be deposited in the Subservicing
Account. (Sections 3.11, 3.12, 3.21 and 4.01)
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related hazard insurance policy or any applicable Special
Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any Letter of Credit, Mortgage
Pool Insurance Policy or any related Primary Insurance Policy, the Master
Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to one or more classes of Certificateholders on liquidation of the
Mortgage Loan after reimbursement of the Master Servicer for its expenses and
(ii) that such expenses will be recoverable by it through Liquidation
50
<PAGE>
Proceeds or Insurance Proceeds. If recovery under any Letter of Credit,
Mortgage Pool Insurance Policy, other credit enhancement or any related Primary
Insurance Policy is not available because the Master Servicer has been unable
to make the above determinations, has made such determinations incorrectly or
recovery is not available for any other reason, the Master Servicer is
nevertheless obligated to follow such normal practices and procedures (subject
to the preceding sentence) as it deems necessary or advisable to realize upon
the defaulted Mortgage Loan and in the event such determination has been
incorrectly made, is entitled to reimbursement of its expenses in connection
with such restoration. (Section 3.14)
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
Unless otherwise specified in the Prospectus Supplement, the amount of credit
support provided pursuant to any of the credit enhancements (including, without
limitation, a Mortgage Pool Insurance Policy, Special Hazard Insurance Policy,
Bankruptcy Bond, Letter of Credit, Reserve Fund, Purchase Obligation, or any
alternative form of credit enhancement) may be reduced under certain specified
circumstances. In most cases, the amount available pursuant to any credit
enhancement will be subject to periodic reduction in accordance with a schedule
or formula on a nondiscretionary basis pursuant to the terms of the related
Pooling and Servicing Agreement. Additionally, in most cases, such credit
support (and any replacements therefor) may be replaced, reduced or terminated,
and the formula used in calculating the amount of coverage with respect to
Bankruptcy Losses, Special Hazard Losses or Fraud Losses may be changed,
without the consent of the Certificateholders, upon the written assurance from
each applicable Rating Agency that the then-current rating of the related
series of Certificates will not be adversely affected. Furthermore, in the
event that the credit rating of any obligor under any applicable credit
enhancement is downgraded, the credit rating of the related Certificates may be
downgraded to a corresponding level, and, unless otherwise specified in the
related Prospectus Supplement, the Master Servicer will not be obligated to
obtain replacement credit support in order to restore the rating of the
Certificates. The Master Servicer will also be permitted to replace such credit
support with other credit enhancement instruments issued by obligors whose
credit ratings are equivalent to such downgraded level and in lower amounts
which would satisfy such downgraded level, provided that the then-current
rating of the related series of Certificates 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 Company, the Master Servicer or such other
person that is entitled thereto. Any assets so released will not be available
for distributions in future periods.
PURCHASE OBLIGATIONS
With respect to certain types of Mortgage Loans to be included in any
Mortgage Pool, if specified in the related Prospectus Supplement, the Mortgage
Loans may be sold subject to a Purchase Obligation as described below that
would become applicable on a specified date or upon the occurrence of a
specified event. For example, with respect to certain types of ARM Loans as to
which the Mortgage Rate is fixed for the first five years , a Purchase
Obligation may apply on the first date of the Mortgage Rate of such Mortgage
Loan is adjusted, and such obligation may apply to the Mortgage Loans or to the
related Certificates themselves, or to a corresponding Purchase Obligation of
the Company or another person as specified in the related Prospectus
Supplement. With respect to any Purchase Obligation, such obligation will be an
obligation of an entity (which may include a bank or other financial
institution or an insurance company) specified in the related Prospectus
Supplement, and an instrument evidencing such obligation (a "Purchase
Obligation") shall be delivered to the Trustee for the benefit of the
Certificateholders to the related series.
The specific terms and conditions applicable to any Purchase Obligation will
be described in the related Prospectus Supplement, including the purchase
price, the timing of and any limitations and conditions to any such purchase.
Any Purchase Obligation will be payable solely to the Trustee for the benefit
of the Certificateholders of the related series and will be nontransferable.
Unless otherwise provided in the related
51
<PAGE>
Prospectus Supplement, each Purchase Obligation will be a general unsecured
obligation of the provider thereof, and prospective purchasers of Certificates
must look solely to the credit of such entity (and not any assets of the
related Trust Fund) for payment under the Purchase Obligation.
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below) and, if required as described below, a Primary
Insurance Policy. The following is only a brief description of certain
insurance policies and does not purport to summarize or describe all of the
provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers. The
descriptions of any insurance policies 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 such forms of policies,
sample copies of which are available upon request.
PRIMARY MORTGAGE INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, (i) each
Mortgage Loan having a Loan-to-Value Ratio at origination of over 80% is
required by the Company to be covered by a primary mortgage guaranty insurance
policy (a "Primary Insurance Policy") insuring against default on such Mortgage
Loan up to at least the minimum amount required to be covered by FNMA and
FHLMC, unless and until the principal balance of the Mortgage Loan is reduced
to a level that would produce a Loan-to-Value Ratio equal to or less than 80%,
and (ii) the Company will represent and warrant that, to the best of the
Company's knowledge, such Mortgage Loans are so covered. 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 below an 80% Loan-to-Value Ratio level as of the applicable Cut-
off Date. In addition, unless otherwise specified in the Prospectus Supplement,
the Company will have the ability to cancel any Primary Insurance Policy if the
Loan-to-Value Ratio of the Mortgage Loan is reduced below 75% either based on
an appraisal of the Mortgaged Property after the related Cut-off Date or as a
result of principal payments that reduce the principal balance of the Mortgage
Loan after such Cut-off Date. Mortgage Loans which are subject to negative
amortization will only be covered by a Primary Insurance Policy if such
coverage was so required upon their origination, notwithstanding that
subsequent negative amortization may cause such Mortgage Loan's Loan-to-Value
Ratio (based on the then-current balance) to subsequently exceed the limits
which would have required such coverage upon their origination.
While the terms and conditions of the Primary Insurance Policies issued by
one primary mortgage guaranty insurer (a "Primary Insurer") will differ from
those in Primary Insurance Policies issued by other Primary Insurers, each
Primary Insurance Policy will in general provide substantially the following
coverage. The amount of the loss as calculated under a Primary Insurance Policy
covering a Mortgage Loan (herein referred to as the "Loss") will generally
consist of the unpaid principal amount of such Mortgage Loan and accrued and
unpaid interest thereon and reimbursement of certain expenses, less (i) rents
or other payments collected or received by the insured (other than the proceeds
of hazard insurance) that are derived from the related Mortgaged Property, (ii)
hazard insurance proceeds in excess of the amount required to restore such
Mortgaged Property and which have not been applied to the payment of the
Mortgage Loan, (iii) amounts expended but not approved by the Primary Insurer,
(iv) claim payments previously made on such Mortgage Loan and (v) unpaid
premiums and certain other amounts.
The Primary Insurer will generally be required to pay either: (i) the insured
percentage of the Loss; (ii) 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 (iii) 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,
52
<PAGE>
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.
As conditions precedent to the filing or payment of a claim under a Primary
Insurance Policy, in the event of default by the Mortgagor, the insured will
typically be required, among other things, to: (i) 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; (ii) 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 (iii) tender to the Primary Insurer good and
merchantable title to, and possession of, the Mortgaged Property.
For any Certificates offered hereunder, the Master 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 such coverage is required under the
standard described above, provided that such Primary Insurance Policy was in
place as of the Cut-off Date and the Company had knowledge of such Primary
Insurance Policy. In the event that the Company gains knowledge that as of the
Closing Date, a Mortgage Loan had a Loan-to-Value Ratio at origination in
excess of 80% and was not the subject of a Primary Insurance Policy (and was
not included in any exception to such standard disclosed in the related
Prospectus Supplement) and that such Mortgage Loan has a then current Loan-to-
Value Ratio in excess of 80%, then the Master Servicer is required to use its
reasonable efforts to obtain and maintain a Primary Insurance Policy to the
extent that such a policy is obtainable at a reasonable price. The Master
Servicer or, in the case of a Designated Seller Transaction, the Seller will
not cancel or refuse to renew any such Primary Insurance Policy in effect at
the time of the initial issuance of a series of Certificates that is required
to be kept in force under the applicable Pooling and Servicing Agreement unless
the replacement Primary Insurance Policy for such cancelled or non-renewed
policy is maintained with an insurer whose claims-paying ability is acceptable
to the Rating Agency or Agencies that rated such series of Certificates for
mortgage pass-through certificates having a rating equal to or better than the
then-current ratings of such series of Certificates. (Section 3.11) For further
information regarding the extent of coverage under any Mortgage Pool Insurance
Policy or Primary Insurance Policy, see "Description of Credit Enhancement--
Mortgage Pool Insurance Policies."
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a hazard
insurance policy for their Mortgage Loan. Additionally, the Pooling and
Servicing Agreement will require the Master Servicer to cause to be maintained
for each Mortgage Loan a hazard insurance policy providing for no less than the
coverage of the standard form of fire insurance policy with extended coverage
customary in the state in which the property is located. Unless otherwise
specified in the related Prospectus Supplement, such coverage generally will be
in an amount equal to the lesser of the principal balance owing on such
Mortgage Loan or 100% of the insurable value of the improvements securing the
Mortgage Loan except that, if generally available, such coverage must not be
less than the minimum amount required under the terms thereof to fully
compensate for any damage or loss on a replacement cost basis. The ability of
the Master 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 upon the extent to which information in this regard is furnished to the
Master Servicer by Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under any
hazard policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited initially in
the Custodial
53
<PAGE>
Account and ultimately in the Certificate Account. The Pooling and Servicing
Agreement provides that the Master Servicer may satisfy its obligation to cause
hazard policies to be maintained by maintaining a blanket policy insuring
against losses on the Mortgage Loans. If such blanket policy contains a
deductible clause, the Master Servicer will deposit in the Custodial Account or
the applicable Certificate Account all sums which would have been deposited
therein but for such clause.
In general, 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,
subject to the conditions and exclusions specified in each policy. Although 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 thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-
related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. Where the improvements securing a Mortgage Loan are located in a
federally designated flood area at the time of origination of such Mortgage
Loan, the Pooling and Servicing Agreement requires the Master Servicer to cause
to be maintained for each such Mortgage Loan serviced, flood insurance (to the
extent available) in an amount equal in general 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 which in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally 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) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Since the amount of hazard insurance that Mortgagors 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 "Subordination" above for a description of when subordination is
provided, the protection (limited to the Special Hazard Amount as described in
the related Prospectus Supplement) afforded by such 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 (including losses caused by the application of the co-insurance clause
described in the preceding paragraph).
Under the terms of the Mortgage Loans, Mortgagors are generally required to
present claims to insurers under hazard insurance policies maintained on the
Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present claims under any Special Hazard
Insurance Policy or other Special Hazard Instrument and any blanket insurance
policy insuring against hazard losses on the Mortgaged Properties. However, the
ability of the Master Servicer to present such claims is dependent upon the
extent to which information in this regard is furnished to the Master Servicer
or the Subservicers by Mortgagors. (Section 3.12)
54
<PAGE>
THE COMPANY
The Company is an indirect wholly-owned subsidiary of GMAC Mortgage which is
a wholly-owned subsidiary of GMAC. The Company was incorporated in the State of
Delaware on January 25, 1985. The Company was organized for the purpose of
serving as a private secondary mortgage market conduit. As described more fully
above under "Mortgage Loan Program," the Company anticipates that it will in
many cases have acquired Mortgage Loans indirectly through Residential Funding,
which is also an indirect wholly-owned subsidiary of GMAC Mortgage. The Company
does not have, nor is it expected in the future to have, any significant
assets.
The Company maintains its principal office at 8400 Normandale Lake Boulevard,
Suite 700, Minneapolis, Minnesota 55437. Its telephone number is (612) 832-
7000.
RESIDENTIAL FUNDING CORPORATION
Unless otherwise specified in the related Prospectus Supplement, Residential
Funding, an affiliate of the Company, will act as the Master Servicer or
Manager for a series of Certificates.
Residential Funding buys conventional mortgage loans under several loan
purchase programs from mortgage loan originators or sellers nationwide that
meet its seller/servicer eligibility requirements and services mortgage loans
for its own account and for others. Residential Funding's principal executive
offices are located at 8400 Normandale Lake Boulevard, Suite 700, Minneapolis,
Minnesota 55437. Its telephone number is (612) 832-7000. Residential Funding
conducts operations from its headquarters in Minneapolis and from offices
located in California, Colorado, Connecticut, Florida, Georgia, Maryland, North
Carolina, Rhode Island and Texas.
At December 31, 1993, Residential Funding was master servicing a loan
portfolio of approximately $21.539 billion. Residential Funding's delinquency,
foreclosure and loan loss experience as of the end of the most recent calendar
quarter for which such information is available on the portfolio of loans
master serviced by it that were originated under its modified loan purchase
criteria will be summarized in each Prospectus Supplement relating to a
Mortgage Pool master serviced by it. There can be no assurance that such
experience will be representative of the results that may be experienced with
respect to any particular series of Certificates.
THE POOLING AND SERVICING AGREEMENT
As described above under "Description of the Certificates--General," each
series of Certificates will be issued pursuant to a Pooling and Servicing
Agreement as described in that section. The following summaries describe
certain additional provisions common to each Pooling and Servicing Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; SPREAD
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each series of Certificates will
be equal to the percentage per annum described in the related Prospectus
Supplement (which may vary under certain circumstances) of the outstanding
principal balance of each Mortgage Loan, and such compensation will be retained
by it from collections of interest on such Mortgage Loan in the related Trust
Fund (after provision has been made for the payment of interest at the
applicable Pass-Through Rate or Net Mortgage Rate, as the case may be, to
Certificateholders and for the payment of any Spread) at the time such
collections are deposited into the applicable Custodial Account.
Notwithstanding the foregoing, with respect to a series of Certificates as to
which the Trust Fund includes Mortgage Securities, the compensation payable to
the Master Servicer or Manager for servicing and administering such Mortgage
Securities on behalf of the holders of such Certificates may be based on a
55
<PAGE>
percentage per annum described in the related Prospectus Supplement of the
outstanding balance of such Mortgage Securities and may be retained from
distributions of interest thereon, if so specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement, as
compensation for its servicing duties, a Subservicer or, if there is no
Subservicer, the Master Servicer will be entitled to a monthly servicing fee as
described in the related Prospectus Supplement, which may vary under certain
circumstances from the amounts described in the Prospectus Supplement. Certain
Subservicers may also receive additional compensation in the amount of all or a
portion of the interest due and payable on the applicable Mortgage Loan which
is over and above the interest rate specified at the time the Company or
Residential Funding, as the case may be, committed to purchase the Mortgage
Loan. See "Mortgage Loan Program--Subservicing by Sellers." Subservicers will
be required to pay to the Master Servicer an amount equal to one month's
interest (net of its servicing or other compensation) on the amount of any
partial Principal Prepayment. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will retain such amounts to the
extent collected from Subservicers. In addition, the Master Servicer or a
Subservicer will retain all prepayment charges, assumption fees and late
payment charges, to the extent collected from Mortgagors, and any benefit which
may accrue as a result of the investment of funds in the Custodial Account or
the applicable Certificate Account (unless otherwise specified in the related
Prospectus Supplement) or in a Subservicing Account, as the case may be.
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the Pooling and Servicing Agreement, including, without
limitation, payment of any fee or other amount payable in respect of any
alternative credit enhancement arrangements, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee, the
Certificate Registrar and any Paying Agent, and payment of expenses incurred in
enforcing the obligations of Subservicers and Sellers. The Master Servicer will
be entitled to reimbursement of expenses incurred in enforcing the obligations
of Subservicers and Sellers under certain limited circumstances. In addition,
as indicated in the preceding section, the Master 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, such right of reimbursement being prior to the rights of
Certificateholders to receive any related Liquidation Proceeds (including
Insurance Proceeds).
The Prospectus Supplement for a series of Certificates will specify whether
there will be any Spread retained. Any such Spread will be a specified portion
of the interest payable on each Mortgage Loan in a Mortgage Pool. Any such
Spread will be established on a loan-by-loan basis and the amount thereof with
respect to each Mortgage Loan in a Mortgage Pool will be specified on an
exhibit to the related Pooling and Servicing Agreement. Any Spread in respect
of a Mortgage Loan will represent a specified portion of the interest payable
thereon and will not be part of the related Trust Fund. Any partial recovery of
interest in respect of a Mortgage Loan will be allocated between the owners of
any Spread and the holders of classes of Certificates entitled to payments of
interest as provided in the Prospectus Supplement and the applicable Pooling
and Servicing Agreement.
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning the first such 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 Company and the Trustee to the
effect that, on the basis of an examination by such firm conducted
substantially in compliance with the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for FHLMC, the servicing of
mortgage loans under agreements (including the related Pooling and Servicing
Agreement) substantially similar to each other was conducted in compliance with
such agreements except for such significant exceptions or errors in records
that, in the opinion of the firm, the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for FHLMC requires it to
report. In rendering its statement such firm may rely, as to the matters
relating to the direct servicing of mortgage loans by Subservicers, upon
comparable statements for examinations conducted substantially in compliance
with
56
<PAGE>
the Uniform Single Audit Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to those Subservicers
which also have been the subject of such an examination. (Section 3.19)
Each Pooling and Servicing Agreement will also provide for delivery (on or
before a specified date in each year) to the Trustee of an annual statement
signed by an officer of the Master Servicer to the effect that the Master
Servicer has fulfilled in all material respects its obligations under the
Pooling and Servicing Agreement throughout the preceding year or, if there has
been a material default in the fulfillment of any such obligation, such
statement shall specify each such known default and the nature and status
thereof. Such statement may be provided as a single form making the required
statements as to more than one Pooling and Servicing Agreement. (Section 3.18)
Copies of the annual statement of the Master Servicer may be obtained by
Certificateholders without charge upon written request to the Master Servicer.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The Pooling and Servicing Agreement for each series of Certificates will
provide that the Master Servicer may not resign from its obligations and duties
thereunder except upon a determination that performance of such 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 Trustee or a successor servicer has assumed the Master Servicer's
obligations and duties under the Pooling and Servicing Agreement. (Section
6.04)
Each Pooling and Servicing Agreement will also provide that, except as set
forth below, neither the Master Servicer, the Company, nor any director,
officer, employee or agent of the Master Servicer or the Company will be under
any liability to the Trust Fund or the Certificateholders for any action taken
or for refraining from the taking of any action in good faith pursuant to the
Pooling and Servicing Agreement, or for errors in judgment; provided, however,
that neither the Master Servicer, the Company, 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. Each
Pooling and Servicing Agreement will further provide that the Master Servicer,
the Company, and any director, officer, employee or agent of the Master
Servicer or the Company 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 Pooling and Servicing
Agreement or the related series of Certificates, other than any loss, liability
or expense related to any specific Mortgage Loan or Mortgage Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the Pooling
and Servicing Agreement) and any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or gross negligence in the performance of
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Pooling and Servicing Agreement will provide that
neither the Master Servicer nor the Company will 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 Pooling and Servicing Agreement
and which in its opinion may involve it in any expense or liability. The Master
Servicer or the Company may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the Pooling and
Servicing Agreement and the rights and duties of the parties thereto and the
interests of the Certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Trust Fund and the Master Servicer or
the Company, as the case may be, will be entitled to be reimbursed therefor out
of funds otherwise distributable to Certificateholders. (Section 6.03)
Any person into which the Master Servicer may be merged or consolidated, any
person resulting from any merger or consolidation to which the Master Servicer
is a party or any person succeeding to the business of the Master Servicer will
be the successor of the Master Servicer under the Pooling and Servicing
Agreement, provided that (i) such person is qualified to service mortgage loans
on behalf of FNMA or
57
<PAGE>
FHLMC and (ii) such merger, consolidation or succession does not adversely
affect the then-current rating of the classes of Certificates of the related
series that have been rated. In addition, notwithstanding the prohibition on
its resignation, the Master Servicer may assign its rights under a Pooling and
Servicing Agreement to any person to whom the Master Servicer is transferring a
substantial portion of its mortgage servicing portfolio, provided clauses (i)
and (ii) above are satisfied and such person is reasonably satisfactory to the
Company and the Trustee. In the case of any such assignment, the Master
Servicer will be released from its obligations under such Pooling and Servicing
Agreement, exclusive of liabilities and obligations incurred by it prior to the
time of such assignment. (Section 6.02)
EVENTS OF DEFAULT
Events of Default under the Pooling and Servicing Agreement in respect of a
series of Certificates, unless otherwise specified in the Prospectus
Supplement, will include, without limitation, (i) any failure by the Master
Servicer to make a required deposit to the Certificate Account or, if the
Master Servicer is the Paying Agent, to distribute to the holders of any class
of Certificates of such series any required payment which continues unremedied
for 5 days after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Company, or to the Master Servicer, the Company
and the Trustee by the holders of Certificates of such class evidencing not
less than 25% of the aggregate Percentage Interests constituting such class;
(ii) any failure by the Master Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Pooling and
Servicing Agreement with respect to such series of Certificates which continues
unremedied for 30 days (15 days in the case of a failure to pay the premium for
any insurance policy which is required to be maintained under the Pooling and
Servicing Agreement) after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Company, or to the Master Servicer, the
Company and the Trustee by the holders of any class of Certificates of such
series evidencing not less than 25% of the aggregate Percentage Interests
constituting such class; and (iii) certain events of insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings regarding
the Master Servicer and certain actions by the Master Servicer indicating its
insolvency or inability to pay its obligations. (Section 7.01) A default
pursuant to the terms of any Mortgage Securities included in any Trust Fund
will not constitute an Event of Default under the related Pooling and Servicing
Agreement.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Company or the
Trustee may, and at the direction of the holders of Certificates evidencing not
less than 51% of the aggregate undivided interests (or, if so specified in the
related Prospectus Supplement, voting rights) in the related Trust Fund (except
as otherwise provided for in the related Pooling and Servicing Agreement with
respect to the Credit Enhancer) the Trustee shall, by written notification to
the Master Servicer and to the Company or the Trustee, as applicable, terminate
all of the rights and obligations of the Master Servicer under the Pooling and
Servicing Agreement (other than any rights of the Master Servicer as
Certificateholder) covering such Trust Fund and in and to the Mortgage Loans
and the proceeds thereof, whereupon the Trustee or, upon notice to the Company
and with the Company's consent, its designee will succeed to all
responsibilities, duties and liabilities of the Master Servicer under such
Pooling and 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 Trustee would be obligated to succeed the
Master Servicer but is unwilling so to act, it may appoint (or if it is unable
so to act, it shall appoint) or petition a court of competent jurisdiction for
the appointment of, a FNMA- or FHLMC-approved mortgage servicing institution
with a net worth of at least $10,000,000 to act as successor to the Master
Servicer under the Pooling and Servicing Agreement (unless otherwise set forth
in the Pooling and Servicing Agreement). Pending such appointment, the Trustee
is obligated to act in such capacity. The Trustee and such successor may agree
upon the servicing compensation to be paid, which in no event may be greater
than the compensation to the initial Master Servicer under the Pooling and
Servicing Agreement. (Sections 7.01 and 7.02)
58
<PAGE>
No Certificateholder will have any right under a Pooling and Servicing
Agreement to institute any proceeding with respect to such Pooling and
Servicing Agreement (except as otherwise provided for in the related Pooling
and Servicing Agreement with respect to the Credit Enhancer) unless such holder
previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class have made written request upon the Trustee to institute such
proceeding in its own name as Trustee thereunder and have offered to the
Trustee reasonable indemnity and the Trustee for 60 days after receipt of such
request and indemnity has neglected or refused to institute any such
proceeding. (Section 11.03) However, the Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the Pooling and Servicing
Agreement or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
Certificates covered by such Pooling and Servicing Agreement, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby. (Section 8.02)
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Company, the
Master Servicer and the Trustee, without the consent of any of the holders of
Certificates covered by such Pooling and Servicing Agreement, (i) to cure any
ambiguity, (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein or to correct any error, (iii) to
change the timing and/or nature of deposits in the Custodial Account or the
Certificate Account or to change the name in which the Custodial Account is
maintained; provided that (a) the Certificate Account Deposit Date would in no
event be later than the related Distribution Date, (b) such change would not
adversely affect in any material respect the interests of any
Certificateholder, as evidenced by an opinion of counsel, and (c) such change
would not adversely affect the then-current rating of any rated classes of
Certificates, as evidenced by a letter from each applicable Rating Agency, (iv)
if a REMIC election has been made with respect to the related Trust Fund, to
modify, eliminate or add to any of its provisions (A) to such extent as shall
be necessary to maintain the qualification of the Trust Fund as a REMIC or to
avoid or minimize the risk of imposition of any tax on the related Trust Fund,
provided that the Trustee has received an Opinion of Counsel to the effect that
(a) such action is necessary or desirable to maintain such qualification or to
avoid or minimize such risk, and (b) such action will not adversely affect in
any material respect the interests of any holder of Certificates covered by the
Pooling and Servicing Agreement, or (B) to restrict the transfer of the REMIC
Residual Certificates, provided that the Company has determined that the then-
current ratings of the classes of the Certificates that have been rated will
not be adversely affected, as evidenced by a letter from each applicable Rating
Agency, and that any such amendment will not give rise to any tax with respect
to the transfer of the REMIC Residual Certificates to a non-Permitted
Transferee, (v) to make any other provisions with respect to matters or
questions arising under such Pooling and Servicing Agreement which are not
materially inconsistent with the provisions thereof, provided that such action
will not adversely affect in any material respect the interests of any
Certificateholder, or (vi) to amend specified provisions that are not material
to holders of any class of Certificates offered hereunder.
The Pooling and Servicing Agreement may also be amended by the Company, the
Master Servicer and the Trustee (except as otherwise provided for in the
related Pooling and Servicing Agreement with respect to the Credit Enhancer)
with the consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such Pooling
and Servicing Agreement or of modifying in any manner the rights of the holders
of Certificates covered by such Pooling and Servicing Agreement, except that no
such amendment may (i) reduce in any manner the amount of, or delay the timing
of, payments received on Mortgage Loans which are required to be distributed on
a Certificate of any class without the consent of the holder of such
Certificate or (ii) reduce the aforesaid percentage of Certificates of any
class the holders of which are required to consent to any such amendment
without the consent of the holders of all Certificates of such class covered by
such Pooling and Servicing Agreement then outstanding.
59
<PAGE>
Notwithstanding the foregoing, if a REMIC election has been made with respect
to the related Trust Fund, the Trustee will not be entitled to consent to any
amendment to a Pooling and Servicing Agreement without having first received an
Opinion of Counsel to the effect that such amendment or the exercise of any
power granted to the Master Servicer, the Company or the Trustee in accordance
with such amendment will not result in the imposition of a tax on the related
Trust Fund or cause such Trust Fund to fail to qualify as a REMIC. (Section
11.01)
TERMINATION; RETIREMENT OF CERTIFICATES
The obligations created by the Pooling and Servicing Agreement for each
series of Certificates (other than certain limited payment and notice
obligations of the Trustee and the Company, respectively) will terminate upon
the payment to Certificateholders of that series of all amounts held in the
Certificate Account or by the Master Servicer and required to be paid to them
pursuant to such Pooling and Servicing Agreement following the earlier of (i)
the final payment or other liquidation or disposition (or any advance with
respect thereto) of the last Mortgage Loan subject thereto and all property
acquired upon foreclosure or deed in lieu of foreclosure of any such Mortgage
Loan and (ii) the purchase by the Master Servicer or the Company or, if
specified in the related Prospectus Supplement, by the holder of the REMIC
Residual Certificates (see "Certain Federal Income Tax Consequences" below)
from the Trust Fund for such series of all remaining Mortgage Loans and all
property acquired in respect of such Mortgage Loans. In addition to the
foregoing, the Master Servicer or the Company will have the option to purchase,
in whole but not in part, the Certificates specified in the related Prospectus
Supplement in the manner set forth in the related Prospectus Supplement. Upon
the purchase of such Certificates or at any time thereafter, at the option of
the Master Servicer or the Company, the Mortgage Loans may be sold, thereby
effecting a retirement of the Certificates and the termination of the Trust
Fund, or the Certificates so purchased may be held or resold by the Master
Servicer or the Company. In no event, however, will the trust created by the
Pooling and Servicing Agreement continue beyond the expiration of 21 years from
the death of the survivor of certain persons named in such Pooling and
Servicing Agreement. Written notice of termination of the Pooling and Servicing
Agreement will be given to each Certificateholder, and the final distribution
will be made only upon surrender and cancellation of the Certificates at an
office or agency appointed by the Trustee which will be specified in the notice
of termination. (Section 9.01) If the Certificateholders are permitted to
terminate the trust under the applicable Pooling and Servicing Agreement, a
penalty may be imposed upon the Certificateholders based upon the fee that
would be foregone by the Master Servicer because of such termination.
Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Certificates shall be made at the
option of the Master Servicer, the Company or, if applicable, the holder of the
REMIC Residual Certificates at the price specified in the related Prospectus
Supplement. The exercise of such right will effect early retirement of the
Certificates of that series, but the right of the Master Servicer, the Company
or, if applicable, such holder to so purchase is subject to the aggregate
principal balance of the Mortgage Loans for that series as of the Distribution
Date on which the purchase proceeds are to be distributed to Certificateholders
being less than the percentage specified in the related Prospectus Supplement
of the aggregate principal balance of the Mortgage Loans at the Cut-off Date
for that series. The Prospectus Supplement for each series of Certificates will
set forth the amounts that the holders of such Certificates will be entitled to
receive upon such early retirement. Such early termination may adversely affect
the yield to holders of certain classes of such Certificates.If a REMIC
election has been made, the termination of the related Trust Fund will be
effected in a manner consistent with applicable federal income tax regulations
and its status as a REMIC. (Sections 9.01 and 9.02)
THE TRUSTEE
The Trustee under each Pooling and Servicing Agreement will be named in the
related Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the Company and/or its
affiliates, including Residential Funding.
60
<PAGE>
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Company will be obligated to appoint
a successor Trustee. The Trustee may also be removed at any time by the holders
of Certificates evidencing not less than 51% of the aggregate undivided
interests (or, if so specified in the related Prospectus Supplement, voting
rights) in the related Trust Fund. 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. (Section 8.07)
YIELD CONSIDERATIONS
The yield to maturity of a Certificate will depend on the price paid by the
holder for such Certificate, the Pass-Through Rate on any such Certificate
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate and timing of
principal payments (including prepayments, defaults, liquidations and
repurchases) on the Mortgage Loans and the allocation thereof to reduce the
principal balance of such Certificate (or notional amount thereof if
applicable) and other factors.
Each monthly interest payment on a Mortgage Loan will be calculated as one-
twelfth of the applicable Mortgage Rate multiplied by the principal balance of
such Mortgage Loan outstanding as of the first day of the month prior to the
month in which the Distribution Date for the related series of Certificates
occurs, after giving effect to the payment of principal due on such first day,
subject to any Deferred Interest. The amount of such payments with respect to
each Mortgage Loan distributed (or accrued in the case of Deferred Interest or
Accrual Certificates) monthly to holders of a class of Certificates entitled to
payments of interest will be similarly calculated on the basis of such class's
specified percentage of each such payment of interest (or accrual in the case
of Accrual Certificates) and will be expressed as a fixed, adjustable or
variable Pass-Through Rate payable on the outstanding principal balance or
notional amount of such Certificate, or any combination of such Pass-Through
Rates, calculated as described herein and in the related Prospectus Supplement.
Holders of Strip Certificates or a class of Certificates having a Pass-Through
Rate that varies based on the weighted average Mortgage Rate of the underlying
Mortgage Loans will be affected by disproportionate prepayments and repurchases
of Mortgage Loans having higher Net Mortgage Rates or rates applicable to the
Strip Certificates, as applicable.
The effective yield to maturity to each holder of Certificates entitled to
payments of interest will be below that otherwise produced by the applicable
Pass-Through Rate and purchase price of such Certificate because, while
interest will accrue on each Mortgage Loan from the first day of each month,
the distribution of such interest will be made on the 25th day (or, if such day
is not a business day, the next succeeding business day) of the month following
the month of accrual.
A class of Certificates may be entitled to payments of interest at a fixed
Pass-Through Rate, a variable Pass-Through Rate or adjustable Pass-Through
Rate, or any combination of such Pass-Through Rates, each as specified in the
related Prospectus Supplement. A variable Pass-Through Rate may be calculated
based on the weighted average of the Mortgage Rates (net of servicing fees and
any Spread (each, a "Net Mortgage Rate")) of the related Mortgage Loans for the
month preceding the Distribution Date if so specified in the related Prospectus
Supplement. As will be described in the related Prospectus Supplement, the
aggregate payments of interest on a class of Certificates, and the yield to
maturity thereon, will be affected by the rate of payment of principal on the
Certificates (or the rate of reduction in the notional balance of Certificates
entitled only to payments of interest) and, in the case of Certificates
evidencing interests in ARM Loans, by changes in the Net Mortgage Rates on the
ARM Loans. See "Maturity and Prepayment Considerations" below. The yield on the
Certificates will also be affected by liquidations of Mortgage Loans following
Mortgagor defaults and by purchases of Mortgage Loans in the event of breaches
of representations made in
61
<PAGE>
respect of such Mortgage Loans by the Company, the Master Servicer and others,
or conversions of ARM Loans to a fixed interest rate. See "Mortgage Loan
Program--Representations by Sellers" and "Descriptions of the Certificates--
Assignment of Mortgage Loans" above.
In general, if a class of Certificates is purchased at initial issuance at a
premium and payments of principal on the related Mortgage Loans 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.
Conversely, if a class of Certificates is purchased at initial issuance at a
discount and payments of principal on the related Mortgage Loans occur at a
rate slower than that assumed at the time of purchase, the purchaser's actual
yield to maturity will be lower than that originally anticipated. The effect of
principal prepayments, liquidations and purchases on yield will be particularly
significant in the case of a series of Certificates having a class entitled to
payments of interest only or to payments of interest that are
disproportionately high relative to the principal payments to which such class
is entitled. Such a class will likely be sold at a substantial premium to its
principal balance and any faster than anticipated rate of prepayments will
adversely affect the yield to holders thereof. In certain circumstances
extremely rapid prepayments may result in the failure of such holders to recoup
their original investment. In addition, the yield to maturity on certain other
types of classes of Certificates, including Accrual Certificates, Certificates
with a Pass-Through Rate which fluctuates inversely with or at a multiple of an
index or certain other classes in a series including more than one class of
Certificates, may be relatively more sensitive to the rate of prepayment on the
related Mortgage Loans than other classes of Certificates.
The timing of changes in the rate of principal payments on or repurchases of
the Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. In general, the earlier a
prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, 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 Certificates would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is charged
interest on the principal amount of the Mortgage 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 Mortgage Rate by 365. Unless otherwise
specified in the related Prospectus Supplement, the effect of prepayments in
full will be to reduce the amount of interest paid in the following month to
holders of Certificates entitled to payments of interest because interest on
the principal amount of any Mortgage Loan so prepaid will be paid only to the
date of prepayment rather than for a full month. Unless otherwise specified in
the related Prospectus Supplement, a partial prepayment of principal is applied
so as to reduce the outstanding principal balance of the related Mortgage Loan
as of the first day of the month in which such partial prepayment is received.
As a result, unless otherwise specified in the related Prospectus Supplement,
the effect of a partial prepayment on a Mortgage Loan will be to reduce the
amount of interest passed through to holders of Certificates in the month
following the receipt of such partial prepayment by an amount equal to one
month's interest at the applicable Pass-Through Rate or Net Mortgage Rate, as
the case may be, on the prepaid amount. With respect to amounts due the Master
Servicer from Subservicers in respect of partial principal prepayments, see
"Description of the Certificates--Payment on Mortgage Loans; Deposits to
Certificate Account." Neither full nor partial principal prepayments are passed
through until the month following receipt. See "Maturity and Prepayment
Considerations."
The rate 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
Certificates. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios,
62
<PAGE>
may be higher than for other types of Mortgage Loans. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Mortgage Loans will be
affected by the general economic condition of the region of the country in
which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values.
With respect to certain Mortgage Loans including ARM Loans, the Mortgage Rate
at origination may be below the rate that would result if the index and margin
relating thereto were applied at origination. Under the applicable underwriting
standards, the mortgagor under each Mortgage Loan generally will be qualified
on the basis of the Mortgage Rate in effect at origination. The repayment of
any such Mortgage Loan may thus be dependent on the ability of the mortgagor to
make larger level monthly payments following the adjustment of the Mortgage
Rate. In addition, the periodic increase in the amount paid by the Mortgagor of
a Buydown Mortgage Loan during or at the end of the applicable Buydown Period
may create a greater financial burden for the Mortgagor, who might not have
otherwise qualified for a mortgage under Residential Funding's underwriting
guidelines, and may accordingly increase the risk of default with respect to
the related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the Indices applicable at origination and the related Note Margins), the amount
of interest accruing on the principal balance of such Mortgage Loans may exceed
the amount of the minimum scheduled monthly payment thereon. As a result, a
portion of the accrued interest on negatively amortizing Mortgage Loans may
become Deferred Interest which will be added to the principal balance thereof
and will bear interest at the applicable Mortgage Rate. The addition of any
such Deferred Interest to the principal balance of any related class or classes
of Certificates will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Certificates were purchased. In addition, with respect to certain ARM
Loans subject to negative amortization, during a period of declining interest
rates, it might be expected that each minimum scheduled monthly payment on such
a Mortgage Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be
applied to reduce the principal balance of the related class or classes of
Certificates, the weighted average life of such Certificates will be reduced
and may adversely affect yield to holders thereof, depending upon the price at
which such Certificates were purchased.
For each Mortgage Pool, if all necessary advances are made and if there is no
unrecoverable loss on any Mortgage Loan, the net effect of each distribution
respecting interest will be to pass-through to each holder of a class of
Certificates entitled to payments of interest an amount which is equal to one
month's interest at the applicable Pass-Through Rate on such class's principal
balance or notional balance, as adjusted downward to reflect any decrease in
interest caused by any principal prepayments and the addition of any Deferred
Interest to the principal balance of any Mortgage Loan. See "Description of the
Certificates--Principal and Interest on the Certificates."
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to maturity
of the Mortgage Loans in a given Mortgage Pool will vary depending upon the
type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Certificates will contain information with respect
to the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans may be prepaid without penalty in full or in part at any time.
The prepayment experience with respect to the Mortgage Loans in a Mortgage Pool
will affect the life and yield of the related series of Certificates.
63
<PAGE>
With respect to Balloon Loans, payment of the Balloon Amount (which, based on
the amortization schedule of such Mortgage Loans, is expected to be a
substantial amount) will generally depend on the Mortgagor's ability to obtain
refinancing of such Mortgage Loans 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, prevailing mortgage loan interest rates, the Mortgagor's equity in
the related Mortgaged Property, tax laws and prevailing general economic
conditions. Unless otherwise specified in the related Prospectus Supplement,
neither the Company, the Master Servicer, GMAC nor any of their affiliates will
be obligated to refinance or repurchase any Mortgage Loan or to sell the
Mortgaged Property.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates,
solicitations and the availability of mortgage funds, affect prepayment
experience. Unless otherwise specified in the related Prospectus Supplement,
all Mortgage Loans (other than ARM Loans) will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of the Mortgage Loan upon
sale or certain transfers by the Mortgagor of the underlying Mortgaged
Property. Unless the related Prospectus Supplement indicates otherwise, the
Master 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, provided,
however, that the Master 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 under certain conditions if the proposed transferee of the related
Mortgaged Property establishes its ability to repay the Mortgage Loan and, in
the reasonable judgment of the Master Servicer or the related Subservicer, 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 Mortgagors in connection with the sales of the
Mortgaged Properties will affect the weighted average life of the related
series of Certificates. See "Description of the Certificates--Collection and
Other Servicing Procedures" and "Certain Legal Aspects of the Mortgage Loans
and Related Matters--Enforceability of Certain Provisions" for a description of
certain provisions of the Pooling and Servicing Agreement and certain legal
developments that may affect the prepayment experience on the Mortgage Loans.
In addition, certain Mortgage Securities included in a Mortgage Pool may be
backed by underlying Mortgage Loans having differing interest rates.
Accordingly, the rate at which principal payments are received on the related
Certificates will, to a certain extent, depend on the interest rates on such
underlying Mortgage Loans.
At the request of the Mortgagor, a Subservicer may allow the refinancing of a
Mortgage Loan in any Trust Fund by accepting prepayments thereon and permitting
a new loan secured by a mortgage on the same property. In the event of such a
refinancing, the new loan would not be included in the related Trust Fund and,
therefore, such refinancing would have the same effect as a prepayment in full
of the related Mortgage Loan. A Subservicer or the Master Servicer may, from
time to time, implement programs designed to encourage refinancing. Such
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. In
addition, Subservicers may encourage the refinancing of Mortgage Loans,
including defaulted Mortgage Loans, that would permit creditworthy borrowers to
assume the outstanding indebtedness of such Mortgage Loans.
All statistics known to the Company that have been compiled with respect to
prepayment experience on mortgage loans indicate that while some mortgage loans
may remain outstanding until their stated maturities, a substantial number will
be paid prior to their respective stated maturities.
The rate of prepayment with respect to conventional fixed-rate mortgage loans
has fluctuated significantly in recent years. For example, published principal
balance information for FHLMC and FNMA securities backed by conventional fixed-
rate mortgage loans indicates that the prepayment rates for such
64
<PAGE>
mortgage securities were substantially lower during the high interest rate
climate prevailing during 1980, 1981 and early 1982 than the prepayment rates
during 1985 and 1986 when prevailing interest rates declined. In general, if
interest rates fall below the Mortgage Rates on fixed-rate Mortgage Loans, the
rate of prepayment would be expected to increase.
Although the Mortgage Rates on ARM Loans will be subject to periodic
adjustments, such adjustments generally will, unless otherwise specified in the
related Prospectus Supplement, (i) not increase or decrease such Mortgage Rates
by more than a fixed percentage amount on each adjustment date, (ii) not
increase such Mortgage Rates over a fixed percentage amount during the life of
any ARM Loan and (iii) be based on an index (which may not rise and fall
consistently with mortgage interest rates) plus the related Note Margin (which
may be different from margins being used at the time for newly originated
adjustable rate mortgage loans). As a result, the Mortgage Rates on the ARM
Loans in a Mortgage Pool at any time may not equal the prevailing rates for
similar, newly originated adjustable rate mortgage loans. In certain rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current Mortgage Rates on 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 on the Mortgage Loans during any
period or over the life of any series of Certificates.
Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Certificates may have the option to purchase the Mortgage Loans in a
Trust Fund. See "The Pooling and Servicing Agreement--Termination; Retirement
of Certificates."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ substantially),
the summaries do not purport to be complete nor to reflect the laws of any
particular state nor to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage
Loans.
GENERAL
The Mortgage Loans will be secured by either deeds of trust or mortgages,
depending upon the prevailing practice in the state in which the Mortgaged
Property subject to a Mortgage Loan is located. In some states, a mortgage
creates a lien upon the real property encumbered by the mortgage. In other
states, the mortgage conveys legal title to the property to the mortgagee
subject to a condition subsequent (i.e., the payment of the indebtedness
secured thereby). It is not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers.
Priority between mortgages depends on their terms or on the terms of separate
subordination or intercreditor agreements, the knowledge of the parties in some
cases and generally on the order of recordation of the mortgage 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 the case of a land trust, there are three
parties because 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 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 borrower-homeowner called the trustor (similar to
a mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by law, the express provisions of the deed of trust or
mortgage, and, in some cases, the directions of the beneficiary.
65
<PAGE>
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans may also consist of Cooperative Loans
evidenced by Cooperative Notes secured by security interests in shares issued
by cooperatives, which are private corporations which are entitled to be
treated as housing cooperatives under federal tax law, and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the cooperatives' buildings. The security agreement
will create a lien upon, or grant a title interest in, the property which it
covers, 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 financing statements related thereto) in the appropriate
recording office. Such a lien or title interest is not prior to the lien for
real estate taxes and assessments and other charges imposed under governmental
police powers.
Unless otherwise specified in the related Prospectus Supplement, all
cooperative apartments relating to the Cooperative Loans are located in the
State of New York. Generally, 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 a
blanket mortgage or mortgages on the cooperative apartment building or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the cooperative, as property mortgagor, or
lessee, as the case may be, is also responsible for meeting these mortgage or
rental obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with either the construction or purchase of the
cooperative's apartment 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 are generally
subordinate to the interest of the holder of a blanket 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 a blanket mortgage, the mortgagee
holding a blanket 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. Also, a blanket mortgage on a cooperative may provide financing in
the form of a mortgage that does not fully amortize, with a significant portion
of principal being due in one final payment at maturity. The inability of the
cooperative to refinance a mortgage and its consequent inability to make such
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 a blanket 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
cooperative shares or, in the case of the Mortgage Loans, the collateral
securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a cooperative must make a monthly payment to the
cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed
through a cooperative share loan evidenced by a promissory 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 cooperative shares.
The lender generally takes possession of the share 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 and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral
66
<PAGE>
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.
FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, the trustee must record a notice
of default and send a copy to the borrower trustor and to any person who has
recorded a request for a copy of notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. The trustor, borrower or any person having a junior
encumbrance on the real property may, during a reinstatement period, cure the
default by paying the entire arrears plus costs and expenses incurred in
enforcing the obligation. If the deed of trust 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 state laws require that a copy of the notice of sale be
posted on the property and sent to all parties having an interest of record in
the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties. 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-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
in such 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 either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee generally is
a public sale. However, because of the difficulty a potential buyer at the sale
might 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 referee for a credit bid less than or equal to the unpaid
principal amount of the mortgage note plus the accrued and unpaid interest and
the expense of foreclosure. Generally, 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 such repairs at its own expense as are necessary to render the
property suitable for sale. The lender will commonly obtain the services of a
real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property and,
in some states, the lender may be entitled to a deficiency judgment. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" below. Any loss
may be reduced by the receipt of any mortgage insurance proceeds.
FORECLOSURE ON SHARES OF COOPERATIVES
The cooperative shares and proprietary lease or occupancy agreement owned by
the tenant-stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the cooperative's
certificate of incorporation and 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
67
<PAGE>
cooperative for failure by the tenant stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such tenant-
stockholder. Commonly, rent and other obligations and charges arising under a
proprietary lease or occupancy agreement which are owed to the cooperative are
made liens upon the shares to which the proprietary lease or occupancy
agreement relates. In addition, the proprietary lease or occupancy agreement
generally permits the cooperative to terminate such lease or agreement in the
event 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, establishes the rights and obligations of both parties in
the event of a default by the tenant-stockholder on its obligations under the
proprietary lease or occupancy agreement. A default by the tenant-stockholder
under the proprietary lease or occupancy agreement will usually constitute a
default under the security agreement between the lender and the tenant-
stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with 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 cooperative
apartment, subject, however, to the cooperative's right to sums due under such
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
generally 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 generally provide that in the event 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 cooperative as
required by the proprietary lease before transferring the cooperative shares or
assigning the proprietary lease. Such 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.
Generally, the lender is not limited in any rights it may have to dispossess
the tenant-stockholder.
The terms of the Cooperative Loans do not require either the tenant-
stockholder or the cooperative to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
also may adversely affect the marketability of the cooperative dwelling unit in
the event of foreclosure.
In New York, foreclosure on the cooperative shares is accomplished by public
sale in accordance with the provisions of Article 9 of the New York Uniform
Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a 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. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative 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.
Conversely, if a portion of the indebtedness remains unpaid, the tenant-
stockholder is generally responsible for the deficiency. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
68
<PAGE>
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors or other parties are given
a statutory period (generally ranging from six months to two years) in which to
redeem the property from the foreclosure sale. In some states, redemption may
occur only upon payment of the entire principal balance of the loan, accrued
interest and expenses of foreclosure. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption 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. 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
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states including California, statutes limit the right of the beneficiary or
mortgagee 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, even if
obtainable under applicable law, may be of little value to the mortgagee or
beneficiary if there are no trust assets against which such deficiency judgment
may be executed. Some state statutes require the beneficiary or mortgagee to
exhaust the security afforded under a deed of trust or mortgage by foreclosure
in an attempt to satisfy the full debt before bringing a personal action
against the borrower. In certain other states, the lender has the option of
bringing a personal action against the borrower on the debt without first
exhausting such security; however in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. Consequently, the practical effect of the election requirement, in
those states permitting such election, is that lenders will usually proceed
against the security first rather than bringing a personal action against the
borrower. Finally, in certain other 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 generally to prevent a
beneficiary or mortgagee from obtaining a large deficiency judgment against the
former borrower as a result of low or no bids at the judicial sale.
In the case of cooperative loans, lenders generally realize proceeds upon
foreclosure from the disposition of the cooperative shares and the accompanying
proprietary leases or occupancy agreements given to secure the cooperative
loans under Article 9 of the UCC. Some courts have interpreted Article 9 to
prohibit or limit a deficiency award in certain circumstances, including
circumstances where the disposition of the collateral was not conducted in a
commercially reasonable manner.
With respect to mortgage loans secured by collateral in addition to the
related mortgaged properties, realization upon the additional collateral may be
governed by the Uniform Commercial Code in effect under the law of the state
applicable thereto. Some courts have interpreted the Uniform Commercial Code to
prohibit or limit a deficiency award in certain circumstances, including those
in which the disposition of the collateral was not conducted in a commercially
reasonable manner. In some states, the Uniform Commercial Code does not apply
to liens upon additional collateral consisting of certain types of personal
property (including, for example, bank accounts and, to a certain extent,
insurance policies and annuities). Realization upon such additional collateral
will be governed by state laws applicable thereto rather than by the Uniform
Commercial Code, and the availability of deficiency awards under such state
laws may be limited. Whether realization upon any additional collateral is
governed by the Uniform Commercial Code or by other state laws, the ability of
secured parties to realize upon the additional collateral may be limited by
statutory
69
<PAGE>
prohibitions that limit remedies in respect of the related mortgage loans. Such
prohibitions may affect secured parties either independently or in conjunction
with statutory requirements that secured parties proceed against the related
mortgaged properties first or against both such mortgaged properties and the
additional collateral concurrently. Some state statutes require secured parties
to exhaust the security afforded by the mortgaged properties through
foreclosure before attempting to realize upon the related additional collateral
(including any third-party guarantees). Other state statutes require secured
parties to foreclose upon mortgaged properties and additional collateral
concurrently. In states where statutes limit the rights of secured parties to
obtain deficiency judgments against borrowers or guarantors following
foreclosure upon the related mortgaged properties and where secured parties
either are required or elect to proceed against such mortgaged properties
before proceeding against the related additional collateral, limitations upon
the amounts of deficiency judgments may reduce the amounts that may be realized
by the secured parties upon the disposition of such additional collateral.
Further, in certain states where secured parties may choose whether to proceed
against the related mortgaged properties or additional collateral first or
against both concurrently, the secured parties, following a proceeding against
one, may be deemed to have elected a remedy and may be precluded from
exercising remedies with respect to the other. Consequently, the practical
effect of the election requirement, in those states permitting such election,
is that secured parties will usually proceed against both concurrently or
against the mortgaged properties first if prohibited from proceeding against
both by state law.
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 collateral or
enforce a deficiency judgment. For example, with respect to 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 with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within
a reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court (provided no sale of
the residence had yet occurred) prior to the filing of the debtor's petition.
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 default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage 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 collateral, thus leaving the lender a
general unsecured creditor for the difference between the value of the
collateral and the outstanding balance of the loan. Generally, however, the
terms of a mortgage loan secured only by a mortgage on real property that is
the debtor's principal residence may not be modified pursuant to a plan
confirmed pursuant to Chapter 13 except with respect to mortgage payment
arrearages, which may be cured within a reasonable time period, but a mortgage
loan secured by property of the debtor in addition to such a mortgage is
permitted to be so modified. Therefore, with respect to any additional
collateral loan secured by property of the debtor in addition to such a
mortgage, courts with federal bankruptcy jurisdiction may reduce the amount of
each monthly payment, change the rate of interest, alter the repayment
schedule, forgive all or a portion of the debt, reduce the lender's security
interest to the value of the collateral and otherwise subject such mortgage
loan to the cramdown provisions of Chapter 13.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. With respect to mortgage loans secured by collateral
in addition to the related mortgaged properties, such tax liens may in certain
circumstances provide priority over the lien on such additional collateral. In
addition, substantive
70
<PAGE>
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of mortgage 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 laws
impose specific statutory liabilities upon lenders who originate mortgage loans
and who fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the mortgage loans.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property that
is the subject of a cleanup action by the state on account of hazardous wastes
or hazardous substances released or disposed of on the property. Such a lien
will generally have priority over all subsequent liens on the property and, in
certain of these states, will have priority over prior recorded liens including
the lien of a mortgage. In addition, under federal environmental legislation
and under state law in a number of states, a secured party which takes a deed
in lieu of foreclosure or acquires a mortgaged property at a foreclosure sale
or becomes involved in the operation or management of a property so as to be
deemed an "owner" or "operator" of the property may be liable for the costs of
cleaning up a contaminated site. Although such costs could be substantial, it
is unclear whether they would be imposed on a lender (such as a Trust Fund)
secured by residential real property. In the event that title to a Mortgaged
Property securing a Mortgage Loan in a Trust Fund was acquired by the Trust
Fund and cleanup costs were incurred in respect of the Mortgaged Property, the
holders of the related series of Certificates might realize a loss if such
costs were required to be paid by the Trust Fund.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, the Mortgage Loans
generally 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 mortgaged 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 was limited or denied. However, the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act")
preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain 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, notwithstanding the fact that a transfer of the mortgaged 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 upon the acceleration of a loan
pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage 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 upon the
average life of the Mortgage Loans and the number of Mortgage Loans which may
be outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his 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 substituted their judgment for
the lender's judgment and 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,
71
<PAGE>
courts have limited the right of the lender to foreclose if the default under
the mortgage instrument is not monetary, such as the borrower failing to
adequately maintain the property or the borrower executing a second mortgage or
deed of trust affecting the property. Finally, some courts have been faced with
the issue of whether or not federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers
under deeds of trust 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 mortgage having a power of sale, does not
involve sufficient state action to afford constitutional protections to the
borrower.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first
three months of 1980. The Office of Thrift Supervision is authorized to issue
rules and regulations and to publish interpretations governing implementation
of Title V. The statute authorized any state to reimpose interest rate limits
by adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits or to limit
discount points or other charges.
As indicated above under "Mortgage Loan Program--Representations by Sellers,"
each Seller of a Mortgage Loan will have represented that such Mortgage Loan
was originated in compliance with then applicable state laws, including usury
laws, in all material respects. However, the Mortgage Rates on the Mortgage
Loans will be subject to applicable usury laws as in effect from time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subjected to a variety of restrictions. Such
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 ("Title VIII"). Title VIII provides that,
notwithstanding any state law to the contrary, state-chartered banks may
originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to origination of
alternative mortgage instruments by national banks, state-chartered credit
unions may originate alternative mortgage instruments in accordance with
regulations promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by federal credit
unions, and all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks
and mutual savings banks and mortgage banking companies, may originate
alternative mortgage instruments in accordance with the regulations promulgated
by the Federal Home Loan Bank Board, predecessor to the Office of Thrift
Supervision, with respect to origination of alternative mortgage instruments by
federal savings and loan associations. Title VIII 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 such provisions. Certain states have taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan),
72
<PAGE>
may not be charged interest (including fees and charges) above an annual rate
of 6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. The Relief Act applies to
Mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act applies to
Mortgagors who enter military service (including reservists who are called to
active duty) after origination of the related Mortgage Loan, no information can
be provided as to the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an indeterminate
period of time, the ability of the Master Servicer to collect full amounts of
interest on certain of the Mortgage 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
Mortgage Loans, would result in a reduction of the amounts distributable to the
holders of the related Certificates, and would not be covered by Advances, any
Letter of Credit or any other form of credit enhancement provided in connection
with the related series of Certificates. In addition, the Relief Act imposes
limitations that would impair the ability of the Master Servicer to foreclose
on an affected Mortgage Loan during the Mortgagor's period of active duty
status, and, under certain circumstances, during an additional three month
period thereafter. Thus, in the event that the Relief Act or similar
legislation or regulations applies to any Mortgage Loan which goes into
default, there may be delays in payment and losses on the related Certificates
in connection therewith. Any other interest shortfalls, deferrals or
forgiveness of payments on the Mortgage Loans resulting from similar
legislation or regulations may result in delays in payments or losses to
Certificateholders of the related series.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of certain anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986 (the "Code") and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as banks,
insurance companies and foreign investors) may be subject to special rules.
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 (including
those filed by any REMIC or other issuer) 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 (i) is given with
respect to events that have occurred at the time the advice is rendered and is
not given with respect to the consequences of contemplated actions, and (ii) is
directly relevant to the determination of an entry on a tax return.
Accordingly, taxpayers should consult their own 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 herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Certificates. See "State and Other Tax Consequences."
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("Grantor Trust Certificates") representing interests in a Trust
Fund ("Grantor Trust Fund") which the Master Servicer will covenant not to
elect to have treated as a real estate mortgage investment conduit ("REMIC"),
and (ii) certificates ("REMIC Certificates") representing interests in a Trust
Fund, or a portion thereof, which the Master Servicer will covenant to elect to
have treated as a REMIC under Sections 860A through 860G (the "REMIC
Provisions") of the Code. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election (or elections) will be made
for the related Trust Fund and, if such an election is
73
<PAGE>
to be made, will identify all "regular interests" and "residual interests" in
the REMIC. For purposes of this tax discussion, references to a
"Certificateholder" or a "holder" are to the beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code
and in the Treasury regulations issued thereunder (the "OID Regulations"), and
in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations, which are effective
with respect to debt instruments issued on or after April 4, 1994, do not
adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
With respect to each series of Grantor Trust Certificates, Thacher Proffitt &
Wood or Orrick, Herrington & Sutcliffe, counsel to the Company, will deliver
their opinion to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the related Grantor Trust Fund
will be classified as a grantor trust under subpart E, part I of subchapter J
of the Code and not as a partnership or an association taxable as a
corporation. Accordingly, each holder of a Grantor Trust Certificate generally
will be treated as the owner of an interest in the Mortgage Loans included in
the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor
Trust Fractional Interest Certificate." A Grantor Trust Certificate
representing ownership of all or a portion of the difference between interest
paid on the Mortgage Loans constituting the related Grantor Trust Fund (net of
normal administration fees and any Spread) and interest paid to the holders of
Grantor Trust Fractional Interest Certificates issued with respect to such
Grantor Trust Fund will be referred to as a "Grantor Trust Strip Certificate."
A Grantor Trust Strip Certificate may also evidence a nominal ownership
interest in the principal of the Mortgage Loans constituting the related
Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
Grantor Trust Fractional Interest Certificates
In the case of Grantor Trust Fractional Interest Certificates, unless
otherwise disclosed in the related Prospectus Supplement and subject to the
discussion below with respect to Buydown Mortgage Loans, counsel to the Company
will deliver an opinion that, in general, Grantor Trust Fractional Interest
Certificates will represent interests in (i) "qualifying real property loans"
within the meaning of Section 593(d) of the Code; (ii) "loans......secured by an
interest in real property'' within the meaning of Section 7701(a)(19)(C)(v) of
the Code; (iii) ""obligation[s] (including any participation or certificate of
beneficial ownership therein) which ....[are] principally secured by an interest
in real property'' within the meaning of Section 860G(a)(3)(A) of the Code; and
(iv) ""real estate assets'' within the meaning of Section 856(c)(5)(A) of the
Code. In addition, counsel to the Company will deliver an opinion that interest
on Grantor Trust Fractional Interest Certificates will be considered ""interest
on obligations secured by mortgages on real property or on interests in real
property'' within the meaning of Section 856(c)(3)(B) of the Code.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage Loans
will depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets
described in the foregoing sections of the Code. No directly applicable
precedents exist with respect to the federal income tax treatment or the
characterization of investments in Buydown Mortgage Loans. Accordingly, holders
of Grantor Trust Certificates should consult their own tax advisors with
respect to the characterization of
74
<PAGE>
investments in Grantor Trust Certificates representing an interest in a Grantor
Trust Fund that includes Buydown Mortgage Loans.
Grantor Trust Strip Certificates
Even if Grantor Trust Strip Certificates evidence an interest in a Grantor
Trust Fund consisting of Mortgage Loans that are "loans...secured by an interest
in real property'' within the meaning of Section 7701(a)(19)(C)(v) of the Code,
""qualifying real property loans'' within the meaning of Section 593(d) of the
Code, and ""real estate assets'' within the meaning of Section 856(c)(5)(A) of
the Code, and the interest on which is ""interest on obligations secured by
mortgages on real property'' within the meaning of Section 856(c)(3)(B) of the
Code, it is unclear whether the Grantor Trust Strip Certificates, and the
income therefrom, will be so characterized. However, the policies underlying
such sections (namely, to encourage or require investments in mortgage loans by
thrift institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Company will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or certificate of beneficial ownership therein) which ...[are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
Holders of a particular series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the Mortgage Loans (including
amounts used to pay reasonable servicing fees and other expenses) and will be
entitled to deduct their shares of any such reasonable servicing fees and other
expenses. Because of stripped interests, market or original issue discount, or
premium, the amount includible in income on account of a Grantor Trust
Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under
Section 67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the 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 such amount or (ii) 80%
of the amount of itemized deductions otherwise allowable for the taxable year.
The amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust
Certificates using a method that recognizes that each such class benefits from
the related services. In the absence of statutory or administrative
clarification as to the method to be used, it currently is intended to base
information returns or reports to the Internal Revenue Service (the "IRS") and
Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates
75
<PAGE>
is issued as part of the same series of Certificates or (ii) the Company or any
of its affiliates retains (for its own account or for purposes of resale) a
right to receive a specified portion of the interest payable on the Mortgage
Loans. Further, the IRS has ruled that an unreasonably high servicing fee
retained by a seller or servicer will be treated as a retained ownership
interest in mortgages that constitutes a stripped coupon. For purposes of
determining what constitutes reasonable servicing fees for various types of
mortgages the IRS has established certain "safe harbors." The servicing fees
paid with respect to the Mortgage Loans for certain series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to the Master Servicer,
any subservicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply.
If Stripped Bond Rules Apply
If the stripped bond rules apply, each Grantor Trust Fractional Interest
Certificate will be treated as having been issued with "original issue
discount" within the meaning of Section 1273(a) of the Code, subject, however,
to the discussion below regarding the treatment of certain stripped bonds as
market discount bonds and the discussion regarding de minimis market discount.
See "--Taxation of Owners of Grantor Trust Fractional Interest Certificates--
Market Discount." Under the stripped bond rules, the holder of a Grantor Trust
Fractional Interest Certificate (whether a cash or accrual method taxpayer)
will be required to report interest income from its Grantor Trust Fractional
Interest Certificate for each month in an amount equal to the income that
accrues on such Certificate in that month calculated under a constant yield
method, in accordance with the rules of the Code relating to original issue
discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, as well as such
Certificate's share of reasonable servicing fees and other expenses, other than
payments of "qualified stated interest," if any. See "--Taxation of Owners of
Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules Do Not
Apply" for a definition of "qualified stated interest." In general, the amount
of such income that accrues in any month would equal the product of such
holder's adjusted basis in such Grantor Trust Fractional Interest Certificate
at the beginning of such month (see "Sales of Grantor Trust Certificates") and
the yield of such Grantor Trust Fractional Interest Certificate to such holder.
Such yield would be computed at the rate (assuming compounding based on the
regular interval between payment dates) that, if used to discount the holder's
share of future payments on the Mortgage Loans, would cause the present value
of those future payments to equal the price at which the holder purchased such
Certificate. In computing yield under the stripped bond rules, a
Certificateholder's share of future payments on the Mortgage Loans will not
include any payments made in respect of any ownership interest in the Mortgage
Loans retained by the Company, the Master Servicer, any subservicer or their
respective affiliates, but will include such Certificateholder's share of any
reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to
the prepayment assumption with respect to certain categories of debt
instruments, and regulations could be adopted applying those provisions to the
Grantor Trust Fractional Interest Certificates. It is unclear whether those
provisions would be applicable to the Grantor Trust Fractional Interest
Certificates or whether use of a prepayment assumption may be required or
permitted in the absence of such regulations. It is also uncertain, if a
prepayment assumption is used, whether the assumed prepayment rate would be
determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any subsequent
holder, at the time of purchase of the Grantor Trust Fractional Interest
Certificate by that holder. Certificateholders are advised to consult their own
tax advisors concerning reporting original issue discount in general and, in
particular, whether a prepayment assumption should be used in reporting
original issue discount with respect to Grantor Trust Fractional Interest
Certificates.
76
<PAGE>
In the case of a Grantor Trust Fractional Interest Certificate acquired at a
price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption would not ordinarily have any
significant effect on the yield used in calculating accruals of interest
income. In the case, however, of a Grantor Trust Fractional Interest
Certificate acquired at a discount or premium (that is, at a price less than or
greater than such principal amount, respectively), the use of a prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays in
full, the holder of a Grantor Trust Fractional Interest Certificate acquired at
a discount or a premium generally will recognize ordinary income or loss equal
to the difference between the portion of the prepaid principal amount of the
Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such
Certificateholder's interest in the Mortgage Loan. If a prepayment assumption
is used, it appears that no separate item of income or loss should be
recognized upon a prepayment. Instead, a prepayment should be treated as a
partial payment of the stated redemption price of the Grantor Trust Fractional
Interest Certificate and accounted for under a method similar to that described
for taking account of original issue discount on REMIC Regular Certificates.
See "--REMICs--Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." It is unclear what adjustments would be required to reflect
differences between an assumed prepayment rate and the actual rate of
prepayments.
In the absence of statutory or administrative clarification, it is currently
intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Company nor the Master Servicer will make any representation that
the Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that
the use of a representative initial offering price will mean that such
information returns or reports, even if otherwise accepted as accurate by the
IRS, will in any event be accurate only as to the initial Certificateholders of
each series who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are to be
treated as market discount bonds and, accordingly, any purchaser of such a bond
is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue
discount) or (ii) the annual stated rate of interest payable on the original
bond is no more than one percentage point lower than the gross interest rate
payable on the original mortgage loan (before subtracting any servicing fee or
any stripped coupon). If interest payable on a Grantor Trust Fractional
Interest Certificate is more than one percentage point lower than the gross
interest rate payable on the Mortgage Loans, the related Prospectus Supplement
will disclose that fact. If the original issue discount or market discount on a
Grantor Trust Fractional Interest Certificate determined under the stripped
bond rules is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loans, then such original issue
discount or market discount will be considered to be de minimis. Original issue
discount or market discount of only a de minimis amount will be included in
income in the same manner as de minimis original issue and market discount
described in "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Do Not Apply" and "--Market Discount."
If Stripped Bond Rules Do Not Apply
Subject to the discussion below on original issue discount, if the stripped
bond rules do not apply to a Grantor Trust Fractional Interest Certificate, the
Certificateholder will be required to report its share of the interest income
on the Mortgage Loans in accordance with such Certificateholder's normal method
of accounting. The original issue discount rules will apply to a Grantor Trust
Fractional Interest Certificate to the extent it evidences an interest in
Mortgage Loans issued with original issue discount.
77
<PAGE>
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on such Mortgage Loan other than
"qualified stated interest." "Qualified stated interest" includes interest that
is unconditionally payable at least annually at a single fixed rate, or 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 generally
does not operate in a manner that accelerates or defers interest payments on
such Mortgage Loan. In general, the issue price of a Mortgage Loan will be the
amount received by the borrower from the lender under the terms of the Mortgage
Loan, less any "points" paid by the borrower, and the stated redemption price
of a Mortgage Loan will equal its principal amount, unless the Mortgage Loan
provides for an initial below-market rate of interest or the acceleration or
the deferral of interest payments.
In the case of Mortgage Loans bearing adjustable or variable interest rates,
the related Prospectus Supplement will describe the manner in which such rules
will be applied with respect to those Mortgage Loans by the Trustee in
preparing information returns to the Certificateholders and the IRS.
Notwithstanding the general definition of original issue discount, original
issue discount will be considered to be de minimis if such original issue
discount is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loan. For this purpose, the weighted
average maturity of the Mortgage Loan will be computed as the sum of the
amounts determined, as to each payment included in the stated redemption price
of such Mortgage Loan, by multiplying (i) the number of complete years
(rounding down for partial years) from the issue date until such payment is
expected to be made by (ii) a fraction, the numerator of which is the amount of
the payment and the denominator of which is the stated redemption price of the
Mortgage Loan. 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" rate or 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 such de minimis original issue discount and a fraction, the numerator
of which is the amount of each such payment and the denominator of which is the
outstanding stated principal amount of the Mortgage Loan. The OID Regulations
also permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--
Taxation of Owners of Grantor Trust Fractional Interest Certificates--Market
Discount" below.
If original issue discount is in excess of a de minimis amount, all original
issue discount with respect to a Mortgage Loan will be required to be accrued
and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be used in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related
Prospectus Supplement with respect to each series to determine whether and in
what manner the original issue discount rules will apply to Mortgage Loans in
such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that purchases
such Grantor Trust Fractional Interest Certificate at a cost less than such
Certificate's allocable portion of the aggregate remaining stated redemption
price of the Mortgage Loans held in the related Trust Fund will also be
required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage
Loans held in the related Trust Fund, approximately in
78
<PAGE>
proportion to the ratio such excess bears to such Certificate's allocable
portion of the aggregate original issue discount remaining to be accrued on
such Mortgage Loans. The adjusted issue price of a Mortgage Loan on any given
day equals the sum of (i) the adjusted issue price (or, in the case of the
first accrual period, the issue price) of such Mortgage Loan at the beginning
of the accrual period that includes such day and (ii) the daily portions of
original issue discount for all days during such accrual period prior to such
day. The adjusted issue price of a Mortgage Loan at the beginning of any
accrual period will equal the issue price of such Mortgage Loan, increased by
the aggregate amount of original issue discount with respect to such Mortgage
Loan that accrued in prior accrual periods, and reduced by the amount of any
payments made on such Mortgage Loan in prior accrual periods of amounts
included in its stated redemption price.
The Trustee will provide to any holder of a Grantor Trust Fractional Interest
Certificate such information as such holder may reasonably request from time to
time with respect to original issue discount accruing on Grantor Trust
Fractional Interest Certificates. See "Grantor Trust Reporting" below.
Market Discount
If the stripped bond rules do not apply to the Grantor Trust Fractional
Interest Certificate, a Certificateholder may be subject to the market discount
rules of Sections 1276 through 1278 of the Code to the extent an interest in a
Mortgage Loan is considered to have been purchased at a "market discount," that
is, in the case of a Mortgage Loan issued without original issue discount, at a
purchase price less than its remaining stated redemption price (as defined
above), or in the case of a Mortgage Loan issued with original issue discount,
at a purchase price less than its adjusted issue price (as defined above). If
market discount is in excess of a de minimis amount (as described below), the
holder generally will be required to include in income in each month the amount
of such discount that has accrued (under the rules described in the next
paragraph) through such month that has not previously been included in income,
but limited, in the case of the portion of such discount that is allocable to
any Mortgage Loan, to the payment of stated redemption price on such Mortgage
Loan that is received by (or, in the case of accrual basis Certificateholders,
due to) the Trust Fund in that month. A Certificateholder may elect to include
market discount in income currently as it accrues (under a constant yield
method based on the yield of the Certificate to such holder) rather than
including it on a deferred basis in accordance with the foregoing. If made,
such election will apply to all market discount bonds acquired by such
Certificateholder during or after the first taxable year to which such election
applies. In addition, the OID Regulations would 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 such an election were made with respect to a Mortgage Loan with
market discount, the Certificateholder would be deemed to have made an election
to include market discount in income currently with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election and thereafter, and possibly previously
acquired instruments. Similarly, a Certificateholder that made this election
for a Certificate acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See "--
REMICs--Taxation of Owners of REMIC Regular Certificates--Premium" below. Each
of these elections to accrue interest, discount and premium with respect to a
Certificate on a constant yield method or as interest is irrevocable.
Section 1276(b)(3) of the 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 such time as regulations are issued by the Treasury
Department, certain rules described in the Conference Committee Report (the
"Committee Report") accompanying the Tax Reform Act of 1986 will apply. Under
those rules, in each accrual period market discount on the Mortgage Loans
should accrue, at the Certificateholder's option: (i) on the basis of a
constant yield method, (ii) in the case of a Mortgage Loan 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 stated interest remaining to be paid on the Mortgage Loan as
of the beginning of the accrual period, or (iii) in the
79
<PAGE>
case of a Mortgage Loan 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 at the beginning of the accrual period. The prepayment
assumption, if any, used in calculating the accrual of original issue discount
is to be used in calculating the accrual of market discount. The effect of
using a prepayment assumption could be to accelerate the reporting of such
discount income. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a Mortgage Loan purchased at a discount in the
secondary market.
Since the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount
would be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be considered
to be de minimis if it is not greater than or equal to 0.25% of the stated
redemption price of the Mortgage Loans multiplied by the number of complete
years to maturity remaining after the date of its purchase. In interpreting a
similar rule with respect to 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 with respect
to market discount, presumably taking into account the prepayment assumption
used, if any. The effect of using a prepayment assumption could be to
accelerate the reporting of such discount income. If market discount is treated
as de minimis under the foregoing rule, it appears that actual discount would
be treated in a manner similar to original issue discount of a de minimis
amount. See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Do Not Apply."
Further, under the rules described in "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Market Discount," below, any discount that is not
original issue discount and exceeds a de minimis amount may require the
deferral of interest expense deductions attributable to accrued market discount
not yet includible in income, unless an election has been made to report market
discount currently as it accrues.
Premium
If a Certificateholder is treated as acquiring the underlying Mortgage Loans
at a premium, that is, at a price in excess of their remaining stated
redemption price, such Certificateholder may elect under Section 171 of the
Code to amortize such premium using a constant yield method. Amortizable
premium is treated as an offset to interest income on the related Mortgage
Loans rather than as a separate interest deduction. Premium allocable to
Mortgage Loans for which an amortization election is not made should be
allocated among the payments on the Mortgage Loan representing stated
redemption price and be allowed as an ordinary deduction as such payments are
made (or, for a Certificateholder using the accrual method of accounting, when
such payments are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should
be treated as a partial payment of the stated redemption price of the Grantor
Trust Fractional Interest Certificate and accounted for under a method similar
to that described for taking account of original issue discount on REMIC
Regular Certificates. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear what adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
80
<PAGE>
Taxation of Owners of Grantor Trust Strip Certificates
The "stripped coupon" rules of Section 1286 of the Code will apply to the
Grantor Trust Strip Certificates. Except as described above in "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond
Rules Apply," no regulations or published rulings under Section 1286 of the
Code have been issued and some uncertainty exists as to how it will be applied
to securities such as the Grantor Trust Strip Certificates. Accordingly,
holders of Grantor Trust Strip Certificates should consult their own tax
advisors concerning the method to be used in reporting income or loss with
respect to such Certificates.
The OID Regulations do not apply to "stripped coupons," although they provide
general guidance as to how the original issue discount sections of the Code
will be applied. In addition, the discussion below is subject to the discussion
under "Possible Application of Proposed Contingent Payment Rules" and assumes
that the holder of a Grantor Trust Strip Certificate will not own any Grantor
Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount will
be required to be accrued in each month on the Grantor Trust Strip Certificates
based on a constant yield method. In effect, each holder of Grantor Trust Strip
Certificates would include as interest income in each month an amount equal to
the product of such holder's adjusted basis in such Grantor Trust Strip
Certificate at the beginning of such month and the yield of such Grantor Trust
Strip Certificate to such holder. Such yield would be calculated based on the
price paid for that Grantor Trust Strip Certificate by its holder and the
payments remaining to be made thereon at the time of the purchase, plus an
allocable portion of the servicing fees and expenses to be paid with respect to
the Mortgage Loans. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption
is used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Company nor the Master Servicer will make
any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only
as to the initial Certificateholders of each series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a Mortgage
Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken
81
<PAGE>
into account in computing yield with respect to such Grantor Trust Strip
Certificate, it appears that no loss may be available as a result of any
particular prepayment unless prepayments occur at a rate faster than the
Prepayment Assumption. However, if a Grantor Trust Strip Certificate is treated
as an interest in discrete Mortgage Loans, or if the Prepayment Assumption is
not used, then when a Mortgage Loan is prepaid, the holder of a Grantor Trust
Strip Certificate should be able to recognize a loss equal to the portion of
the adjusted issue price of the Grantor Trust Strip Certificate that is
allocable to such Mortgage Loan.
Possible Application of Proposed Contingent Payment Rules
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Mortgage Loans were prepaid in full, the Grantor Trust Strip Certificates
could be considered to be debt instruments providing for contingent payments.
Under the OID Regulations, debt instruments providing for contingent payments
are not subject to the same rules as debt instruments providing for
noncontingent payments, but no final regulations have been promulgated with
respect to contingent payment debt instruments. Proposed regulations were
promulgated on December 16, 1994 regarding contingent payment debt instruments.
As in the case of the OID Regulations, such proposed regulations do not
specifically address securities, such as the Grantor Trust Strip Certificates,
that are subject to the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the proposed regulations were to apply,
the holder of a Grantor Trust Strip Certificate would be required to apply a
"noncontingent bond method." Under that method, the issuer of a Grantor Trust
Strip Certificate would determine a projected payment schedule with respect to
such Grantor Trust Strip Certificate. Holders of Grantor Trust Strip
Certificates would be bound by the issuer's projected payment schedule, which
would consist of all noncontingent payments and a projected amount for each
contingent payment based on the projected yield (as described below) of the
Grantor Trust Strip Certificate. The projected amount of each payment would be
determined so that the projected payment schedule reflected the projected yield
reasonably expected to be received by the holder of a Grantor Trust Strip
Certificate. The projected yield referred to above would be a reasonable rate,
not less than the "applicable Federal rate" that, as of the issue date,
reflected general market conditions, the credit quality of the issuer, and the
terms and conditions of the Mortgage Loans. The holder of a Grantor Trust Strip
Certificate would be required to include as interest income in each month the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period multiplied by the projected yield, and would add to, or subtract
from, such income any variation between the payment actually received in such
month and the payment originally projected to be made in such month.
Certificateholders should consult their tax advisors concerning the possible
application of the contingent payment rules to the Grantor Trust Strip
Certificates.
SALES OF GRANTOR TRUST CERTIFICATES
Except as described below, any gain or loss recognized on the sale of a
Grantor Trust Certificate generally will be capital gain or loss, and will be
equal to the difference between the amount realized on the sale of a Grantor
Trust Certificate and its adjusted basis. The adjusted basis of a Grantor Trust
Certificate generally will equal its cost, increased by any income (including
original issue discount and market discount income) recognized by the seller
and reduced (but not below zero) by any previously reported losses, amortized
premium and distributions with respect to such Grantor Trust Certificate. The
Code currently provides for a top marginal tax rate applicable to ordinary
income of individuals of 39.6% while maintaining a maximum marginal rate for
the long-term capital gains of individuals of 28%. No such rate differential
exists for corporations. In addition, the distinction between a capital gain or
loss and ordinary income or loss remains relevant for other purposes.
82
<PAGE>
Gain or loss from the sale of a Grantor Trust Certificate may be partially or
wholly ordinary and not capital in certain circumstances. Gain attributable to
accrued and unrecognized market discount will be treated as ordinary income, as
will gain or loss recognized by banks and other financial institutions subject
to Section 582(c) of the Code. Furthermore, a portion of any gain that might
otherwise be capital gain may be treated as ordinary income to the extent that
the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the 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 such transaction. The amount of gain 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
such net capital gain in total net investment income for that 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.
GRANTOR TRUST REPORTING
The Trustee will furnish to each holder of a Grantor Trust Certificate with
each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying Mortgage Loans and to interest thereon
at the related Pass-Through Rate. In addition, within a reasonable time after
the end of each calendar year, based on information provided by the Master
Servicer, the Trustee will furnish to each Certificateholder during such year
such customary factual information as the Trustee deems necessary or desirable
to enable holders of Grantor Trust Certificates to prepare their tax returns
and will furnish comparable information to the IRS as and when required by law
to do so. Because the rules for accruing discount and amortizing premium with
respect to the Grantor Trust Certificates are uncertain in various respects,
there is no assurance the IRS will agree with the Trustee's information reports
of such items of income and expense. Moreover, such information reports, even
if otherwise accepted as accurate by the IRS, will in any event be accurate
only as to the initial Certificateholders who bought their Certificates at the
representative initial offering price used in preparing such reports.
BACKUP WITHHOLDING
In general, the rules described in "--REMICs--Backup Withholding with Respect
to REMIC Certificates" will also apply to Grantor Trust Certificates.
FOREIGN INVESTORS
In general, the discussion with respect to REMIC Regular Certificates in "--
REMICs--Foreign Investors in REMIC Certificates--REMIC Regular Certificates"
applies to Grantor Trust Certificates.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of
a non-resident alien individual.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Thacher Proffitt &
Wood or Orrick, Herrington & Sutcliffe, counsel to the Company, will deliver
their opinion generally to the effect that, assuming
83
<PAGE>
compliance with all provisions of the related Pooling and Servicing Agreement,
the related Trust Fund (or each applicable portion thereof) will qualify as a
REMIC and the REMIC Certificates offered with respect thereto will be
considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a separate
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, no such
regulations have been issued. Any such relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
Trust Fund's income for the period in which the requirements for such status
are not satisfied. The Pooling and Servicing Agreement with respect to each
REMIC will include provisions designed to maintain the Trust Fund's status as a
REMIC under the REMIC Provisions. It is not anticipated that the status of any
Trust Fund as a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, the REMIC Certificates will be "qualifying real property loans"
within the meaning of Section 593(d) of the Code, "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all
times during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and
income allocated to the class of REMIC Residual Certificates will be interest
described in Section 856(c)(3)(B) of the Code to the extent that such
Certificates are treated as "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code. In addition, the REMIC Regular Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3)(C) of the Code
if transferred to another REMIC on its startup day in exchange for regular or
residual interests therein. The determination as to the percentage of the
REMIC's assets that constitute assets described in the foregoing sections of
the Code will be made with respect to each calendar quarter based on the
average adjusted basis of each category of the assets held by the REMIC during
such calendar quarter. The Master Servicer will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans, payments
on Mortgage Loans held pending distribution on the REMIC Certificates and
property acquired by foreclosure held pending sale, and may include amounts in
reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in
assets described in the foregoing sections) otherwise would receive the same
treatment as the Mortgage Loans for purposes of all of the foregoing sections.
In addition, in some instances Mortgage Loans (including Additional collateral
Loans) may not be treated entirely as assets described in the foregoing
sections. If so, the related Prospectus Supplement will describe the Mortgage
Loans (including Additional Collateral Loans) that may not be so treated. The
REMIC Regulations do provide, however, that payments on Mortgage Loans held
pending distribution are considered part of the Mortgage Loans for purposes of
Sections 593(d) and 856(c)(5)(A) of the Code.
TIERED REMIC STRUCTURES
For certain series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon
84
<PAGE>
the issuance of any such series of REMIC Certificates, Thacher Proffitt & Wood
or Orrick, Herrington & Sutcliffe, counsel to the Company, will deliver their
opinion generally to the effect that, assuming compliance with all provisions
of the related Pooling and Servicing Agreement, the Tiered REMICs will each
qualify as a REMIC and the REMIC Certificates issued by the Tiered REMICs,
respectively, will be considered to evidence ownership of REMIC Regular
Certificates or REMIC Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC Regular Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC
Regular Certificates under an accrual method.
Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally 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 such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have
not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner
prescribed in Treasury regulations; as noted above, those regulations have not
been issued. The Committee Report indicates that the regulations will provide
that the prepayment assumption used with respect to a REMIC Regular Certificate
must be the same as that used in pricing the initial offering of such REMIC
Regular Certificate. The prepayment assumption used by the Master Servicer in
reporting original issue discount for each series of REMIC Regular Certificates
(the "Prepayment Assumption") will be consistent with this standard and will be
disclosed in the related Prospectus Supplement. However, neither the Company
nor the Master Servicer will make any representation that the Mortgage 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 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 REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC 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 REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be treated as the
fair market value of such class on the Closing Date. Under the OID Regulations,
the stated redemption price of a REMIC Regular Certificate is equal to the
total of all payments to be made on such Certificate other than "qualified
stated interest."
85
<PAGE>
"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 generally does not operate in a manner that accelerates or
defers interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest rates,
the determination of the total amount of original issue discount and the timing
of the inclusion thereof will vary according to the characteristics of such
REMIC Regular Certificates. If the original issue discount rules apply to such
Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied by the Master Servicer with respect to those
Certificates in preparing information returns to the Certificateholders and the
IRS.
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such 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 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 REMIC Regular Certificate and accounted
for as original issue discount. Because interest on REMIC 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 REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing
Date, a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such 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 with respect to periods
prior to the Closing Date is treated as part of the overall cost of such REMIC
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 such REMIC Regular Certificate. However, the OID
Regulations state that all or some portion of such 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 such an election
could be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such 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 such REMIC Regular Certificate. Under the OID
Regulations, original issue discount of only a de minimis amount (other than de
minimis original issue discount attributable to a so-called "teaser" interest
rate or an initial interest holiday) will be included in income as each payment
of stated principal is made, based on the product of the total amount of such
de minimis original issue discount and a fraction, the numerator of which is
the amount of such principal payment and the denominator of which is the
outstanding stated principal amount of the REMIC 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
86
<PAGE>
constant yield method. See "Taxation of Owners of REMIC Regular Certificates--
Market Discount" for a description of such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such 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 such REMIC Regular
Certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a REMIC 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 related
Prospectus Supplement, each period that ends on a date that corresponds to a
Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on
the Closing Date), a calculation will be made of the portion of the original
issue discount that accrued during such 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 REMIC Regular
Certificate, if any, in future periods and (B) the distributions made on such
REMIC Regular Certificate during the accrual period of amounts included in the
stated redemption price, over (ii) the adjusted issue price of such REMIC
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 (i) assuming that distributions on the REMIC Regular Certificate
will be received in future periods based on the Mortgage Loans being prepaid at
a rate equal to the Prepayment Assumption and (ii) 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 Mortgage Loans being prepaid at a rate equal
to the Prepayment Assumption. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue price
of such Certificate, increased by the aggregate amount of original issue
discount that accrued with respect to such Certificate in prior accrual
periods, and reduced by the amount of any distributions made on such REMIC
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 such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a price (excluding any portion of such 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 with respect to such Certificate. However, each
such daily portion will be reduced, if such cost is in excess of its "adjusted
issue price," in proportion to the ratio such excess bears to the aggregate
original issue discount remaining to be accrued on such REMIC Regular
Certificate. The adjusted issue price of a REMIC Regular Certificate on any
given day equals the sum of (i) the adjusted issue price (or, in the case of
the first accrual period, the issue price) of such Certificate at the beginning
of the accrual period which includes such day and (ii) the daily portions of
original issue discount for all days during such accrual period prior to such
day.
Market Discount
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, in the case of a REMIC Regular Certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC Regular Certificate issued with
original issue discount, at a purchase price less than its adjusted issue price
will recognize income upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such 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
87
<PAGE>
as it accrues rather than including it on a deferred basis in accordance with
the foregoing. If made, such election will apply to all market discount bonds
acquired by such Certificateholder on or after the first day of the first
taxable year to which such 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 such an election were made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include market
discount in income currently with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
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 with respect to all debt instruments having amortizable bond
premium that such Certificateholder owns or acquires. See "Taxation of Owners
of REMIC Regular Certificates--Premium." Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant
yield method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will be
considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to 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 with respect
to 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 "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." Such treatment would 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 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 REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the basis
of a constant yield method, (ii) in the case of a REMIC 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 REMIC Regular Certificate as of the beginning of the accrual
period, or (iii) in the case of a REMIC 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 REMIC
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 such regulations might have on the tax
treatment of a REMIC Regular Certificate purchased at a discount in the
secondary market.
To the extent that REMIC 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 such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC
Regular Certificate generally will be required to treat a portion of any gain
on the sale or exchange of such 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.
88
<PAGE>
Further, under Section 1277 of the Code a holder of a REMIC 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 REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium
A REMIC Regular Certificate purchased at a cost (excluding any portion of
such 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 such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or
subsequently acquires. Amortizable premium will be treated as an offset to
interest income on the related REMIC 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 "Taxation of Owners of REMIC
Regular Certificates--Market Discount." The 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 with respect to
REMIC Regular Certificates without regard to whether such Certificates have
original issue discount) will also apply in amortizing bond premium under
Section 171 of the Code.
Realized Losses
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such 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 Mortgage Loans. However, it
appears that a noncorporate holder that does not acquire a REMIC Regular
Certificate in connection with a trade or business will not be entitled to
deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., 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 REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC 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 such loss or reduction in income.
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 Mortgage Loans or as debt instruments issued by the
REMIC.
89
<PAGE>
A holder of a REMIC Residual Certificate generally will be required to report
its daily portion of the taxable income or, subject to the limitations noted in
this discussion, the net loss of the REMIC for each day during a calendar
quarter that such holder owned such 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 related
Prospectus Supplement. The daily amounts will then be allocated among the REMIC
Residual Certificateholders in proportion to their respective ownership
interests on such 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 below 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 until the REMIC terminates.
Ordinary income derived from REMIC Residual Certificates will be "portfolio
income" for purposes of the taxation of taxpayers subject to limitations under
Section 469 of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate from
a prior holder of such 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 such 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 certain modifications of the general rules may be made, by
regulations, legislation or otherwise, to reduce (or increase) the income or
loss of a holder of a REMIC Residual Certificateholder that purchased such
REMIC Residual Certificate from a prior holder of such Certificate at a price
greater than (or less than) the adjusted basis (as defined below) such REMIC
Residual Certificate would have had in the hands of an original holder of such
Certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be
taken into account in determining the income of such holder for federal income
tax purposes. Although it appears likely that any such payment would be
includible in income immediately upon its receipt, the IRS might assert that
such 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 such payments, holders of REMIC
Residual Certificates should consult their tax advisors concerning the
treatment of such payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such 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,"
residual interests without "significant value" 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 such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such 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 Mortgage Loans
and other assets of the REMIC plus any cancellation of indebtedness income due
to the allocation of realized losses to REMIC 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
REMIC Regular Certificates (and any other class of REMIC Certificates
constituting "regular interests" in the REMIC not offered
90
<PAGE>
hereby), amortization of any premium on the Mortgage Loans, bad debt deductions
with respect to the Mortgage 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 intends to treat the fair market value of the Mortgage Loans as being
equal to the aggregate issue prices of the REMIC Regular Certificates and REMIC
Residual Certificates. Such aggregate basis will be allocated among the
Mortgage 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 Regular Certificates--Original Issue Discount."
Accordingly, if one or more classes of REMIC Certificates are retained
initially rather than sold, the Master Servicer may be required to estimate the
fair market value of such interests in order to determine the basis of the
REMIC in the Mortgage 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 with respect to Mortgage Loans that it holds will be equivalent to the
method of accruing original issue discount income for REMIC Regular
Certificateholders (that is, under the constant yield method taking into
account the Prepayment Assumption). However, a REMIC that acquires loans at a
market discount must include such discount in income currently, as it accrues,
on a constant interest basis. See "--Taxation of Owners of REMIC 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 Mortgage Loans with
market discount that it holds.
A Mortgage 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 such discount will be includible in the income of the
REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any
premium on the Mortgage Loans. Premium on any Mortgage Loan to which such
election applies may be amortized under a constant yield method, presumably
taking into account a Prepayment Assumption.
The REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC 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 REMIC 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 Regular Certificates--
Original Issue Discount," except that the de minimis rule and the adjustments
for subsequent holders of REMIC 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 REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess, "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such 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 Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of the REMIC is required to 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
91
<PAGE>
be taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such 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 such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions." If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such 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 such REMIC Residual Certificate, increased by amounts included
in the income of the REMIC Residual Certificateholder and decreased (but not
below zero) by distributions made, and by net losses allocated, to such REMIC
Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without regard
to such net loss). Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to 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 may be subject to additional limitations under the Code, as
to which REMIC Residual 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 such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such 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 Fund. However, such basis increases may not occur
until the end of the calendar quarter, or perhaps the end of the calendar year,
with respect to which such REMIC taxable income is allocated to the REMIC
Residual Certificateholders. To the extent such REMIC Residual
Certificateholders' initial bases are less than the distributions to such REMIC
Residual Certificateholders, and increases in such initial bases either occur
after such distributions or (together with their initial bases) are less than
the amount of such distributions, gain will be recognized to such REMIC
Residual Certificateholders on such distributions and will be treated as gain
from the sale of their REMIC Residual Certificates.
The effect of these rules is that a Residual 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 upon the sale of its REMIC Residual Certificate. See "--
Sales of REMIC Certificates." For a discussion of possible modifications of
these rules that may require adjustments to income of a holder of a REMIC
Residual Certificate other than an original holder in order to reflect any
difference between the cost of such REMIC Residual Certificate to such holder
and the adjusted basis such REMIC Residual Certificate would have had in the
hands of the original holder, see "--Taxation of Owners of REMIC Residual
Certificates--General."
Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate will,
with an exception discussed below for certain REMIC Residual Certificates held
by thrift institutions, be subject to federal income tax in all events.
92
<PAGE>
In general, the "excess inclusions" with respect to 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 such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such 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
with respect to such REMIC Residual Certificate before the beginning of such
quarter. The issue price of a REMIC Residual Certificate is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial amount of the REMIC Residual Certificates were sold. 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 (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates," below.
As an exception to the general rules described above, thrift institutions are
allowed to offset their excess inclusions with unrelated deductions, losses or
loss carryovers, but only if the REMIC Residual Certificates are considered to
have "significant value." The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20 percent of the
anticipated weighted average life of the REMIC, 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.
Although it has not done so, the Treasury also has authority to issue
regulations that would treat the entire amount of income accruing on a REMIC
Residual Certificate as an excess inclusion if the REMIC Residual Certificates
are considered not to have "significant value." The related Prospectus
Supplement will disclose whether offered REMIC Residual Certificates may be
considered to have "significant value" under the REMIC Regulations; provided,
however, that any disclosure that a REMIC Residual Certificate will have
"significant value" will be based upon certain assumptions, and the Company
will make no representation that a REMIC Residual Certificate will have
"significant value" for purposes of the above-described rules. The above-
described exception for thrift institutions applies only to those residual
interests held directly by, and deductions, losses and loss carryovers incurred
by, such institutions (and not by other members of an affiliated group of
corporations filing a consolidated income tax return) or by certain wholly-
owned direct subsidiaries of such institutions formed or operated exclusively
in connection with the organization and operation of one or more REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such 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
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule
to regulated investment companies, common trust funds and certain cooperatives;
the REMIC Regulations currently do not address this subject.
93
<PAGE>
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 such transfer is disregarded, the
purported transferor will continue to remain liable for any taxes due with
respect to the income on such "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 with respect to 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 with respect to 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 certain restrictions under the terms of the related Pooling
and Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain 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
such transferee's historic payment of its debts and ability to continue to pay
its debts as they come due in the future. Prior to purchasing a REMIC Residual
Certificate, prospective purchasers should consider the possibility that a
purported transfer of such 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
such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Company 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 REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to
transfers of certain REMIC Residual Certificates to foreign persons.
Mark-to-Market Rules
On December 28, 1993, the IRS released temporary regulations (the "Mark-to-
Market Regulations") relating to the requirement that a securities dealer mark
to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a "negative value" REMIC Residual Certificate is not treated as a
security and thus generally may not be marked to market. This exclusion from
the mark-to-market requirement is expanded to include all REMIC Residual
Certificates under proposed Treasury regulations published January 4, 1995
which provide that any REMIC Residual Certificate issued after January 4, 1995
will not be treated as a security and therefore generally may not be marked to
market. Prospective purchasers of a REMIC Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to REMIC Residual Certificates.
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 such fees and expenses should be
allocated to the
94
<PAGE>
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such 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 REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC 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 such individual's,
estate's or trust's share of such fees and expenses will be added to the gross
income of such holder and (ii) such individual's, estate's or trust's share of
such fees and expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code, which permits
such 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 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 such 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 subject to the
limitations of either Section 67 or Section 68 of the 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 such holder's gross income. Accordingly, such 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. Such prospective investors should consult carefully with their tax
advisors prior to making an investment in such Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC 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 REMIC Certificate. The adjusted basis of a REMIC
Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
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 such gain or loss generally will
be capital gain or loss. The Code as of the date of this Prospectus provides
for a top marginal tax rate of 39.6% for individuals and a maximum marginal
rate for long-term capital gains of individuals of 28%. No such rate
differential exists for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to such REMIC Regular
Certificate had income accrued thereon at a rate equal to 110% of the
"applicable Federal rate" (generally, 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 such REMIC Regular Certificate, over
(ii) the amount of ordinary income actually includible in the seller's income
prior to such sale. In addition, gain recognized on the sale of a REMIC Regular
Certificate by a seller who purchased such REMIC 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 Regular Certificates--
Market Discount."
95
<PAGE>
REMIC Certificates will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that might
otherwise be capital gain may be treated as ordinary income to the extent that
such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the 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 such 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 such 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.
Except as may be provided in Treasury regulations yet to be issued, 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 Code) within six months of the date
of such sale, the sale will be subject to the "wash sale" rules of Section 1091
of the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to such REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived from
"prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than
a Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage 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, certain contributions to a REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would
be subject to such 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 related 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 related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
96
<PAGE>
Unless otherwise stated in the related 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 or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will be payable out of the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) 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 with respect to the Certificate, which rate is computed and
published monthly by the IRS) of the total anticipated excess inclusions with
respect to such REMIC Residual Certificate for periods after the transfer and
(ii) 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 such transfer, the Prepayment Assumption and any
required or permitted clean up calls or required liquidation provided for in
the REMIC's organizational documents. Such a tax generally would be imposed on
the transferor of the REMIC Residual Certificate, except that where such
transfer is through an agent for a disqualified organization, the tax would
instead be imposed on such agent. However, a transferor of a REMIC Residual
Certificate would in no event be liable for such tax with respect to 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 such affidavit is false.
Moreover, an entity will not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that (i) residual interests in such entity are
not held by disqualified organizations and (ii) information necessary for the
application of the tax described herein will be made available. Restrictions on
the transfer of REMIC Residual Certificates and certain other provisions that
are intended to meet this requirement will be included in the Pooling and
Servicing Agreement, and will be discussed more fully in any Prospectus
Supplement relating to the offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in income
excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such 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 such 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 such pass-through
entity furnishes to such pass-through entity (i) such holder's social security
number and a statement under penalties of perjury that such social security
number is that of the record holder or (ii) a statement under penalties of
perjury that such record holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated
investment company, real estate investment trust,
97
<PAGE>
trust, partnership or certain other entities described in Section 860E(e)(6) of
the Code. In addition, a person holding an interest in a pass-through entity as
a nominee for another person will, with respect to such interest, be treated as
a pass-through entity.
TERMINATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC 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 such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should be treated as
realizing a loss equal to the amount of such difference, and such loss may be
treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Master Servicer will file REMIC federal income tax returns on
behalf of the related REMIC, will be designated as and will act as the "tax
matters person" with respect to the REMIC in all respects, and generally will
hold at least a nominal amount of REMIC Residual Certificates.
As the tax matters person, the Master Servicer will, subject to certain
notice requirements and various restrictions and limitations, generally 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 generally be required to
report such 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, as tax matters person, and the IRS
concerning any such REMIC item. Adjustments made to the REMIC tax return may
require a REMIC Residual Certificateholder to make corresponding adjustments on
its return, and an audit of the REMIC's tax return, or the adjustments
resulting from such an audit, could result in an audit of a REMIC Residual
Certificateholder's return. No REMIC will be registered as a tax shelter
pursuant to Section 6111 of the 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 such person and
other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and
the IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30
days after the end of the quarter for which the information was requested, or
two weeks after the receipt of the request. The REMIC must also comply with
rules requiring a REMIC Regular Certificate issued with original issue discount
to disclose on its face certain information including the amount of original
issue discount and the issue date, and requiring such information to be
reported to the IRS. Reporting with respect to 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, generally on a quarterly basis.
98
<PAGE>
As applicable, the REMIC Regular Certificate information reports will include
a statement of the adjusted issue price of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to 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 will not have, such
regulations only require that information pertaining to the appropriate
proportionate method of accruing market discount be provided. See "Taxation of
Owners of REMIC Regular Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules will be
borne by the Master Servicer. Certificateholders may request any information
with respect to the returns described in Section 1.6049-7(e)(2) of the Treasury
regulations. Such request should be directed to the Master Servicer at
Residential Funding Corporation, 8400 Normandale Lake Boulevard, Suite 600,
Minneapolis, Minnesota 55437.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds from the
sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax.
Furthermore, certain 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 REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not be subject to United States federal
income or withholding tax in respect of a distribution on a REMIC 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 such
Certificateholder is not a United States person and providing the name and
address of such 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
or any political subdivision thereof, or an estate or trust whose income from
sources without the United States is includible in gross income for United
States federal income tax purposes regardless of its connection with the
conduct of a trade or business within the United States. It is possible that
the IRS may assert that the foregoing tax exemption should not apply with
respect 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. If the holder does not qualify for exemption,
distributions of interest, including distributions in respect of accrued
original issue discount, to such 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 such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC 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 related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons
will be prohibited under the related Pooling and Servicing Agreement.
99
<PAGE>
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of
the 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 own tax advisors with
respect to the various tax consequences of investments in the certificates
offered hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving "plan assets" of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
PLAN ASSET REGULATIONS
An investment of Plan Assets (as defined below) in Certificates may cause the
underlying Mortgage Loans and Mortgage Securities (if any) included in a Trust
Fund to be deemed "plan assets" of such Plan. The U.S. Department of Labor (the
"DOL") has promulgated regulations at 29 C.F.R. section 2510.3-101 (the "DOL
Regulations") concerning whether or not a Plan's assets would be deemed to
include an interest in the underlying assets of an entity (such as a Trust
Fund), for purposes of applying the general fiduciary responsibility provisions
of ERISA and the prohibited transaction provisions of ERISA and the Code, when
a Plan acquires an "equity interest" (such as a Certificate) in such entity.
Because of the factual nature of certain of the rules set forth in the DOL
Regulations, Plan Assets either may be deemed to include an interest in the
assets of a Trust Fund or may be deemed merely to include its interest in the
Certificates. Therefore, neither Plans nor such entities should acquire or hold
Certificates in reliance upon the availability of any exception under the DOL
Regulations. For purposes of this Section "ERISA Considerations," the term
"Plan Assets" or assets of a Plan has the meaning specified in the DOL
Regulations and includes an undivided interest in the underlying assets of
certain entities in which a Plan invests.
100
<PAGE>
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Company, the Master
Servicer, any Subservicer, the Trustee, the obligor under any credit
enhancement mechanism or certain affiliates thereof, to be considered or become
Parties in Interest or Disqualified Persons with respect to an investing Plan
(or of a Plan holding an interest in such an entity). If so, the acquisition or
holding of Certificates by or on behalf of the investing Plan could also give
rise to a prohibited transaction under ERISA and the Code, unless some
statutory or administrative exemption is available. Certificates acquired by a
Plan would be assets of that Plan. Under the DOL Regulations, the Trust Fund,
including the Mortgage Loans or Mortgage Securities and the other assets held
in the Trust Fund, may also be deemed to be assets of each Plan that acquires
Certificates. Special caution should be exercised before Plan Assets are used
to acquire a Certificate in such circumstances, especially if, with respect to
such assets, the Company, the Master Servicer, any Subservicer, the Trustee,
the obligor under any credit enhancement mechanism or an affiliate thereof
either (i) has investment discretion with respect to the investment of Plan
assets; or (ii) has authority or responsibility to give (or regularly gives)
investment advice with respect to Plan assets for a fee pursuant to an
agreement or understanding that such advice will serve as a primary basis for
investment decisions with respect to such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets, and any person who provides
investment advice with respect to such assets for a fee (in the manner
described above), is a fiduciary of the investing Plan. If the Mortgage Loans
or Mortgage Securities were to constitute Plan Assets, then any party
exercising management or discretionary control regarding those assets may be
deemed to be a Plan "fiduciary," and thus subject to the fiduciary requirements
of ERISA and the prohibited transaction provisions of ERISA and Section 4975 of
the Code with respect to any investing Plan. In addition, if the Mortgage Loans
or Mortgage Securities were to constitute Plan Assets, then the acquisition or
holding of Certificates by, on behalf of or with Plan Assets, as well as the
operation of the Trust Fund, may constitute or involve a prohibited transaction
under ERISA and the Code.
PROHIBITED TRANSACTION EXEMPTION
On March 29, 1994, the DOL issued (with an effective date of June 9, 1992) an
individual exemption (the "Exemption"), to the Company and certain of its
affiliates, which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed on
such prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation of
mortgage pools and the purchase, sale and holding of mortgage pass-through
certificates in a trust as to which (i) the Company or any of its affiliates is
the sponsor if any entity which has received from the DOL an individual
prohibited transaction exemption which is similar to the Exemption is the sole
underwriter, or manager or co-manager of the underwriting syndicate or a seller
or placement agent, or (ii) the Company or an affiliate is the underwriter (as
hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this Section "ERISA Considerations,"
the term "Underwriter" shall include (a) the Company and certain of its
affiliates, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with the
Company and certain of its affiliates, (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to a class of Certificates, or (d) any
entity which has received an exemption from the DOL relating to Certificates
which is similar to the Exemption.
The 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 thereunder. First, the acquisition of
Certificates by or with Plan Assets must be on terms that are at least as
favorable to the Plan as they would be in an arm's-length transaction with an
unrelated party. Second, the Exemption only applies to Certificates evidencing
rights and interests that are not subordinated to the rights and interests
evidenced by the other Certificates of the same trust. Third, the Certificates
at the time of acquisition by or with Plan Assets must be rated in one of the
three highest generic rating categories by Standard & Poor's Ratings Group,
Moody's Investors Service, Inc., Duff & Phelps, Inc. or Fitch Investors
Service, Inc. Fourth, the Trustee
101
<PAGE>
cannot be an affiliate of any member of the "Restricted Group" which consists
of any Underwriter, the Company, the Master Servicer, any Subservicer and any
mortgagor with respect to Trust Fund Assets constituting more than 5% of the
aggregate unamortized principal balance of the Trust Fund Assets in the related
Trust Fund as of the date of initial issuance of the Certificates. Fifth, the
sum of all payments made to and retained by the Underwriters must represent not
more than reasonable compensation for underwriting the Certificates; the sum of
all payments made to and retained by the Company pursuant to the assignment of
the Trust Fund Assets to the related Trust Fund must represent not more than
the fair market value of such obligations; and the sum of all payments made to
and retained by the Master Servicer and any Subservicer must represent not more
than reasonable compensation for such person's services under the related
Pooling and Servicing Agreement and reimbursement of such person's reasonable
expenses in connection therewith. Sixth, the Exemption states that the
investing Plan must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities Act
of 1933, as amended.
A fiduciary of or other investor of plan assets of any Plan contemplating
purchasing a Certificate must make its own determination that the general
conditions set forth above will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407
of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Certificates by or with Plan Assets. However, no exemption is provided from the
restrictions of Sections 406(a)(1)(E) and 406(a)(2) of ERISA for the
acquisition or holding of a Certificate by or with Plan Assets of an "Excluded
Plan" by any person who has discretionary authority or renders investment
advice with respect to Plan Assets of such Excluded Plan. For purposes of the
Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Certificates in the initial issuance of Certificates between the
Company or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of the
relevant Plan Assets in the Certificates is (a) a mortgagor with respect to 5%
or less of the fair market value of the Trust Fund Assets or (b) an affiliate
of such a person, (2) the direct or indirect acquisition or disposition in the
secondary market of Certificates by or with "plan assets" of a Plan and (3) the
holding of Certificates by or with Plan Assets.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 or ERISA, and the taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Mortgage Pools.
The Company expects that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Certificates so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA (as well as the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code) for
transactions in connection with the servicing, management and operation of the
Mortgage Pools, provided that the general conditions of the Exemption are
satisfied.
The Exemption also may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" (within the meaning of Section 3(14) of
ERISA) or a "disqualified person" (within the meaning of Section 4975(e)(2) of
the Code) with respect to an investing Plan (or the
102
<PAGE>
investing entity holding Plan Assets) by virtue of providing services to the
Plan (or by virtue of having certain specified relationships to such a person)
solely as a result of the ownership of Certificates by or with Plan Assets.
Before purchasing a Certificate, a fiduciary of or other investor of Plan
Assets should itself confirm (a) that the Certificates constitute
"certificates" for purposes of the Exemption and (b) that the specific and
general conditions set forth in the Exemption and the other requirements set
forth in the Exemption would be satisfied. In addition to making its own
determination as to the availability of the exemptive relief provided in the
Exemption, the fiduciary or other Plan investor should consider its general
fiduciary obligations under ERISA in determining whether to purchase any
Certificates by or with Plan Assets.
Any fiduciary or other Plan investor which proposes to purchase Certificates
on behalf of or with Plan Assets should consult with its counsel with respect
to the potential applicability of ERISA and the Code to such investment and the
availability of the Exemption or any other prohibited transaction exemption in
connection therewith. In particular, in connection with a contemplated purchase
of Certificates representing a beneficial ownership interest in a pool of
single-family residential first mortgage loans, such fiduciary or other Plan
investor should consider the availability of the Exemption or Prohibited
Transaction Class Exemption 83-1 ("PTCE 83-1") for certain transactions
involving mortgage pool investment trusts. The Prospectus Supplement with
respect to a series of Certificates may contain additional information
regarding the application of the Exemption, PTCE 83-1, or any other exemption,
with respect to the Certificates offered thereby. However, PTCE 83-1 does not
provide exemptive relief with respect to Certificates evidencing interests in
Trust Funds which include Cooperative Loans.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501 of
the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the 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 "Certain Federal Income Tax Consequences--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions."
CONSULTATION WITH COUNSEL
Any fiduciary or other Plan investor that proposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment and the Exemption, the
availability of PTCE 83-1 or any other prohibited transaction exemption.
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement each such class that is rated in one of the
two highest rating categories by at least one Rating Agency will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), and, as such, will be legal investments for
persons, trusts, corporations, partnerships, associations, business trusts and
business entities (including depository institutions, life insurance companies
and pension funds) created pursuant to or existing under the laws of the United
States or of any State whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency
or instrumentality thereof constitute legal investments for such entities.
103
<PAGE>
Under SMMEA, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent
provided therein. Certain States have 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 such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such 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 such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS with an effective date of
February 10, 1992. The Policy Statement generally indicates that a mortgage
derivative product will be deemed to be high risk if it exhibits greater price
volatility than a standard fixed rate thirty-year mortgage security. According
to the Policy Statement, prior to purchase, a depository institution will be
required to determine whether a mortgage derivative product that it is
considering acquiring is high-risk, and if so that the proposed acquisition
would reduce the institution's overall interest rate risk. Reliance on analysis
and documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable. There can
be no assurance as to which classes of Certificates will be treated as high-
risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision ("OTS") issued a
bulletin, entitled, "Mortgage Derivative Products and Mortgage Swaps", which is
applicable to thrift institutions regulated by the OTS. The bulletin
established guidelines for the investment by savings institutions in certain
"high-risk" mortgage derivative securities and limitations on the use of such
securities by insolvent, undercapitalized or otherwise "troubled" institutions.
According to the bulletin, such "high-risk" mortgage derivative securities
include securities having certain specified characteristics, which may include
certain classes of Certificates. In addition, the National Credit Union
Administration has issued regulations governing federal credit union
investments which prohibit investment in certain specified types of securities,
which may include certain classes of Certificates. Similar policy statements
have been issued by regulators having jurisdiction over other types of
depository institutions.
Certain classes of Certificates offered hereby, including any class that is
not rated in one of the two highest rating categories by at least one Rating
Agency, will not constitute "mortgage related securities" for purposes of
SMMEA. Any such class of Certificates will be identified in the related
Prospectus Supplement. Prospective investors in such classes of Certificates,
in particular, should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of certain investors either to
purchase certain classes of Certificates or to purchase any class of
Certificates representing more than a specified percentage of the investors'
assets. The Company will make no representations as to the proper
characterization of any class of Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Certificates.
Accordingly, all investors whose investment activities are subject to
104
<PAGE>
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 Certificates 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 such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage Loans
underlying the Certificates or will be used by the Company for general
corporate purposes. The Company expects that it will make additional sales of
securities similar to the Certificates from time to time, but the timing and
amount of any such additional offerings will be dependent upon a number of
factors, including the volume of mortgage loans purchased by the Company,
prevailing interest rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related 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
Company from such sale.
The Company intends that Certificates 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
Certificates may be made through a combination of two or more of these methods.
Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
2. By placements by the Company with institutional investors through
dealers; and
3. By direct placements by the Company with institutional investors.
In addition, if specified in the related Prospectus Supplement, a series of
Certificates may be offered in whole or in part in exchange for the Mortgage
Loans (and other assets, if applicable) that would comprise the Mortgage Pool
in respect of such Certificates.
If underwriters are used in a sale of any Certificates (other than in
connection with an underwriting on a best efforts basis), such Certificates
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. Such
underwriters may be broker-dealers affiliated with the Company whose identities
and relationships to the Company will be as set forth in the related Prospectus
Supplement. The managing underwriter or underwriters with respect to the offer
and sale of a particular series of Certificates will be set forth on the cover
of the Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Certificates, underwriters may receive
compensation from the Company or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
105
<PAGE>
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Company and any profit on the resale of
Certificates 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 Certificates will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company 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 with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Company and purchasers of
Certificates of such series.
The Company anticipates that the Certificates offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Certificates, including dealers, may, depending on the
facts and circumstances of such purchases, be deemed to be "underwriters"
within the meaning of the Securities Act of 1933, as amended, in connection
with reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Thacher Proffitt
& Wood, New York, New York, or by Orrick, Herrington & Sutcliffe, New York, New
York, as specified in the Prospectus Supplement.
FINANCIAL INFORMATION
The Company has determined that its financial statements are not material to
the offering made hereby.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each series of
Certificates, contains a summary of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices.
106
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accrual Certificates....................................................... 4
Advance.................................................................... 36
Additional Collateral...................................................... 11
Additional Collateral Loan................................................. 11
Affiliated Sellers......................................................... 12
Appraised Value............................................................ 14
ARM Loans.................................................................. 13
Balloon Amount............................................................. 14
Balloon Loans.............................................................. 14
Bankruptcy Amount.......................................................... 41
Bankruptcy Loss............................................................ 43
Beneficial Owner........................................................... 27
Buydown Account............................................................ 15
Buydown Agreement.......................................................... 32
Buydown Funds.............................................................. 15
Buydown Mortgage Loans..................................................... 15
Buydown Period............................................................. 15
Certificate Account........................................................ 31
Certificate Account Deposit Date........................................... 31
Certificateholders......................................................... 1
Certificates............................................................... 1
Closing Date............................................................... 85
Code....................................................................... 4
Committee Report........................................................... 79
Company.................................................................... 1
Contributions Tax.......................................................... 96
Convertible Mortgage Loan.................................................. 15
Cooperative Loans.......................................................... 11
Cooperative Notes.......................................................... 11
Credit Enhancer............................................................ 43
Custodial Account.......................................................... 22
Cut-off Date............................................................... 5
Debt Service Reduction..................................................... 48
Defaulted Mortgage Loss.................................................... 43
Deferred Interest.......................................................... 13
Deficient Valuation........................................................ 48
Deleted Mortgage Loan...................................................... 22
Designated Seller Transaction.............................................. 12
Determination Date......................................................... 34
Disqualified Persons....................................................... 100
Distribution Date.......................................................... 5
DOL........................................................................ 100
DOL Regulations............................................................ 100
DTC........................................................................ 26
DTC Registered Certificates................................................ 26
Due Date................................................................... 30
Eligible Account........................................................... 31
ERISA...................................................................... 7
ERISA Plans................................................................ 100
Exemption.................................................................. 101
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Extraordinary Losses....................................................... 43
FDIC....................................................................... 19
FHLMC...................................................................... 49
FIRREA..................................................................... 19
FNMA....................................................................... 49
Fraud Loss................................................................. 43
Fraud Loss Amount.......................................................... 41
Garn-St Germain Act........................................................ 71
GMAC....................................................................... 1
GMAC Mortgage.............................................................. 4
Grantor Trust Certificates................................................. 8
Grantor Trust Fractional Interest Certificate.............................. 74
Grantor Trust Fund......................................................... 73
Grantor Trust Strip Certificate............................................ 74
Guide...................................................................... 16
Index...................................................................... 13
Insurance Proceeds......................................................... 30
Intermediates.............................................................. 27
IRAs....................................................................... 100
IRS........................................................................ 75
Issue Premium.............................................................. 91
Letter of Credit........................................................... 44
Letter of Credit Bank...................................................... 44
Liquidated Mortgage Loan................................................... 39
Liquidation Proceeds....................................................... 30
Loan-to-Value Ratio........................................................ 14
Loss....................................................................... 52
Mark-to-Market Regulations................................................. 94
Master Commitments......................................................... 16
Master Servicer............................................................ 1
Mortgage Loans............................................................. 1
Mortgage Notes............................................................. 11
Mortgage Pool.............................................................. 1
Mortgage Rate.............................................................. 13
Mortgage Securities........................................................ 5
Mortgaged Properties....................................................... 4
Mortgagor.................................................................. 10
Net Mortgage Rate.......................................................... 61
Nonrecoverable Advance..................................................... 33
Note Margin................................................................ 13
OID Regulations............................................................ 74
OTS........................................................................ 104
Participants............................................................... 26
Parties in Interest........................................................ 100
Pass-Through Rate.......................................................... 3
Paying Agent............................................................... 33
Payment Date............................................................... 33
Percentage Interest........................................................ 33
Permitted Investments...................................................... 31
Plan....................................................................... 7
Plans...................................................................... 100
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pool Insurer............................................................... 32
Pooling and Servicing Agreement............................................ 3
Prepayment Assumption...................................................... 77
Prepayment Interest Shortfall.............................................. 67
Primary Insurance Policy................................................... 52
Primary Insurer............................................................ 52
Principal Prepayments...................................................... 30
Prohibited Transactions Tax................................................ 96
PTCE 83-1.................................................................. 103
Purchase Obligation........................................................ 51
Purchase Price............................................................. 22
Qualified Insurer.......................................................... 49
Qualified Retirement Plans................................................. 100
Qualified Substitute Mortgage Loan......................................... 22
Rating Agency.............................................................. 7
Realized Loss.............................................................. 41
Record Date................................................................ 33
Relief Act................................................................. 72
REMIC...................................................................... 1
REMIC Certificates......................................................... 73
REMIC Provisions........................................................... 73
REMIC Regular Certificates................................................. 8
REMIC Regulations.......................................................... 74
REMIC Residual Certificates................................................ 8
REO Mortgage Loan.......................................................... 39
Reserve Fund............................................................... 48
Residential Funding........................................................ 3
RTC........................................................................ 19
Sellers.................................................................... 12
Senior Certificates........................................................ 4
Senior Percentage.......................................................... 42
Senior/Subordinate Series.................................................. 26
Servicing Advances......................................................... 32
Single Certificate......................................................... 37
SMMEA...................................................................... 103
Special Hazard Amount...................................................... 41
Special Hazard Instrument.................................................. 43
Special Hazard Insurance Policy............................................ 47
Special Hazard Insurer..................................................... 47
Special Hazard Loss........................................................ 43
Spread..................................................................... 3
Stated Principal Balance................................................... 42
Strip Certificates......................................................... 4
Subordinate Amount......................................................... 42
Subordinate Certificates................................................... 4
Subservicers............................................................... 16
Subservicing Account....................................................... 29
Subservicing Agreement..................................................... 23
Tax-Exempt Investor........................................................ 103
Tax-Favored Plans.......................................................... 100
Tiered REMICs.............................................................. 84
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Title V.................................................................... 72
Title VIII................................................................. 72
Trust Fund................................................................. 1
Trustee.................................................................... 3
UBTI....................................................................... 103
UCC........................................................................ 68
Unaffiliated Sellers....................................................... 12
Unrecovered Senior Portion................................................. 41
</TABLE>
110
<PAGE>
__________________________________ _________________________________
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary.......................................................................................................... S-4
Description of the Mortgage Pool................................................................................. S-19
Description of the Certificates.................................................................................. S-25
Certain Yield and Prepayment Considerations...................................................................... S-41
Pooling and Servicing Agreement.................................................................................. S-55
Certain Federal Income Tax Consequences.......................................................................... S-59
Method of Distribution........................................................................................... S-62
Legal Opinions................................................................................................... S-63
Ratings.......................................................................................................... S-63
Legal Investment................................................................................................. S-64
ERISA Considerations............................................................................................. S-64
PROSPECTUS
Summary of Prospectus............................................................................................ 3
Special Considerations........................................................................................... 8
The Mortgage Pools............................................................................................... 10
Mortgage Loan Program............................................................................................ 15
Description of the Certificates.................................................................................. 24
Subordination.................................................................................................... 39
Description of Credit Enhancement................................................................................ 42
Purchase Obligations............................................................................................. 50
Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder.................................................. 51
The Company...................................................................................................... 53
Residential Funding Corporation.................................................................................. 54
The Pooling and Servicing Agreement.............................................................................. 55
Investment Considerations........................................................................................
Yield Considerations............................................................................................. 60
Maturity and Prepayment Considerations........................................................................... 63
Certain Legal Aspects of Mortgage Loans and Related Matters...................................................... 64
Certain Federal Income Tax Consequences.......................................................................... 73
State and Other Tax Consequences................................................................................. 99
ERISA Considerations............................................................................................. 99
Legal Investment Matters......................................................................................... 102
Use of Proceeds.................................................................................................. 103
Methods of Distribution.......................................................................................... 104
Legal Matters.................................................................................................... 105
Financial Information............................................................................................ 105
Additional Information........................................................................................... 105
Index of Principal Definitions................................................................................... 106
</TABLE>
RESIDENTIAL
FUNDING MORTGAGE
SECURITIES I, INC.
$447,941,596
MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 1995-S11
<TABLE>
<S> <C> <C> <C>
CLASS A-1 CERTIFICATES 7.65% $ 11,300,000
CLASS A-2 CERTIFICATES 7.50% $105,000,000
CLASS A-3 CERTIFICATES 7.25% $ 47,939,000
CLASS A-4 CERTIFICATES 7.65% $ 27,875,000
CLASS A-5 CERTIFICATES 7.65% $ 30,655,000
CLASS A-6 CERTIFICATES 7.65% $ 20,568,000
CLASS A-7 CERTIFICATES 7.50% $ 5,000,000
CLASS A-8 CERTIFICATES 7.65% $ 2,100,000
CLASS A-9 CERTIFICATES 7.40% $ 12,900,000
CLASS A-10 CERTIFICATES 7.75% $ 6,000,000
CLASS A-11 CERTIFICATES 6.00% $ 2,581,000
CLASS A-12 CERTIFICATES 7.40% $ 2,456,000
CLASS A-13 CERTIFICATES 7.40% $ 3,544,000
CLASS A-14 CERTIFICATES 8.00% $ 4,741,000
CLASS A-15 CERTIFICATES 7.50% $100,000,000
CLASS A-16 CERTIFICATES 7.50% $ 32,887,000
CLASS A-17 CERTIFICATES 0.00% $ 1,348,796
CLASS A-18 CERTIFICATES VARIABLE RATE $ 0
CLASS A-19 CERTIFICATES 7.50% $ 9,500,000
CLASS R-I CERTIFICATES 7.50% $ 100
CLASS R-II CERTIFICATES 7.50% $ 100
CLASS M-1 CERTIFICATES 7.50% $ 11,340,300
CLASS M-2 CERTIFICATES 7.50% $ 5,670,200
CLASS M-3 CERTIFICATES 7.50% $ 4,536,100
</TABLE>
------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------
PAINEWEBBER INCORPORATED
August 24, 1995
__________________________________ _________________________________
