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RULE NO. 424(b)(5)
REGISTRATION NO. 33-54227
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 23, 1994)
$301,391,144
RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
COMPANY
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1995-S2
$301,391,044 ADJUSTABLE RATE CLASS A CERTIFICATES
$ 100 ADJUSTABLE RATE CLASS R CERTIFICATES
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The Series 1995-S2 Mortgage Pass-Through Certificates will include the
following two classes (the "Senior Certificates"): (i) Class A Certificates
and (ii) Class R Certificates (the "Residual Certificates"). In addition to
the Senior Certificates, the Series 1995-S2 Mortgage Pass-Through Certificates
will consist of three classes of subordinate certificates which are designated
as the Class B-1 Certificates, Class B-2 Certificates and Class B-3
Certificates (collectively, the "Class B Certificates" and, together with the
Senior Certificates, the "Certificates"). Only the Senior Certificates are
offered hereby.
It is a condition of the issuance of the Senior Certificates that they be
rated "AAAr" by Standard & Poor's Ratings Group ("Standard & Poor's") and
"Aaa" by Moody's Investors Service, Inc. ("Moody's").
The Senior Certificates in the aggregate will evidence an initial undivided
interest of approximately 97.0% in a trust fund (the "Trust Fund") consisting
primarily of a pool of conventional, adjustable-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. The interest rate (the "Mortgage Rate") on each Mortgage
Loan will adjust semi-annually as described herein, subject to the limitations
described herein. Accordingly, a significant increase in the Mortgage Rate and
the amount of the scheduled monthly payments due thereafter may result, which
may increase the likelihood
(Continued on following page)
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PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE POLICY (AS
DESCRIBED HEREIN) ARE THE SOLE SOURCE OF PAYMENTS ON THE SENIOR
CERTIFICATES. THE SENIOR 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 SENIOR
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.
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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.
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There is currently no secondary market for the Senior Certificates. Bear,
Stearns & Co. Inc. (the "Underwriter") intends to make a secondary market in
the Senior Certificates, but is not obligated to do so. There can be no
assurance that a secondary market for the Senior Certificates will develop or,
if it does develop, that it will continue. The Senior Certificates will not be
listed on any securities exchange.
The Senior Certificates will be purchased from the Company by the
Underwriter and will be offered by the Underwriter 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 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 Senior Certificates, before deducting expenses payable to the Company,
will be equal to approximately 101.1% of the initial aggregate principal
balance of the Senior Certificates plus accrued interest thereon from March 1,
1995 (the "Cut-off Date"). The Senior Certificates are offered by the
Underwriter, subject to prior sale, when, as and if delivered to and accepted
by the Underwriter and subject to certain other conditions. The Underwriter
reserves the right to withdraw, cancel or modify such offer and to reject any
order in whole or in part. It is expected that the delivery of the Senior
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 discussed herein, and that delivery of the Residual
Certificates will be made at the offices of the Underwriter, New York, New
York, on or about March 29, 1995, against payment therefor in immediately
available funds.
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BEAR, STEARNS & CO. INC.
MARCH 24, 1995
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(Continued from previous page)
of default on and prepayment of such Mortgage Loan. The characteristics of the
Mortgage Loans are more fully described herein under "Description of the
Mortgage Pool."
The Class A 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 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, a "real estate mortgage investment conduit" ("REMIC")
election will be made in connection with the Trust Fund for federal income tax
purposes. The Class A Certificates will represent ownership of "regular
interests" in the REMIC and the Residual Certificates will constitute the sole
class of "residual interests" in the 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 Senior 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 April 25, 1995 (each, a "Distribution Date"). As described
herein, interest distributions on the Senior Certificates on each Distribution
Date will be based on the Certificate Principal Balance thereof and the then-
applicable Pass-Through Rate, which will equal the weighted average of the Net
Mortgage Rates (as defined herein) on the Mortgage Loans for the month
preceding such Distribution Date. The Pass-Through Rate for the Senior
Certificates on the first Distribution Date will be 5.9833% per annum. The
Pass-Through Rates will change thereafter because the weighted average of the
Net Mortgage Rates is expected to change as a result of adjustments to the
Mortgage Rates and changes in the Mortgage Pool. Distributions in respect of
principal of the Senior Certificates will be made as described herein under
"Description of the Certificates--Principal Distributions on the Senior
Certificates." The rights of the holders of the 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 to the extent
described herein and in the Prospectus. The Senior Certificates will be
entitled to the benefit of a certificate guaranty insurance policy (the
"Policy") to be issued by Municipal Bond Investors Assurance Corporation (the
"Insurer"), which will protect the holders of the Senior Certificates against
any interest shortfalls (except as described herein) allocated to the Senior
Certificates and the principal portion of any Realized Losses allocated to the
Senior Certificates. See "Description of the Certificates--the Certificate
Guaranty Insurance Policy" herein.
THE YIELD TO MATURITY ON THE SENIOR CERTIFICATES WILL DEPEND ON THE RATE AND
TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON THE MORTGAGE LOANS AND ON ADJUSTMENTS TO THE MORTGAGE RATES.
THE MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME
WITHOUT PENALTY. THE YIELD TO INVESTORS ON THE SENIOR CERTIFICATES WILL 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. SEE "SUMMARY--SPECIAL
PREPAYMENT CONSIDERATIONS," "--SPECIAL YIELD CONSIDERATIONS" AND "CERTAIN
YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN AND "YIELD CONSIDERATIONS" IN THE
PROSPECTUS.
Approximately 4.6% of the Mortgage Loans (by aggregate principal balance as
of the Cut-off Date) provide that, at the option of the related Mortgagors,
the adjustable interest rate on such Mortgage Loans may be converted to a
fixed interest rate (the "Convertible Mortgage Loans"), provided that certain
conditions have been satisfied. Upon notification from a Mortgagor of such
Mortgagor's intent to convert from an adjustable interest rate to a fixed
interest rate, and prior to the conversion of any such Mortgage Loan (a
"Converting Mortgage Loan"), the related Subservicer will be obligated to
purchase the Converting Mortgage Loan at a price equal to the outstanding
principal balance thereof plus accrued interest thereon at the related
Mortgage Rate net of any subservicing fees (the "Conversion Price"). In the
event of a failure by a Subservicer to purchase a Converting Mortgage Loan,
the Master Servicer is required to use its best efforts to purchase such
Converted Mortgage Loan (as defined herein) from the Mortgage Pool at the
Conversion Price during the one-month period following the date of conversion.
In the event that neither the related Subservicer nor the Master Servicer
purchases a Converting or Converted Mortgage Loan, the Mortgage Pool will
thereafter include both fixed-rate and adjustable-rate Mortgage Loans. See
"Certain Yield and Prepayment Considerations" herein.
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THE SENIOR 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 JUNE 23, 1994, 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
SENIOR CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED
BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
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UNTIL JUNE 22, 1995, ALL DEALERS EFFECTING TRANSACTIONS IN THE SENIOR
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.
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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.
Title of Securities......... Mortgage Pass-Through Certificates, Series 1995-
S2.
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................ March 1, 1995.
Delivery Date............... On or about March 29, 1995.
Denominations............... The Class A 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 Certifi-
cates will be issued in minimum denominations of
$25,000 and integral multiples of $1 in excess
thereof. The Residual Certificates will be of-
fered in registered, certificated form in minimum
denominations of a 20% Percentage Interest, ex-
cept as otherwise set forth herein under "Certain
Federal Income Tax Consequences."
The Mortgage Pool........... The Mortgage Pool will consist of a pool of con-
ventional, adjustable-rate, fully-amortizing
mortgage loans (the "Mortgage Loans"), with an
aggregate principal balance as of the Cut-off
Date of $310,712,520. The Mortgage Loans are se-
cured by first liens on fee simple or leasehold
interests in one- to four-family residential real
properties (each, a "Mortgaged Property") having
individual principal balances at origination of
at least $45,500 but not more than $1,000,000,
with an average principal balance at origination
of approximately $261,734. The Mortgage Loans
have terms to maturity from the date of origina-
tion or modification of not more than 30 years,
and a weighted average remaining term to stated
maturity of approximately 353 months as of the
Cut-off Date. Approximately 44.8% of the Mortgage
Loans (by aggregate principal balance as of the
Cut-off Date) will be refinance mortgage loans.
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The Mortgage Rate on each Mortgage Loan will ad-
just semi-annually on the date (the "Adjustment
Date") specified in the related Mortgage Note to
a rate equal to the sum (rounded as described
herein) of the Index described below and the Note
Margin set forth in the related Mortgage Note,
subject to the limitations described herein. The
amount of the monthly payment on each Mortgage
Loan will be adjusted semi-annually on the first
day of the month following the month in which the
Adjustment Date occurs to the amount necessary to
pay interest at the then applicable Mortgage Rate
and to fully amortize the outstanding principal
balance of the Mortgage Loan over its remaining
term to stated maturity. The Mortgage Loans will
initially bear interest at Mortgage Rates of at
least 3.750% per annum but no more than 8.500%
per annum, with a weighted average Mortgage Rate
of approximately 6.4844% per annum as of the Cut-
off Date. The Mortgage Loans will have different
Adjustment Dates, Note Margins and limitations on
the Mortgage Rate adjustments, as described here-
in.
For a further description of the Mortgage Loans,
see "Description of the Mortgage Pool" herein.
The Index................... The Index applicable with respect to approxi-
mately 37.4% of the Mortgage Loans (by aggregate
principal balance as of the Cut-off Date) will be
a per annum rate equal to the average of
interbank offered rates for six-month U.S. dol-
lar-denominated deposits in the London market
based on quotations of major banks ("LIBOR") as
published by FNMA and as most recently available
as of the date forty-five days prior to the Ad-
justment Date. With respect to approximately
54.5% and 8.1% of the Mortgage Loans (each, by
aggregate principal balance as of the Cut-off
Date), the Index shall be LIBOR as published in
The Wall Street Journal and as most recently
available as of the first business day of the
month immediately preceding the month in which
the Adjustment Date occurs, or as of the date
forty-five days prior to the Adjustment Date, re-
spectively. In the event that the Index specified
in a Mortgage Note is no longer available, an in-
dex reasonably acceptable to the Trustee that is
based on comparable information will be selected
by the Master Servicer. See "Description of the
Mortgage Pool" herein.
Conversion of Mortgage
Loans...................... Approximately 4.6% of the Mortgage Loans (by ag-
gregate principal balance as of the Cut-off Date)
(the "Convertible Mortgage Loans") provide that,
at the option of the related Mortgagors, the ad-
justable interest rate on such Mortgage Loans may
be converted to a fixed interest rate, provided
that certain conditions have been satisfied. Upon
notification from a Mortgagor of such Mortgagor's
intent to convert from an adjustable interest
rate to a fixed interest rate, and prior to the
conversion of any such Mortgage Loan, the related
Subservicer will be obligated to purchase the
Converting
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Mortgage Loan (as defined herein) at the Conver-
sion Price (as defined herein). In the event of a
failure by a Subservicer to purchase a Converting
Mortgage Loan, the Master Servicer is required to
use its best efforts to purchase such Converted
Mortgage Loan (as defined herein) from the Mort-
gage Pool at the Conversion Price during the one-
month period following the date of conversion. In
the event that neither the related Subservicer
nor the Master Servicer purchases a Converting or
Converted Mortgage Loan, the Mortgage Pool will
thereafter include both fixed-rate and adjust-
able-rate Mortgage Loans. See "Certain Yield and
Prepayment Considerations" herein.
The Senior Certificates..... The Senior Certificates in the aggregate evidence
an initial interest of approximately 97.0%, in a
trust fund (the "Trust Fund") consisting primar-
ily of the Mortgage Pool. The Senior Certificates
will be issued pursuant to a Pooling and Servic-
ing Agreement, to be dated as of the Cut-off
Date, among the Company, the Master Servicer and
the Trustee (the "Pooling and Servicing Agree-
ment"). The Senior Certificates will consist of
two classes: (i) the Class A Certificates having
an initial principal balance of $301,391,044, and
(ii) the Class R Certificates (the "Residual Cer-
tificates") having an initial principal balance
of $100.
The Senior Certificates are subject to priorities
for payment of interest and principal as de-
scribed herein. For a description of the alloca-
tion of interest and principal distributions
among the Senior Certificates see "Summary--In-
terest Distributions," and "--Principal Distribu-
tions," "Description of the Certificates--
Interest Distributions," and "--Principal Distri-
butions on the Senior Certificates" herein.
The Senior Certificates will be entitled to the
benefit of a certificate guaranty insurance pol-
icy (the "Policy") to be issued by Municipal Bond
Investors Assurance Corporation (the "Insurer"),
which will protect the holders of the Senior Cer-
tificates against any interest shortfalls (except
for shortfalls in respect of the Relief Act (as
defined in the Prospectus) and any Prepayment In-
terest Shortfalls (as defined herein)) allocated
to the Senior Certificates, and against the prin-
cipal portion of any Realized Losses allocated to
the Senior Certificates. See "Description of the
Certificates."
Pass-Through Rate on the
Senior Certificates........ The Pass-Through Rate applicable to the Senior
Certificates for any Distribution Date will equal
the weighted average of the Net Mortgage Rates on
the Mortgage Loans as of the Due Date in the
month preceding the month in which such Distribu-
tion Date occurs. The Net Mortgage Rate on each
Mortgage Loan is equal to the Mortgage Rate
thereon minus the rates per annum (collectively,
the "Servicing Fee and Policy Premium Rate") at
which the related master servicing fee, the
subservicing fees and the premium
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payable with respect to the Policy accrue. The
Net Mortgage Rate with respect to each Mortgage
Loan as of the Cut-off Date will be set forth in
the Mortgage Loan Schedule attached to the Pool-
ing and Servicing Agreement. As of the Cut-off
Date, the weighted average Net Mortgage Rate is
5.9833% per annum. The Net Mortgage Rate on each
Mortgage Loan will be adjusted on each Adjustment
Date to equal the Mortgage Rate minus the Servic-
ing Fee and Policy Premium Rate, subject to the
Maximum Mortgage Rate, Minimum Mortgage Rate and
Periodic Rate Cap (each as defined herein) for
such Mortgage Loan. In the event a Convertible
Mortgage Loan became a Converted Mortgage Loan
and remained in the Mortgage Pool, the Net Mort-
gage Rate on each such Converted Mortgage Loan
would equal the Mortgage Rate thereon less
0.4465% per annum. The Net Note Margin is equal
to the Note Margin minus the Servicing Fee and
Policy Premium Rate. The Net Note Margins for the
Mortgage Loans will be at least 1.9285% per annum
but not more than 2.9285% per annum as of the
Cut-off Date, with an initial weighted average
Net Note Margin of 2.4430% per annum.
The Pass-Through Rate on the Senior Certificates
on the first Distribution Date will be 5.9833%
per annum, and is expected to change thereafter
because the weighted average of the Net Mortgage
Rates is expected to change for succeeding Dis-
tribution Dates.
Certificate Registration.... The DTC Registered Certificates will be repre-
sented by one or more certificates registered in
the name of Cede & Co., as nominee of The Deposi-
tory 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 Residual Certificates will be offered
in fully registered, certificated form. See "De-
scription of the Certificates--Book-Entry Regis-
tration of the Class A Certificates" herein.
Interest Distributions...... On each Distribution Date, the holders of each
class of Senior Certificates will be entitled to
receive interest distributions in an amount equal
to one month's interest on the Certificate Prin-
cipal Balance thereof at the then-applicable
Pass-Through Rate, subject to reduction only in
the event of shortfalls caused by the Relief Act
and any Prepayment Interest Shortfalls to the ex-
tent not covered by the Master Servicer allocated
as described herein. Notwithstanding the forego-
ing, if payments were not made as required under
the Policy, interest shortfalls may be allocated
to the Senior Certificates, as described herein.
See "Description of the Certificates--Interest
Distributions" herein.
Any Prepayment Interest Shortfalls resulting from
prepayments in full in any calendar month will be
offset by the Master Servicer
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on the Distribution Date in the following calen-
dar 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) the sum of the master
servicing fee payable to the Master Servicer in
respect of its master servicing activities and
reinvestment income received by the Master
Servicer on amounts payable with respect to such
Distribution Date. No assurance can be given that
the master servicing compensation available to
cover Prepayment Interest Shortfalls will be suf-
ficient therefor. See "Pooling and Servicing
Agreement--Servicing and Other Compensation and
Payment of Expenses" and "Description of the
Certificates--Interest Distributions" herein.
Principal Distributions..... Holders of the Senior Certificates in the aggre-
gate will be entitled to receive on each Distri-
bution Date, in the manner and priority set forth
herein, to the extent of the portion of the
Available Distribution Amount remaining after Ac-
crued Certificate Interest on the Senior Certifi-
cates is distributed, a distribution allocable to
principal which will, as described herein, in-
clude (i) the Senior Percentage (as defined be-
low) of scheduled principal payments due on the
Mortgage Loans and of the principal portion of
any unscheduled collections (other than Mortgagor
prepayments and any amounts received in connec-
tion with a Final Disposition (as defined herein)
of a Mortgage Loan described in clause (ii) be-
low), including repurchases of the Mortgage
Loans, (ii) in connection with the Final Disposi-
tion of a Mortgage Loan that did not result in
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 Senior Percentage of the
Stated Principal Balance (as defined herein) of
such Mortgage Loan and (b) the 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, (iii) the Se-
nior Accelerated Distribution Percentage of Mort-
gagor prepayments and (iv) the Excess Subordinate
Principal Amount (as defined herein), if any, for
such Distribution Date. See "Description of the
Certificates--Principal Distributions on the Se-
nior Certificates" herein.
The Senior Percentage initially will be approxi-
mately 97.0% and will be recalculated after each
Distribution Date as described herein to reflect
the entitlement of the holders of the Senior Cer-
tificates to subsequent distributions of amounts
allocable to principal. Initially, the Senior Ac-
celerated Distribution Percentage will equal
100%. Thereafter, as described herein, during
certain periods, subject to certain loss, delin-
quency and other criteria described herein, the
Senior Accelerated Distribution Percentage may be
100% or otherwise disproportionately large (rela-
tive to the Senior Percentage). In addition, un-
der certain loss scenarios,
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100% of the Senior Accelerated Distribution Per-
centage of full and partial principal prepayments
will be allocated solely to the Senior Certifi-
cates. See "Description of the Certificates--
Principal Distributions on the Senior Certifi-
cates" herein.
The Insurer................. Municipal Bond Investors Assurance Corporation.
See "Municipal Bond Investors Assurance Corpora-
tion" herein.
Certificate Guaranty
Insurance Policy........... The Insurer will issue the Policy as a means of
providing additional credit enhancement to the
Senior Certificates. Under the Policy, the In-
surer will pay the Trustee, for the benefit of
the holders of each class of Senior Certificates,
on each Distribution Date, as further described
herein, an amount that will cover any interest
shortfalls (except for shortfalls in respect of
the Relief Act and any Prepayment Interest
Shortfalls) allocated to the Senior Certificates
plus the principal portion of any Realized Losses
allocated to the Senior Certificates. A payment
by the Insurer under the Policy is referred to
herein as an "Insured Payment." See "Description
of the Certificates--The Certificate Guaranty In-
surance Policy" 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.............. All Realized Losses allocated to the Senior Cer-
tificates will be covered by the Policy. Notwith-
standing the foregoing, if payments were not made
as required under the Policy, certain Realized
Losses will be allocated first to the Class B
Certificates until the Certificate Principal Bal-
ances thereof have been reduced to zero and sec-
ond to the Senior Certificates to the extent de-
scribed in "Description of the Certificates--Al-
location of Losses" herein.
Neither the Senior Certificates nor the Mortgage
Loans are insured or guaranteed by any governmen-
tal 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 Certifi-
cates and Class B-3 Certificates have initial
Certificate Principal Balances of $4,660,688,
$2,330,345, and $2,330,343, respectively, evi-
dence an initial Class B Percentage of approxi-
mately 3.0% in the Trust Fund, and each has an
initial Pass-Through Rate of 5.9833% per annum.
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 Mort-
gage Loans is less than 5% of the aggregate prin-
cipal balance of the Mortgage Loans as of the
Cut-off Date, the Master Servicer or the Company
may (i) purchase
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from the Trust Fund all remaining Mortgage Loans
and other assets thereof, and thereby effect
early retirement of the Certificates or (ii) pur-
chase in whole, but not in part, the Certifi-
cates. See "Pooling and Servicing Agreement--Ter-
mination" herein and "The Pooling and Servicing
Agreement--Termination; Retirement of Certifi-
cates" in the Prospectus.
Special Prepayment
Considerations............. The rate and timing of principal payments on the
Senior Certificates will depend, among other
things, on the rate and timing of principal pay-
ments (including prepayments, defaults, liquida-
tions and purchases of Mortgage Loans due to a
breach of representation and warranty) on the
Mortgage Loans. As is the case with mortgage-
backed securities generally, the Senior Certifi-
cates are subject to substantial inherent cash-
flow uncertainties because the Mortgage Loans may
be prepaid at any time. Generally, when prevail-
ing 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 mort-
gage 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.
As described herein, during certain periods all
or a disproportionately large percentage of prin-
cipal prepayments on the Mortgage Loans will be
allocated among the Senior Certificates.
See "Description of the Certificates--Principal
Distributions on the Senior Certificates" and
"Certain Yield and Prepayment Considerations"
herein and "Maturity and Prepayment Considera-
tions" in the Prospectus. For further information
regarding the effect of principal prepayments on
the weighted average life of the Class A Certifi-
cates, see the table entitled "Percent of Initial
Certificate Principal Balance Outstanding at the
Following Percentages of CPR" herein.
Special Yield
Considerations............. The yield to maturity on each class of the Senior
Certificates will depend on, among other things,
the rate and timing of principal payments (in-
cluding prepayments, defaults, liquidations and
purchases of Mortgage Loans due to a breach of
representation and warranty) on the Mortgage
Loans and the allocation thereof to reduce the
Certificate Principal Balance of such class. In
addition, to the extent Subservicers and the Mas-
ter Servicer fail to purchase Converting or Con-
verted Mortgage Loans, the yield to investors on
each class of Senior Certificates may be affected
by the inclusion of fixed-rate Mortgage Loans in
the Mortgage Pool. The yield to maturity on each
class of the Senior Certificates will also depend
on changes in the Index and the effect of the
Maximum Mortgage Rate, Minimum Mortgage Rate and
Periodic Rate Cap applicable to each Mortgage
Loan. The yield to investors on any
S-9
<PAGE>
class of Senior Certificates will be adversely
affected by any allocation to such class of Pre-
payment Interest Shortfalls on the Mortgage
Loans, which are expected to result from the dis-
tribution of interest only to the date of prepay-
ment (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 Senior Cer-
tificates to the extent such Prepayment Interest
Shortfalls are covered by the Master Servicer as
discussed herein.
In general, if a class of Senior Certificates is
purchased at a premium and principal distribu-
tions to such class occur at a rate faster than
anticipated at the time of purchase, the invest-
or's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely,
if a class of Senior Certificates is purchased at
a discount and principal distributions to such
class occur at a rate slower than that assumed at
the time of purchase, the investor's actual yield
to maturity will be lower than assumed at the
time of purchase.
Holders of the Residual Certificates are entitled
to receive distributions of principal and inter-
est as described herein; however, holders of such
Certificates may have tax liabilities with re-
spect to their Certificates during the early
years of the term of the REMIC that substantially
exceed the principal and interest payable thereon
during such periods.
See "Certain Yield and Prepayment Considera-
tions," especially "--Additional Yield Considera-
tions Applicable Solely to the Residual Certifi-
cates" herein, "Certain Federal Income Tax Conse-
quences" herein and in the Prospectus and "Yield
Considerations" in the Prospectus.
Certain Federal Income Tax
Consequences............... An election will be made to treat the Trust Fund
as a real estate mortgage investment conduit
("REMIC") for federal income tax purposes. Upon
the issuance of the Senior Certificates, Thacher
Proffitt & Wood, counsel to the Company, will de-
liver its opinion generally to the effect that,
assuming compliance with all provisions of the
Pooling and Servicing Agreement, for federal in-
come tax purposes, the Trust Fund will qualify as
a REMIC under Sections 860A through 860G of the
Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, the Residual
Certificates will constitute the sole class of
"residual interests" in the REMIC and the Class A
and Class B Certificates will represent ownership
of "regular interests" in the REMIC and will gen-
erally be treated as debt instruments of the
REMIC.
S-10
<PAGE>
Under the REMIC Regulations (as defined herein),
the Residual Certificates will not be regarded as
having "significant value" for purposes of apply-
ing the rules relating to "excess inclusions." In
addition, the Residual Certificates may consti-
tute "noneconomic" residual interests for pur-
poses 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 disre-
garded under the REMIC Regulations. See "Certain
Federal Income Tax Consequences--Special Tax Con-
siderations Applicable to Residual Certificates"
herein and "Certain Federal Income Tax Conse-
quences--REMICs--Taxation of Owners of REMIC Re-
sidual 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 re-
spect to the early years of the REMIC's term that
significantly exceeds distributions on the Resid-
ual Certificates during such years, with corre-
sponding tax deductions or losses deferred until
the later years of the REMIC's term. Accordingly,
on a present value basis, the tax detriments oc-
curring 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 Considera-
tions," especially "--Additional Yield Considera-
tions Applicable Solely to the Residual Certifi-
cates," and "Certain Federal Income Tax Conse-
quences--Special Tax Considerations Applicable to
Residual Certificates" herein.
For further information regarding the federal in-
come tax consequences of investing in the Senior
Certificates, see "Certain Federal Income Tax
Consequences" herein and in the Prospectus.
Legal Investment............ The Senior 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 one of the two
highest rating categories by at least one of the
Rating Agencies. Institutions whose investment
activities are subject to legal investment laws
and regulations, regulatory capital requirements
or review by regulatory authorities may be sub-
ject to restrictions on investment in the Senior
Certificates and should consult with their legal
advisors. See "Legal Investment" herein and "Le-
gal Investment Matters" in the Prospectus.
Ratings..................... It is a condition to the issuance of the Senior
Certificates that they be rated "AAAr" by Stan-
dard & Poor's Ratings Group ("Standard & Poor's")
and "Aaa" by Moody's Investors Service,
S-11
<PAGE>
Inc. ("Moody's"). STANDARD & POOR'S RATINGS (AS
EVIDENCED BY THE SYMBOL "r") AND MOODY'S RATINGS
OF THE SENIOR CERTIFICATES WILL NOT REPRESENT ANY
ASSESSMENT OF THE RELATED SUBSERVICER'S OR THE
MASTER SERVICER'S ABILITY TO PURCHASE CONVERTING
OR CONVERTED MORTGAGE LOANS. In the event that
neither the related Subservicer nor the Master
Servicer purchases a Converting or Converted
Mortgage Loan, investors in the Senior Certifi-
cates might suffer a lower than anticipated
yield. A security rating is not a recommendation
to buy, sell or hold securities and may be sub-
ject 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. See "Certain Yield and Pre-
payment Considerations" and "Ratings" herein and
"Yield Considerations" in the Prospectus.
S-12
<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 $310,712,520. The Mortgage Pool will consist of
conventional, adjustable rate, fully-amortizing, 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. 36.8% and 25.3% of the Mortgage Loans were purchased from, and are
being subserviced by, Countrywide Funding Corporation and EMC Mortgage
Corporation, an affiliate of the Underwriter, respectively. Except as set forth
in the preceding sentence, no Unaffiliated Seller sold more than 2.8% of the
Mortgage Loans to Residential Funding. 25.5% of the Mortgage Loans are being or
will be subserviced by GMAC Mortgage Corporation of Iowa, which is an affiliate
of the Company.
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 Sellers that were, as of the Cut-off Date, institutions under the
control of the Resolution Trust Corporation or otherwise in receivership or
conservatorship or involved in other insolvency or bankruptcy proceedings, or
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 or the Insurer 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. Losses on
Mortgage Loans as to which there was fraud in the origination of such Mortgage
Loans will be covered as described herein under "Description of the
Certificates--Allocation of Losses; Subordination."
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate on each Mortgage Loan will adjust semi-annually on the
Adjustment Date specified in the related Mortgage Note to a rate equal to the
sum (with respect to 85.7% of the Mortgage Loans rounded to the nearest
multiple of 0.125% and with respect to 14.3% of the Mortgage Loans, not
rounded) of the Index described below and a fixed percentage set forth in the
related Mortgage Note (the "Note Margin"), subject to certain limitations
described herein. The amount of the monthly payment on each Mortgage Loan will
be adjusted semi-annually on the first day of the month following the month in
which the Adjustment Date occurs to equal the amount necessary to pay interest
at the then-applicable Mortgage Rate and fully amortize the outstanding
principal balance of the Mortgage Loan over its remaining term to stated
maturity. As of the Cut-off Date, 58.1% of the Mortgage Loans will have reached
their first Adjustment Date. The Mortgage Loans will have different Adjustment
Dates, Note Margins and limitations on the Mortgage Rate adjustments, as
described below.
S-13
<PAGE>
Each Mortgage Note contains an interest rate adjustment cap (the "Periodic
Rate Cap") which limits the adjustment of the Mortgage Rate to not more than
1.00% above or below the previous Mortgage Rate. The Mortgage Rate on a
Mortgage Loan may not exceed the maximum Mortgage Rate (the "Maximum Mortgage
Rate") or be less than the minimum Mortgage Rate (the "Minimum Mortgage Rate")
specified for such Mortgage Loan in the related Mortgage Note. The Minimum
Mortgage Rate for each Mortgage Loan will be equal to the Note Margin, except
for 7.3% of the Mortgage Loans which have a Minimum Mortgage Rate greater than
the Note Margin. The Minimum Mortgage Rates will range from 2.500% to 7.000%,
with a weighted average Minimum Mortgage Rate as of the Cut-off Date of
3.0803%. The Maximum Mortgage Rates will range from 9.625% to 14.875%, with a
weighted average Maximum Mortgage Rate as of the Cut-off Date of 11.8368%. No
Mortgage Loan provides for payment caps on any Adjustment Date which would
result in deferred interest or negative amortization.
The Index applicable with respect to approximately 37.4% of the Mortgage
Loans will be a per annum rate equal to the average of interbank offered rates
for six-month U.S. dollar-denominated deposits in the London market based on
quotations of major banks ("LIBOR") as published by FNMA and as most recently
available as of the date forty-five days prior to the Adjustment Date. With
respect to approximately 54.5% and 8.1% of the Mortgage Loans, the Index shall
be LIBOR as published in The Wall Street Journal and as most recently available
as of the first business day of the month immediately preceding the month in
which the Adjustment Date occurs, or as of the date forty-five days prior to
the Adjustment Date, respectively. In the event that the Index is no longer
available, an index reasonably acceptable to the Trustee that is based on
comparable information will be selected by the Master Servicer.
Listed below are levels of LIBOR as published by FNMA that are or would have
been applicable to mortgage loans having the following adjustment dates for the
indicated years. Such average yields may fluctuate significantly from month to
month as well as over longer periods and may not increase or decrease in a
constant pattern from period to period. There can be no assurance that levels
of LIBOR published in The Wall Street Journal for the corresponding periods set
forth herein would have been at the same levels as those set forth below. The
following does not purport to be representative of future levels of LIBOR (as
published by FNMA or The Wall Street Journal). No assurance can be given as to
the level of LIBOR on any Adjustment Date or during the life of any Mortgage
Loan.
LIBOR
<TABLE>
<CAPTION>
ADJUSTMENT DATE 1991 1992 1993 1994 1995
--------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
January 1................................. 8.063% 5.359% 3.641% 3.500% 6.000%
February 1................................ 8.375 4.938 3.891 3.516 6.438
March 1................................... 7.563 4.250 3.641 3.500 7.000
April 1................................... 7.125 4.250 3.438 3.391
May 1..................................... 6.891 4.375 3.328 4.000
June 1.................................... 6.531 4.547 3.375 4.250
July 1.................................... 6.313 4.266 3.313 4.625
August 1.................................. 6.188 4.250 3.438 5.000
September 1............................... 6.563 4.125 3.563 5.250
October 1................................. 6.313 3.625 3.563 5.328
November 1................................ 5.875 3.625 3.438 5.328
December 1................................ 5.688 3.313 3.375 5.688
</TABLE>
The initial Mortgage Rate in effect on a Mortgage Loan generally will be
lower, and may be significantly lower, than the sum of the Index that would
have been applicable at origination and the Note Margin. Therefore, unless the
Index declines after origination of a Mortgage Loan, the related Mortgage Rate
will generally increase on the first Adjustment Date following origination of
such Mortgage Loan subject to the Periodic Rate Cap. The repayment of the
Mortgage Loans will be dependent on the ability of the Mortgagors
S-14
<PAGE>
to make larger monthly payments following adjustments of the Mortgage Rate.
Mortgage Loans that have the same initial Mortgage Rate may not always bear
interest at the same Mortgage Rate because such Mortgage Loans may have
different Adjustment Dates (and the Mortgage Rates therefore may reflect
different Index values), Note Margins, Maximum Mortgage Rates and Minimum
Mortgage Rates. The Net Mortgage Rate with respect to each Mortgage Loan as of
the Cut-off Date will be set forth in the Mortgage Loan Schedule attached to
the Pooling and Servicing Agreement. The Net Mortgage Rate on each Mortgage
Loan will be adjusted on each Adjustment Date to equal the Mortgage Rate minus
the Servicing Fee and Policy Premium Rate (as defined herein), subject to the
Maximum Mortgage Rate, Minimum Mortgage Rate and Periodic Rate Cap for such
Mortgage Loan. In the event a Convertible Mortgage Loan became a Converted
Mortgage Loan and remained in the Mortgage Pool, the Net Mortgage Rate on each
such Converted Mortgage Loan would equal the Mortgage Rate thereon less 0.4465%
per annum. The Net Note Margin is equal to the Note Margin minus the Servicing
Fee and Policy Premium Rate. The Net Note Margins for the Mortgage Loans will
be at least 1.9285% per annum but not more than 2.9285% per annum as of the
Cut-off Date.
CONVERTIBLE MORTGAGE LOANS
Approximately 4.6% of the Mortgage Loans ("Convertible Mortgage Loans")
provide that, at the option of the related Mortgagors, the adjustable interest
rate on such Mortgage Loans may be converted to a fixed interest rate. The
first month in which any of the Mortgage Loans were able to convert was
September 1, 1992, and the last month in which any of the Mortgage Loans may
convert is March 1, 2000. Upon conversion, the Mortgage Rate will be converted
to a fixed interest rate determined in accordance with the formula set forth in
the related Mortgage Note which formula is intended to result in a Mortgage
Rate which is not less than the then current market interest rate (subject to
applicable usury laws). After such conversion, the monthly payments of
principal and interest will be adjusted to provide for full amortization over
the remaining term to scheduled maturity. Upon notification from a Mortgagor of
such Mortgagor's intent to convert from an adjustable interest rate to a fixed
interest rate and prior to the conversion of any such Mortgage Loan (a
"Converting Mortgage Loan"), the related Subservicer will be obligated to
purchase the Converting Mortgage Loan at a price equal to the outstanding
principal balance thereof plus accrued interest thereon at the related Mortgage
Rate net of any subservicing fees (the "Conversion Price"). In the event of a
failure by a Subservicer to purchase a Converting Mortgage Loan, the Master
Servicer is required to use its best efforts to purchase such Mortgage Loan
following its conversion (a "Converted Mortgage Loan") during the one-month
period following the date of conversion at the Conversion Price.
In the event that the related Subservicer fails to purchase a Converting
Mortgage Loan and the Master Servicer does not purchase a Converted Mortgage
Loan, neither the Company, GMAC Mortgage or any of their affiliates nor any
other entity is obligated to purchase or arrange for the purchase of any
Converted Mortgage Loan. Any such Converted Mortgage Loan will remain in the
Mortgage Pool as a fixed-rate Mortgage Loan and will result in the Mortgage
Pool's having both fixed-rate and adjustable-rate Mortgage Loans. See "Certain
Yield and Prepayment Considerations" herein.
Following the purchase of any Converted Mortgage Loan as described above, the
purchaser will be entitled to receive an assignment from the Trustee of such
Mortgage Loan and the purchaser will thereafter own such Mortgage Loan free of
any further obligation to the Trustee or the Certificateholders with respect
thereto.
S-15
<PAGE>
MORTGAGE POOL CHARACTERISTICS
The Mortgage Pool will have the following characteristics as of the Cut-off
Date:
<TABLE>
<S> <C>
Number of Mortgage Loans...................................... 1,200
Initial Pass-Through Rate on the Certificates (1)............. 5.9833%
Range of Net Mortgage Rates (2)............................... 3.1785%-7.9285%
Mortgage Rates:
Weighted Average............................................ 6.4844%
Range....................................................... 3.750%-8.500%
Note Margins:
Weighted Average............................................ 2.9441%
Range....................................................... 2.500%-3.375%
Net Note Margins:
Weighted Average............................................ 2.4430%
Range....................................................... 1.9285%-2.9285%
Minimum Mortgage Rates:
Weighted Average............................................ 3.0803%
Range....................................................... 2.500%-7.000%
Minimum Net Mortgage Rates:
Weighted Average............................................ 2.5791%
Range....................................................... 1.9285%-6.5535%
Maximum Mortgage Rates:
Weighted Average............................................ 11.8368%
Range....................................................... 9.625%-14.875%
Maximum Net Mortgage Rates:
Weighted Average............................................ 11.3357%
Range....................................................... 9.1785%-14.3035%
Weighted Average Months to next Adjustment Date after March 1,
1995 (3)..................................................... 3
</TABLE>
- --------
(1) The Pass-Through Rate on the Certificates will be equal to the weighted
average of the Net Mortgage Rates on the Mortgage Loans.
(2) The Net Mortgage Rates are calculated as described under "Description of
the Certificates--Interest Distributions" herein, and the Net Mortgage Rate
as to each Mortgage Loan on and after its initial Adjustment Date will be
generally equal to the Mortgage Rate minus the Servicing Fee and Policy
Premium Rate, subject to the Maximum Mortgage Rate, Minimum Mortgage Rate
and Periodic Rate Cap.
(3) The Weighted Average Months to next Adjustment Date will be equal to the
weighted average of the number of months until the Adjustment Date next
following March 1, 1995.
S-16
<PAGE>
The following table sets forth the number, aggregate principal balance and
percentage of Mortgage Loans as of the Cut-off Date having their next
Adjustment Dates in the months and years set forth below.
<TABLE>
<CAPTION>
MONTH AND YEAR OF NUMBER OF AGGREGATE PRINCIPAL PERCENTAGE OF
NEXT ADJUSTMENT DATES MORTGAGE LOANS BALANCE MORTGAGE LOANS
--------------------- -------------- ------------------- --------------
<S> <C> <C> <C>
April 1995.............. 194 $ 52,721,310 16.97%
May 1995................ 298 88,660,457 28.53
June 1995............... 252 62,867,731 20.23
July 1995............... 179 38,389,488 12.36
August 1995............. 124 28,714,718 9.24
September 1995.......... 153 39,358,816 12.67
----- ------------ ------
Total................. 1,200 $310,712,520 100.00%
===== ============ ======
</TABLE>
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.
None of the Mortgage Loans will have been originated prior to August 2, 1991
or will have a maturity date later than March 1, 2025. No Mortgage Loan will
have a remaining term to stated maturity as of the Cut-off Date of less than
318 months. The weighted average remaining term to stated maturity of the
Mortgage Loans as of the Cut-off Date will be 353 months. The weighted average
original term to maturity of the Mortgage Loans as of the Cut-off Date will be
360 months.
As of the Cut-off Date, no Mortgage Loan will be one month or more delinquent
in payment of principal and interest.
The Mortgage Loans are generally assumable pursuant to the terms of the
related Mortgage Note. See "Maturity and Prepayment Considerations" in the
Prospectus.
No Mortgage Loan provides for deferred interest or negative amortization.
In January 1995, a series of storms caused severe flooding across the State
of California and resulted in a state of emergency being declared by Governor
Pete Wilson. Approximately 3.1% of the Mortgage Loans in the Mortgage Pool are
secured by properties located in zip code areas in which the Company believes
the potential for moderate to high flood damage exists.
None of the Mortgage Loans will be Buydown Mortgage Loans.
S-17
<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 by aggregate
principal balance as of the Cut-off Date (except as otherwise indicated).
Unless otherwise specified, all principal balances of the Mortgage Loans are as
of the Cut-off Date and are rounded to the nearest dollar.
MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
MORTGAGE RATES (%) LOANS BALANCE MORTGAGE POOL
- ------------------ --------- ------------ -------------
<S> <C> <C> <C>
3.750-4.874............................... 1 $ 297,727 0.10%
4.875-4.999............................... 1 214,478 0.07
5.000-5.124............................... 2 622,123 0.20
5.125-5.249............................... 4 801,561 0.26
5.250-5.374............................... 16 4,328,796 1.39
5.375-5.499............................... 27 7,334,001 2.36
5.500-5.624............................... 58 17,460,702 5.62
5.625-5.749............................... 24 6,916,206 2.23
5.750-5.874............................... 61 15,979,265 5.14
5.875-5.999............................... 91 24,206,472 7.79
6.000-6.124............................... 69 17,747,633 5.71
6.125-6.249............................... 29 7,509,851 2.42
6.250-6.374............................... 93 25,976,819 8.36
6.375-6.499............................... 62 16,434,693 5.29
6.500-6.624............................... 114 30,091,047 9.68
6.625-6.749............................... 67 17,310,539 5.57
6.750-6.874............................... 94 24,587,889 7.91
6.875-6.999............................... 80 19,876,999 6.40
7.000-7.124............................... 49 11,274,074 3.63
7.125-7.249............................... 34 9,349,408 3.01
7.250-7.374............................... 50 10,485,932 3.37
7.375-7.499............................... 34 8,551,541 2.75
7.500-7.624............................... 48 11,676,647 3.76
7.625-7.749............................... 30 7,925,219 2.55
7.750-7.874............................... 27 6,190,299 1.99
7.875-7.999............................... 10 2,064,081 0.66
8.000-8.124............................... 8 1,799,604 0.58
8.125-8.249............................... 6 1,145,146 0.37
8.250-8.374............................... 9 1,981,812 0.64
8.375-8.499............................... 1 385,768 0.12
8.500-8.624............................... 1 186,187 0.06
----- ------------ ------
Total.................................... 1,200 $310,712,520 100.00%
===== ============ ======
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of the Mortgage
Loans will be approximately 6.4844% per annum.
S-18
<PAGE>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
NUMBER OF
ORIGINAL MORTGAGE MORTGAGE PRINCIPAL PERCENT OF
LOAN BALANCE LOANS BALANCE MORTGAGE POOL
----------------- --------- ------------ -------------
<S> <C> <C> <C>
$ 0- 100,000....................... 106 $ 7,830,869 2.52%
100,001- 200,000....................... 238 34,609,813 11.14
200,001- 300,000....................... 534 130,422,517 41.98
300,001- 400,000....................... 183 63,069,047 20.30
400,001- 500,000....................... 70 31,506,948 10.14
500,001- 600,000....................... 35 19,167,504 6.17
600,001- 700,000....................... 22 13,936,191 4.49
700,001- 800,000....................... 5 3,728,315 1.20
800,001- 900,000....................... 3 2,468,652 0.79
900,001-1,000,000....................... 4 3,972,665 1.28
----- ------------ ------
Total.................................. 1,200 $310,712,520 100.00%
===== ============ ======
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the Mortgage
Loans will be approximately $258,927.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
ORIGINAL NUMBER OF
LOAN-TO- MORTGAGE PRINCIPAL PERCENT OF
VALUE RATIO (%) LOANS BALANCE MORTGAGE POOL
--------------- --------- ------------ -------------
<S> <C> <C> <C>
0.01-50.00............................... 39 $ 11,935,325 3.84%
50.01-55.00............................... 22 6,449,385 2.08
55.01-60.00............................... 35 10,972,998 3.53
60.01-65.00............................... 52 16,053,183 5.17
65.01-70.00............................... 78 19,822,914 6.38
70.01-75.00............................... 133 39,346,880 12.66
75.01-80.00............................... 332 91,113,705 29.32
80.01-85.00............................... 42 11,386,874 3.66
85.01-90.00............................... 392 92,228,479 29.68
90.01-95.00............................... 75 11,402,777 3.67
----- ------------ ------
Total................................... 1,200 $310,712,520 100.00%
===== ============ ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage Loans
will be approximately 78.31%.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
STATE LOANS BALANCE MORTGAGE POOL
- ----- --------- ------------ -------------
<S> <C> <C> <C>
California................................. 774 $220,043,871 70.82%
Washington................................. 56 12,131,044 3.90
Arizona.................................... 40 10,840,914 3.49
Other (1).................................. 330 67,696,692 21.79
----- ------------ ------
Total.................................... 1,200 $310,712,520 100.00%
===== ============ ======
</TABLE>
- --------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than 1.1% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than 0.8%
of the Mortgage Loans will be secured by Mortgaged Properties located in any
one zip code area outside California.
S-19
<PAGE>
MORTGAGE LOAN PURPOSE
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
LOAN PURPOSE LOANS BALANCE MORTGAGE POOL
- ------------ --------- ------------ -------------
<S> <C> <C> <C>
Purchase................................... 717 $171,428,152 55.17%
Rate/Term Refinance........................ 391 115,043,348 37.03
Equity Refinance........................... 92 24,241,020 7.80
----- ------------ ------
Total.................................... 1,200 $310,712,520 100.00%
===== ============ ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Mortgage Loans will be 74.95%. The weighted average Loan-to-Value
Ratio at origination of equity refinance Mortgage Loans will be 65.22%.
MORTGAGE LOAN DOCUMENTATION TYPES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
DOCUMENTATION TYPE LOANS BALANCE MORTGAGE POOL
- ------------------ --------- ------------ -------------
<S> <C> <C> <C>
Full Documentation......................... 1,089 $286,597,106 92.24%
Reduced Documentation...................... 111 24,115,414 7.76
----- ------------ ------
Total.................................... 1,200 $310,712,520 100.00%
===== ============ ======
</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
63.25%. No more than 54.1% of such reduced loan documentation Mortgage Loans
will be secured by Mortgaged Properties located in California.
OCCUPANCY TYPES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
OCCUPANCY LOANS BALANCE MORTGAGE POOL
- --------- --------- ------------ -------------
<S> <C> <C> <C>
Primary Residence.......................... 1,143 $299,649,634 96.44%
Second/Vacation............................ 57 11,062,886 3.56
Non Owner-occupied......................... 0 0 0.00
----- ------------ ------
Total.................................... 1,200 $310,712,520 100.00%
===== ============ ======
</TABLE>
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE PRINCIPAL PERCENT OF
PROPERTY TYPE LOANS BALANCE MORTGAGE POOL
- ------------- --------- ------------ -------------
<S> <C> <C> <C>
Single-family detached..................... 866 $225,821,606 72.68%
Planned Unit Developments (detached)....... 227 64,245,051 20.68
Two- to four-family units.................. 10 2,216,260 0.71
Condo Low-Rise (less than 5 stories)....... 75 14,320,593 4.61
Condo Mid-Rise (5 to 8 stories)............ 2 417,077 0.13
Condo High-Rise (9 stories or more)........ 1 187,534 0.06
Townhouse.................................. 4 506,656 0.16
Townhouse (2 to 4 family units)............ 1 426,751 0.14
Planned Unit Developments (attached)....... 11 2,016,685 0.65
Leasehold.................................. 3 554,306 0.18
----- ------------ ------
Total.................................... 1,200 $310,712,520 100.00%
===== ============ ======
</TABLE>
In connection with the Mortgage Loans that are secured by a leasehold
interest, the Seller shall have represented to the Company that, among other
things: the use of leasehold estates for residential properties is an accepted
practice in the area where the Mortgaged Property is located; residential
property in such area
S-20
<PAGE>
consisting of leasehold estates is readily marketable; the lease is recorded
and no party is in any way in breach of any provision of such lease; the
leasehold is in full force and effect and is not subject to any prior lien or
encumbrance by which the leasehold could be terminated or subject to any charge
or penalty; and the remaining term of the lease does not terminate less than
ten years after the maturity date of each such Mortgage Loan.
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, 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 Republic Mortgage Insurance
Company, General Electric Mortgage Insurance Corporation, PMI Mortgage
Insurance Company, Commonwealth Mortgage Assurance Company, United Guaranty
Residential Insurance Company, or Mortgage Guaranty Insurance Corporation
(collectively, the "Primary Insurers"). Each Primary Insurer has a claims
paying ability currently acceptable to the Rating Agencies that have been
requested to rate the Senior 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 Senior
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
included in the Mortgage Pool prior to the issuance of the Senior 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 Senior 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 Senior
Certificates and, together with the Pooling and Servicing Agreement, will be
filed with the Securities and Exchange Commission within fifteen days after the
initial issuance of the Senior 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.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1995-S2 Mortgage Pass-Through Certificates will include the
following two classes (the "Senior Certificates"): (i) Class A Certificates and
(ii) Class R Certificates (the "Residual Certificates"). In addition to the
Senior Certificates, the Series 1995-S2 Mortgage Pass-Through Certificates will
consist of three classes of subordinate certificates which are designated as
the Class B-1 Certificates, Class B-2 Certificates and Class B-3 Certificates
(collectively, the "Class B Certificates" and, together with the Senior
Certificates, the "Certificates"). Only the Senior Certificates are offered
hereby.
The Senior Certificates together with the Class B 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 Senior Certificates
will be entitled to the benefit of a certificate guaranty insurance policy (the
"Policy") to be issued by Municipal Bond Investors Assurance Corporation (the
"Insurer"), which will protect the holders of the Senior Certificates against
any interest
S-21
<PAGE>
shortfalls (except as described herein) allocated to the Senior Certificates
and the principal portion of any Realized Losses allocated to the Senior
Certificates. The Policy is not part of the Trust Fund.
The Class A 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 will be issued in minimum denominations of $25,000 and
integral multiples of $1 in excess thereof. The Residual Certificates will be
issued in registered, certificated form in minimum denominations of a 20%
Percentage Interest, except as otherwise set forth herein under "Certain
Federal Income Tax Consequences."
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 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 the Class A 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 THE CLASS A 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, the Insurer 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.
S-22
<PAGE>
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.
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 the
sum of (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 fee, any subservicing
fees and the premium payable with respect to the Policy, (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. 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
On each Distribution Date, holders of each class of Senior Certificates will
be entitled to receive interest distributions in an amount equal to one month's
interest on the Certificate Principal Balance thereof at the then-applicable
Pass-Through Rate, subject to reduction only in the event of shortfalls caused
by the Relief Act (as defined in the Prospectus) and any Prepayment Interest
Shortfalls for such Distribution Date to the extent not covered by the Master
Servicer allocated in the manner described below. As described below, Accrued
Certificate Interest on each class of Certificates is subject to reduction in
the event of certain interest shortfalls allocable thereto. However, in the
event that any such shortfall is allocated to the Senior Certificates, the
amount of such allocated shortfall will be drawn under the Policy and
distributed to the holders of the Senior Certificates; provided that no such
draw will be made (and therefore the Senior Certificates will not be protected
against) in respect of any such shortfall caused by the Relief Act and any
Prepayment Interest Shortfalls. Notwithstanding the foregoing, if payments were
not made as required under the Policy, any interest shortfalls may be allocated
to the Senior Certificates as described below.
With respect to any Distribution Date and each class of Senior Certificates,
Accrued Certificate Interest will be equal to one month's interest accrued on
the Certificate Principal Balance of the Certificates of such class at the then
applicable Pass-Through Rate (as defined below), in each case, less interest
shortfalls, if any, allocated to such class for such Distribution Date, to the
extent not covered with respect to the Senior Certificates by the Subordination
provided by the Class B Certificates, including in each case (i) any
S-23
<PAGE>
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 solely to the Class B
Certificates, (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 (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. Accrued Certificate Interest is calculated on the basis of a 360-day
year consisting of twelve 30-day months.
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 payable to the Master Servicer in
respect of its master servicing activities 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.
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 each class of Senior
Certificates in proportion to the respective amounts of Accrued Certificate
Interest for such Distribution Date on each such class. 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 second
preceding paragraph) will constitute unpaid Accrued Certificate Interest and
will be distributable to holders of the Certificates of such classes entitled
to such amounts on subsequent Distribution Dates, 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 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 preceding paragraph with respect to Prepayment
Interest Shortfalls resulting from prepayments in full.
The Pass-Through Rate on the Senior Certificates for any Distribution Date
will equal the weighted average of the Net Mortgage Rates on the outstanding
Mortgage Loans for the month preceding such Distribution Date, determined as of
the close of business on the Due Date occurring in such month (or, with respect
to the first Distribution Date, as of the Cut-off Date). The Net Mortgage Rate
on each Mortgage Loan is equal to the Mortgage Rate thereon minus the rates per
annum (collectively, the "Servicing Fee and Policy Premium Rate") at which the
master servicing fee, the subservicing fees and the premium payable with
respect to the Policy (collectively, the "Servicing Fees and Policy Premium")
accrue. The Net Mortgage Rate with respect to each Mortgage Loan as of the Cut-
off Date will be set forth in the Mortgage Loan Schedule attached to the
Pooling and Servicing Agreement. As of the Cut-off Date, the weighted average
Net
S-24
<PAGE>
Mortgage Rate will be 5.9833% per annum. The initial Pass-Through Rate on the
Senior Certificates will be 5.9833% per annum.
On each Adjustment Date applicable to each Mortgage Loan, the Net Mortgage
Rate on each Mortgage Loan will be adjusted to a rate equal to the Mortgage
Rate minus the Servicing Fee and Policy Premium Rate, subject to the Maximum
Mortgage Rate and Minimum Mortgage Rate for such Mortgage Loan; provided that
the Net Mortgage Rate on any Mortgage Loan on any Adjustment Date may not
increase or decrease by more than 1.00% (the "Periodic Rate Cap"). The Net Note
Margin is equal to the Note Margin minus the Servicing Fee and Policy Premium
Rate. The Net Note Margins for the Mortgage Loans will be at least 1.9285% per
annum but not more than 2.9285% per annum as of the Cut-off Date, with an
initial weighted average Net Note Margin of 2.4430% per annum. See "Description
of the Mortgage Pool--Mortgage Rate Adjustment."
As described herein, the Accrued Certificate Interest allocable to each class
of Senior Certificates is based on the Certificate Principal Balance of such
class. The Certificate Principal Balance of any Senior 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 in the manner described herein.
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Holders of the Senior Certificates in the aggregate 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 is so distributed, a distribution
allocable to principal equal to the sum of the following:
(i) the product of (A) the then-applicable Senior Percentage and (B) the
aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on the
Mortgage Loans 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) 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) 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;
(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 Senior Percentage of the Stated Principal Balance of such
Mortgage Loan and (b) the then-applicable Senior Accelerated Distribution
Percentage (as defined below) of the related collections, including
Insurance Proceeds and Liquidation Proceeds, to the extent applied as
recoveries of principal;
(iii) the then-applicable Senior Accelerated Distribution Percentage of
the aggregate of all full and partial Principal Prepayments made by the
respective Mortgagors during the preceding calendar month;
(iv) any Excess Subordinate Principal Amount (as defined below) for such
Distribution Date; and
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<PAGE>
(v) any amounts allocable to principal for any previous Distribution Date
(calculated pursuant to clauses (i), (ii) and (iii) above) that remain
undistributed to the extent that any such amounts are not attributable to
Realized Losses which were allocated to the Class B Certificates.
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 amount, if any, by which (i) the amount that would otherwise be
distributable in respect of principal on such classes of Certificates on such
Distribution Date is greater than (ii) the excess, if any, of the aggregate of
the Certificate Principal Balances of such classes of Certificates immediately
prior to such Distribution Date over the aggregate amount of Realized Losses to
be allocated to such classes of Certificates on such 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.
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 other 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 97.0% and
will in no event exceed 100%, will be adjusted for each Distribution Date to be
the percentage equal to the aggregate Certificate Principal Balance of the
Senior Certificates immediately prior to such Distribution Date divided by the
aggregate Stated Principal Balance of all of the Mortgage Loans immediately
prior to such Distribution Date. The Class B Percentage as of any date of
determination is equal to 100% minus the Senior Percentage as of such date.
Except as described below, the Senior Accelerated Distribution Percentage for
any Distribution Date occurring prior to the Distribution Date in April 2005
will equal 100%. The Senior Accelerated Distribution Percentage for any
Distribution Date occurring after the first ten years will be as follows: for
any Distribution Date during the eleventh year after the Delivery Date, the
Senior Percentage for such Distribution Date plus 70% of the Class B Percentage
for such Distribution Date; for any Distribution Date during the twelfth year
after the Delivery Date, the Senior Percentage for such Distribution Date plus
60% of the Class B Percentage for such Distribution Date; for any Distribution
Date during the thirteenth year after the Delivery Date, the Senior Percentage
for such Distribution Date plus 40% of the Class B Percentage for such
Distribution Date; for any Distribution Date during the fourteenth year after
the Delivery Date, the Senior Percentage for such Distribution Date plus 20% of
the Class B Percentage for such Distribution Date; and for any Distribution
Date thereafter, the Senior Percentage for such Distribution Date (unless on
any such Distribution Date the Senior Percentage exceeds the initial Senior
Percentage in which case the Senior Accelerated Distribution Percentage for
such Distribution Date will once again equal 100%). Any scheduled reduction to
the Senior Accelerated Distribution Percentage described above shall not be
made as of any Distribution Date unless either (a) both (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 occurring during the eleventh, twelfth, thirteenth, or
fourteenth year or for 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 B Certificates or (b) both (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
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<PAGE>
months, does not exceed 4% and (ii) Realized Losses on the Mortgage Loans to
date are less than 10% of the initial Certificate Principal Balances of the
Class B Certificates.
Notwithstanding the above, if on any Distribution Date (a) the Class B
Percentage, prior to giving effect to any distribution on such Distribution
Date, equals or exceeds 6.0% (approximately twice the initial Class B
Percentage), and (b) both of the conditions set forth in either clause (a) or
clause (b) in the preceding paragraph have been met, then the Senior
Accelerated Distribution Percentage for such Distribution Date will equal the
sum of (i) the Senior Percentage for such Distribution Date and (ii) 50% of the
Class B Percentage for such Distribution Date, if such Distribution Date is
prior to April 25, 1998, and will equal the Senior Percentage for such
Distribution Date if such Distribution Date is on or after April 25, 1998.
Notwithstanding the foregoing, upon reduction of the Certificate Principal
Balances of the Senior Certificates to zero, the Senior Accelerated
Distribution Percentage will equal 0%. See "Subordination" in the Prospectus.
Distributions of principal on the Senior Certificates on each Distribution
Date will be made (to the extent of the Available Distribution Amount remaining
after distribution of the Accrued Certificate Interest on the Senior
Certificates as described under "Interest Distributions") as follows:
(a) Prior to the occurrence of the Class B Credit Support Depletion Date
(as defined below), the sum of the amounts described in clauses (i) through
(v) of the first paragraph under "--Principal Distributions on the Senior
Certificates" will be distributed first to the holders of the Residual
Certificates, until the Certificate Principal Balance thereof has been
reduced to zero and then to the holders of the Class A Certificates, until
the Certificate Principal Balance thereof has been reduced to zero.
(b) On or after the occurrence of the Class B Credit Support Depletion
Date, the sum of the amounts described in clauses (i) through (v) of the
first paragraph under "--Principal Distributions on the Senior
Certificates" will be distributed to the holders of the Senior Certificates
pro rata in accordance with their respective Certificate Principal
Balances.
(c) If the Certificate Principal Balances of the Senior Certificates have
been reduced to zero prior to the occurrence of the Class B Credit Support
Depletion Date, the Senior Certificates will be entitled to no further
distributions of principal, and the Available Distribution Amount will be
paid solely to the holders of the Class B Certificates, other than
reimbursable amounts due to the Insurer as set forth in the Pooling and
Servicing Agreement.
The "Class B Credit Support Depletion Date" is the first Distribution Date on
which the Senior Percentage equals 100%.
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 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.
CERTIFICATE GUARANTY INSURANCE POLICY
The following information regarding the Policy has been supplied by the
Insurer for inclusion herein.
The Insurer, in consideration of the payment of the premium and subject to
the terms of the Policy, thereby unconditionally and irrevocably guarantees to
any Owner that an amount equal to each full and complete Insured Payment (as
defined below) will be received by the Trustee, on behalf of the Owners (as
defined below), for distribution by the Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Insurer's obligations under the
Policy with respect to a particular Insured Payment
S-27
<PAGE>
shall be discharged to the extent funds equal to the applicable Insured Payment
are received by the Trustee, whether or not such funds are properly applied by
the Trustee. Insured Payments shall be made only at the time set forth in the
Policy, and no accelerated Insured Payments shall be made regardless of any
acceleration of the Senior Certificates, unless such acceleration is at the
sole option of the Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust Fund, the REMIC
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability).
The Insurer will pay any amounts payable under the Policy no later than 12:00
noon, New York City time, on the later of the Distribution Date on which the
related Deficiency Amount (as defined below) is due or the Business Day
following receipt in New York, New York on a Business Day by State Street Bank
and Trust Company, N.A., as Insurer's Fiscal Agent or any successor fiscal
agent appointed by the Insurer (the "Insurer's Fiscal Agent") of a Notice (as
described below); provided that if such Notice is received after 12:00 noon,
New York City time, on such Business Day, it will be deemed to be received on
the following Business Day. If any such Notice received by the Insurer's Fiscal
Agent is not in proper form or is otherwise insufficient for the purpose of
making a claim under the Policy it shall be deemed not to have been received by
the Insurer's Fiscal Agent for purposes of this paragraph, and the Insurer or
the Insurer's Fiscal Agent, as the case may be, shall promptly so advise the
Trustee and the Trustee may submit an amended Notice.
Insured Payments due under the Policy, unless otherwise stated therein, will
be disbursed by the Insurer's Fiscal Agent to the Trustee on behalf of the
Owners by wire transfer of immediately available funds in the amount of the
Insured Payment.
The Insurer's Fiscal Agent is the agent of the Insurer only and the Insurer's
Fiscal Agent shall in no event be liable to Owners for any acts of the
Insurer's Fiscal Agent or any failure of the Insurer to deposit, or cause to be
deposited, sufficient funds to make payments due under the Policy.
As used in the Policy, the following terms shall have the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of March 1,
1995, among Residential Funding Mortgage Securities I, Inc., as company,
Residential Funding Corporation, as master servicer, and the Trustee, as
trustee, without regard to any amendment or supplement thereto.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee under the Agreement or the Insurer is
located are authorized or obligated by law or executive order to close.
"Deficiency Amount" means, with respect to the Senior Certificates as of any
Distribution Date (i) any shortfall in amounts available in the Certificate
Account to pay one full month's interest on the Certificate Principal Balance
of each of the Senior Certificates at the then applicable Pass-Through Rate,
net of any Prepayment Interest Shortfalls and any interest shortfalls relating
to the Relief Act allocated to each of the Senior Certificates, and (ii) the
principal portion of any Realized Loss allocated to each of the Senior
Certificates and (iii) following the purchase of all assets of the Trust Fund
pursuant to the termination section of the Agreement, any shortfall in the
Available Distribution Amount to pay amounts owed to the Holders of the Class A
and Class R Certificates pursuant to such section of the Agreement.
"Insured Payment" means, as of any Distribution Date, any Deficiency Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
Policy, the original of which is subsequently delivered by registered or
certified mail from the Trustee specifying the Insured Payment which shall be
due and owing on the applicable Distribution Date.
"Owner" means a holder of any Class A Certificate or Residual Certificate
who, on the applicable Distribution Date, is entitled under the terms of the
applicable Certificate to payment thereunder.
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<PAGE>
Capitalized terms used in the Policy and not otherwise defined in the Policy
shall have the respective meanings set forth in the Agreement as of the date of
execution of the Policy, without giving effect to any subsequent amendment or
modification to the Agreement unless such amendment or modification has been
approved in writing by the Insurer.
Any notice under the Policy or service of process on the Insurer's Fiscal
Agent may be made at the address listed below for the Insurer's Fiscal Agent or
such other address as the Insurer shall specify in writing to the Trustee.
The notice address of the Insurer's Fiscal Agent is 61 Broadway, 15th Floor,
New York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or
such other address as the Insurer's Fiscal Agent shall specify in writing.
The Policy is being issued under and pursuant to and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by the Policy is not covered by the Property/Casualty
Insurance Security Fund specified in Article 76 of the New York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy is not
refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Senior Certificates.
ALLOCATION OF LOSSES; SUBORDINATION
The Policy will cover all Realized Losses allocated to the Senior
Certificates. Notwithstanding the foregoing, if payments were not made as
required under the Policy, Realized Losses would be allocable to the Senior
Certificates based on the following priorities.
The Subordination provided to the Senior Certificates by the Class B
Certificates 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 Realized
Losses which are not Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses will be allocated first, to the Class
B Certificates until the Certificate Principal Balances of the Class B
Certificates have been reduced to zero; and second, to the Senior Certificates
on a pro rata basis. Any allocation of a Realized Loss (other than a Debt
Service Reduction) to a Certificate will be made by reducing 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. Any allocation of the principal portion of a
Realized Loss to the Senior Certificates (to the extent not covered by the
Policy) would be made pro rata. 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 the Class B Certificates will result from the priority of distributions of
the Available Distribution Amount as described herein. 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. The holders of the Senior Certificates will
not be entitled to any additional payments with respect to Realized Losses from
amounts otherwise distributable on any Class B Certificates (except in limited
circumstances in respect of any Excess Subordinate Principal
S-29
<PAGE>
Amount). Accordingly, the Subordination provided to the Senior Certificates by
the Class B Certificates with respect to Realized Losses allocated on any
Distribution Date will be effected primarily by increasing the Senior
Percentage of future distributions of principal of the remaining Mortgage
Loans.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses, Extraordinary Losses or other losses of a type not covered by
Subordination will be allocated on a pro rata basis among the Senior
Certificates and Class B Certificates (any such Realized Losses so allocated to
the Senior Certificates will be allocated without priority among various
classes of the Senior Certificates). 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 amounts of
interest and principal to be distributed to holders of the Senior Certificates
on each Distribution Date, holders of Senior Certificates have a right to
distributions of the Available Distribution Amount that is prior to the rights
of the holders of the Class B Certificates.
The application of the Senior Accelerated Distribution Percentage (when it
exceeds the Senior Percentage) to determine the distribution of principal on
the Senior Certificates will accelerate the amortization of the Senior
Certificates relative to the actual amortization of the Mortgage Loans. To the
extent that the Senior Certificates are amortized faster than the Mortgage
Loans, in the absence of offsetting Realized Losses allocated to the Class B
Certificates, the percentage interest evidenced by the Senior Certificates in
the Trust Fund will be decreased (with a corresponding increase in the interest
in the Trust Fund evidenced by the Class B Certificates), thereby increasing,
relative to their respective Certificate Principal Balances, the Subordination
afforded the Senior Certificates by the Class B Certificates, collectively. In
addition, if losses on the Mortgage Loans exceed the amounts described above
under "--Principal Distributions on the Senior Certificates," 100% of the
Senior Accelerated Distribution Percentage of full and partial principal
prepayments will be allocated to the Senior Certificates, thereby accelerating
the amortization of the Senior Certificates relative to the Class B
Certificates.
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 $1,587,438. As of any date of determination
following the Cut-off Date, the Special Hazard Amount shall equal $1,587,438
less the sum of (A) any amounts allocated solely to the Class B Certificates
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
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 $3,107,125. As of any date of
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<PAGE>
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 1.00% 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; (Y) from the first to the
second anniversary of the Cut-off Date, an amount equal to (1) the lesser of
(a) the Fraud Loss Amount as of the most recent anniversary of the Cut-off Date
and (b) 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
amount allocated through Subordination with respect to Fraud Losses since the
most recent anniversary of the Cut-off Date up to such date of determination;
and (Z) from the second to the fifth anniversary of the Cut-off Date, an amount
equal to (1) the lesser of (a) the Fraud Loss Amount as of the most recent
anniversary of the Cut-off Date and (b) 0.50% 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 amount 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 $100,000. As of any date of determination, the Bankruptcy
Amount shall equal $100,000 less the sum of any amounts allocated through
Subordination for such losses up to such date of determination.
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 and Policy Premium, other than the
portion thereof relating to the premium payable with respect to the Policy)
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. 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.
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<PAGE>
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; 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 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.
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
The following information has been supplied by Municipal Bond Investors
Assurance Corporation (the "Insurer") for inclusion in this Prospectus
Supplement.
The Insurer is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange-listed company. MBIA Inc. is not obligated to pay the debts of
or claims against the Insurer. The Insurer is a limited liability corporation
rather than a several liability association. The Insurer is domiciled in the
State of New York and licensed to do business in all 50 states, the District of
Columbia and the Commonwealth of Puerto Rico.
The tables below present selected financial information of the Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
--------------------------
DECEMBER 31, SEPTEMBER 30,
1993 1994
------------ -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets................................. $3,051 $3,314
Liabilities..................................... 2,073 2,231
Capital and Surplus............................. 978 1,083
<CAPTION>
GAAP
--------------------------
DECEMBER 31, SEPTEMBER 30,
1993 1994
------------ -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets.......................................... $3,474 $3,743
Liabilities..................................... 1,616 1,697
Shareholder's Equity............................ 1,858 2,046
</TABLE>
Audited financial statements of the Insurer as of December 31, 1993 and 1992
and for each of the three years in the period ended December 31, 1993 are
included herein as Appendix A. Unaudited financial statements of the Insurer
for the nine-month period ended September 30, 1994 are included herein as
Appendix B. Such financial statements have been prepared on the basis of
generally accepted accounting principles. Copies of the Insurer's 1993 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available from the Insurer. The address of the Insurer is 113
King Street, Armonk, New York 10504.
S-32
<PAGE>
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Policy and the Insurer set forth under the
heading "Description of the Certificates--Certificate Guaranty Insurance
Policy," and "Municipal Bond Investors Assurance Corporation," and in
Appendices A and B.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yield to maturity and the aggregate amount of distributions on the Senior
Certificates will be affected by the rate and timing of principal payments on
the Mortgage Loans, the amount and timing of Mortgagor defaults resulting in
Realized Losses and by adjustments to the Mortgage Rates. 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 (which will change as described above), 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 or the conversion of
Convertible Mortgage Loans. 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 more fully 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 Senior Certificates. In
the event that substantial numbers of Mortgagors exercise their conversion
rights with respect to Convertible Mortgage Loans, and the related Subservicers
or the Master Servicer purchase the Converting and Converted Mortgage Loans,
the Mortgage Pool will experience substantial prepayment of principal.
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
are assumable under certain circumstances if, in the sole judgment of the
Master Servicer or Subservicer, the prospective purchaser of a Mortgaged
Property is creditworthy and the security for such Mortgage Loan is not
impaired by the assumption. In the event the Master Servicer or Subservicer
does not approve an assumption, the related Mortgage Loan will be due-on-sale.
The Master Servicer shall enforce any due-on-sale clause contained in any
Mortgage Note or Mortgage, to the extent permitted under applicable law and
governmental regulations; provided, however, if the Master Servicer determines
that it is reasonably likely that any Mortgagor will bring, or if any Mortgagor
does bring, legal action to declare invalid or otherwise avoid enforcement of a
due-on-sale clause contained in any Mortgage Note or Mortgage, the Master
Servicer shall not be required to enforce the due-on-sale clause or to contest
such action. The extent to which the Mortgage Loans are assumed by purchasers
of the Mortgaged Properties rather than prepaid by the related Mortgagors in
connection with the sales of the Mortgaged Properties will affect the weighted
average life of the Certificates and may result in a prepayment experience on
the Mortgage Loans that differs from that on other conventional mortgage loans.
See "Maturity and Prepayment Considerations" in the Prospectus. 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. Prepayments, liquidations and purchases of the
Mortgage Loans will result in distributions to holders of the Senior
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 and servicing decisions.
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<PAGE>
The Convertible Mortgage Loans provide that the Mortgagors may, during a
specified period of time, convert the adjustable interest rate of such Mortgage
Loans to a fixed interest rate. The Company is not aware of any publicly
available statistics that set forth principal prepayment, conversion experience
or conversion forecasts of adjustable-rate mortgage loans over an extended
period of time, and its experience with respect to adjustable-rate mortgages is
insufficient to draw any conclusions with respect to the expected prepayment or
conversion rates on the adjustable-rate Mortgage Loans included in the Mortgage
Pool. As is the case with conventional, fixed-rate mortgage loans originated in
a high interest rate environment which may be subject to a greater rate of
principal prepayments when interest rates decrease, adjustable-rate mortgage
loans may be subject to a greater rate of principal prepayments (or purchases
by the related Subservicer or the Master Servicer) due to their refinancing or
conversion to fixed interest rate loans in a low interest rate environment. For
example, if prevailing interest rates fall significantly, adjustable-rate
mortgage loans could be subject to higher prepayment and conversion rates than
if prevailing interest rates remain constant because the availability of fixed-
rate or other adjustable-rate mortgage loans at competitive interest rates may
encourage Mortgagors to refinance their adjustable-rate mortgages to "lock in"
a lower fixed interest rate or to take advantage of the availability of such
other adjustable-rate mortgage loans, or, in the case of convertible
adjustable-rate mortgage loans, to exercise their option to convert the
adjustable interest rates to fixed interest rates. The conversion feature may
also be exercised in a rising interest rate environment as Mortgagors attempt
to limit their risk of higher rates. Such a rising interest rate environment
may also result in an increase in the rate of defaults on the Mortgage Loans.
If the related Subservicer or the Master Servicer purchases Converting or
Converted Mortgage Loans, a Mortgagor's exercise of the conversion option will
result in a distribution of the principal portion thereof to the
Certificateholders, as described herein. Alternatively, to the extent
Subservicers fail to purchase Converting Mortgage Loans and the Master Servicer
does not purchase Converted Mortgage Loans, the Mortgage Pool will include
fixed-rate Mortgage Loans, which will have the effect of limiting the extent to
which the related Pass-Through Rate can increase or decrease in accordance with
changes in the Index and accordingly may affect the yield to the
Certificateholders.
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. Increases in the monthly payments to an amount in excess of the monthly
payment required at the time of origination may result in a default rate higher
than that on level payment mortgage loans, particularly since the Mortgagor
under each Mortgage Loan was qualified on the basis of the Mortgage Rate in
effect at origination. The repayment of such Mortgage Loans will be dependent
on the ability of the Mortgagor to make larger monthly payments as the Mortgage
Rate increases. In addition, 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.
Although the Mortgage Rates on the Mortgage Loans will adjust semi-annually,
such increases and decreases will be limited by the Periodic Rate Cap, the
Maximum Mortgage Rate and the Minimum Mortgage Rate, if applicable, on each
Mortgage Loan, and will be based on the Index (which may not rise and fall
consistently with prevailing mortgage rates) plus the related Note Margin
(which may be different from the prevailing margins on other mortgage loans).
As a result, the Mortgage Rates on the Mortgage Loans at any time may not equal
the prevailing rates for other adjustable-rate loans and accordingly, the rate
of prepayment may be lower or higher than would otherwise be anticipated. In
addition, because all of the Mortgage Loans have Maximum Mortgage Rates, if
prevailing mortgage rates were to increase above the Maximum Mortgage Rates,
the rate of prepayment on the Mortgage Loans may be expected to decrease, and
the yield to investors may be less than prevailing mortgage rates. In general,
if prevailing mortgage rates fall significantly below the Mortgage Rates on the
Mortgage Loans, the rate of prepayments (including
S-34
<PAGE>
refinancings) will be expected to increase. Conversely, if prevailing mortgage
rates rise significantly above the Mortgage Rates on the Mortgage Loans, the
rate of prepayment on the Mortgage Loans will be expected to decrease.
The amount of interest otherwise payable to holders of the Senior
Certificates will be reduced by any interest shortfalls to the extent not
covered by the Policy or by the Master Servicer as described herein. If
payments were not made as required under the Policy, interest shortfalls not
allocable to the Class B Certificates and not covered by the Master Servicer
would be allocated to the Senior Certificates as described herein. 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 Senior
Certificates and certain possible shortfalls in the collection of interest.
In addition, the yield to maturity of the Senior Certificates will depend on,
among other things, the price paid by the holders of the Senior Certificates
and the then applicable Pass-Through Rate. The extent to which the yield to
maturity of a Senior 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 Senior 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 Senior
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. Because the Pass-Through Rate with respect to the Senior
Certificates at any time is the weighted average of the Net Mortgage Rates on
the Mortgage Loans, subject to certain limitations described herein, the Pass-
Through Rate and the yields on the Senior Certificates will be reduced as a
result of prepayments, liquidations and purchases of Mortgage Loans having
higher Net Mortgage Rates. Because Mortgage Loans having higher Net Mortgage
Rates generally have higher Mortgage Rates, such Mortgage Loans are generally
more likely to be prepaid at a faster rate under most circumstances than are
Mortgage Loans having lower Net Mortgage Rates. For additional considerations
relating to the yield on the Certificates, see "Yield Considerations" and
"Maturity and Prepayment Considerations" in the Prospectus.
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 Senior 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. Because the amortization schedule of each Mortgage
Loan will be recalculated semi-annually after the initial Adjustment Date for
such Mortgage Loan, any partial prepayments thereof will not reduce the term to
maturity of such Mortgage Loan. In addition, an increase in the Mortgage Rate
on a Mortgage Loan will result in a larger monthly payment and in a larger
percentage of such monthly payment being allocated to interest and a smaller
percentage being allocated to principal, and conversely, a decrease in the
Mortgage Rate on the Mortgage Loan will result in a lower monthly payment and
in a larger percentage of each monthly payment being allocated to principal and
a smaller percentage being allocated to interest.
The first distribution on the Senior Certificates reflecting an adjustment to
the scheduled monthly payment on a Mortgage Loan will be passed through to
holders of the Senior Certificates on the Distribution Date in the month
following the Adjustment Date for such Mortgage Loan. Adjustments to the Net
Mortgage Rates are based on the Index delayed as described herein under
"Description of the Mortgage Pool--Mortgage Rate Adjustment." Accordingly, the
yield to Certificateholders will be affected on a delayed basis relative to
movements in the Index. Although the Net Mortgage Rate of each Mortgage Loan
will be adjusted to reflect changes in the Index, such rate is subject to the
Periodic Rate Cap and is also limited by the Maximum Mortgage Rate and Minimum
Mortgage Rate, if any, applicable to such Mortgage Loan. If the Index increases
substantially between Adjustment Dates, the Net Mortgage Rate may be lower than
it would have been if the Net Mortgage Rate could be adjusted based on the
Index without such caps. Furthermore,
S-35
<PAGE>
because the Pass-Through Rate on the Senior Certificates is subject to
adjustment, such Pass-Through Rate will generally decrease if the Index
declines for any subsequent Adjustment Dates.
A number of factors affect the performance of the Index and may cause the
Index to move in a manner different from other indices. To the extent that the
Index may reflect changes in the general level of interest rates less quickly
than other indices, in a period of rising interest rates, increases in the
yield to Senior Certificateholders due to such rising interest rates may occur
later than that which would be produced by other indices, and in a period of
declining rates, the Index may remain higher than other market interest rates
which may result in a higher level of prepayments of the Mortgage Loans, which
adjust in accordance with the Index, than of mortgage loans which adjust in
accordance with other indices.
The assumed final Distribution Date with respect to each class of Senior
Certificates is March 25, 2025, which is the Distribution Date immediately
following the latest scheduled maturity date of any Mortgage Loan. No event of
default, change in the priorities for distribution among the various classes or
other provision 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.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement, the Constant
Prepayment Rate model ("CPR"), assumes that the outstanding principal balance
of a pool of mortgage loans prepays at a specified constant annual rate or CPR.
In generating monthly cash flows, this rate is converted to an equivalent
constant monthly rate. To assume a 15% CPR or any other CPR percentage is to
assume that the stated percentage of the outstanding principal balance of the
pool is prepaid over the course of a year. No representation is made that the
Mortgage Loans will prepay at that or any other rate.
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 Class A Certificates, the aggregate principal balance of the
Mortgage Loans is $310,712,520, and each Mortgage Loan has an initial Mortgage
Rate of 6.4844% per annum and a Servicing Fee and Policy Premium Rate of
0.5011% per annum, which are in effect until the Adjustment Date occurring in
June 1995 when the Mortgage Rate becomes 7.4844% per annum (based on an assumed
Index of 6.4375% and a Note Margin of 2.9441%, and subject to a Periodic Rate
Cap of 1.00% per annum) and the Servicing Fee and Policy Premium Rate remains
0.5011% per annum, an original term to maturity of 360 months and a remaining
term to stated maturity of 353 months; (ii) the scheduled monthly payment for
each Mortgage Loan has been based on its outstanding balance, interest rate and
remaining term to stated maturity, such that the Mortgage Loan will amortize in
amounts sufficient for repayment thereof over its remaining term to stated
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 the Master Servicer
will not exercise any option to purchase the Mortgage Loans and thereby cause a
termination of the Trust Fund or to purchase the Certificates other than the
Residual Certificates; (iv) there are no delinquencies or Realized Losses on
the Mortgage Loans, there are no conversions of Mortgage Loans from adjustable
to fixed rates and principal payments on the Mortgage Loans will be timely
received together with prepayments, if any, at the respective constant
percentages of CPR 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 April
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 March 29, 1995.
S-36
<PAGE>
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 CPR until maturity or that all of the Mortgage Loans will prepay at
the same level of CPR. Moreover, the diverse remaining terms to stated maturity
of the Mortgage Loans could produce slower or faster principal distributions
than indicated in the table at the various constant percentages of CPR
specified, even if the weighted average remaining term to stated 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 experience, will affect the percentages of initial Certificate
Principal Balances outstanding over time and the weighted average life of the
Class A Certificates.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of the Class A Certificates, and sets forth
the percentages of the initial Certificate Principal Balance of the Class A
Certificates that would be outstanding after each of the dates shown at various
percentages of CPR.
S-37
<PAGE>
PERCENT OF INITIAL PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING PERCENTAGES
OF SPA
<TABLE>
<CAPTION>
CLASS A
----------------------------
DISTRIBUTION DATE 6% 9% 12% 15% 18% 21% 24%
- ----------------- ---- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................................. 100 100 100 100 100 100 100
March 25, 1996..................................... 93 90 87 84 81 78 75
March 25, 1997..................................... 86 81 75 70 65 60 55
March 25, 1998..................................... 80 73 65 59 52 47 41
March 25, 1999..................................... 75 65 57 49 42 36 31
March 25, 2000..................................... 69 59 49 41 34 28 23
March 25, 2001..................................... 64 52 43 35 28 22 18
March 25, 2002..................................... 60 47 37 29 23 17 13
March 25, 2003..................................... 55 42 32 24 18 14 10
March 25, 2004..................................... 51 38 28 20 15 11 7
March 25, 2005..................................... 47 34 24 17 12 8 6
March 25, 2006..................................... 43 30 21 14 10 6 4
March 25, 2007..................................... 39 27 18 12 8 5 3
March 25, 2008..................................... 36 24 15 10 6 4 2
March 25, 2009..................................... 33 21 13 8 5 3 2
March 25, 2010..................................... 30 19 11 7 4 2 1
March 25, 2011..................................... 27 16 10 5 3 2 1
March 25, 2012..................................... 25 14 8 4 2 1 1
March 25, 2013..................................... 22 12 7 4 2 1 *
March 25, 2014..................................... 20 11 6 3 1 1 *
March 25, 2015..................................... 18 9 5 2 1 1 *
March 25, 2016..................................... 15 8 4 2 1 * *
March 25, 2017..................................... 13 6 3 1 1 * *
March 25, 2018..................................... 11 5 2 1 * * *
March 25, 2019..................................... 9 4 2 1 * * *
March 25, 2020..................................... 7 3 1 1 * * *
March 25, 2021..................................... 6 2 1 * * * *
March 25, 2022..................................... 4 2 1 * * * *
March 25, 2023..................................... 2 1 * * * * *
March 25, 2024..................................... 1 * * * * * *
March 25, 2025..................................... 0 0 0 0 0 0 0
Weighted Average
Life in Years**.................................... 11.0 8.5 6.8 5.6 4.7 4.0 3.5
</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 amount of each net distribution in reduction of
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
distributions 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 THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
S-38
<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 own 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 March 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 Senior Certificates. The Trustee will
appoint Norwest Bank Minnesota, National Association to serve as Custodian in
connection with the Certificates. The Senior 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
S-39
<PAGE>
were being master serviced by Residential Funding on December 31, 1992,
December 31, 1993 and December 31, 1994. The tables set forth information for
the total mortgage loan portfolio and the adjustable rate 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 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, AT DECEMBER 31, AT DECEMBER 31,
1992 1993 1994
------------------- ------------------- -------------------
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.... 73,426 $19,890,884 79,293 $21,538,566 90,308 $23,562,318
Period of Delinquency...
31 to 59 days.......... 1,268 325,516 1,264 316,487 1,373 343,184
60 to 89 days.......... 366 102,598 299 77,960 431 100,943
90 days or more(1)..... 260 74,052 228 66,045 357 94,041
Foreclosures Pending.... 905 272,393 1,021 304,070 763 217,244
------ ----------- ------ ----------- ------ -----------
Total Delinquent Loans.. 2,799 $ 774,559 2,812 $ 764,562 2,924 $ 755,412
====== =========== ====== =========== ====== ===========
Percent of Loan Portfo-
lio.................... 3.812% 3.894% 3.546% 3.550% 3.238% 3.206%
</TABLE>
- --------
(1) Does not include foreclosures pending.
TOTAL ADJUSTABLE RATE LOAN PORTFOLIO DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
1992 1993 1994
------------------ ------------------ ------------------
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 Adjustable Rate
Loan Portfolio......... 20,565 $4,991,653 20,372 $5,043,514 23,684 $5,533,144
Period of Delinquency
31 to 59 days.......... 455 108,748 461 105,978 554 128,777
60 to 89 days.......... 148 39,889 106 26,730 183 39,735
90 days or more(1) .... 115 34,065 71 18,599 158 40,351
Foreclosures Pending.... 347 100,480 369 108,711 280 82,433
------ ---------- ------ ---------- ------ ----------
Total Delinquent Loans.. 1,065 $ 283,182 1,007 $ 260,018 1,175 $ 291,296
====== ========== ====== ========== ====== ==========
Percent of Adjustable
Rate Loan Portfolio.... 5.179% 5.673% 4.943% 5.155% 4.961% 5.265%
</TABLE>
S-40
<PAGE>
TOTAL REDUCED LOAN DOCUMENTATION LOAN PORTFOLIO DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31,
1992 1993 1994
------------------ ------------------ ------------------
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 Docu-
mentation Loan Portfo-
lio.................... 22,108 $5,909,750 22,104 $5,242,372 23,962 $5,192,295
Period of Delinquency
31 to 59 days......... 541 144,759 496 122,334 442 104,501
60 to 89 days......... 168 50,925 123 33,508 107 29,184
90 days or more(1).... 143 43,731 101 30,265 123 34,527
Foreclosures Pending.... 477 153,732 473 149,380 306 94,399
------ ---------- ------ ---------- ------ ----------
Total Delinquent Loans.. 1,329 $ 393,147 1,193 $ 335,487 978 $ 262,611
====== ========== ====== ========== ====== ==========
Percent of Reduced Loan
Documentation Loan
Portfolio.............. 6.011% 6.653% 5.397% 6.400% 4.081% 5.058%
</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, 1992, December 31, 1993 and December 31, 1994 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 and Net
Loss respectively during the period indicated by the Average Portfolio Balance
during such period.
TOTAL LOAN PORTFOLIO FORECLOSURE EXPERIENCE
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR AT OR FOR
THE YEAR THE YEAR THE YEAR
ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER 31,
31, 1992 31, 1993 1994
----------- ----------- ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total Loan Portfolio.................... $19,890,884 $21,538,566 $23,562,318
Average Portfolio Balance............... $18,192,650 $21,245,118 $23,080,841
Foreclosed Loans(1)..................... $ 102,340 $ 138,634 $ 149,334
Liquidated Foreclosed Loans(2).......... $ 113,465 $ 285,323 $ 323,801
Foreclosed Loans Ratio.................. 0.515% 0.644% 0.634%
Gross Loss(3)........................... $ 30,315 $ 89,508 $ 98,625
Gross Loss Ratio........................ 0.167% 0.421% 0.427%
Covered Loss(4)......................... $ 24,215 $ 82,647 $ 84,869
Net Loss(5)............................. $ 6,101 $ 6,861 $ 13,756
Net Loss Ratio.......................... 0.034% 0.032% 0.060%
Excess Recovery(6)...................... $ 5 $ 85 $ 221
</TABLE>
S-41
<PAGE>
TOTAL ADJUSTABLE RATE LOAN PORTFOLIO FORECLOSURE EXPERIENCE
<TABLE>
<CAPTION>
AT OR FOR AT OR FOR AT OR FOR
THE YEAR THE YEAR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994
------------ ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total Adjustable Rate Loan Portfolio..... $4,991,653 $5,043,514 $5,533,144
Average Portfolio Balance................ $5,047,754 $4,990,992 $5,296,630
Foreclosed Loans(1)...................... $ 38,046 $ 50,024 $ 55,968
Liquidated Foreclosed Loans(2)........... $ 44,335 $ 99,641 $ 105,679
Foreclosed Loans Ratio................... 0.762% 0.992% 1.012%
Gross Loss(3)............................ $ 10,879 $ 27,368 $ 32,236
Gross Loss Ratio......................... 0.216% 0.548% 0.609%
Covered Loss(4).......................... $ 7,279 $ 23,882 $ 25,424
Net Loss(5).............................. $ 3,599 $ 3,485 $ 6,812
Net Loss Ratio........................... 0.071% 0.070% 0.129%
Excess Recovery(6)....................... $ 4 $ 66 $ 110
</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 YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994
------------ ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total Reduced Loan Documentation Loan
Portfolio.............................. $5,909,750 $5,242,372 $5,192,295
Average Portfolio Balance............... $6,193,424 $5,596,217 $5,265,539
Foreclosed Loans(1)..................... $ 55,454 $ 72,547 $ 61,337
Liquidated Foreclosed Loans(2).......... $ 64,650 $ 152,092 $ 142,353
Foreclosed Loans Ratio.................. 0.938% 1.384% 1.181%
Gross Loss(3)........................... $ 17,814 $ 54,323 $ 48,896
Gross Loss Ratio........................ 0.288% 0.971% 0.929%
Covered Loss(4)......................... $ 15,593 $ 51,487 $ 42,715
Net Loss(5)............................. $ 2,221 $ 2,836 $ 6,181
Net Loss Ratio.......................... 0.036% 0.051% 0.117%
Excess Recovery(6)...................... $ 1 $ 10 $ 89
</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 (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.
S-42
<PAGE>
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees and Policy Premium for each Mortgage Loan are payable out
of the interest payments on such Mortgage Loan. The Servicing Fee and Policy
Premium Rate in respect of each Mortgage Loan will be at least 0.4465% per
annum and not more than 0.8215% per annum of the outstanding principal balance
of such Mortgage Loan. The Servicing Fees and Policy Premium consist of (a)
servicing compensation payable to the Master Servicer in respect of its master
servicing activities, (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), and
(c) the premium payable with respect to the Policy. The primary compensation to
be paid to the Master Servicer in respect of its master servicing activities
will be 0.08% per annum of the outstanding principal balance of each Mortgage
Loan. The Subservicer is entitled to servicing compensation in a minimum amount
equal to at least 0.25% per annum and not more than 0.625% per annum of the
outstanding principal balance of each Mortgage Loan serviced by it. As of the
Cut-off Date, the weighted average of the Servicing Fee and Policy Premium
Rates for the Mortgage Loans is approximately 0.5011% per annum. The servicing
compensation to which the Subservicer is entitled may vary as the related
Mortgage Rates become fully indexed and as Mortgage Loans approach their
Maximum Mortgage Rates or Minimum Mortgage Rates. 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 the Subservicer 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. 99% of all Voting Rights
will be allocated among all holders of the Certificates (other than the
Residual Certificates) in proportion to their then outstanding Certificate
Principal Balances, and 1% of all Voting Rights will be allocated among holders
of the Residual Certificates 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.
The Insurer will be entitled to exercise certain rights with respect to any
amendment of the Pooling and Servicing Agreement.
TERMINATION
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the Senior 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 5% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date, (i) to purchase all
remaining Mortgage Loans and other assets in the Trust Fund, thereby effecting
early retirement of the Senior 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, if less than such
unpaid principal balance, the fair market appraised value of the related
underlying Mortgaged Properties with respect to Mortgage Loans as to which
title to such underlying Mortgaged Properties has been acquired) (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 pro rata, based on
their respective Certificate Principal Balances, and second, except as set
forth in the Pooling and Servicing Agreement, to the Class B Certificates. The
proceeds of any such distribution
S-43
<PAGE>
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
appraised value of any underlying Mortgaged Property and such appraised value
is less than 100% of the unpaid principal balance of the related Mortgage Loan;
provided, however, with respect to the Senior Certificates, if such amount is a
Deficiency Amount, such amount will be paid under the Policy. Any such purchase
of the Certificates will be made at a price equal to 100% of the Certificate
Principal Balance thereof plus the sum of one month's interest thereon at the
applicable Pass-Through Rate and any previously unpaid Accrued Certificate
Interest. Upon the purchase of the 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 Senior Certificates in connection with
the termination of the Trust Fund or a purchase of Certificates, the holders of
the Senior Certificates will receive an amount equal to the Certificate
Principal Balance of such class plus one month's interest thereon at the then
applicable Pass-Through Rate plus any previously unpaid Accrued Certificate
Interest.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Senior Certificates, Thacher Proffitt & Wood,
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, the Trust Fund will qualify as a REMIC under
the Code.
For federal income tax purposes, the Residual Certificates will constitute
the sole class of "residual interests" in the Trust Fund and the Class A
Certificates and Class B Certificates will represent ownership of "regular
interests" in the REMIC and will generally be treated as debt instruments of
the REMIC. See "Certain Federal Income Tax Consequences--REMICs" in the
Prospectus.
For federal income tax reporting purposes, the Class A Certificates will be
treated as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, market discount and premium, if any, for federal income tax
purposes will be based on the assumption that subsequent to the date of any
determination the Mortgage Loans will prepay at a rate equal to 15% CPR. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Certain Federal Income Tax Consequences--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount" in the
Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers
of the Senior Certificates should be aware that Section 1272(a)(6) of the Code
and the OID Regulations do not adequately address certain issues relevant to,
or not applicable to, prepayable securities bearing a variable rate of interest
such as the Senior Certificates. In the absence of other authority, the Master
Servicer intends to be guided by certain principles of the OID Regulations
applicable to variable rate debt instruments in determining whether such
Certificates should be treated as issued with original issue discount and in
adapting the provisions of Section 1272(a)(6) of the Code to such Certificates
for the purpose of preparing reports furnished to Certificateholders and the
IRS. Because of the uncertainties concerning the application of Section
1272(a)(6) of the Code to such Certificates and because the rules relating to
debt instruments having a variable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert
that the Class A Certificates should be treated as having been issued with
original issue discount or that such Certificates should be governed by some
other method not yet set forth in regulations. Prospective purchasers of the
Senior Certificates are advised to consult their tax advisors concerning the
tax treatment of such Certificates.
S-44
<PAGE>
The Master Servicer believes that a reasonable application of the principles
of the OID Regulations to the Class A Certificates would be to report all
income with respect to such Certificates as original issue discount for each
period, computing such original issue discount (i) by assuming that the value
of the applicable index will remain constant for purposes of determining the
original yield to maturity of each such class of Certificates and projecting
future distributions on such Certificates, thereby treating such Certificates
as fixed rate instruments to which the original issue discount computation
rules described in the Prospectus can be applied, and (ii) by accounting for
any positive or negative variation in the actual value of the applicable index
in any period from its assumed value as a current adjustment to original issue
discount with respect to such period. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--
Original Issue Discount" in the Prospectus.
If the rules of the OID Regulations that determine the amount and accrual of
original issue discount were applied literally to the Class A Certificates
(even though such rules are by their terms generally inapplicable to REMIC
Regular Certificates such as the Class A Certificates), it appears that such
rules would (i) require that the stated fixed interest rate initially payable
on the Class A Certificates be replaced by a hypothetical adjustable rate that
would not cause the fair market value of the Class A Certificates to be
affected, (ii) determine the amount and accrual of original issue discount by
assuming that the Class A Certificates bore interest at successive fixed rates
equal to the closing date values of the hypothetical and the actual adjustable
rates, and (iii) make such periodic adjustments to interest income and original
issue discount as are necessary to account for the actual interest paid on such
Certificates, including differences between the stated fixed interest rate and
the rate assumed to have been paid during the fixed rate period. This treatment
could cause a holder of a Class A Certificate to recognize income more rapidly
than would occur under the Master Servicer's method of reporting interest and
original issue discount, and such a holder should consult a tax advisor with
regard to the appropriate method to recognize interest and original issue
discount with respect to the Class A Certificates.
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.
The Senior 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 Senior 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 Senior Certificates
are treated as "real estate assets" under Section 856(c)(5)(A) of the Code.
Moreover, the Senior 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 Senior 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 Senior
Certificates may adversely affect any REMIC that holds such Senior 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 Senior Certificates, see "Certain Federal Income Tax
Consequences--REMICs" in the Prospectus.
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
S-45
<PAGE>
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 term 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.
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.
The Residual Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the Trust Fund's
term that significantly exceeds the amount of cash distributions received by
such Residual Certificateholders from the Trust Fund with respect to such
periods. Furthermore, the tax on such income may exceed the cash distributions
with respect to such periods. Consequently, Residual Certificateholders should
have other sources of funds sufficient to pay any federal income taxes due in
the earlier years of the REMIC as a result of their ownership of Residual
Certificates. In addition, the required inclusion of this amount of taxable
income during the REMIC'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 Residual Certificate (or possibly later under
the "wash sale" rules of Section 1091 of the Code) may cause the Residual
Certificateholders' after-tax rate of return to be zero or negative even where
the Residual Certificateholders' pre-tax rate of return is positive. That is,
on a present value basis, the Residual Certificateholders' resulting tax
liabilities could substantially exceed the sum of any tax benefits and the
amount of any cash distributions on such Residual Certificates over their life.
S-46
<PAGE>
As discussed above, the rules for accrual of original issue discount with
respect to the Class A Certificates are subject to significant complexity and
uncertainty. Because original issue discount on the Class A Certificates will
be deducted by the REMIC in determining its taxable income, any changes
required by the IRS in the application of those rules to such Certificates may
significantly affect the timing of original issue discount deductions to the
REMIC and therefore the amount of the REMIC's taxable income allocable to
holders of the Residual Certificates.
Residential Funding will be designated as the "tax matters person" with
respect to the REMIC as defined in the REMIC Provisions, and in connection
therewith will be required to hold not less than 0.01% of the Residual
Certificates.
Purchasers of the Residual Certificates are strongly advised to consult their
own 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 March 24, 1995, (the "Underwriting Agreement"), Bear, Stearns & Co. Inc.
(the "Underwriter") has agreed to purchase, and the Company has agreed to sell
to the Underwriter, the Senior Certificates, except that a de minimis portion
of the Residual Certificates will be retained by Residential Funding
Corporation, and such portion is not offered hereby. It is expected that the
delivery of the Class A Certificates will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, and that delivery of the
Residual Certificates will be made at the offices of the Underwriter, New York,
New York, on or about March 29, 1995, against payment therefor in immediately
available funds.
The Underwriting Agreement provides that the obligation of the Underwriter to
pay for and accept delivery of the Senior 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 Senior Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds to
the Company from the sale of the Senior Certificates before deducting expenses
payable by the Company, will be approximately 101.1% of the aggregate
Certificate Principal Balance of the Senior Certificates plus accrued interest
thereon from the Cut-off Date. The Underwriter may effect such transactions by
selling Senior 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 Senior Certificates, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting compensation. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Senior Certificates the Underwriter may be deemed to be
underwriters and any profit on the resale of the Senior Certificates positioned
by them may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and under limited circumstances the 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.
There can be no assurance that a secondary market for the Senior Certificates
will develop or, if it does develop, that it will continue. The primary source
of information available to investors concerning the Senior
S-47
<PAGE>
Certificates will be the monthly statements as discussed in the Prospectus
under "Description of the Certificates--Reports to Certificateholders," which
will include information as to the outstanding principal balance of the Senior
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Senior
Certificates will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Senior Certificates will be generally available on an ongoing basis. The
limited nature of such information regarding the Senior Certificates may
adversely affect the liquidity of the Senior Certificates, even if a secondary
market for the Senior Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon for
the Company by Thacher Proffitt & Wood, New York, New York and for the
Underwriter by Brown & Wood, New York, New York. Certain legal matters relating
to the validity and enforceability of the Policy will be passed upon by Kutak
Rock, Omaha, Nebraska, special counsel to the Insurer.
RATINGS
It is a condition to the issuance of the Senior Certificates that they be
rated "AAAr" by Standard & Poor's Ratings Group ("Standard & Poor's") and "Aaa"
by Moody's Investors Service, Inc. ("Moody's").
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 Senior Certificates is based on
the claims paying ability of the Insurer. Standard & Poor's rating on the
Senior Certificates does not, however, constitute a statement regarding
frequency of prepayments on the mortgages. See "Certain Yield and Prepayment
Considerations" herein.
The rating assigned by Moody's to the Senior Certificates is based on the
claims paying ability of the Insurer. Ratings by Moody's address the
structural, legal and issuer related aspects associated with the certificates,
including the nature and quality of the underlying mortgage loans. Such ratings
do not represent any assessment of the likelihood of principal prepayments by
mortgagors or of the degree by which such prepayments might differ from those
originally anticipated.
Standard & Poor's ratings (as evidence by the symbol "r") and Moody's ratings
on mortgage pass-through certificates do not represent any assessment of the
related Subservicer's ability to purchase Converting Mortgage Loans or the
Master Servicer's ability to purchase Converted Mortgage Loans. In the event
that neither the related Subservicer nor the Master Servicer purchases a
Converting or Converted Mortgage Loan, investors in the Senior Certificates
might suffer a lower than anticipated yield. See "Certain Yield and Prepayment
Considerations" herein.
The Company has not requested a rating on the Senior Certificates by any
rating agency other than Standard & Poor's and Moody's. However, there can be
no assurance as to whether any other rating agency will rate the Senior
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 Moody's.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Senior 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 Senior Certificates.
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<PAGE>
LEGAL INVESTMENT
The Senior 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, however, provides 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 Company makes no representations as to the proper characterization of any
class of the Senior Certificates for legal investment or other purposes, or as
to the ability of particular investors to purchase any class of the Senior
Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Senior
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 own
legal advisors in determining whether and to what extent any class of the
Senior 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 Senior 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 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 Residual
Certificates. The purchase or holding of the Senior Certificates (other than
the 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 Residual Certificates
will qualify, for exemptive relief under the Exemption, the similar exemption
issued to the Underwriter or PTE 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, or 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.
EXPERTS
The consolidated financial statements of the Insurer, Municipal Bond
Investors Assurance Corporation, included as Appendix A to this Prospectus
Supplement have been audited by Coopers & Lybrand, independent auditors, as set
forth in their report thereon appearing in this Prospectus Supplement and are
included in reliance upon the authority of such firm as experts in accounting
and auditing.
S-49
<PAGE>
APPENDIX A
AUDITED FINANCIAL STATEMENTS OF THE INSURER
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1993 AND 1992
AND FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
<PAGE>
Coopers
& Lybrand certified public accountants
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of Municipal Bond
Investors Assurance Corporation and Subsidiaries as of December 31, 1993 and
1992, and the related consolidated statements of income, changes in
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1993. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Municipal Bond
Investors Assurance Corporation and Subsidiaries as of December 31, 1993 and
1992, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1993 in conformity with
generally accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes."
/s/Coopers & Lybrand
New York, New York
February 2, 1994.
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
----------------- -----------------
Assets
<S> <C> <C>
Investments:
Fixed maturity securities, at amortized cost
(market value $2,971,369 and $2,413,831) $2,753,974 $2,297,854
Short-term investments, at amortized cost
(which approximates market value) 104,205 121,733
Other investments 98,215 55,981
---------- ----------
Total investments 2,956,394 2,475,568
Cash and cash equivalents 747 614
Accrued investment income 51,514 46,505
Deferred acquisition costs 120,484 110,451
Prepaid reinsurance premiums 170,551 164,408
Goodwill (less accumulated amortization of
$27,476 and $22,475) 115,504 120,505
Property and equipment, at cost (less accumulated
depreciation of $3,452 and $2,198) 37,574 35,232
Receivable for investments sold 1,949 2,111
Other assets 18,912 16,539
---------- ----------
Total assets $3,473,629 $2,971,933
========== ==========
Liabilities and Shareholder's Equity
Liabilities:
Deferred premium revenue $1,402,807 $1,196,155
Loss and loss adjustment expense reserves 33,735 25,510
Current income taxes payable 1,771 502
Deferred income taxes 106,686 97,802
Payable for investments purchased 33,340 ---
Other liabilities 37,547 32,321
---------- ----------
Total liabilities 1,615,886 1,352,290
---------- ----------
Shareholder's Equity
Common stock, par value $150 per share;
authorized, issued and outstanding -
100,000 shares 15,000 15,000
Additional paid-in capital 943,794 931,943
Retained earnings 895,312 670,795
Cumulative translation adjustment (1,203) (474)
Unrealized appreciation of investments, net
of deferred income taxes of $2,606 and $1,225 4,840 2,379
---------- ----------
Total shareholder's equity 1,857,743 1,619,643
---------- ----------
Total liabilities and shareholder's equity $3,473,629 $2,971,933
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-2-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Gross premiums written $479,390 $368,732 $269,206
Ceded premiums (47,552) (32,588) (46,160)
-------- -------- --------
Net premiums written 431,838 336,144 223,046
Increase in deferred premium revenue (200,519) (173,203) (90,800)
-------- -------- --------
Premiums earned (net of ceded
premiums of $41,409,
$28,276 and $20,396) 231,319 162,941 132,246
Net investment income 175,329 149,359 130,933
Net realized gains 8,941 11,419 2,935
Other income 3,996 2,001 1,168
-------- -------- --------
Total revenues 419,585 325,720 267,282
-------- -------- --------
Expenses:
Losses and loss adjustment expenses 7,821 5,619 17,197
Underwriting and operating expenses 38,006 34,092 25,463
Policy acquisition costs, net 25,480 18,119 14,479
-------- -------- --------
Total expenses 71,307 57,830 57,139
-------- -------- --------
Income before income taxes and cumulative
effect of accounting changes 348,278 267,890 210,143
Provision for income taxes 86,684 54,802 41,974
-------- -------- --------
Income before cumulative effect of
accounting changes 261,594 213,088 168,169
Cumulative effect of accounting changes 12,923 --- ---
-------- -------- --------
Net income $274,517 $213,088 $168,169
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1993, 1992 and 1991
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Cumulative Appreciation
--------------- Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------- ------- -------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1991 100,000 $2,500 $768,223 $352,538 --- $(2,839)
Net income --- --- --- 168,169 --- ---
Change in foreign currency translation --- --- --- --- $(126) ---
Change in unrealized appreciation
(depreciation) of investments net of
change in deferred income taxes of $(74) --- --- --- --- --- 2,982
Dividends declared (per
common share $410.00) --- --- --- (41,000) --- ---
Capital contribution of subsidiary
from MBIA Inc. --- --- 5,926 --- --- ---
Tax reduction related to
MBIA Inc.'s Stock Option Plan --- --- 2,395 --- --- ---
------- ------- -------- --------- ------------- --------------
Balance, December 31, 1991 100,000 2,500 776,544 479,707 (126) 143
------- ------- -------- --------- ------------- --------------
Increase in par value of common stock 12,500 (12,500) --- --- ---
Net income --- --- --- 213,088 --- ---
Change in foreign currency translation --- --- --- --- (348) ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(1,151) --- --- --- --- --- 2,236
Dividends declared (per
common share $220.00) --- --- --- (22,000) --- ---
Capital contribution from MBIA Inc. --- --- 163,368 --- --- ---
Tax reduction related to
MBIA Inc.'s Stock Option Plan --- --- 4,531 --- --- ---
------- ------- -------- --------- ------------- --------------
Balance, December 31, 1992 100,000 15,000 931,943 670,795 (474) 2,379
------- ------- -------- --------- ------------- --------------
Net income --- --- --- 274,517 --- ---
Change in foreign currency translation --- --- --- --- (729) ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(1,381) --- --- --- --- --- 2,461
Dividends declared (per
common share $500.00) --- --- --- (50,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 11,851 --- --- ---
------- ------- -------- --------- ------------- --------------
Balance, December 31, 1993 100,000 $15,000 $943,794 $895,312 $(1,203) $4,840
======= ======= ======== ========= ============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $274,517 $213,088 $168,169
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (5,009) (8,869) (4,069)
Increase in deferred acquisition costs (10,033) (13,278) (8,342)
Increase in prepaid reinsurance premiums (6,143) (4,312) (25,764)
Increase in deferred premium revenue 206,662 177,515 116,564
Increase in loss and loss adjustment expense
reserves 8,225 4,337 16,173
Depreciation 1,259 685 676
Amortization of goodwill 5,001 5,095 5,215
Amortization of bond premium, net (743) 647 3,125
Net realized gains on sale of investments (8,941) (11,419) (2,935)
Deferred income taxes 7,503 8,217 7,799
Other, net 15,234 (2,385) (455)
-------- -------- --------
Total adjustments to net income 213,015 156,233 107,987
-------- -------- --------
Net cash provided by operating activities 487,532 369,321 276,156
-------- -------- --------
Cash flows from investing activities:
Purchase of fixed maturity securities, net
of payable for investments purchased (786,510) (913,643) (959,197)
Sale of fixed maturity securities, net of
receivable for investments sold 205,342 371,693 704,572
Redemption of fixed maturity securities,
net of receivable for investments redeemed 225,608 40,947 23,004
Sale of short-term investments, net (40,461) 28,206 12,605
Purchase of other investments (37,777) (31,766) (15,489)
Sale of other investments --- 1,761 ---
Capital expenditures, net of disposals (3,601) (8,029) (2,781)
-------- -------- --------
Net cash used by investing activities (437,399) (510,831) (237,286)
-------- -------- --------
Cash flows from financing activities:
Capital contribution from MBIA Inc. --- 163,368 ---
Dividends paid (50,000) (22,000) (41,000)
-------- -------- --------
Net cash provided (used) by financing activities (50,000) 141,368 (41,000)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 133 (142) (2,130)
Cash and cash equivalents - beginning of year 614 756 2,886
-------- -------- --------
Cash and cash equivalents - end of year $747 $614 $756
======== ======== ========
Supplemental cash flow disclosures:
Income taxes paid $52,967 $40,997 $33,297
The accompanying notes are an integral part of the consolidated financial statements.
-5-
</TABLE>
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
- -----------------------------
Municipal Bond Investors Assurance Corporation ("MBIA Corp.") is a wholly-owned
subsidiary of MBIA Inc. MBIA Inc. was incorporated in Connecticut on November
12, 1986 as a licensed insurer and, through the following series of transactions
during December 1986, became the successor to the business of the Municipal Bond
Insurance Association (the "Association"), a voluntary unincorporated
association of insurers writing municipal bond and note insurance as agent for
the member insurance companies:
. MBIA Inc. acquired for $17 million all of the outstanding common stock of a
New York domiciled insurance company and changed the name of the insurance
company to MBIA Corp. Prior to the acquisition, all of the obligations of
this company were reinsured and/or indemnified by the former owner.
. Four of the five member companies of the Association together with their
affiliates purchased all of the outstanding common stock of MBIA Inc. and
entered into reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. MBIA
Inc.'s reinsurance obligations were then assumed by MBIA Corp. The
participation of these four members aggregated approximately 89% of the net
insurance in force of the Association. The net assets transferred from the
predecessor included the cash transferred in connection with the
reinsurance agreements, the related deferred acquisition costs and
contingent commissions receivable, net of the related unearned premiums and
contingent commissions payable. The deferred income taxes inherent in
these assets and liabilities were recorded by MBIA Corp. Contingent
commissions receivable (payable) with respect to premiums earned prior to
the effective date of the reinsurance agreements by the Association in
accordance with statutory accounting practices, remained as assets
(liabilities) of the member companies.
During 1988, a wholly-owned subsidiary of MBIA Inc. was merged into MBIA Corp.,
resulting in a contribution to additional paid-in capital of $61.7 million,
representing goodwill of $62.2 million, which arose when MBIA Inc. acquired the
subsidiary, offset by net liabilities of the subsidiary of $0.5 million.
-6-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of the
outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company of
Bond Investors Guaranty Insurance Company ("BIG Ins."), which was subsequently
renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
In January 1990, MBIA Illinois ceded its portfolio of net insured obligations in
exchange for cash and investments equal to its unearned premium reserve of $153
million to MBIA Corp. Subsequent to this cession, MBIA Inc. contributed the
common stock of BIG to MBIA Corp. resulting in additional paid-in capital of
$200.4 million. The insured portfolio acquired from BIG consists of municipal
obligations with risk characteristics similar to those insured by MBIA Corp. On
December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"), a wholly-
owned, French subsidiary, to write financial guarantee insurance in the European
Community. MBIA Assurance provides insurance for public infrastructure
financings, structured finance transactions and certain obligations of financial
institutions. The stock of MBIA Assurance was contributed to MBIA Corp. in 1991
resulting in additional paid-in capital of $5.9 million. Pursuant to a
reinsurance agreement with MBIA Corp., a substantial amount of the risks insured
by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Corp. assumed the remaining business from the fifth member of the
Association.
In 1993, MBIA Inc. formed a new wholly-owned subsidiary, MBIA Investment
Management Corp. ("IMC"), with the principal purpose of providing guaranteed
investment agreements guaranteed as to principal and interest for states,
municipalities and municipal authorities. IMC commenced operations in August
1993. MBIA Corp. insures IMC's outstanding investment agreement liabilities.
2. SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). Significant accounting
policies are as follows:
-7-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp., MBIA
Illinois, MBIA Assurance and BIG Services, Inc. All significant intercompany
balances have been eliminated. Certain amounts have been reclassified in prior
years' financial statements to conform to the current presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
INVESTMENTS
Fixed maturity securities which MBIA Corp. intends to hold until maturity are
classified as investments and carried at amortized cost. Bond discounts and
premiums are amortized on the effective-yield method over the remaining term of
the securities. For prerefunded bonds the remaining term is determined based on
the contractual refunding date. Short-term investments are carried at amortized
cost, which approximates market value. Investment income is recorded as earned.
Realized gains or losses on sale of investments are determined by specific
identification and are included as a separate component of revenues.
Other investments consist primarily of marketable equity securities and MBIA
Corp.'s interest in limited partnerships and a mutual fund which invest
primarily in marketable equity securities. MBIA Corp. records dividends and
realized capital gains and losses from its investments in marketable equity
securities and its share of limited partnerships and mutual funds as a component
of investment income. In addition, MBIA Corp. records its share of the
unrealized gains and losses of these investments, net of applicable deferred
income taxes, as a separate component of shareholder's equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated to
each bond maturity based on par amount and are earned on a straight-line basis
over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the portion which is credited to a
new policy in those cases where MBIA Corp. insures the refunding issue, is
earned at that time, since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represent the
-8-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
portion of premiums written that is applicable to the unexpired risk of insured
bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA
Corp., such costs include compensation of employees involved in marketing,
underwriting and policy issuance functions, certain rating agency fees, state
premium taxes and certain other underwriting expenses, reduced by ceding
commission income on premiums ceded to reinsurers. For business assumed from
the Association, such costs were comprised of management fees, certain rating
agency fees and marketing and legal costs, reduced by ceding commissions
received by the Association on premiums ceded to reinsurers. Policy acquisition
costs are deferred and amortized over the period in which the related premiums
are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established in an
amount equal to MBIA Corp.'s estimate of the identified and unidentified losses,
including costs of settlement, on the obligations it has insured.
To the extent that specific insured issues are identified as currently or likely
to be in default, the present value of expected payments, including loss and
loss adjustment expenses associated with these issues, net of expected
recoveries, is allocated within the total loss reserve as case basis reserves.
Management of MBIA Corp. periodically evaluates its estimates for losses and LAE
and any resulting adjustments are reflected in current earnings. Management
believes that the reserves are adequate to cover the ultimate net cost of
claims, but the reserves are necessarily based on estimates and there can be no
assurance that the ultimate liability will not exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the Association's
reinsurers under various reinsurance treaties and are accrued as the related
premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax
provision for MBIA Corp. for financial reporting purposes is determined on a
stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax
-9-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in
shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences between
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
The Internal Revenue Code permits financial guarantee insurance companies to
deduct from taxable income additions to the statutory contingency reserve
subject to certain limitations. The tax benefits obtained from such deductions
must be invested in non-interest bearing U. S. Government tax and loss bonds.
MBIA Corp. records purchases of tax and loss bonds as payments of Federal income
taxes. The amounts deducted must be restored to taxable income when the
contingency reserve is released, at which time MBIA Corp. may present the tax
and loss bonds for redemption to satisfy the additional tax liability.
PROPERTY AND EQUIPMENT
Property consists of MBIA Corp.'s headquarters and MBIA Assurance's furniture,
fixtures and equipment, which are recorded at cost and, exclusive of land, are
depreciated on the straight-line method over their estimated service lives
ranging from 4 to 31 years. Maintenance and repairs are charged to expenses as
incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the licensed insurance
company includes recognition of the value of the state licenses held by that
company, and is amortized by the straight-line method over 25 years. Goodwill
related to the wholly-owned subsidiary of MBIA Inc. contributed in 1988 is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the straight-
line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
current exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting
-10-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
from translation are included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
- ----------------------------------
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
. premiums are earned only when the related risk has expired rather than over
the period of the risk;
. acquisition costs are charged to operations as incurred rather than as the
related premiums are earned;
. contingent commissions are accrued when the related earned premiums are
recognized;
. a contingency reserve is computed on the basis of statutory requirements
and reserves for losses and LAE are established, at present value, for
specific insured issues which are identified as currently or likely to be
in default, while under GAAP reserves are established based on MBIA Corp.'s
reasonable estimate of the identified and unidentified losses and LAE on
the insured obligations it has written;
. Federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP deferred income taxes are
provided with respect to temporary differences;
. tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
. certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
The following is a reconciliation of consolidated shareholder's equity presented
on a GAAP basis to statutory capital and surplus for MBIA Corp. and its
subsidiaries, MBIA Illinois and MBIA Assurance:
-11-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
As of December 31
---------------------------------------
In thousands 1993 1992 1991
- --------------------------------------------------------------------------
<S> <C> <C> <C>
GAAP shareholder's equity $1,857,743 $1,619,643 $1,258,768
Premium revenue recognition (242,577) (210,179) (184,858)
Deferral of acquisition costs (120,484) (110,451) (97,173)
Contingent commissions (1,880) (2,185) (3,315)
Contingency reserve (539,103) (403,875) (316,527)
Loss and loss adjustment
expense reserves 26,262 11,085 8,895
Deferred income taxes 99,186 90,303 77,637
Tax and loss bonds 25,771 31,454 36,342
Goodwill and other non-admitted
assets, net (127,182) (129,802) (132,948)
---------- ---------- ----------
Statutory capital
and surplus $ 977,736 $ 895,993 $ 646,821
========== ========== ==========
</TABLE>
Consolidated net income of MBIA Corp. determined in accordance with statutory
accounting practices for the years ended December 31, 1993, 1992 and 1991 was
$258.4 million, $189.6 million and $148.7 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
- --------------------------------------------------
Premiums earned include $85.6 million, $43.1 million and $26.4 million for 1993,
1992 and 1991, respectively, related to refunded and called bonds.
5. INVESTMENTS
- ---------------
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital and claims-paying capability
through maintenance of high quality investments with adequate liquidity, and the
avoidance of excessive interest rate risk exposure through prudent maturity
selection. MBIA Corp.'s investment policies limit the amount of credit exposure
to any one issuer. The fixed maturity portfolio is comprised of high quality
(average Double-A) taxable and tax-exempt investments of diversified maturities.
MBIA Corp. does not invest in non-investment grade securities or in real estate.
In 1993 the Financial Accounting Standards Board adopted Statement of Financial
Accounting Standards "SFAS" 115, "Accounting for Certain
-12-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Investments in Debt and Equity Securities," effective January 1, 1994. SFAS 115
will require MBIA Corp. to report some portion of its fixed maturity portfolio
at market value. The difference between market value and amortized cost will be
recorded as a separate component of shareholder's equity, net of applicable
deferred income taxes.
The following tables set forth the amortized cost and market value of the fixed
maturities included in the consolidated investment portfolio of MBIA Corp. as of
December 31, 1993 and 1992.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
In thousands Cost Gains Losses Market Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
Taxable bonds
United States Treasury
and Government Agency $ 334,729 $ 17,326 $ 354 $ 351,701
Corporate and other
obligations 365,660 25,326 1,493 389,493
Tax-exempt bonds
State and municipal
obligations 2,053,585 177,285 695 2,230,175
---------- -------- ------ ----------
Total fixed
maturities $2,753,974 $219,937 $2,542 $2,971,369
========== ======== ====== ==========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
In thousands Cost Gains Losses Market Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1992
Taxable bonds
United States Treasury
and Government Agency $ 314,317 $ 19,039 $ 495 $ 332,861
Corporate and other
obligations 194,980 14,437 94 209,323
Tax-exempt bonds
State and municipal
obligations 1,788,557 84,272 1,182 1,871,647
---------- -------- ------ ----------
Total fixed
maturities $2,297,854 $117,748 $1,771 $2,413,831
========== ======== ====== ==========
</TABLE>
Fixed maturity investments carried at amortized cost of $7.6 million and $7.4
million as of December 31, 1993 and 1992, respectively, were on deposit with
various regulatory authorities to comply with insurance laws.
-13-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table below sets forth the distribution by expected maturity of the fixed
maturities and short-term investments at amortized cost and market value at
December 31, 1993. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
Amortized Market
In thousands Cost Value
- -----------------------------------------------------------------
<S> <C> <C>
Maturity
Within 1 year $ 104,205 $ 104,205
Beyond 1 year but within 5 years 512,876 551,937
Beyond 5 years but within 10 years 1,481,113 1,589,194
Beyond 10 years but within 15 years 568,697 626,161
Beyond 15 years but within 20 years 34,618 37,936
Beyond 20 years 156,670 166,141
---------- ----------
Total fixed maturities and short-term
investments $2,858,179 $3,075,574
========== ==========
</TABLE>
6. INVESTMENT INCOME AND GAINS AND LOSSES
- ------------------------------------------
Investment income consists of:
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------
In thousands 1993 1992 1991
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $173,070 $147,598 $128,408
Short-term investments 2,844 2,749 3,492
Other investments 2,078 1,265 1,030
-------- -------- --------
Gross investment income 177,992 151,612 132,930
Investment expenses 2,663 2,253 1,997
-------- -------- --------
Net investment income 175,329 149,359 130,933
Net realized gains (losses):
Fixed maturities 8,326 11,798 20,079
Other investments 615 (379) (17,144)
-------- -------- --------
Net realized gains (losses) 8,941 11,419 2,935
Total investment income $184,270 $160,778 $133,868
======== ======== ========
</TABLE>
-14-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Unrealized gains (losses) consist of:
<TABLE>
<CAPTION>
As of December 31
-----------------------
In thousands 1993 1992
- -------------------------------------------------
<S> <C> <C>
Fixed maturities:
Gains $219,937 $117,748
Losses (2,542) (1,771)
-------- --------
Net 217,395 115,977
Other investments:
Gains 7,446 3,604
-------- --------
Total 224,841 119,581
Deferred income taxes 2,606 1,225
-------- --------
Unrealized gains, net $222,235 $118,356
======== ========
</TABLE>
The change in net unrealized gains (losses) consists of:
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------
In thousands 1993 1992 1991
- --------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $101,418 $19,118 $80,393
Other investments 3,842 3,387 3,056
-------- ------- -------
Total 105,260 22,505 83,449
Deferred income taxes 1,381 1,151 74
-------- ------- -------
Unrealized gains, net $103,879 $21,354 $83,375
======== ======= =======
</TABLE>
7. INCOME TAXES
- ----------------
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109. MBIA Corp. adopted the new
pronouncement on the cumulative catch-up basis and recorded a cumulative
adjustment which increased net income and reduced the deferred tax liability by
$13.0 million. The cumulative effect represents the impact of adjusting the
deferred tax liability to reflect the January 1, 1993 tax rate of 34% as opposed
to the higher tax rates that were in effect when certain of the deferred taxes
originated. As permitted under the new rules, prior years' financial statements
have not been restated.
SFAS 109 requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. The
effect
-15-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1993 and 1992 (as if
SFAS 109 had been adopted on December 31, 1992) are as presented below:
<TABLE>
<CAPTION>
In thousands 1993 1992
- -------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Tax and loss bonds $ 24,168 $ 24,168
Alternative minimum tax credit carry
forwards 7,570 18,420
Loss and loss adjustment expense
reserves 9,192 3,769
Other 3,084 2,808
-------- --------
Total gross deferred tax assets 44,014 49,165
-------- --------
Deferred tax liabilities
Contingency reserve 47,621 46,199
Deferred premium revenue 45,903 41,376
Deferred acquisition costs 44,502 39,886
Unrealized gains 2,606 1,225
Contingent commissions 4,744 1,692
Other 5,324 3,552
-------- --------
Total gross deferred tax liabilities 150,700 133,930
-------- --------
Net deferred tax liability $106,686 $ 84,765
======== ========
</TABLE>
Under SFAS 109, a change in the Federal tax rate requires a restatement of
deferred tax assets and liabilities. Accordingly, the restatement for the
change in the 1993 Federal tax rate resulted in a $5.4 million increase in the
tax provision, of which $3.2 million resulted from the recalculation of deferred
taxes at the new Federal rate.
The provision for income taxes is composed of:
<TABLE>
<CAPTION>
Years ended December 31
----------------------------
In thousands 1993 1992 1991
- --------------------------------------------
<S> <C> <C> <C>
Current $66,086 $46,585 $34,175
Deferred 20,598 8,217 7,799
------- ------- -------
Total $86,684 $54,802 $41,974
======= ======= =======
</TABLE>
The provision for income taxes gives effect to permanent differences between
financial and taxable income. Accordingly, MBIA Corp.'s effective income tax
rate differs from the statutory rate on ordinary income. The reasons for MBIA
Corp.'s lower effective tax rates are as follows:
-16-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Years ended December 31
----------------------------
1993 1992 1991
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed on pre-tax
financial income at statutory rates 35.0% 34.0% 34.0%
Increase (reduction in taxes
resulting from:
Tax-exempt interest (10.6) (11.3) (10.7)
Benefit from tax sharing agreement --- (3.0) (4.8)
Amortization of goodwill 0.5 0.7 0.8
Other --- 0.1 0.7
----- ----- -----
Provision for income taxes 24.9% 20.5% 20.0%
===== ===== =====
</TABLE>
The sources of temporary differences and the related provision (benefit) for
deferred income taxes are as follows:
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------
In thousands 1993 1992 1991
- ------------------------------------------------------------
<S> <C> <C> <C>
Deferred acquisition costs $ 3,511 $ 4,515 $ 3,289
Contingent commissions 3,013 577 (21)
Premium revenue recognition 4,734 6,887 9,224
Unearned premium offset 3,749 (9,546) (6,797)
Other, net 5,591 5,784 2,104
------- ------- -------
$20,598 $ 8,217 $ 7,799
======= ======= =======
</TABLE>
8. DIVIDENDS AND CAPITAL REQUIREMENTS
- --------------------------------------
Under New York Insurance Law, MBIA Corp. may pay a dividend only from earned
surplus subject to the maintenance of a minimum capital requirement and the
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-based financial
statements, or adjusted net investment income, as defined, for such 12-month
period without prior approval of the Superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which can be
paid in any 12-month period, MBIA Corp. had approximately $47 million available
for the payment of dividends as of December 31, 1993. In 1993, 1992 and 1991,
MBIA Corp. declared and paid dividends of $50 million, $22 million and $41
million, respectively, to MBIA Inc.
-17-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from unassigned
surplus, and the dividends in any 12-month period may not exceed the greater of
10% of policyholders' surplus (total capital and surplus) at the end of the
preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which can be
paid in any 12-month period, MBIA Illinois may pay a dividend only with prior
approval as of December 31, 1993.
The insurance departments of New York State and certain other states and the
agencies which rate the bonds insured by MBIA Corp. have various requirements
with which MBIA Corp. was in compliance as of December 31, 1993, relating to the
maintenance of certain minimum ratios of statutory capital and reserves to net
insurance in force.
9. LINES OF CREDIT
- -------------------
MBIA Corp. has a standby line of credit commitment in the amount of $575 million
with a group of major banks to provide loans to MBIA Corp. after it has incurred
cumulative losses (net of any recoveries) from December 31, 1993 in excess of
the greater of $500 million or 6.25% of average annual debt service. The
obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term and expires on
December 31, 2000 but, subject to approval by the bank, may be annually renewed
to extend the term to seven years beyond the renewal date.
MBIA Corp. also maintains short-term bank liquidity facilities aggregating $130
million with four other major banks.
In 1993, no borrowings were outstanding under these lines of credit.
10. NET INSURANCE IN FORCE
- ---------------------------
MBIA Corp. guarantees the timely payment of principal and interest on municipal
and certain non-municipal bonds and notes. MBIA Corp.'s
-18-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ultimate exposure to credit loss in the event of nonperformance by the insured
is represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional commitments to
guarantee timely payment on the bonds and notes to bondholders. The
creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or
notes may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets.
The right to such money or collateral would typically become MBIA Corp.'s upon
the payment of the insured amount by MBIA Corp.
As of December 31, 1993, insurance in force, net of cessions to reinsurers, has
a range of maturity of 1-40 years. The distribution of net insurance in force
by state and type of bond, including MBIA Investment Management Corp.'s $493.0
million municipal investment agreement liability guaranteed by MBIA Corp. in
1993, is set forth in the following tables:
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------------------------------------------
1993 1992
------------------------------------- -----------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance of Issues Insurance
In Force Outstanding In Force In Force Outstanding In Force
-----------------------------------------------------------------------------
(in billions) (in billions)
<S> <C> <C> <C> <C> <C> <C>
California $ 37.9 2,410 14.2% $ 27.8 2,167 12.5%
Florida 22.9 1,716 8.6 21.4 1,685 9.6
New York 21.5 4,116 8.0 18.5 4,114 8.3
Pennsylvania 17.7 1,889 6.6 15.5 1,712 6.9
Texas 17.5 1,784 6.5 15.7 1,809 7.0
Illinois 12.2 1,120 4.6 9.9 1,095 4.4
New Jersey 11.9 1,298 4.5 10.5 1,247 4.7
Massachusetts 7.4 959 2.8 6.4 1,040 2.9
Ohio 7.0 915 2.6 6.3 944 2.8
Georgia 5.9 815 2.2 4.9 746 2.2
All others 105.4 10,130 39.4 86.2 9,867 38.7
------ ------ ----- ------ ------ -----
$267.3 27,152 100.0% $223.1 26,426 100.0%
====== ====== ===== ====== ====== =====
</TABLE>
-19-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
As of December 31
---------------------------------------------------------------------------
1993 1992
------------------------------------ ----------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance of Issues Insurance
In Force Outstanding In Force In Force Outstanding In Force
---------------------------------------------------------------------------
(in billions) (in billions)
<S> <C> <C> <C> <C> <C> <C>
Municipal
General Obligation $ 72.7 10,310 27.2% $ 62.5 10,148 28.0%
Utilities 50.8 4,640 19.0 41.1 4,779 18.4
Health Care 47.7 2,558 17.8 41.9 2,459 18.8
Special Revenue 20.6 1,153 7.7 17.1 1,068 7.7
Transportation 19.1 1,431 7.1 14.8 1,385 6.6
Housing 14.7 2,614 5.5 15.5 2,775 7.0
Higher education 12.7 1,119 4.8 10.6 1,037 4.8
Industrial develop- 3.2
ment and pollution
control revenue 11.2 1,058 4.2 7.2 1,040
Other 2.4 68 0.9 2.7 86 1.2
------ ------ ----- ------ ------ -----
251.9 24,951 94.2 213.4 24,777 95.7
------ ------ ----- ------ ------ -----
Non-municipal
Asset/mortgage-
backed 8.5 94 3.2 5.4 50 2.4
Investor-owned
utilities 4.5 2,056 1.7 3.6 1,590 1.6
Other 2.4 51 0.9 0.7 9 0.3
------ ------ ----- ------ ------ -----
15.4 2,201 5.8 9.7 1,649 4.3
------ ------ ----- ------ ------ -----
$267.3 27,152 100.0% $223.1 26,426 100.0%
====== ====== ===== ====== ====== =====
</TABLE>
11. REINSURANCE
- ----------------
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by MBIA
Corp. and MBIA Illinois were $36.8 billion and $33.2 billion, at December 31,
1993 and 1992, respectively. The distribution of ceded insurance in force by
state and type of bond is set forth in the tables below:
-20-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
As of December 31
-----------------------------------------------------
1993 1992
-----------------------------------------------------
Ceded % of Ceded Ceded % of Ceded
Insurance Insurance Insurance Insurance
State In Force In Force In Force In Force
- -------------------------------------------------------------------------------
(in billions) (in billions)
<S> <C> <C> <C> <C>
California $ 5.7 15.5% $ 4.2 12.7%
New York 4.2 11.4 4.2 12.7
Pennsylvania 2.7 7.3 2.8 8.5
Texas 2.6 7.1 2.3 6.9
Florida 1.9 5.2 2.2 6.6
Illinois 1.9 5.2 1.0 3.0
Washington 1.1 3.0 0.8 2.4
Puerto Rico 1.1 3.0 1.1 3.3
District of Columbia 0.9 2.4 1.1 3.3
New Jersey 0.9 2.4 0.9 2.7
Georgia 0.9 2.4 0.7 2.1
Massachusetts 0.8 2.2 0.9 2.7
Ohio 0.7 1.9 0.8 2.4
All others 11.4 31.0 10.2 30.7
----- ----- ----- -----
$36.8 100.0% $33.2 100.0%
===== ===== ===== =====
<CAPTION>
As of December 31
-----------------------------------------------------
1993 1992
-----------------------------------------------------
Ceded % of Ceded Ceded % of Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- -------------------------------------------------------------------------------
(in billions) (in billions)
<S> <C> <C> <C> <C>
Municipal
Utilities $ 8.8 23.9% $ 7.9 23.8%
General obligation 8.3 22.5 7.3 22.0
Health care 6.8 18.5 7.0 21.1
Transportation 3.1 8.4 2.7 8.1
Special revenue 2.6 7.1 1.8 5.4
Housing 1.2 3.3 1.1 3.3
Higher education 0.9 2.4 0.9 2.7
Industrial development
and pollution
control revenue 0.3 0.8 0.3 0.9
Other 1.8 4.9 3.0 9.1
----- ----- ----- -----
33.8 91.8 32.0 96.4
----- ----- ----- -----
Non-municipal
Asset/mortgage-backed 2.1 5.7 0.9 2.7
Other 0.9 2.5 0.3 0.9
----- ----- ----- -----
3.0 8.2 1.2 3.6
----- ----- ----- -----
$36.8 100.0% $33.2 100.0%
===== ===== ===== =====
</TABLE>
-21-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Included in gross premiums written are assumed premiums from other insurance
companies of $20.4 million, $10.1 million and $7.3 million for the years ended
December 31, 1993, 1992 and 1991, respectively. The percentages of the amounts
assumed to net premiums written were 4.7%, 3.0% and 3.3% in 1993, 1992 and 1991,
respectively.
Gross premiums written include $5.4 million in 1993 and $5.0 million in 1992
related to the assumption by MBIA Corp. of reinsurance previously ceded. Also
included in gross premiums in 1993 is $10.8 million of premiums assumed from a
member of the Association. Ceded premiums written are net of $2.5 million in
1993 and $4.7 million in 1992 related to the reassumption of reinsurance
previously ceded by MBIA Corp.
Effective January 1, 1993, MBIA Corp. adopted SFAS 113. Under SFAS 113, assets
and liabilities relating to reinsurance contracts must be shown gross of the
effects of reinsurance. The provisions of SFAS 113, applied retroactively,
resulted in MBIA Corp. recording prepaid reinsurance premiums of $170.6 million
and $164.4 million at December 31, 1993 and 1992, respectively, and increasing
deferred premium revenue to $1.4 billion and $1.2 billion at December 31, 1993
and 1992, respectively. This SFAS also establishes guidelines to determine
whether risk is transferred under a reinsurance contract. If risk is
transferred, the conditions for reinsurance accounting are met. If risk is not
transferred, the contract is accounted for as a deposit.
12. EMPLOYEE BENEFITS
- ----------------------
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1993, 1992 and 1991 was $3.1 million,
$2.7 million and $2.5 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the
first 5% of total compensation. MBIA Corp. contributions to the profit sharing
plan aggregated $1.3 million, $0.9 million and $0.9 million for the years ended
December 31, 1993, 1992 and 1991, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a non-
qualified deferred compensation plan. Of the above amounts for the pension and
profit sharing plans, $2.6 million, $2.2 million and $2.0 million for the years
ended
-22-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1993, 1992 and 1991, respectively, are included in policy
acquisition costs.
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan which
enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to benefit
from appreciation in the price of the common stock of MBIA Inc. Certain key
employees of MBIA Corp. were granted Stock Appreciation Rights ("SARs"). On
March 29, 1991, those MBIA Corp. employees who had previously been granted SARS
agreed to the cancellation of such SARs.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106. Under SFAS 106,
companies are required to accrue the cost of employee post-retirement benefits
during the years that employees render service. Prior to January 1, 1993, MBIA
Corp. had accounted for these post-retirement benefits on a cash basis. In
1993, MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis
and recorded a cumulative effect adjustment which decreased net income and
increased other liabilities by $0.1 million.
13. RELATED PARTY TRANSACTIONS
- -------------------------------
The business assumed from the Association includes deferred premium revenue of
$2.3 million and $1.9 million at December 31, 1993 and 1992, respectively,
relating to insurance on unit investment trusts sponsored by two members of the
Association.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred premium
revenue from a member of the Association which had not previously ceded its
insurance portfolio. Also in 1993, MBIA Corp. assumed $0.4 million of deferred
premium revenue relating to one of the trusts which was previously ceded to an
affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment
obligations of the members of the Association, one of which is a principal
shareholder of MBIA Inc., which had their Standard & Poor's claims-paying rating
downgraded from Triple-A on their previously issued Association policies. In
the event that they do not meet their Association policy payment obligations,
MBIA Corp. will pay the required amounts directly to the paying agent instead of
to the former Association member as was previously required. The aggregate
amount payable by MBIA Corp. on these surety bonds is limited to $340 million.
These surety bonds remain outstanding as of December 31, 1993.
-23-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MBIA Corp. has investment management and advisory agreements with an affiliate
of a principal shareholder of MBIA Inc., which provide for payment of fees on
assets under management. Total related expenses for the years ended December
31, 1993, 1992 and 1991 amounted to $2.4 million, $2.1 million and $1.8 million,
respectively.
MBIA Corp. held an investment in a limited partnership which was managed by an
independent management company and had as one of its general partners an
affiliate of a former principal shareholder of MBIA Inc. The limited
partnership was liquidated in 1991.
MBIA Corp. has various insurance coverages provided by a principal shareholder
of MBIA Inc., the cost of which was $2.0 million, $2.2 million and $2.2 million
for the years ended December 31, 1993, 1992 and 1991, respectively.
Included in other assets at December 31, 1993 is $3.2 million of net receivables
from MBIA Inc. and other subsidiaries. Included in other liabilities at
December 31, 1992 is $2.8 million of net payables to MBIA Inc. and other
subsidiaries.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
- ----------------------------------------
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount MBIA Corp. could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
FIXED MATURITY SECURITIES - The fair value of fixed maturity securities equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
-24-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which, because of their short duration, is a reasonable estimate of fair value.
OTHER INVESTMENTS - Other investments consist principally of marketable equity
securities, as well as MBIA Corp.'s interest in limited partnerships and a
mutual fund, both of which invest primarily in marketable equity securities.
The fair value of other investments is based on quoted market prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims. Therefore, the carrying
amount is a reasonable estimate of the fair value of the reserve.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream at MBIA Corp.'s estimated cost of
capital.
-25-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------
1993 1992
----------------------- ------------------------
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Fixed maturity securities $2,753,974 $2,971,369 $2,297,854 $2,413,831
Short-term investments 104,205 104,205 121,733 121,733
Other investments 98,215 98,215 55,981 55,981
Cash and cash equivalents 747 747 614 614
Prepaid reinsurance
premiums 170,551 141,441 164,408 134,132
Receivable for
investments sold 1,949 1,949 2,111 2,111
LIABILITIES:
Deferred premium
revenue 1,402,807 1,173,882 1,196,155 1,003,480
Loss and loss adjustment
expense reserves 33,735 33,735 25,510 25,510
Payable for investments
purchased 33,340 33,340 --- ---
OFF-BALANCE-SHEET
INSTRUMENTS:
Installment premiums --- 186,490 --- 173,242
</TABLE>
-26-
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1994 AND DECEMBER 31, 1993
AND FOR THE PERIODS ENDED SEPTEMBER 30, 1994 AND 1993
<PAGE>
APPENDIX B
UNAUDITED FINANCIAL STATEMENTS OF THE INSURER
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
---------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets - September 30, 1994 (Unaudited)
and December 31, 1993 (Audited) 3
Consolidated Statements of Income - Three months and
nine months ended September 30, 1994 and 1993 (Unaudited) 4
Consolidated Statement of Changes in Shareholder's
Equity - Nine months ended September 30, 1994 (Unaudited) 5
Consolidated Statements of Cash Flows
- Nine months ended September 30, 1994 and 1993 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
</TABLE>
(2)
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
September 30, 1994 December 31, 1993
------------------ -----------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Investments:
Fixed maturity securities, at amortized
cost (market value $2,971,369) $ --- $2,753,974
Fixed maturity securities held as available-for-sale
at market (amortized cost $3,064,590) 3,063,011 ---
Short-term investments, at amortized cost
(which approximates market value) 107,887 104,205
Other investments 11,883 98,215
----------- -----------
Total investments 3,182,781 2,956,394
Cash and cash equivalents 1,310 747
Accrued investment income 52,728 51,514
Deferred acquisition costs 128,044 120,484
Prepaid reinsurance premiums 183,150 170,551
Goodwill (less accumulated amortization of
$31,197 and $27,476) 111,783 115,504
Property and equipment, at cost (less accumulated
depreciation of $4,486 and $3,452) 36,696 37,574
Receivable for investments sold 935 1,949
Other assets 45,498 18,912
----------- -----------
Total assets $3,742,925 $3,473,629
=========== ===========
Liabilities and Shareholder's Equity
Liabilities:
Deferred premium revenue $1,488,522 $1,402,807
Loss and loss adjustment expense reserves 38,811 33,735
Current income taxes payable --- 1,771
Deferred income taxes 117,155 106,686
Payable for investments purchased --- 33,340
Other liabilities 52,114 37,547
---------- ----------
Total liabilities 1,696,602 1,615,886
---------- ----------
Shareholder's Equity
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 951,267 943,794
Retained earnings 1,081,379 895,312
Cumulative translation adjustment 725 (1,203)
Unrealized (depreciation) appreciation of investments,
net of deferred income tax (benefit) provision
of $(732) and $2,606 (2,048) 4,840
---------- ----------
Total shareholder's equity 2,046,323 1,857,743
---------- ----------
Total liabilities and shareholder's equity $3,742,925 $3,473,629
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(3)
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ----------------------
1994 1993 1994 1993
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Gross premiums written $ 80,313 $110,022 $274,841 $362,362
Ceded premiums (12,011) (6,487) (38,686) (35,646)
-------- ------- -------- --------
Net premiums written 68,302 103,535 236,155 326,716
Increase in deferred premium revenue (13,358) (42,298) (72,829) (153,093)
-------- ------- -------- --------
Premiums earned (net of ceded
premiums of $11,719, $10,674,
$26,087 and $28,408) 54,944 61,237 163,326 173,623
Net investment income 49,676 44,050 144,070 129,043
Net realized gains 751 1,019 9,659 6,420
Other income 887 1,552 1,505 3,927
-------- ------- -------- --------
Total revenues 106,258 107,858 318,560 313,013
-------- ------- -------- --------
Expenses:
Losses and loss adjustment expenses 1,626 1,862 5,665 6,018
Underwriting and operating expenses 10,820 9,106 30,466 27,734
Policy acquisition costs, net 5,232 6,413 16,292 18,922
-------- ------- -------- --------
Total expenses 17,678 17,381 52,423 52,674
-------- ------- -------- --------
Income before income taxes and cumulative
effect of accounting changes 88,580 90,477 266,137 260,339
Provision for income taxes 19,293 31,280 59,070 65,454
-------- ------- -------- --------
Income before cumulative effect of
accounting changes 69,287 59,197 207,067 194,885
Cumulative effect of accounting changes --- --- --- 12,923
-------- ------- -------- --------
Net income $69,287 $59,197 $207,067 $207,808
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(4)
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
For the nine months ended September 30, 1994
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Cumulative Appreciation
--------------------- Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
-------- -------- -------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 100,000 $15,000 $943,794 $ 895,312 $(1,203) $ 4,840
Net income --- --- --- 207,067 --- ---
Change in foreign currency translation --- --- --- --- 1,928 ---
Change in unrealized appreciation
(depreciation) of investments net of
change in deferred income taxes
of $(3,338) --- --- --- --- --- (6,888)
Dividends declared (per common
share $210.00) --- --- --- (21,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 7,473 --- --- ---
------- ------- -------- ---------- ----------- --------------
Balance, September 30, 1994 100,000 $15,000 $951,267 $1,081,379 $725 $(2,048)
======= ======= ======== ========== =========== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(5)
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
---------------------
1994 1993
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 207,067 $ 207,808
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (1,214) (238)
Increase in deferred acquisition costs (7,560) (7,315)
Increase in prepaid reinsurance premiums (12,599) (7,238)
Increase in deferred premium revenue 85,499 160,331
Increase in loss and loss adjustment expense reserves 5,076 7,470
Depreciation 1,027 931
Amortization of goodwill 3,721 3,752
Amortization of bond discount, net (3) (716)
Net realized gains on sale of investments (9,659) (6,420)
Deferred income taxes 13,807 3,694
Other, net (4,339) 65,436
Total adjustments to net income 73,756 219,687
Net cash provided by operating activities 280,823 427,495
Cash flows from investing activities:
Purchase of fixed maturity securities, net
of payable for investments purchased (824,635) (671,484)
Sale of fixed maturity securities, net of
receivable for investments sold 355,441 175,463
Redemption of fixed maturity securities,
net of receivable for investments redeemed 91,793 170,848
Sale (purchase) of short-term investments, net 30,897 (35,573)
Sale (purchase) of other investments 87,376 (23,019)
Capital expenditures, net of disposals (132) (2,992)
Net cash used in investing activities (259,260) (386,757)
Cash flows from financing activities:
Dividends paid (21,000) (38,000)
Net cash used by financing activities (21,000) (38,000)
Net increase in cash and cash equivalents 563 2,738
Cash and cash equivalents - beginning of period 747 614
Cash and cash equivalents - end of period $ 1,310 $ 3,352
Supplemental cash flow disclosures:
Income taxes paid $ 41,530 $ 35,842
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(6)
<PAGE>
MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
- -------------------------
The accompanying consolidated financial statements are unaudited and include the
accounts of Municipal Bond Investors Assurance Corporation and its Subsidiaries
(the "Company"). The statements do not include all of the information and
disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 1993 for the
Company. The accompanying consolidated financial statements have not been
audited by independent accountants in accordance with generally accepted
auditing standards but in the opinion of management such financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to summarize fairly the Company's financial position and results of
operations. The results of operations for the nine months ended September 30,
1994 may not be indicative of the results that may be expected for the year
ending December 31, 1994. The December 31, 1993 condensed balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
2. DIVIDENDS DECLARED
- ----------------------
Dividends declared by the Company during the nine months ended September 30,
1994 were $21.0 million.
3. INVESTMENTS IN DEBT AND EQUITY SECURITIES
- ---------------------------------------------
As of March 31, 1994 the Company adopted Statement of Financial Accounting
Standards ("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities." Fixed-income investments, which were previously carried at
amortized cost were deemed by management to be available-for-sale and therefore
are reported at market value with net unrealized gains and losses reported in
shareholders' equity. As of September 30, 1994, the adoption of SFAS 115
resulted in a decrease of $(1.6) million in the reported value of the Company's
investment portfolio and a decrease in shareholders' equity of $(1.0) million.
There was no income statement impact.
(7)
MASTER BASE
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.
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. The Certificates will not
be listed on any securities exchange.
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 June 23, 1994.
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.
TABLE OF CONTENTS
Caption Page
Summary of Prospectus. . . . . . . . . . . . . 3
Special Considerations . . . . . . . . . . . . 9
The Mortgage Pools . . . . . . . . . . . . . . 10
General. . . . . . . . . . . . . . . . . 10
The Mortgage Loans . . . . . . . . . . . 12
Mortgage Loan Program. . . . . . . . . . . . . 15
Underwriting Standards . . . . . . . . . 15
Qualifications of Sellers. . . . . . . . 16
Representations by Sellers . . . . . . . 18
Subservicing by Sellers. . . . . . . . . 21
Description of the Certificates. . . . . . . . 23
General. . . . . . . . . . . . . . . . . 23
Form of Certificates . . . . . . . . . . 24
Assignment of Mortgage Loans . . . . . . 25
Payments on Mortgage Loans;
Deposits to Certificate Account. . . . 26
Withdrawals from the Custodial
Account. . . . . . . . . . . . . . . . 29
Distributions. . . . . . . . . . . . . . 30
Principal and Interest on the
Certificates . . . . . . . . . . . . . 30
Example of Distributions . . . . . . . . 31
Advances . . . . . . . . . . . . . . . . 33
Reports to Certificateholders. . . . . . 33
Collection and Other Servicing
Procedures . . . . . . . . . . . . . . 35
Realization Upon Defaulted Mortgage
Loans. . . . . . . . . . . . . . . . . 36
Subordination. . . . . . . . . . . . . . . . . 37
Description of Credit Enhancement. . . . . . . 39
Letter of Credit . . . . . . . . . . . . 40
Mortgage Pool Insurance Policies . . . . 41
Special Hazard Insurance Policies. . . . 42
Bankruptcy Bonds . . . . . . . . . . . . 43
Reserve Funds. . . . . . . . . . . . . . 43
Maintenance of Credit Enhancement. . . . 44
Reduction or Substitution of Credit
Enhancement. . . . . . . . . . . . . . 46
Purchase Obligations . . . . . . . . . . . . . 46
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder . . . . . . 47
Primary Mortgage Insurance Policies. . . 47
Hazard Insurance Policies. . . . . . . . 48
The Company. . . . . . . . . . . . . . . . . . 49
Residential Funding Corporation. . . . . . . . 49
The Pooling and Servicing Agreement. . . . . . 50
Servicing and Other Compensation
and Payment of Expenses; Spread. . . . 50
Evidence as to Compliance. . . . . . . . 51
Certain Matters Regarding the Master
Servicer and the Company . . . . . . . 51
Events of Default. . . . . . . . . . . . 52
Rights Upon Event of Default . . . . . . 52
Amendment. . . . . . . . . . . . . . . . 53
Termination; Retirement of Certificates. 54
The Trustee. . . . . . . . . . . . . . . 54
Yield Considerations . . . . . . . . . . . . . 55
Maturity and Prepayment Considerations . . . . 57
Certain Legal Aspects of Mortgage Loans and
Related Matters. . . . . . . . . . . . . . . 58
General. . . . . . . . . . . . . . . . . 59
Cooperative Loans. . . . . . . . . . . . 59
Foreclosure. . . . . . . . . . . . . . . 60
Foreclosure on Shares of
Cooperatives . . . . . . . . . . . . . 61
Rights of Redemption . . . . . . . . . . 62
Anti-Deficiency Legislation and
Other Limitations on Lenders . . . . . 62
Environmental Legislation. . . . . . . . 63
Enforceability of Certain
Provisions . . . . . . . . . . . . . . 63
Applicability of Usury Laws. . . . . . . 64
Alternative Mortgage Instruments . . . . 64
Soldiers' and Sailors' Civil
Relief Act of 1940 . . . . . . . . . . 64
Certain Federal Income Tax Consequences. . . . 65
General. . . . . . . . . . . . . . . . . 65
Grantor Trust Funds. . . . . . . . . . . 66
REMICS . . . . . . . . . . . . . . . . . 74
State and Other Tax Consequences . . . . . . . 89
ERISA Considerations . . . . . . . . . . . . . 90
Plan Asset Regulations . . . . . . . . . 90
Prohibited Transaction Exemption . . . . 91
Tax Exempt Investors . . . . . . . . . . 92
Consultation with Counsel. . . . . . . . 92
Legal Investment Matters . . . . . . . . . . . 93
Use of Proceeds. . . . . . . . . . . . . . . . 94
Methods of Distribution. . . . . . . . . . . . 94
Legal Matters. . . . . . . . . . . . . . . . . 95
Financial Information. . . . . . . . . . . . . 95
Additional Information . . . . . . . . . . . . 95
Index of Principal Definitions . . . . . . . . 96
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.
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.
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 distribu-
tions, 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
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 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 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 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.
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.
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."
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, 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.
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.
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 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,
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 the 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.
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.
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 Mortgage 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.
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 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.
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 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.
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 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 the following 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 accepted by Residential Funding for participation in
Residential Funding's loan purchase programs. As of the date of
approval, each Seller is a seller/servicer approved by either, and
in many cases both, the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"),
having generally a minimum of three years' experience (which may be
through a predecessor entity) in originating conventional mortgage
loans. Unless waived or modified by Residential Funding in its
sole discretion, which Residential Funding has done in numerous
cases, the Guide requires each Seller to meet the following
requirements as of the date of its acceptance: each Seller should
have a conventional mortgage loan servicing portfolio of at least
$100,000,000, should have originated at least $25,000,000 in
conventional mortgage loans within the twelve months preceding its
application to participate in Residential Funding's loan purchase
programs and should have a "GAAP tangible net worth" (i. e., total
net worth as determined in accordance with generally accepted
accounting principles, exclusive of goodwill) which, when added to
an amount equal to 1% of all mortgage loans serviced for
Residential Funding, is at least equal to $500,000.
Notwithstanding these requirements, however, there can be no
assurance that any Seller presently meets such qualifications or
will continue to meet such 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 described above 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 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 set
forth in the third preceding paragraph 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; (viii) each Mortgage
Loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws in all material respects;
and (ix) with respect to each Mortgaged Property securing a
Mortgage Loan, the dwelling is either (a) an owner-occupied primary
residence or (b) a vacation or second home that (i) is not part of
a rental pool and (ii) is suitable for year-round occupancy. 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.
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.
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
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 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.
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; (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
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 transferrable 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 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)
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.
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 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.
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.
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)
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 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 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. 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.
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:
Date Note Description
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.
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 Certificate-
holders.
(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 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 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.
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. 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 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. 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 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.
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 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.
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, if applicable, with respect to each series
of Certificates will be set forth in the related Prospectus
Supplement. 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.
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 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 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 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 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 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 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.
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
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 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 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
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 as to at
least the principal amount thereof exceeding 75% of the Appraised
Value of the Mortgaged Property at origination of the Mortgage
Loan, 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. 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, 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
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)
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, Connecticut,
Florida, Georgia, Rhode Island and Washington, D.C.
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 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 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 two officers 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 will also certify that, to the
best knowledge of such officers of the Master Servicer, each
Subservicer has fulfilled in all material respects its obligations
under the relevant Subservicing Agreement during such period 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 accountants' statement and the annual
statement of officers 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 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 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)
No Certificateholder will have any right under a Pooling and
Servicing Agreement to institute any proceeding with respect to
such Pooling and Servicing Agreement 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 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.
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.
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 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, 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.
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.
There can be no assurance as to the rate of prepayment of the
Mortgage Loans. The Company is not aware of any publicly available
statistics relating to the principal prepayment experience of
diverse portfolios of mortgage loans such as the Mortgage Loans
over an extended period of time. 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 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 in some cases or
on the terms of separate subordination or intercreditor agreements,
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.
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 the terms of
the particular security agreement as well as the order of
recordation of the agreement 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. 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 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. 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. Judicial foreclosure proceedings are often not contested
by any of the applicable 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 is a public sale. However, because of the difficulty
a potential buyer at the sale would 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 or deed of
trust, 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 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. 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 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.
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. 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.
Other 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
former 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 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, 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 residence, thus
leaving the lender a general unsecured creditor for the difference
between the value of the residence 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.
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. In addition,
substantive 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 federal 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 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 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, 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--Representa-
tions 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), 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 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 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 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.
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 other
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.
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 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 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 other adjustments would be required to reflect
differences between an assumed prepayment rate and the actual rate
of prepayments.
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 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 in
1986 regarding contingent payment debt instruments, but have not
been made final and are likely to be substantially revised before
being made final. Moreover, like 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 regulations proposed
in 1986 were to apply, the holder of a Grantor Trust Strip
Certificate would be required to include as interest income in each
month a portion of the periodic payment ("Accrued Periodic
Payment") due on the Grantor Trust Strip Certificate. That portion
(the "Periodic Income Amount") would equal the product of (x) the
adjusted issue price of the Grantor Trust Strip Certificate at the
beginning of the period and (y) a specified yield (as further
described below). The excess of the Accrued Periodic Payment over
the Periodic Income Amount first would reduce the adjusted issue
price of the Grantor Trust Strip Certificate and, to that extent,
would be treated as a return of capital and not as interest income;
after the adjusted issue price had been reduced to zero, the entire
Accrued Periodic Payment would be treated as interest income.
The specified yield referred to in clause (y) above would
equal the "applicable Federal rate" (expressed as a monthly rate)
in effect at the time of purchase of the Grantor Trust Strip
Certificate by that holder, which rate is computed monthly by the
IRS. It is unclear whether a prepayment assumption should be made
in determining which Treasury securities (short-term, mid-term or
long-term) should be used to determine the "applicable Federal
rate" for this purpose.
Income accrual with respect to a Grantor Trust Strip
Certificate will generally be slower if the foregoing contingent
payment rules apply than if they do not. However, as noted above,
there is substantial doubt that the contingent payment rules of the
proposed regulations in their current form will be permitted to be
applied to instruments such as the Grantor Trust Strip Certificates
and revised contingent payment regulations are expected to be
proposed. 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.
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 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 may not be treated entirely as assets described in
the foregoing sections. If so, the related Prospectus Supplement
will describe the Mortgage 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 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." "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 life. For this purpose, the weighted
average life 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 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 cost (excluding any portion of such
cost attributable to accrued qualified stated interest) less than
its remaining stated redemption price will also be required to
include in gross income the daily portions of any original issue
discount 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 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 currently market discount in income 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.
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.
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. 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 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 will be
determined in the same manner as if the REMIC were an individual
having the calendar year as its taxable year and using the accrual
method of accounting. However, no item of income, gain, loss or
deduction allocable to a prohibited transaction will be taken into
account. See "--Prohibited Transactions and Other 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.
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.
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. In general, a REMIC Residual Certificate has
negative value if, as of the date a taxpayer acquires the REMIC
Residual Certificate, the present value of the tax liabilities
associated with holding the REMIC Residual Certificate exceeds the
sum of (i) the present value of the expected future distributions
on the REMIC Residual Certificate and (ii) the present value of the
anticipated tax savings associated with holding the REMIC Residual
Certificate as the REMIC generates losses. The amounts and present
values of the anticipated tax liabilities, expected future
distributions and anticipated tax savings are all to be determined
using (i) the prepayment and reinvestment assumptions adopted under
Section 1272(a)(6) of the Code, or that would have been adopted had
the REMIC's regular interests been issued with original issue
discount, (ii) any required or permitted clean up calls, or
required qualified liquidation, provided for in the REMIC's
organizational documents and (iii) a discount rate equal to the
"applicable Federal rate" (as specified in Section 1274(d)(1) of
the Code) that would apply to a debt instrument issued on the date
of acquisition of the REMIC Residual Certificate. Furthermore, the
Mark-to-Market Regulations provide the IRS with the authority to
treat any REMIC Residual Certificate having substantially the same
economic effect as a "negative value" residual interest. The IRS
could issue subsequent regulations which could apply retroactively,
providing additional or different requirements with respect to such
deemed negative value residual interests. Any such regulations
could also limit the applicability of the mark-to-market
requirements to residual interests having economic value at the
time of their acquisition. Prospective purchasers of a REMIC
Residual Certificate should consult their tax advisors regarding
the possible application of the Mark-to-Market Regulations 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
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."
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.
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, 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.
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.
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.
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 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 of 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 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. 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 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 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.
INDEX OF PRINCIPAL DEFINITIONS
Page
Accrual Certificates 4
Advance 32
Affiliated Sellers 10
Appraised Value 12
ARM Loans 11
Balloon Amount 12
Balloon Loans 12
Bankruptcy Amount 36
Bankruptcy Loss 38
Beneficial Owner 23
Buydown Account 13
Buydown Agreement 28
Buydown Funds 13
Buydown Mortgage Loans 13
Buydown Period 13
Certificate Account 27
Certificate Account Deposit Date 27
Certificateholders 1
Certificates 1
Code 4
Committee Report 70
Company 1
Contributions Tax 85
Convertible Mortgage Loan 12
Cooperative Loans 9
Cooperative Notes 9
Custodial Account 19
Cut-off Date 5
Debt Service Reduction 42
Defaulted Mortgage Loss 38
Deferred Interest 11
Deficient Valuation 42
Deleted Mortgage Loan 19
Designated Seller Transaction 10
Determination Date 30
Disqualified Persons 89
Distribution Date 5
DOL 89
DOL Regulations 89
DTC 23
DTC Registered Certificates 23
Due Date 26
Eligible Account 27
ERISA 7
ERISA Plans 89
Extraordinary Losses 38
FDIC 16
FHLMC 16
FIRREA 16
FNMA 16
Fraud Loss 38
Fraud Loss Amount 36
Garn-St Germain Act 62
GMAC 1
GMAC Mortgage 4
Grantor Trust Certificates 7
Grantor Trust Fractional Interest Certificate 65
Grantor Trust Fund 64
Grantor Trust Strip Certificate 65
Index 11
Insurance Proceeds 26
IRAs 89
IRS 66
Issue Premium 81
Letter of Credit 39
Letter of Credit Bank 39
Liquidated Mortgage Loan 35
Liquidation Proceeds 26
Loan-to-Value Ratio 12
Loss 46
Master Servicer 1
Mortgage Loans 1
Mortgage Notes 9
Mortgage Pool 1
Mortgage Rate 11
Mortgage Securities 5
Mortgaged Properties 4
Mortgagor 9
Net Mortgage Rate 54
Nonrecoverable Advance 29
Note Margin 11
OTS 92
Participants 23
Parties in Interest 89
Pass-Through Rate 3
Paying Agent 29
Payment Date 29
Percentage Interest 29
Permitted Investments 27
Plan 7
Plans 89
Pool Insurer 28
Pooling and Servicing Agreement 3
Prepayment Assumption 68
Prepayment Interest Shortfall 5
Primary Insurance Policy 46
Primary Insurer 46
Principal Prepayments 26
Prohibited Transactions Tax 85
PTCE 83-1 91
Purchase Obligation 46
Purchase Obligations 26
Purchase Price 19
Qualified Retirement Plans 89
Qualified Substitute Mortgage Loan 19
Rating Agency 7
Realized Loss 36
Record Date 29
Relief Act 64
REMIC 1
REMIC Certificates 64
REMIC Provisions 64
REMIC Regular Certificates 7
REMIC Regulations 65
REMIC Residual Certificates 7
Reserve Fund 43
Residential Funding 3
RTC 16
Sellers 10
Senior Certificates 4
Senior Percentage 37
Senior/Subordinate Series 22
Servicing Advances 28
Single Certificate 33
SMMEA 7
Special Hazard Amount 36
Special Hazard Instrument 38
Special Hazard Insurance Policy 41
Special Hazard Insurer 42
Special Hazard Loss 38
Spread 3
Stated Principal Balance 37
Strip Certificates 3
Subordinate Amount 37
Subordinate Certificates 4
Subservicers 13
Subservicing Account 25
Subservicing Agreement 20
Tax-Favored Plans 89
Tiered REMICs 74
Title V 63
Title VIII 63
Trust Fund 1
Trustee 3
UBTI 91
UCC 60
Unaffiliated Sellers 10
Unrecovered Senior Portion 37
<PAGE>
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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 UNDER-
WRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OF-
FER 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 CIR-
CUMSTANCES, 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
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PROSPECTUS SUPPLEMENT
<S> <C>
Summary.................................................................... S- 3
Description of the Mortgage Pool........................................... S-13
Description of the Certificates............................................ S-21
Municipal Bond Investors Assurance Corporation............................. S-32
Certain Yield and Prepayment Considerations................................ S-33
Pooling and Servicing Agreement............................................ S-39
Certain Federal Income Tax Consequences.................................... S-44
Method of Distribution..................................................... S-47
Legal Opinions............................................................. S-48
Ratings.................................................................... S-48
Legal Investment........................................................... S-49
ERISA Considerations....................................................... S-49
Experts.................................................................... S-49
Appendix A
Appendix B
PROSPECTUS
Summary of Prospectus...................................................... 3
Special Considerations..................................................... 9
The Mortgage Pools......................................................... 11
Mortgage Loan Program...................................................... 15
Description of the Certificates............................................ 25
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........................................ 54
Yield Considerations....................................................... 59
Maturity and Prepayment Considerations..................................... 62
Certain Legal Aspects of Mortgage Loans and Related Matters................ 64
Certain Federal Income Tax Consequences.................................... 71
State and Other Tax Consequences........................................... 98
ERISA Considerations....................................................... 98
Legal Investment Matters................................................... 101
Use of Proceeds............................................................ 103
Methods of Distribution.................................................... 103
Legal Matters.............................................................. 104
Financial Information...................................................... 104
Additional Information..................................................... 104
Index of Principal Definitions............................................. 105
</TABLE>
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RESIDENTIAL
FUNDING MORTGAGE
SECURITIES I, INC.
$301,391,144
MORTGAGE
PASS-THROUGH CERTIFICATES
SERIES 1995-S2
CLASS A CERTIFICATES ADJUSTABLE RATE $301,391,044
CLASS R CERTIFICATES ADJUSTABLE RATE $ 100
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PROSPECTUS SUPPLEMENT
MARCH 24, 1995
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BEAR, STEARNS & CO. INC.
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