<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 21, 1996)
$496,315,833
RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
COMPANY
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-S5
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
$101,437,000 7.500% Class A-1 Certificates $28,000,000 7.500% Class A-8 Certificates
$ 35,986,000 7.500% Class A-2 Certificates $ 4,059,000 7.000% Class A-9 Certificates
$ 29,287,000 7.500% Class A-3 Certificates $ 1,271,533 0.000% Class A-10 Certificates(1)
$ 16,236,000 7.625% Class A-4 Certificates $ 0 Variable Rate(2) Class A-11 Certificates
$125,000,000 7.500% Class A-5 Certificates $ 100 7.500% Class R Certificates
$132,774,000 7.500% Class A-6 Certificates $10,026,600 7.500% Class M-1 Certificates
$ 2,212,000 7.500% Class A-7 Certificates $ 5,013,300 7.500% Class M-2 Certificates
$5,013,300 7.500% Class M-3 Certificates
</TABLE>
- ------------
(1) The Class A-10 Certificates will be Principal Only Certificates and will not
be entitled to receive distributions of interest.
(2) Based on the Notional Amount as described herein.
------------------------
The Series 1997-S5 Mortgage Pass-Through Certificates will include the
following twelve classes (the 'Senior Certificates'): (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-6
Certificates, Class A-7 Certificates, Class A-8 Certificates and Class A-9
Certificates; (ii) Class A-4 Certificates (the 'Insured Certificates'); (iii)
Class A-5 Certificates (the 'Prepayment Lockout Certificates'); (iv) Class A-10
Certificates (the 'Principal Only Certificates'); (v) Class A-11 Certificates
(the 'Variable Strip Certificates') and (vi) Class R Certificates (the 'Residual
Certificates'). In addition to the Senior Certificates, the Series 1997-S5
Mortgage Pass-Through Certificates will also include six classes of subordinate
certificates which are designated as the Class M-1 Certificates, Class M-2
Certificates and Class M-3 Certificates (collectively, the 'Class M
Certificates') and the Class B-1 Certificates, Class B-2 Certificates and Class
B-3 Certificates (collectively, the 'Class B Certificates' and, together with
the Class M Certificates and Senior Certificates, the 'Certificates'). Only the
Senior Certificates and Class M Certificates (together, the 'Offered
Certificates') are offered hereby. See 'Index of Principal Definitions' in the
Prospectus for the meanings of capitalized terms and acronyms not otherwise
defined herein.
(Continued on following page)
------------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST
IN OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, GMAC MORTGAGE GROUP,
INC. OR ANY OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR
THE UNDERLYING MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE
MASTER SERVICER, GMAC MORTGAGE GROUP, INC. OR ANY OF
THEIR AFFILIATES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE
OFFERED CERTIFICATES, SEE 'RISK FACTORS' IN THE PROSPECTUS COMMENCING ON PAGE 8.
There is currently no secondary market for the Offered Certificates. Morgan
Stanley & Co. Incorporated (the 'Underwriter') intends to make a secondary
market in the Senior Certificates other than the Variable Strip Certificates and
the Principal Only Certificates (the 'Underwritten Certificates'), but is not
obligated to do so. There can be no assurance that a secondary market for the
Offered Certificates will develop or, if it does develop, that it will continue.
The Offered Certificates will not be listed on any securities exchange.
The Underwritten Certificates will be purchased from the Company by the
Underwriter. The Underwriter intends to sell a portion of the Insured
Certificates to Edward D. Jones & Co., L.P. ('EDJ'). The Underwritten
Certificates (other than the Insured Certificates) will be offered by the
Underwriter and the Insured Certificates may be offered by the Underwriter or
EDJ, 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,
and such portion is not offered hereby. The proceeds to the Company from the
sale of the Underwritten Certificates, before deducting expenses payable by the
Company, will be equal to approximately 99.35% of the initial aggregate
principal balance of the Underwritten Certificates, plus accrued interest
thereon from April 1, 1997 (the 'Cut-off Date'). The Underwritten 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. A
portion of the Insured Certificates may be offered by EDJ, subject to prior
sale, when, as and if delivered to and accepted by EDJ and subject to certain
other conditions. The Underwriter and EDJ reserve the right to withdraw, cancel
or modify such offer and to reject any order in whole or in part. It is expected
that delivery of the Underwritten Certificates (other than the Residual
Certificates) will be made only in book-entry form through the Same Day Funds
Settlement System of DTC as further 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 April 25, 1997, against payment therefor in immediately
available funds.
The Variable Strip Certificates, Principal Only Certificates and Class M
Certificates may be offered by the Company from time to time to the public,
directly or through an underwriter or agent, in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Company from any sale of the Variable Strip Certificates, Principal Only
Certificates or Class M Certificates will be equal to the purchase price paid by
the purchaser thereof, net of any expenses payable by the Company and any
compensation payable to any such underwriter or agent.
MORGAN STANLEY & CO. EDWARD D. JONES & CO., L.P.
INCORPORATED
APRIL 21, 1997
<PAGE>
<PAGE>
(Continued from previous page)
It is a condition to the issuance of the Senior Certificates (other than the
Variable Strip Certificates and Principal Only Certificates), Class M-1
Certificates and Class M-2 Certificates that they be rated 'AAA', 'AA' and 'A',
respectively, by each of Standard & Poor's Ratings Services ('STANDARD &
POOR'S') and Fitch Investors Service, L.P. ('FITCH'). It is a condition to the
issuance of the Variable Strip Certificates and Principal Only Certificates that
they be rated 'AAAr' by Standard & Poor's and 'AAA' by Fitch. It is a condition
to the issuance of the Class M-3 Certificates that they be rated not lower than
'BBB' by Fitch.
The Senior Certificates in the aggregate and the Class M-1 Certificates,
Class M-2 Certificates and Class M-3 Certificates will evidence initial
undivided interests of approximately 95.00%, 2.00%, 1.00%, and 1.00%,
respectively, in the Trust Fund consisting primarily of a pool of certain
conventional, fixed-rate, one- to four-family first mortgage loans, with terms
to maturity of not more than 30 years (the 'MORTGAGE LOANS'), to be deposited by
the Company into the Trust Fund for the benefit of the Certificateholders.
Certain characteristics of the Mortgage Loans are described herein under
'Description of the Mortgage Pool.' The rights of the holders of the Class M
Certificates and Class B Certificates to receive distributions with respect to
the Mortgage Loans will be subordinate to the rights of the holders of the
Senior Certificates; the rights of the holders of the Class M-2 Certificates to
receive distributions with respect to the Mortgage Loans will also be
subordinate to the rights of the holders of the Class M-1 Certificates; the
rights of the holders of the Class M-3 Certificates to receive distributions
with respect to the Mortgage Loans will also be subordinate to the rights of the
holders of the other classes of Class M Certificates; and the rights of the
holders of the Class B Certificates to receive distributions with respect to the
Mortgage Loans will also be subordinate to the rights of the holders of the
Class M Certificates, in each case to the extent described herein and in the
Prospectus.
The DTC Registered Certificates (as defined herein) will be represented by
certificates registered in the name of Cede & Co., as nominee of DTC, as further
described herein. The interests of beneficial owners of the DTC Registered
Certificates will be represented by book entries on the records of participating
members of DTC. Definitive certificates will be available for the DTC Registered
Certificates only under the limited circumstances described herein. See
'Description of the Certificates -- Book-Entry Registration of Certain of the
Senior Certificates' herein.
As described herein, a REMIC election will be made in connection with the
Trust Fund for federal income tax purposes. Each class of the Offered
Certificates (other than the Residual Certificates) will represent ownership of
'regular interests' in the 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 and Restrictions on Transfers of REMIC
Residual Certificates to Certain Organizations' and ' -- Taxation of Owners of
REMIC Residual Certificates -- Noneconomic REMIC Residual Certificates.'
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next business day,
commencing in May 1997 (each, a 'DISTRIBUTION DATE'). The Principal Only
Certificates will not be entitled to receive distributions of interest. As
described herein, interest distributions on the Offered Certificates entitled to
interest distributions will be based on the Certificate Principal Balance
thereof (or the related Notional Amount (as defined herein) in the case of the
Variable Strip Certificates) and the Pass-Through Rate thereof, which will be
variable for the Variable Strip Certificates and fixed for all other classes of
Certificates, and may be reduced by certain interest shortfalls. Distributions
in respect of principal on the Offered Certificates entitled to principal
distributions will be allocated among the various classes of the Offered
Certificates as described herein under 'Description of the Certificates --
Principal Distributions on the Senior Certificates' and ' -- Principal
Distributions on the Class M Certificates.' The Insured Certificates will
be entitled to the benefits of a certificate guaranty insurance policy
(the 'POLICY') to be issued by Financial Security Assurance Inc. (the
'INSURER'). The Policy will protect the holders of the Insured Certificates
against any interest shortfalls (except as described herein) allocated to
the Insured Certificates and the principal portion of any Realized Losses
allocated to the Insured Certificates and will guarantee the Certificate
Principal Balances of the Insured Certificates to the extent unpaid on the final
Distribution Date or earlier termination of the Trust Fund. See 'Description of
the Certificates -- The Policy' herein.
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON THE RATE
AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON THE MORTGAGE LOANS, THE ALLOCATION THEREOF AMONG THE VARIOUS
CLASSES OF CERTIFICATES ENTITLED TO DISTRIBUTIONS OF PRINCIPAL AND, WITH RESPECT
TO THE INSURED CERTIFICATES, THE DISTRIBUTION THEREOF PURSUANT TO THE RANDOM LOT
PROCEDURES AS DESCRIBED HEREIN UNDER 'DESCRIPTION OF THE
CERTIFICATES -- PRINCIPAL DISTRIBUTIONS ON THE INSURED CERTIFICATES.' THE YIELD
TO MATURITY ON EACH CLASS OF CLASS M CERTIFICATES WILL BE EXTREMELY SENSITIVE TO
LOSSES DUE TO DEFAULTS ON THE MORTGAGE LOANS (AND THE TIMING THEREOF), TO THE
EXTENT THAT SUCH LOSSES ARE NOT COVERED BY THE CLASS B CERTIFICATES OR BY ANY
CLASS OF CLASS M CERTIFICATES HAVING A LOWER PAYMENT PRIORITY, AS DESCRIBED
HEREIN. THE MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY
TIME WITHOUT PENALTY. THE YIELD TO INVESTORS ON THE OFFERED CERTIFICATES 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 DISCUSSED HEREIN. BECAUSE THE PRINCIPAL ONLY CERTIFICATES
WILL BE PURCHASED AT A DISCOUNT, AND BECAUSE AMOUNTS PAYABLE WITH RESPECT TO THE
PRINCIPAL ONLY CERTIFICATES DERIVE ONLY FROM PRINCIPAL PAYMENTS ON THE MORTGAGE
LOANS WITH NET MORTGAGE RATES THAT ARE LOWER THAN 7.50% PER ANNUM ('DISCOUNT
MORTGAGE LOANS'), THE YIELD ON THE PRINCIPAL ONLY CERTIFICATES WILL BE ADVERSELY
AFFECTED BY SLOWER THAN EXPECTED PAYMENTS OF PRINCIPAL ON THE DISCOUNT MORTGAGE
LOANS. IN ADDITION, THE YIELD TO MATURITY ON THE VARIABLE STRIP CERTIFICATES
WILL BE EXTREMELY SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS, DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS, WHICH
RATE MAY FLUCTUATE SIGNIFICANTLY OVER TIME. A RAPID RATE OF PRINCIPAL PAYMENTS
ON THE MORTGAGE LOANS COULD RESULT IN THE FAILURE OF INVESTORS IN THE VARIABLE
STRIP CERTIFICATES TO RECOVER THEIR INITIAL INVESTMENTS. SEE 'SUMMARY -- SPECIAL
PREPAYMENT CONSIDERATIONS', ' -- SPECIAL YIELD CONSIDERATIONS' AND 'CERTAIN
YIELD AND PREPAYMENT CONSIDERATIONS' HEREIN AND 'YIELD CONSIDERATIONS' IN THE
PROSPECTUS.
The Senior Certificates (other than the Principal Only Certificates),
including the Insured Certificates, are subject to various priorities for
payment of principal, as described herein. Such Senior Certificates, including
the Insured Certificates, would not be an appropriate investment for any
investor requiring a distribution of a particular amount of principal on a
specific date or an otherwise predictable stream of distributions. Investors in
the Offered Certificates should also be aware that the market value of the
Certificates could vary significantly during the period the Certificates are
outstanding. The length of time that the Offered Certificates may be outstanding
may vary significantly based on the amount and timing of prepayments on the
Mortgage Loans.
The Company will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon the oral or written request of such
person, a copy of any or all of the documents that have been incorporated by
reference under the heading 'The Insurer -- Incorporation of Certain Documents
by Reference.' Requests for such copies should be directed as provided under
'The Insurer -- Incorporation of Certain Documents by Reference.'
------------------------
THE OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE COMPANY AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED JUNE 21, 1996, OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
------------------------
UNTIL JULY 20, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S-2
<PAGE>
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the Underwriter. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell, or a solicitation of an offer to buy, the
securities offered hereby to anyone in any jurisdiction in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make any such offer or solicitation. Neither the delivery of
this Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that information herein or
therein is correct as of any time since the date of this Prospectus Supplement
or the Prospectus.
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary.................................................................................................... S-4
Description of the Mortgage Pool........................................................................... S-15
Description of the Certificates............................................................................ S-20
The Insurer................................................................................................ S-36
Certain Yield and Prepayment Considerations................................................................ S-38
Pooling and Servicing Agreement............................................................................ S-49
Certain Federal Income Tax Consequences.................................................................... S-54
Method of Distribution..................................................................................... S-57
Legal Opinions............................................................................................. S-58
Ratings.................................................................................................... S-58
Legal Investment........................................................................................... S-59
ERISA Considerations....................................................................................... S-59
Experts.................................................................................................... S-60
</TABLE>
S-3
<PAGE>
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
<TABLE>
<CAPTION>
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Title of Securities................. Mortgage Pass-Through Certificates, Series 1997-S5.
Company............................. Residential Funding Mortgage Securities I, Inc., an affiliate of
Residential Funding Corporation. See 'The Company' in the Prospectus.
Master Servicer..................... Residential Funding Corporation. See 'Pooling and Servicing
Agreement -- The Master Servicer' herein and 'Residential Funding
Corporation' in the Prospectus.
Trustee............................. Bankers Trust Company, a New York banking corporation.
Cut-off Date........................ April 1, 1997.
Delivery Date....................... On or about April 25, 1997.
Mortgage Pool....................... The Mortgage Pool will consist of a pool of conventional, fixed-rate,
fully-amortizing, level monthly payment first Mortgage Loans with an
aggregate principal balance as of the Cut-off Date of $501,329,787. The
Mortgage Loans are secured by first liens on fee simple or leasehold
interests in one-to four-family residential real properties and, in the
case of fifteen Mortgage Loans, an interest in shares issued by a
cooperative apartment corporation and the related proprietary lease (each,
a 'MORTGAGED PROPERTY'). At origination, the Mortgage Loans had individual
principal balances of at least $15,200 but not more than $1,500,000, with
an average principal balance of approximately $258,830. The Mortgage Loans
have terms to maturity from the date of origination or modification of not
more than 30 years, and a weighted average remaining term to maturity of
approximately 357 months as of the Cut-off Date. The Mortgage Loans will
bear interest at Mortgage Rates of at least 7.000% per annum but not more
than 9.375% per annum, with a weighted average Mortgage Rate of 8.1743% per
annum as of the Cut-off Date. For a further description of the Mortgage
Loans, see 'Description of the Mortgage Pool' herein.
Offered Certificates................ The Offered Certificates will be issued pursuant to a Pooling and Servicing
Agreement, to be dated as of the Cut-off Date, among the Company, the
Master Servicer and the Trustee. The Offered Certificates will have the
following Pass-Through Rates, Certificate Principal Balances and other
features as of the Cut-off Date:
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Class A-1 Certificates 7.500% $101,437,000 Senior
Class A-2 Certificates 7.500% $ 35,986,000 Senior
Class A-3 Certificates 7.500% $ 29,287,000 Senior
Class A-4 Certificates 7.625% $ 16,236,000 Insured/Senior
Class A-5 Certificates 7.500% $125,000,000 Prepayment Lockout/Senior
Class A-6 Certificates 7.500% $132,774,000 Senior
Class A-7 Certificates 7.500% $ 2,212,000 Senior
Class A-8 Certificates 7.500% $ 28,000,000 Senior
Class A-9 Certificates 7.000% $ 4,059,000 Senior
Class A-10 Certificates 0.000% $ 1,271,533 Principal Only/Senior
Class A-11 Certificates Variable Rate $ 0 Variable Strip/Interest Only/Senior
Class R Certificates 7.500% $ 100 Residual/Senior
Class M-1 Certificates 7.500% $ 10,026,600 Mezzanine
Class M-2 Certificates 7.500% $ 5,013,300 Mezzanine
Class M-3 Certificates 7.500% $ 5,013,300 Mezzanine
</TABLE>
<TABLE>
<S> <C>
The Offered Certificates are subject to various priorities for payment of
interest and principal as described herein. For a description of the
allocation of interest and principal distributions among the Senior
</TABLE>
S-4
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<PAGE>
<TABLE>
<S> <C>
Certificates and on the Class M Certificates, see 'Description of the
Certificates -- Interest Distributions,' ' -- Principal Distributions on
the Senior Certificates' and ' -- Principal Distributions on the Class M
Certificates' herein. For a description of the Pass-Through Rate on the
Variable Strip Certificates, see the cover and 'Description of the
Certificates -- Interest Distributions' herein.
The Insured Certificates will be entitled to the benefit of the Policy to
be issued by the Insurer, which will protect the holders of the Insured
Certificates against (i) any interest shortfalls (except for shortfalls in
respect of the Relief Act and except for any Prepayment Interest Shortfalls
(each as defined herein) otherwise covered by the Reserve Fund (as defined
herein) as described herein) allocated to the Insured Certificates and,
(ii) against the principal portion of any Realized Losses allocated to the
Insured Certificates. The Policy will also guarantee the Certificate
Principal Balances of the Insured Certificates to the extent unpaid on the
final Distribution Date or earlier termination of the Trust Fund pursuant
to the terms of the Pooling and Servicing Agreement. See 'Description of
the Certificates -- The Policy.'
Investors in the Offered Certificates should carefully consider the
information set forth under 'Summary -- Special Prepayment Considerations',
' -- Special Yield Considerations' and 'Certain Yield and Prepayment
Considerations' herein and 'Yield Considerations' in the Prospectus.
Certificate Registration............ The Senior Certificates other than the Variable Strip, Principal Only and
Residual Certificates (the 'DTC REGISTERED CERTIFICATES') will be
represented by one or more certificates registered in the name of Cede &
Co., as nominee of DTC. No 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 Variable Strip, Principal Only, Residual and Class M
Certificates will be offered in fully registered, certificated form. For
further registration information and denomination amounts see 'Description
of the Certificates' herein.
Pass-Through Rates on the Offered
Certificates...................... The Pass-Through Rates on all classes of the Offered Certificates (other
than the Variable Strip Certificates) are fixed and are set forth on the
cover hereof. The Pass-Through Rate on the Variable Strip Certificates on
each Distribution Date will equal the weighted average of the Pool Strip
Rates on each of the Mortgage Loans as of the Due Date (as defined herein)
in the month preceding the month in which such Distribution Date occurs.
The Pool Strip Rate on each Mortgage Loan is equal to the Net Mortgage Rate
thereon minus 7.50% (but not less than 0.00%). The Net Mortgage Rate on
each Mortgage Loan is equal to the Mortgage Rate thereon minus the rate per
annum at which the related master servicing and subservicing fees accrue
(the 'SERVICING FEE RATE'). As of the Cut-off Date, the Pool Strip Rates on
the Mortgage Loans range between 0.00% and 1.595% per annum. The initial
Pass-Through Rate on the Variable Strip Certificates is 0.3991% per annum.
The Variable Strip Certificates have no Certificate Principal Balance and
will accrue interest at the then applicable Pass-Through Rate on the
related Notional Amount (as defined herein).
</TABLE>
S-5
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<PAGE>
<TABLE>
<S> <C>
Interest Distributions.............. Holders of each class of Senior Certificates (other than the Principal Only
Certificates) and the Class M Certificates will be entitled to receive
interest distributions in an amount equal to the Accrued Certificate
Interest (as defined herein) on such class on each Distribution Date, in
the manner and priority set forth herein and to the extent of the Available
Distribution Amount (as defined herein) for such Distribution Date, subject
to the priorities described herein.
With respect to any Distribution Date, 'ACCRUED CERTIFICATE INTEREST' will
be equal to (a) in respect of each class of Offered Certificates (other
than the Variable Strip Certificates and Principal Only Certificates), one
month's interest accrued on the Certificate Principal Balance of such
Certificates of such class at the related Pass-Through Rate and (b) in
respect of the Variable Strip Certificates, one month's interest accrued on
the Notional Amount thereof at the then-applicable Pass-Through Rate on
such class for such Distribution Date, in each case less any interest
shortfalls not covered with respect to such class by Subordination, the
Master Servicer or, solely with respect to the Insured Certificates, the
Policy and the Reserve Fund, in each case, as described herein, including
any Prepayment Interest Shortfall (as defined herein) allocated thereto for
such Distribution Date. The Notional Amount as of any Distribution Date is
equal to the aggregate Stated Principal Balance of the related Mortgage
Loans immediately prior to such date. The Principal Only Certificates are
not entitled to distributions of interest. See 'Description of the
Certificates -- Interest Distributions' herein.
Principal Distributions............. Holders of the Senior Certificates (other than the Variable Strip
Certificates and Principal Only Certificates) will be entitled to receive a
distribution of principal on each Distribution Date, in the manner and
priority set forth herein, to the extent of the portion of the Available
Distribution Amount remaining after the Senior Interest Distribution Amount
and Principal Only Distribution Amount (each as defined herein) are
distributed. Holders of the Principal Only Certificates will be entitled to
receive a distribution of principal on each Distribution Date, in the
manner and priority set forth herein, to the extent of the portion of the
Available Distribution Amount remaining after the Senior Interest
Distribution Amount has been distributed. Holders of the Principal Only
Certificates are generally entitled to receive principal payments only with
respect to the Discount Mortgage Loans (as defined herein).
Holders of each class of the Class M Certificates will be entitled to
receive a distribution of principal on each Distribution Date, in the
manner and priority set forth herein, to the extent of the portion of the
Available Distribution Amount remaining after (i) distributions in respect
of interest and principal to the holders of the Senior Certificates and any
class of Class M Certificates having a higher payment priority, (ii)
reimbursements for certain Advances to the Master Servicer and (iii)
distributions in respect of interest to the holders of such class of Class
M Certificates.
See 'Description of the Certificates -- Principal Distributions on the
Senior Certificates' and ' -- Principal Distributions on the Class M
Certificates' herein.
Distributions of Principal on the
Insured Certificates.............. The receipt by any Beneficial Owner of an Insured Certificate of
distributions in reduction of the Certificate Principal Balance is not only
</TABLE>
S-6
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<TABLE>
<S> <C>
dependent upon the entitlement of such class to receive principal payments
relative to that of other classes, and upon the rate and timing of
principal payments (including prepayments, defaults and liquidations) on
the Mortgage Loans, but also upon random lot procedures for allocation of
principal distributions to which the Insured Certificates are subject.
The amount available for distribution in respect of principal on the
Insured Certificates on any Distribution Date will be distributed to
certain Insured Certificateholders as mandatory distributions of principal.
Such mandatory distributions of principal will be made in $1,000 lots,
rounded as necessary, to Insured Certificateholders selected in accordance
with the random lot procedures.
Notwithstanding the foregoing procedures, on each Distribution Date
following the first Distribution Date on which any Realized Losses were
allocated to the Insured Certificates and were not covered as required
under the Policy, principal distributions on the Insured Certificates would
be made pro rata among the holders of the Insured Certificates and would
not be made in integral multiples of $1,000 of mandatory distributions by
random lot.
Because of the random lot procedure, there is no assurance that Beneficial
Owners of Insured Certificates will receive distributions of principal on
any particular Distribution Date. THE INSURED CERTIFICATES WOULD NOT BE AN
APPROPRIATE INVESTMENT FOR ANY INVESTOR WHO REQUIRES DISTRIBUTION OF A
PARTICULAR AMOUNT OF PRINCIPAL ON A SPECIFIC DATE OR AN OTHERWISE
PREDICTABLE STREAM OF PRINCIPAL PAYMENTS.
For a further discussion of the procedures, priorities and limitations
applicable to the distribution of principal to the Insured Certificates,
see 'Description of the Certificates -- Principal Distributions on the
Insured Certificates.'
The Policy.......................... The Insurer will issue the Policy to provide additional credit enhancement
to the Insured Certificates. Under the Policy, the Insurer will pay the
Trustee, for the benefit of the holders of the Insured Certificates, on
each Distribution Date, as described herein, an amount that will cover any
interest shortfalls (except for shortfalls in respect of the Relief Act and
any Prepayment Interest Shortfalls otherwise covered by the Reserve Fund
(as described herein)) allocated to the Insured Certificates plus the
principal portion of any Realized Losses allocated to such Certificates.
The Policy will also guarantee the Certificate Principal Balances of the
Insured Certificates to the extent unpaid on the final Distribution Date or
earlier termination of the Trust Fund pursuant to the terms of the Pooling
and Servicing Agreement. The premium in respect of the Policy will be paid
by the Underwriter on the Delivery Date. See 'Description of the
Certificates -- The Policy' herein.
The Insurer......................... Financial Security Assurance Inc. See 'The Insurer' herein.
Advances............................ The Master Servicer is required to make Advances in respect of delinquent
payments of principal and interest on the Mortgage Loans, subject to the
limitations described herein. See 'Description of the
Certificates -- Advances' herein and in the Prospectus.
Allocation of Losses;
Subordination..................... Subject to the limitations set forth below, Realized Losses on the Mortgage
Loans will be allocated as follows: first, to the Class B Certificates;
second, to the Class M-3 Certificates; third, to the Class M-2
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Certificates; fourth, to the Class M-1 Certificates until, in each case,
the Certificate Principal Balance of each such class of Certificates is
reduced to zero; and thereafter, if any such Realized Loss is on a Discount
Mortgage Loan, to the Principal Only Certificates in an amount equal to the
related Discount Fraction of the principal portion of such Realized Loss,
and the remainder of such Realized Losses and the entire amount of such
Realized Losses on Non-Discount Mortgage Loans to the remaining classes of
Senior Certificates on a pro rata basis, as described herein. The
Subordination provided to the Senior Certificates by the Class B
Certificates and Class M Certificates and the Subordination provided to
each class of Class M Certificates by the Class B Certificates and by any
class of Class M Certificates subordinate thereto will cover Realized
Losses on the Mortgage Loans that are Defaulted Mortgage Losses, and, to
the extent described below, Fraud Losses, Bankruptcy Losses and Special
Hazard Losses (each as defined herein). The aggregate amounts of Realized
Losses which may be allocated by means of Subordination to cover Special
Hazard Losses, Fraud Losses and Bankruptcy Losses are initially limited to
approximately $5,013,298, $10,026,596 and $133,016, respectively. All of
the foregoing amounts are subject to periodic reduction as described herein
and may be further reduced as described in the Prospectus under
'Subordination.'
In addition, any Special Hazard Losses, Fraud Losses and Bankruptcy Losses
in excess of the respective amounts of coverage therefor and any
Extraordinary Losses (as defined herein) on Non-Discount Mortgage Loans
will be allocated on a pro rata basis among the Senior Certificates (other
than the Principal Only Certificates), Class M Certificates and Class B
Certificates (any such Realized Losses so allocated to the Senior
Certificates (other than the Principal Only Certificates) or Class M
Certificates will be allocated without priority among the various classes
thereof). The principal portion of such losses on Discount Mortgage Loans
will be allocated to the Principal Only Certificates in an amount equal to
the related Discount Fraction of such losses, and the remainder of such
losses on Discount Mortgage Loans will be allocated among the remaining
Certificates on a pro rata basis as described above. See 'Description of
the Certificates -- Allocation of Losses; Subordination' herein.
All Realized Losses allocated to the Insured Certificates are to be covered
by the Policy. Notwithstanding the foregoing, if payments are not made as
required under the Policy, Realized Losses allocated to the Insured
Certificates would result in shortfalls in payments to holders of the
Insured Certificates and would adversely affect the yield to maturity on
the Insured Certificates. See 'Description of the Certificates -- The
Policy' and ' -- Allocation of Losses; Subordination' herein.
Neither the Offered Certificates nor the Mortgage Loans are insured or
guaranteed by any governmental agency or instrumentality or by the Company,
the Master Servicer, the Trustee, GMAC Mortgage Group, Inc. or any
affiliate thereof.
Class B Certificates................ The Class B-1 Certificates, Class B-2 Certificates and Class B-3
Certificates will each have a Pass-Through Rate of 7.50% per annum and
initial Certificate Principal Balances of $2,256,000, $1,002,700 and
$1,755,254, respectively, and will evidence initial undivided interests of
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approximately 0.45%, 0.20% and 0.35%, respectively, in the Trust Fund. The
Class B Certificates are not being offered hereby.
Optional Termination................ At its option, on any Distribution Date when the aggregate Stated Principal
Balance of the Mortgage Loans is less than 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date, the Master Servicer
or the Company may (i) purchase from the Trust Fund all remaining Mortgage
Loans and other assets thereof, and thereby effect early retirement of the
Certificates or (ii) purchase in whole, but not in part, the Certificates.
See 'Pooling and Servicing Agreement -- Termination' herein and 'The
Pooling and Servicing Agreement -- Termination; Retirement of Certificates'
in the Prospectus.
Special Prepayment Considerations... The rate and timing of principal payments on the Offered Certificates will
depend on, among other things, the rate and timing of principal payments
(including prepayments, defaults, liquidations and purchases of Mortgage
Loans due to a breach of a representation or warranty) on the Mortgage
Loans and with respect to the Insured Certificates, the distribution
thereof based on random lot. As is the case with mortgage-backed securities
generally, the Offered Certificates are subject to substantial inherent
cash-flow uncertainties because the Mortgage Loans may be prepaid at any
time. Generally, when prevailing interest rates increase, prepayment rates
on mortgage loans tend to decrease, resulting in a slower return of
principal to investors at a time when reinvestment at such higher
prevailing rates would be desirable. Conversely, when prevailing interest
rates decline, prepayment rates on mortgage loans tend to increase,
resulting in a faster return of principal to investors at a time when
reinvestment at comparable yields may not be possible.
The multiple class structure of the Offered Certificates results in the
allocation of prepayments among certain classes as follows:
Sequentially Paying Classes: The Senior Certificates (other than the
Prepayment Lockout Certificates, Variable Strip Certificates and Principal
Only Certificates) are subject to various priorities for payment of
principal as described herein. INVESTORS SHOULD BE AWARE THAT THE
'SEQUENTIAL' NATURE OF THE PAYMENTS OF PRINCIPAL ON SUCH SENIOR
CERTIFICATES IS NOT RELATED TO THE NUMERICAL DESIGNATION OF ANY CLASS OF
SENIOR CERTIFICATES, BUT RATHER RELATES TO THE ALLOCATION OF PRINCIPAL TO
SOME CLASSES OF SENIOR CERTIFICATES PRIOR TO THE ALLOCATION OF PRINCIPAL TO
OTHER CLASSES OF SENIOR CERTIFICATES.
Distributions of principal on classes having an earlier priority of payment
will be affected by the rates of prepayment of the Mortgage Loans early in
the life of the Mortgage Pool.
The timing of commencement of principal distributions and the weighted
average lives of classes of Certificates with a later priority of payment
will be affected by the rates of prepayment experienced both before and
after the commencement of principal distributions on such classes.
The timing of distributions in reduction of the Certificate Principal
Balance with respect to any particular Senior Certificate subject to
sequential allocations of principal is highly uncertain and may be
significantly earlier or later than the date that may be desired by such
Certificateholder. If prepayments on the Mortgage Loans occur at a higher
rate than anticipated, the weighted average lives of such Senior
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Certificates may be shortened significantly. Conversely, if prepayments on
the Mortgage Loans occur at a lower rate than anticipated, the weighted
average lives of such Senior Certificates may be extended significantly.
Investors in the Senior Certificates subject to sequential allocations of
principal that have later priorities of payment, especially the Insured
Certificates, should be aware that such later priority makes such classes
of Senior Certificates particularly sensitive to the rate and timing of
principal prepayments.
Insured Certificates: IN ADDITION TO THE CONSIDERATIONS SET FORTH ABOVE,
INVESTORS IN THE INSURED CERTIFICATES SHOULD BE AWARE THAT SUCH
CERTIFICATES MAY NOT BE AN APPROPRIATE INVESTMENT FOR ALL PROSPECTIVE
INVESTORS. The Insured Certificates would not be an appropriate investment
for any investor requiring a distribution of a particular amount of
principal or interest on a specific date or dates or an otherwise
predictable stream of cash payments. The timing of such distributions may
have a significant effect on an investor's yield on such Certificates if
the Certificate is purchased at a discount or a premium.
Investors in the Insured Certificates also should be aware that
distributions of principal on the Insured Certificates will be allocated by
DTC according to a random lot procedure. Due to this random lot procedure,
there can be no assurance that on any Distribution Date, any holder of an
Insured Certificate will receive a principal distribution. Thus, the timing
of distributions in reduction of the Certificate Principal Balance with
respect to any particular Insured Certificate is highly uncertain and may
be earlier or later than the date that may be desired by such
Certificateholder.
Additionally, investors in the Insured Certificates should be aware that
such Certificates have a later priority of payment with respect to
principal in relation to the other classes of Senior Certificates. This
later priority of payment makes the Insured Certificates particularly
sensitive to the rate and timing of principal prepayments. If prepayments
on the Mortgage Loans occur at a higher rate than anticipated, the weighted
average life of the Insured Certificates may be shortened. Conversely, if
prepayments on the Mortgage Loans occur at a lower rate than anticipated,
the weighted average life of the Insured Certificates may be extended.
Certificates with Prepayment Lockout Feature: As described herein, during
certain periods, all or a disproportionately large percentage of Mortgagor
prepayments will be allocated among the Senior Certificates (other than the
Prepayment Lockout Certificates and Principal Only Certificates) and,
during certain periods, no Mortgagor prepayments (or a disproportionately
small or large percentage of such Mortgagor prepayments) will be
distributed to the Prepayment Lockout Certificates. Unless the Certificate
Principal Balances of the Senior Certificates (other than the Prepayment
Lockout Certificates and Principal Only Certificates) have been reduced to
zero, the Prepayment Lockout Certificates will not be entitled to receive
any distributions of Mortgagor prepayments prior to the Distribution Date
occurring in May 2002.
Certificates with Subordination Features: To the extent that no Mortgagor
prepayments or a disproportionately small percentage of such prepayments
are distributed to the Class M Certificates, the Subordination afforded the
Senior Certificates by the Class M Certificates (together with
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the Class B Certificates), in the absence of offsetting Realized Losses
allocated thereto, will be increased, and the weighted average lives of the
Class M Certificates will be extended. Unless the Certificate Principal
Balances of the Senior Certificates (other than the Principal Only
Certificates) have been reduced to zero, the Class M Certificates will not
be entitled to receive any distributions of Mortgagor prepayments prior to
the Distribution Date occurring in May 2002, as further described herein.
See 'Description of the Certificates -- Principal Distributions on the
Senior Certificates', ' -- Principal Distributions on the Class M
Certificates' and 'Certain Yield and Prepayment Considerations' herein, and
'Maturity and Prepayment Considerations' in the Prospectus. For further
information regarding the effect of Mortgagor prepayments on the weighted
average lives of the Offered Certificates (other than the Variable Strip
Certificates and Residual Certificates), see the table entitled 'Percent of
Initial Certificate Principal Balance Outstanding at the Following
Percentages of SPA' herein.
Special Yield Considerations........ The yield to maturity on each class of the Offered Certificates will depend
on, among other things, the rate and timing of principal payments
(including prepayments, defaults, liquidations and purchases of Mortgage
Loans due to a breach of a representation or warranty) on the Mortgage
Loans and the allocation thereof to reduce the Certificate Principal
Balance or related Notional Amount, as the case may be, of such class. In
addition, with respect to the Insured Certificates, because of the random
lot procedure, there is no assurance that Beneficial Owners of the Insured
Certificates will receive distributions of principal on any particular
Distribution Date. The yield to maturity on each class of the Offered
Certificates will also depend on the Pass-Through Rate (as applicable) and
the purchase price for such Certificates. The yield to investors on any
class of Offered Certificates (other than the Principal Only Certificates)
will be adversely affected by any allocation thereto of Prepayment Interest
Shortfalls on the Mortgage Loans, which are expected to result from the
distribution of interest only to the date of prepayment (rather than a full
month's interest) in connection with prepayments in full and the lack of
any distribution of interest on the amount of any partial prepayments.
Prepayment Interest Shortfalls resulting from Mortgagor prepayments in full
in any calendar month will not adversely affect the yield to investors in
the Offered Certificates to the extent such Prepayment Interest Shortfalls
are offset by the Master Servicer and, solely with respect to the Insured
Certificates, to the extent offset by the Reserve Fund and the Policy. See
'Description of the Certificates -- Interest Distributions' herein.
In general, if a class of Offered Certificates is purchased at a premium
and principal distributions thereon occur at a rate faster than assumed at
the time of purchase, the investor's actual yield to maturity will be lower
than anticipated at the time of purchase. Conversely, if a class of Offered
Certificates is purchased at a discount and principal distributions thereon
occur at a rate slower than assumed at the time of purchase, the investor's
actual yield to maturity will be lower than anticipated at the time of
purchase.
The Offered Certificates were structured assuming, among other things, a
prepayment assumption of 250% SPA (as defined herein) and corresponding
weighted average lives as described herein. The
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prepayment, yield and other assumptions to be used for pricing purposes for
the respective classes that are to be offered hereunder may vary as
determined at the time of sale.
INVESTORS IN THE OFFERED CERTIFICATES, ESPECIALLY THE INSURED CERTIFICATES,
SHOULD BE AWARE THAT SUCH CERTIFICATES MAY NOT BE AN APPROPRIATE INVESTMENT
FOR ALL PROSPECTIVE INVESTORS. Prospective investors in the Offered
Certificates should be aware that the market value of such Certificates
could vary significantly during the period such Certificates are
outstanding. As a result, an investor could suffer a significant loss on
its investment if the investor sells such Certificate rather than holding
it until it is retired.
The multiple class structure of the Offered Certificates causes the yield
of certain classes to be particularly sensitive to changes in the rates of
prepayment of the Mortgage Loans and other factors, as follows:
Prepayment Lockout Certificates: Investors in the Prepayment Lockout
Certificates should be aware that because the Prepayment Lockout
Certificates do not receive any portion of Mortgagor prepayments prior to
the Distribution Date occurring in May 2002 and, prior to the Distribution
Date occurring in May 2006 will receive a disproportionately small portion
of Mortgagor prepayments (unless the Certificate Principal Balances of the
Senior Certificates (other than the Prepayment Lockout Certificates and
Principal Only Certificates) have been reduced to zero), the weighted
average life of the Prepayment Lockout Certificates will be longer than
would be the case if the Prepayment Lockout Certificates were entitled to
receive their pro rata share of Mortgagor prepayments, and the effect on
the market value of the Prepayment Lockout Certificates due to changes in
market interest rates or market yields for similar securities may be
greater than for other classes of Senior Certificates entitled to such
distributions.
Variable Strip Certificates: The yield to investors on the Variable Strip
Certificates will be extremely sensitive to the rate and timing of
principal payments on the Mortgage Loans (including prepayments, defaults
and liquidations), which rate may fluctuate significantly over time. A
faster than expected rate of principal payments on the Mortgage Loans will
have a negative effect on the yield to such investors and could result in
the failure of investors in the Variable Strip Certificates to recover
their initial investments. In addition, because holders of the Variable
Strip Certificates generally have rights to relatively larger portions of
interest payments on Mortgage Loans with higher Mortgage Rates than on
Mortgage Loans with lower Mortgage Rates, and because such Mortgage Loans
having higher Mortgage Rates are generally likely to prepay at a faster
rate than Mortgage Loans with lower Mortgage Rates, the yield on the
Variable Strip Certificates will be adversely affected to a greater extent
than the yields on the other Offered Certificates if the Mortgage Loans
with higher Mortgage Rates prepay faster than the Mortgage Loans with lower
Mortgage Rates. Because the Pool Strip Rates on the Discount Mortgage Loans
equal 0.00%, the yield to investors on the Variable Strip Certificates will
not be affected by Mortgagor prepayments on the Discount Mortgage Loans.
See 'Certain Yield and Prepayment Considerations,' especially ' -- Variable
Strip Certificate and Principal Only Certificate Yield Considerations'
herein.
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Principal Only Certificates: The amounts payable with respect to the
Principal Only Certificates derive only from principal payments on the
Discount Mortgage Loans. As a result, the yield on the Principal Only
Certificates will be adversely affected by slower than expected payments of
principal on the Discount Mortgage Loans. Because the Discount Mortgage
Loans have lower Net Mortgage Rates than the Non-Discount Mortgage Loans,
and because the Mortgage Loans with lower Net Mortgage Rates are likely to
have lower Mortgage Rates, the Discount Mortgage Loans are generally likely
to prepay at a slower rate than the Non-Discount Mortgage Loans. See
'Certain Yield and Prepayment Considerations,' especially ' -- Variable
Strip Certificates and Principal Only Certificate Yield Considerations'
herein.
Certificates with Subordination Features: The yield to investors on each
class of Class M Certificates, and particularly on those classes of Class M
Certificates with lower payment priorities, will be extremely sensitive to
losses due to defaults on the Mortgage Loans (and the timing of such
losses), to the extent such losses are not covered by the Class B
Certificates or by any other class of Class M Certificates having a lower
payment priority, because the entire amount of such losses that are covered
by Subordination will be allocable to such class or classes of Class M
Certificates, as described herein. Furthermore, as described herein, the
timing of receipt of principal and interest by any class of Class M
Certificates may be adversely affected by losses even if such class does
not ultimately bear such loss. See 'Certain Yield and Prepayment
Considerations,' especially ' -- Class M-2 and Class M-3 Certificate Yield
Considerations,' herein and 'Yield Considerations' in the Prospectus.
Residual Certificates: Holders of the Residual Certificates are entitled to
receive distributions of principal and interest as described herein;
however, holders of such Certificates may have tax liabilities with respect
to their Certificates during the early years of the term of the REMIC that
substantially exceed the principal and interest payable thereon during such
periods. See 'Certain Yield and Prepayment Considerations,' especially
' -- Additional Yield Considerations Applicable Solely to the Residual
Certificates' herein, 'Certain Federal Income Tax Consequences' herein and
in the Prospectus and 'Yield Considerations' in the Prospectus.
Certain Federal Income Tax
Consequences...................... An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes. Upon the issuance of the Offered 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 Sections 860A through 860G of the Code.
For federal income tax purposes, the Class R Certificates will constitute
the sole class of 'residual interests' in the REMIC, and the Senior
Certificates (other than the Residual Certificates), Class M Certificates
and Class B Certificates will represent ownership of 'regular interests' in
the Trust Fund and will generally be treated as representing ownership of
debt instruments of the Trust Fund.
Under the REMIC Regulations, the Residual Certificates will not be regarded
as having 'significant value' for purposes of applying the rules relating
to 'excess inclusions.' In addition, the Residual Certificates may
constitute 'noneconomic' residual interests for purposes of the REMIC
Regulations. Transfers of the Residual Certificates will be restricted in a
manner designed to prevent a transfer of a noneconomic residual interest
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from being disregarded under the REMIC Regulations. See 'Certain Federal
Income Tax Consequences -- Special Tax Considerations Applicable to
Residual Certificates' herein and 'Certain Federal Income Tax
Consequences -- REMICs -- Taxation of Owners of REMIC Residual
Certificates -- Excess Inclusions' and ' -- Noneconomic REMIC Residual
Certificates' in the Prospectus.
The Residual Certificateholders may be required to report an amount of
taxable income with respect to the early years of the REMIC's term that
significantly exceeds distributions on the Residual Certificates during
such years, with corresponding tax deductions or losses deferred until the
later years of the REMIC's term. Accordingly, on a present value basis, the
tax detriments occurring in the earlier years may substantially exceed the
sum of any tax benefits in the later years. As a result, the Residual
Certificateholders after-tax rate of return may be zero or negative, even
if their pre-tax rate of return is positive.
See 'Certain Yield and Prepayment Considerations,' especially
' -- Additional Yield Considerations Applicable Solely to the Residual
Certificates' and 'Certain Federal Income Tax Consequences -- Special Tax
Considerations Applicable to Residual Certificates' herein.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see 'Certain Federal Income Tax
Consequences' herein and in the Prospectus.
Legal Investment.................... The Senior Certificates and Class M-1 Certificates will constitute
'mortgage related securities' for purposes of SMMEA for so long as they are
rated in at least the second highest rating category by one or more
nationally recognized statistical rating agencies. The Class M-2
Certificates and Class M-3 Certificates will not constitute 'mortgage
related securities' for purposes of SMMEA. Institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities may be subject to
restrictions on investment in the Offered Certificates and should consult
with their legal advisors. See 'Legal Investment' herein and 'Legal
Investment Matters' in the Prospectus.
Ratings............................. It is a condition to the issuance of the Senior Certificates (other than
the Variable Strip Certificates and Principal Only Certificates), Class M-1
Certificates and Class M-2 Certificates that they be rated 'AAA', 'AA' and
'A', respectively, by each of Standard & Poor's and Fitch. It is a
condition to the issuance of the Variable Strip Certificates and Principal
Only Certificates that they be rated 'AAAr' by Standard & Poor's and 'AAA'
by Fitch. It is a condition to the issuance of the Class M-3 Certificates
that they be rated not lower than 'BBB' by Fitch. A security rating is not
a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating organization. A
security rating does not address the frequency of prepayments of Mortgage
Loans, or the corresponding effect on yield to investors. The ratings of
the Variable Strip Certificates do not address the possibility that the
holders of such Certificates may fail to fully recover their initial
investments. See 'Certain Yield and Prepayment Considerations' and
'Ratings' herein and 'Yield Considerations' in the Prospectus.
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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 $501,329,787. The Mortgage Pool will consist
of conventional, fixed-rate, fully-amortizing, level monthly payment first
Mortgage Loans with terms to maturity of not more than 30 years from the date of
origination or modification. With respect to Mortgage Loans which have been
modified, references herein to the date of origination shall be deemed to be the
date of the most recent modification. All percentages of the Mortgage Loans
described herein are approximate percentages (except as otherwise indicated) by
aggregate principal balance as of the Cut-off Date.
All of the Mortgage Loans were purchased by the Company through its
affiliate Residential Funding from Unaffiliated Sellers as described herein and
in the Prospectus, except in the case of 4.0% of the Mortgage Loans, which were
purchased by the Company through Residential Funding from Homecomings Financial
Network, Inc. (an affiliate of the Company). 23.2% and 10.6% of the Mortgage
Loans were purchased from Chase Manhattan Mortgage Corp. and Homeside Lending,
Inc., respectively, each an Unaffiliated Seller. Except as described above, no
Unaffiliated Seller sold more than 5.6% of the Mortgage Loans to Residential
Funding. 70.8% of the Mortgage Loans are being or will be subserviced by
Capstead Inc. ('Capstead'). As of December 31, 1996, Capstead serviced or
subserviced approximately $35.6 billion of conventional one- to four-family
residential mortgage loans. The principal office of Capstead is located at 2711
North Haskell Avenue, Suite 900, Dallas, Texas 75204, and its telephone number
is (214) 874-2323.
Pursuant to the terms of the Pooling and Servicing Agreement, the Company
will assign the representations and warranties made by the related Sellers of
the Mortgage Loans to the Trustee for the benefit of the Certificateholders and
will also make certain limited representations and warranties regarding the
Mortgage Loans as of the date of issuance of the Certificates. To the best of
the Company's knowledge, none of the Mortgage Loans were sold to Residential
Funding by Unaffiliated Sellers that are institutions which are currently in
receivership or conservatorship or involved in other insolvency or bankruptcy
proceedings, or are no longer in existence. To the extent that any Seller of the
Mortgage Loans does not repurchase a Mortgage Loan in the event of a breach of
its representations and warranties with respect to such Mortgage Loan, neither
the Company nor Residential Funding will be required to repurchase such Mortgage
Loan unless such breach also constitutes a breach of one of the Company's or
Residential Funding's representations and warranties with respect to such
Mortgage Loan and such breach materially and adversely affects the interests of
the Certificateholders in any such Mortgage Loan. In addition, neither the
Company nor Residential Funding will be required to repurchase any Mortgage Loan
in the event of a breach of its representations and warranties with respect to
such Mortgage Loan if the substance of any such breach also constitutes fraud in
the origination of such affected Mortgage Loan. A limited amount of losses on
Mortgage Loans as to which there was fraud in the origination of such Mortgage
Loans will be covered by the Subordination (as defined herein) provided by the
Class M Certificates and Class B Certificates as described herein under
'Description of the Certificates -- Allocation of Losses; Subordination.'
None of the Mortgage Loans will have been originated prior to February 23,
1994 or will have a maturity date later than April 1, 2027. No Mortgage Loan
will have a remaining term to maturity as of the Cut-off Date of less than 33
months. The weighted average remaining term to maturity of the Mortgage Loans as
of the Cut-off Date will be approximately 357 months. The weighted average
original term to maturity of the Mortgage Loans as of the Cut-off Date will be
approximately 359 months.
As of the Cut-off Date, no Mortgage Loan will be one month or more
delinquent in payment of principal and interest.
Seven Mortgage Loans, representing approximately 0.4% of the Mortgage
Loans, will be a Buydown Mortgage Loan.
No Mortgage Loan provides for deferred interest or negative amortization.
None of the Mortgage Loans were underwritten under a reduced loan
documentation program requiring no income verification and no asset
verification.
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
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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
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NUMBER OF PERCENT OF
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
7.000 -- 7.124................................................. 1 $ 219,456 0.04%
7.125 -- 7.249................................................. 1 366,500 0.07
7.250 -- 7.374................................................. 9 2,046,213 0.41
7.375 -- 7.499................................................. 17 4,939,343 0.99
7.500 -- 7.624................................................. 27 6,175,263 1.23
7.625 -- 7.749................................................. 60 16,083,194 3.21
7.750 -- 7.874................................................. 146 36,972,039 7.37
7.875 -- 7.999................................................. 234 64,090,976 12.78
8.000 -- 8.124................................................. 279 78,255,565 15.61
8.125 -- 8.249................................................. 221 58,520,153 11.67
8.250 -- 8.374................................................. 260 70,628,776 14.09
8.375 -- 8.499................................................. 204 55,338,900 11.04
8.500 -- 8.624................................................. 192 47,006,920 9.38
8.625 -- 8.749................................................. 92 19,572,691 3.90
8.750 -- 8.874................................................. 98 20,472,509 4.08
8.875 -- 8.999................................................. 53 9,640,620 1.92
9.000 -- 9.124................................................. 31 6,368,744 1.27
9.125 -- 9.249................................................. 9 2,487,277 0.50
9.250 -- 9.374................................................. 5 2,073,157 0.41
9.375 -- 9.499................................................. 1 71,491 0.01
------ ----------------- -------------
Total..................................................... 1,940 $ 501,329,787 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Rate of the Mortgage
Loans will be approximately 8.1743% per annum.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE NUMBER OF PERCENT OF
LOAN BALANCE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
--------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
$ 0 - 100,000.......................................... 199 $ 13,920,447 2.78%
100,001 - 200,000.......................................... 374 56,613,764 11.29
200,001 - 300,000.......................................... 843 213,213,545 42.53
300,001 - 400,000.......................................... 325 112,275,926 22.40
400,001 - 500,000.......................................... 112 50,418,707 10.06
500,001 - 600,000.......................................... 44 24,518,805 4.89
600,001 - 700,000.......................................... 31 19,779,958 3.95
700,001 - 800,000.......................................... 6 4,535,606 0.90
800,001 - 900,000.......................................... 2 1,646,018 0.33
900,001 -1,000,000.......................................... 3 2,908,835 0.58
1,400,001 --1,500,000.......................................... 1 1,498,176 0.30
------ ----------------- -------------
Total..................................................... 1,940 $ 501,329,787 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
As of the Cut-Off Date, the average unpaid principal balance of the
Mortgage Loans will be approximately $258,417.
S-16
<PAGE>
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
ORIGINAL NUMBER OF PERCENT OF
LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
0.01 - 50.00.................................................. 109 $ 18,955,212 3.78%
50.01 - 55.00.................................................. 39 11,671,205 2.33
55.01 - 60.00.................................................. 68 17,634,144 3.52
60.01 - 65.00.................................................. 115 30,833,250 6.15
65.01 - 70.00.................................................. 189 46,596,012 9.29
70.01 - 75.00.................................................. 338 83,772,210 16.71
75.01 - 80.00.................................................. 810 220,376,227 43.96
80.01 - 85.00.................................................. 28 7,633,983 1.52
85.01 - 90.00.................................................. 169 46,402,078 9.26
90.01 - 95.00.................................................. 75 17,455,465 3.48
------ ----------------- -------------
Total..................................................... 1,940 $ 501,329,787 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will be approximately 75.42%.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
STATE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
California..................................................... 757 $ 214,965,608 42.88%
Florida........................................................ 160 33,622,874 6.71
New York....................................................... 88 22,589,440 4.51
Virginia....................................................... 80 19,987,799 3.99
Maryland....................................................... 59 18,094,145 3.61
Texas.......................................................... 74 16,472,679 3.29
Other(1)....................................................... 722 175,597,242 35.03
------ ----------------- -------------
Total..................................................... 1,940 $ 501,329,787 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
- ------------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than 0.9% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than 0.7%
of the Mortgage Loans will be secured by Mortgaged Properties located in any one
zip code area outside California.
MORTGAGE LOAN PURPOSE
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Purchase....................................................... 1,117 $ 290,824,473 58.01%
Rate/Term Refinance............................................ 555 150,840,413 30.09
Equity Refinance............................................... 268 59,664,901 11.90
------ ----------------- -------------
Total..................................................... 1,940 $ 501,329,787 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Mortgage Loans will be 73.81%. The weighted average Loan-to-Value
Ratio at origination of equity refinance Mortgage Loans will be 67.14%.
S-17
<PAGE>
<PAGE>
MORTGAGE LOAN DOCUMENTATION TYPES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Full Documentation............................................. 1,478 $ 415,701,287 82.92%
Reduced Documentation.......................................... 462 85,628,500 17.08
------ ----------------- -------------
Total..................................................... 1,940 $ 501,329,787 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans which were underwritten under a reduced loan documentation program will be
65.20%. No more than 30.7% of such reduced loan documentation Mortgage Loans
will be secured by Mortgaged Properties located in California.
OCCUPANCY TYPES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Primary Residence.............................................. 1,904 $ 492,238,180 98.19%
Second/Vacation................................................ 36 9,091,606 1.81
Non Owner-occupied............................................. 0 0 0.00
------ ----------------- -------------
Total..................................................... 1,940 $ 501,329,787 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Single-family detached......................................... 1,372 $ 359,165,747 71.64%
Planned Unit Developments (detached)........................... 396 109,325,532 21.81
Two- to four-family units...................................... 13 2,750,791 0.55
Condo Low-Rise (less than 5 stories)........................... 74 12,779,176 2.55
Condo Mid-Rise (5 to 8 stories)................................ 11 3,037,157 0.61
Condo High-Rise (9 stories or more)............................ 16 2,985,595 0.60
Townhouse...................................................... 12 2,107,200 0.42
Townhouse (2 to 4 family units)................................ 3 929,203 0.19
Planned Unit Developments (attached)........................... 27 4,374,518 0.87
Leasehold...................................................... 1 195,900 0.04
Cooperative Units.............................................. 15 3,678,969 0.73
------ ----------------- -------------
Total..................................................... 1,940 $ 501,329,787 100.00%
------ ----------------- -------------
------ ----------------- -------------
</TABLE>
S-18
<PAGE>
<PAGE>
NET MORTGAGE RATES OF DISCOUNT MORTGAGE LOANS
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NET MORTGAGE RATE (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------------------------------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
6.670.......................................................... 1 $ 219,456 0.04%
6.795.......................................................... 1 366,500 0.07
6.920.......................................................... 5 1,224,201 0.24
6.970.......................................................... 1 297,222 0.06
7.020.......................................................... 1 135,000 0.03
7.045.......................................................... 4 1,258,927 0.25
7.070.......................................................... 2 389,790 0.08
7.095.......................................................... 8 2,448,914 0.49
7.120.......................................................... 1 302,008 0.06
7.170.......................................................... 11 2,754,593 0.55
7.195.......................................................... 2 324,866 0.06
7.220.......................................................... 14 2,976,910 0.59
7.270.......................................................... 2 514,568 0.10
7.295.......................................................... 20 6,623,837 1.32
7.320.......................................................... 2 533,823 0.11
7.345.......................................................... 24 5,365,205 1.07
7.370.......................................................... 7 2,010,489 0.40
7.395.......................................................... 4 734,413 0.15
7.420.......................................................... 53 16,107,953 3.21
7.470.......................................................... 59 14,797,589 2.95
--- ----------------- ------
Total................................................ 222 $59,386,263 11.85%
--- ----------------- ------
--- ----------------- ------
</TABLE>
As of the Cut-off Date, the weighted average of the Discount Fractions of
the Discount Mortgage Loans was approximately 2.1411%.
In connection with the Mortgage Loans secured by a leasehold interest, the
related 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 related Mortgaged Property is located; residential
property in such area 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 such Mortgage Loan.
Certain aspects of the Cooperative Loans included in the Mortgage Pool
differ from those of other types of Mortgage Loans. See 'Certain Legal Aspects
of Mortgage Loans -- Cooperative Loans' in the Prospectus.
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 80.00% will be insured by a primary mortgage insurance
policy (a 'PRIMARY INSURANCE POLICY') covering at least 30% of the principal
balance of the Mortgage Loan at origination if the Loan-to-Value Ratio is
between 95.00 and 90.01%, at least 12% of such balance if the Loan-to-Value
Ratio is between 90.00% and 85.01%, and at least 6% of such balance if the
Loan-to-Value ratio is between 85.00% and 80.01%. Substantially all of such
Primary Insurance Policies were issued by General Electric Mortgage Insurance
Corporation, PMI Mortgage Insurance Company, Commonwealth Mortgage Assurance
Company, Republic Mortgage Insurance Company, Mortgage Guaranty Insurance
Corporation or United Guaranty Residential Insurance Company (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
Certificates; however, there is no assurance as to the actual ability of any
Primary Insurer to pay claims. See 'Insurance Policies on Mortgage Loans' in the
Prospectus.
S-19
<PAGE>
<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Offered
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Company deems such removal
necessary or appropriate. A limited number of other mortgage loans may be added
to the Mortgage Pool prior to the issuance of the Offered Certificates. The
Company believes that the information set forth herein will be substantially
representative of the characteristics of the Mortgage Pool as it will be
constituted at the time the Offered Certificates are issued although the range
of Mortgage Rates and maturities and certain other characteristics of the
Mortgage Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the Offered
Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Offered Certificates. In the event Mortgage Loans
are removed from or added to the Mortgage Pool as set forth in the preceding
paragraph, such removal or addition will be noted in the Current Report on Form
8-K.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1997-S5 Mortgage Pass-Through Certificates will include the
following twelve classes (the 'SENIOR CERTIFICATES'): (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-6
Certificates, Class A-7 Certificates, Class A-8 Certificates and Class A-9
Certificates; (ii) Class A-4 Certificates (the 'INSURED CERTIFICATES'); (iii)
Class A-5 Certificates (the 'PREPAYMENT LOCKOUT CERTIFICATES'); (iv) Class A-10
Certificates (the 'PRINCIPAL ONLY CERTIFICATES'); (v) Class A-11 Certificates
(the 'VARIABLE STRIP CERTIFICATES') and (vi) Class R Certificates (the 'RESIDUAL
CERTIFICATES'). In addition to the Senior Certificates, the Series 1997-S5
Mortgage Pass-Through Certificates will also include six classes of subordinate
certificates which are designated as the Class M-1 Certificates, Class M-2
Certificates and Class M-3 Certificates (collectively, the 'CLASS M
CERTIFICATES') and the Class B-1 Certificates, Class B-2 Certificates and Class
B-3 Certificates (collectively, the 'CLASS B CERTIFICATES' and, together with
the Class M Certificates and Senior Certificates, the 'CERTIFICATES'). Only the
Senior Certificates and Class M Certificates (together, the 'OFFERED
CERTIFICATES') are offered hereby.
The Certificates will evidence the entire beneficial ownership interest in
the Trust Fund. The Trust Fund will consist of: (i) the Mortgage Loans; (ii)
such assets as from time to time are identified as deposited in respect of the
Mortgage Loans in the Custodial Account and in the Certificate Account and
belonging to the Trust Fund; (iii) property acquired by foreclosure of such
Mortgage Loans or deed in lieu of foreclosure; and (iv) any applicable Primary
Insurance Policies and Primary Hazard Insurance Policies and all proceeds
thereof.
The Principal Only Certificates will be entitled to payments based on the
Discount Fraction of the Discount Mortgage Loans. A 'DISCOUNT MORTGAGE LOAN' is
any Mortgage Loan with a Net Mortgage Rate less than 7.50% per annum. With
respect to each Discount Mortgage Loan, the 'DISCOUNT FRACTION' is equal to a
fraction, expressed as a percentage, the numerator of which is 7.50% minus the
Net Mortgage Rate for such Discount Mortgage Loan and the denominator of which
is 7.50%. The Mortgage Loans other than the Discount Mortgage Loans are referred
to herein as the 'NON-DISCOUNT MORTGAGE LOANS'.
The DTC Registered Certificates will be issued, maintained and transferred
on the book-entry records of DTC and its Participants. The DTC Registered
Certificates, other than the Insured Certificates, will be issued in minimum
denominations of $25,000 and integral multiples of $1 in excess thereof. The
Insured Certificates will be issued in minimum denominations of $1,000 and
integral multiples of $1,000 in excess thereof. The Principal Only Certificates
and Class M-1 Certificates will be issued in registered, certificated form in
minimum denominations of $25,000 and integral multiples of $1,000 in excess
thereof, except for one Principal Only Certificate and one Class M-1
Certificate, each evidencing the sum of an authorized denomination thereof and
the remainder of the aggregate initial Certificate Principal Balance of such
class of Certificates. The Class M-2 Certificates and Class M-3 Certificates
will be issued in registered, certificated form, in minimum denominations of
$250,000 and integral multiples of $1,000 in excess thereof, except for one
Class M-2 Certificate and one Class M-3 Certificate, each evidencing the sum of
an authorized denomination thereof and the remainder of the
S-20
<PAGE>
<PAGE>
aggregate initial Certificate Principal Balance of such class of Certificates.
The Variable Strip Certificates and Residual Certificates will be issued in
registered, certificated form in minimum denominations of a 20% Percentage
Interest, except, in the case of one Residual Certificate, 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 Beneficial
Owner will be entitled to receive a Definitive Certificate, except as set forth
below under ' -- Book-Entry Registration of Certain of the Senior
Certificates -- Definitive Certificates.' Unless and until Definitive
Certificates are issued for the DTC Registered Certificates under the limited
circumstances described herein, all references to actions by Certificateholders
with respect to the DTC Registered Certificates shall refer to actions taken by
DTC upon instructions from its Participants, and all references herein to
distributions, notices, reports and statements to Certificateholders with
respect to the DTC Registered Certificates shall refer to distributions,
notices, reports and statements to DTC or Cede, as the registered holder of the
DTC Registered Certificates, for distribution to Beneficial Owners by DTC in
accordance with DTC procedures.
BOOK-ENTRY REGISTRATION OF CERTAIN OF THE SENIOR CERTIFICATES
General. Beneficial Owners that are not Participants or Intermediaries 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 through DTC and Participants. Accordingly,
Beneficial Owners may experience delays in their receipt of payments. Unless and
until Definitive Certificates are issued for the related DTC Registered
Certificates, it is anticipated that the only registered Certificateholder of
such DTC Registered Certificates will be Cede, as nominee of DTC. Beneficial
Owners will not be recognized by the Trustee or the Master Servicer as
Certificateholders, as such term is used in the Pooling and Servicing Agreement,
and Beneficial Owners will be permitted to receive information furnished to
Certificateholders and to exercise the rights of Certificateholders only
indirectly through DTC, its Participants and Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the 'RULES'), DTC is required to make book-entry transfers of
DTC Registered Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, such DTC Registered
Certificates. Participants and Intermediaries with which Beneficial Owners have
accounts with respect to such DTC Registered Certificates similarly are required
to make book-entry transfers and receive and transmit such distributions on
behalf of their respective Beneficial Owners. Accordingly, although Beneficial
Owners will not possess physical certificates evidencing their interests in the
DTC Registered Certificates, the Rules provide a mechanism by which Beneficial
Owners, through their Participants and Intermediaries, will receive
distributions and will be able to transfer their interests in the DTC Registered
Certificates.
None of the Company, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the random lot procedure of DTC, actions
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the DTC Registered Certificates held by Cede,
as nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
Definitive Certificates. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
'Description of the Certificates -- Form of Certificates.'
Upon the occurrence of an event described in the Prospectus in the third
paragraph under 'Description of the Certificates -- Form of Certificates,' the
Trustee is required to notify, through DTC, Participants who have ownership of
DTC Registered Certificates as indicated on the records of DTC of the
availability of Definitive Certificates for their DTC Registered Certificates.
Upon surrender by DTC of the definitive certificates representing the DTC
Registered Certificates and upon receipt of instructions from DTC for
re-registration, the Trustee will reissue the DTC Registered Certificates as
Definitive Certificates issued in the respective principal amounts owned by
individual Beneficial Owners, and thereafter the Trustee and the Master Servicer
will
S-21
<PAGE>
<PAGE>
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
(i) the aggregate amount of scheduled payments on the Mortgage Loans due on the
related Due Date and received on or prior to the related Determination Date,
after deduction of the related master servicing fees and any subservicing fees
(collectively, the 'SERVICING FEES'), (ii) certain unscheduled payments,
including Mortgagor prepayments on the Mortgage Loans, Insurance Proceeds,
Liquidation Proceeds and proceeds from repurchases of and substitutions for the
Mortgage Loans occurring during the preceding calendar month and (iii) all
Advances made for such Distribution Date, in each case net of amounts
reimbursable therefrom to the Master Servicer and any Subservicer. In addition
to the foregoing amounts, with respect to unscheduled collections, not including
Mortgagor prepayments, the Master Servicer may elect to treat such amounts as
included in the Available Distribution Amount for the Distribution Date in the
month of receipt, but is not obligated to do so. As described herein under
' -- Principal Distributions on the Senior Certificates,' any such amount with
respect to which such election is so made shall be treated as having been
received on the last day of the preceding calendar month for the purposes of
calculating the amount of principal and interest distributions to any class of
Certificates. With respect to any Distribution Date, (i) the 'DUE DATE' is the
first day of the month in which such Distribution Date occurs and (ii) the
'DETERMINATION DATE' is the 20th day of the month in which such Distribution
Date occurs or, if such day is not a business day, the immediately succeeding
business day.
INTEREST DISTRIBUTIONS
Holders of each class of Senior Certificates (other than the Principal Only
Certificates) will be entitled to receive interest distributions in an amount
equal to the Accrued Certificate Interest on such class on each Distribution
Date, to the extent of the Available Distribution Amount for such Distribution
Date. Holders of each class of Class M Certificates will be entitled to receive
interest distributions in an amount equal to the Accrued Certificate Interest on
such class on each Distribution Date, to the extent of the Available
Distribution Amount for such Distribution Date after distributions of interest
and principal to the Senior Certificates, reimbursements for certain Advances to
the Master Servicer and distributions of interest and principal to any class of
Class M Certificates having a higher payment priority.
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 Insured Certificates, the amount of such allocated shortfall will be drawn
under the Policy and distributed to the holders of the Insured Certificates;
provided that (i) no such draw will be made in respect of (and therefore the
Insured Certificates will not be protected against) any such shortfall caused by
the Relief Act and (ii) no such draw will be made in respect of any shortfall
otherwise covered by the Reserve Fund. Notwithstanding the foregoing, if
payments were not made as required under the Policy, any interest shortfalls may
be allocated to the Insured Certificates as set forth below.
With respect to any Distribution Date, 'ACCRUED CERTIFICATE INTEREST' will
be equal to (a) in the case of each class of Offered Certificates (other than
the Variable Strip Certificates and Principal Only Certificates), one month's
interest accrued on the Certificate Principal Balance of the Certificates of
such class immediately prior to such Distribution Date at the related
Pass-Through Rate and (b) in the case of the Variable Strip Certificates, one
month's interest accrued on the related Notional Amount thereof immediately
prior to such Distribution Date at the then-applicable related Pass-Through
Rate; in each case, less interest shortfalls, if any, allocated thereto for such
Distribution Date to the extent not covered with respect to the Senior
Certificates by the Subordination provided by the Class B Certificates and Class
M Certificates and, with respect to the Class M Certificates to the extent not
covered by the Subordination provided by the Class B Certificates and any class
or classes of Class M Certificates having a lower payment priority, including in
each case:
(i) any Prepayment Interest Shortfall (as defined below) to the extent
not covered by the Master Servicer as described below;
S-22
<PAGE>
<PAGE>
(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 Amount
('EXCESS BANKRUPTCY LOSSES') and losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain
other risks ('EXTRAORDINARY LOSSES')) not allocated through Subordination;
(iii) the interest portion of any Advances that were made with respect
to delinquencies that were ultimately determined to be Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses; and
(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.
Such reductions will be allocated among the holders of all classes of
Certificates in proportion to the respective amounts of Accrued Certificate
Interest which would have been payable on such Distribution Date absent such
reductions. In the case of each class of Class M Certificates, Accrued
Certificate Interest on such class will be further reduced by the allocation of
the interest portion of certain losses thereto, if any, as described below under
' -- Allocation of Losses; Subordination.' Accrued Certificate Interest on each
class of Senior Certificates will be distributed on a pro rata basis. Accrued
Certificate Interest is calculated on the basis of a 360-day year consisting of
twelve 30-day months. The Principal Only Certificates are not entitled to
distributions of interest.
The 'PREPAYMENT INTEREST SHORTFALL' for any Distribution Date is equal to
the aggregate shortfall, if any, in collections of interest (adjusted to the
related Net Mortgage Rates) resulting from Mortgagor prepayments on the Mortgage
Loans during the preceding calendar month. Such shortfalls will result because
interest on prepayments in full is distributed only to the date of prepayment,
and because no interest is distributed on prepayments in part, as such
prepayments in part are applied to reduce the outstanding principal balance of
the related Mortgage Loans as of the Due Date in the month of prepayment.
However, with respect to any Distribution Date, any Prepayment Interest
Shortfalls resulting from prepayments in full during the preceding calendar
month will be offset by the Master Servicer, but only to the extent such
Prepayment Interest Shortfalls do not exceed an amount equal to the lesser of
(a) one-twelfth of 0.125% of the Stated Principal Balance (as defined herein) of
the Mortgage Loans immediately preceding such Distribution Date and (b) the sum
of the master servicing fee 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. The amount of any
Prepayment Interest Shortfall not offset by the Master Servicer is referred to
herein as a 'NON-SUPPORTED PREPAYMENT INTEREST SHORTFALL'. See 'Pooling and
Servicing Agreement -- Servicing and Other Compensation and Payment of Expenses'
herein.
A reserve fund will be established at the time of the issuance of the
Certificates solely for the benefit of the Insured Certificates (the 'RESERVE
FUND') by an initial deposit into the Reserve Fund of approximately $7,080 by
the Underwriter. The Reserve Fund will be maintained by the Trustee in a
separate account. The Reserve Fund will be beneficially owned by the Underwriter
and will not be an asset of the Trust Fund and will not be an asset of the
REMIC. A withdrawal will be made on each Distribution Date from amounts on
deposit in the Reserve Fund, to the extent funds are available therein, only to
cover any Non-Supported Prepayment Interest Shortfalls allocated to the Insured
Certificates. Once the Reserve Fund has been reduced to zero, the Policy will
cover any Non-Supported Prepayment Interest Shortfalls allocated to the Insured
Certificates. The balance of any amount remaining in the Reserve Fund on the
Distribution Date on which the Certificate Principal Balance of the Insured
Certificates has been reduced to zero will be distributed to the Underwriter.
If on any Distribution Date the Available Distribution Amount is less than
Accrued Certificate Interest on the Senior Certificates, the shortfall will be
allocated among the holders of all classes of Senior Certificates in proportion
to the respective amounts of Accrued Certificate Interest. In addition, the
amount of any such interest shortfalls that are covered by Subordination
(specifically, interest shortfalls not described in clauses (i) through (iv) in
the third preceding paragraph) will be unpaid Accrued Certificate Interest and
will be distributable to holders of the Certificates of such classes entitled to
such amounts on subsequent Distribution Dates, to the
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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 second preceding paragraph with
respect to Prepayment Interest Shortfalls resulting from prepayments in full.
The Pass-Through Rates on all classes of Offered Certificates (other than
the Variable Strip Certificates) are fixed and are set forth on the cover
hereof. The Pass-Through Rate on the Variable Strip Certificates on each
Distribution Date will equal the weighted average, as of the Due Date in the
month preceding the month in which such Distribution Date occurs, of the Pool
Strip Rates on each of the Mortgage Loans corresponding to such Variable Strip
Certificate. The 'POOL STRIP RATE' on any Mortgage Loan is equal to the Net
Mortgage Rate thereon minus 7.50% (but not less than 0.00%). The 'NET MORTGAGE
RATE' on each Mortgage Loan is equal to the Mortgage Rate thereon minus the rate
per annum of which the related master servicing and subservicing fees accrue
(the 'SERVICING FEE RATE'). The initial Pass-Through Rate on the Variable Strip
Certificates is 0.3991% per annum.
As described herein, the Accrued Certificate Interest allocable to each
class of Certificates (other than the Principal Only Certificates, which are not
entitled to distributions in respect of interest) is based on the Certificate
Principal Balance or Notional Amount thereof. The 'CERTIFICATE PRINCIPAL
BALANCE' of any Offered Certificate as of any date of determination is equal to
the initial Certificate Principal Balance thereof, reduced by the aggregate of
(a) all amounts allocable to principal previously distributed with respect to
such Certificate and (b) any reductions in the Certificate Principal Balance
thereof deemed to have occurred in connection with allocations of Realized
Losses in the manner described herein, provided that, after the Certificate
Principal Balances of the Class B Certificates have been reduced to zero, the
Certificate Principal Balance of any Certificate of the class of Class M
Certificates outstanding with the lowest payment priority shall equal the
percentage interest evidenced thereby times the excess, if any, of (i) the
then-aggregate Stated Principal Balance of all of the Mortgage Loans over (ii)
the then-aggregate Certificate Principal Balance of all other classes of
Certificates then outstanding.
The 'NOTIONAL AMOUNT' of any Variable Strip Certificate as of any
Distribution Date is equal to the aggregate Stated Principal Balance of the
related Mortgage Loans corresponding to the Pool Strip Rates represented by such
Variable Strip Certificate, immediately prior to such date. At the option of the
initial holder of the Variable Strip Certificates, any Variable Strip
Certificate can be exchanged by such holder for one or more Variable Strip
Certificates that represent, in the aggregate, the same Notional Amount.
Reference to the Notional Amount with respect to any Variable Strip Certificate
is solely for convenience in certain calculations and does not represent the
right to receive distributions allocable to principal.
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Except as provided below, holders of the Senior Certificates (other than
the Variable Strip Certificates, which are not entitled to receive any principal
distributions, and the Principal Only Certificates) will be entitled to receive
on each Distribution Date, in the priority set forth herein and to the extent of
the portion of the Available Distribution Amount remaining after the aggregate
amount of Accrued Certificate Interest to be distributed to the holders of the
Senior Certificates for such Distribution Date (the 'SENIOR INTEREST
DISTRIBUTION AMOUNT') and the Principal Only Distribution Amount (as defined
below) are distributed, a distribution allocable to principal equal to the sum
of the following:
(i) the product of (A) the then-applicable Senior Percentage and (B)
the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on
the Mortgage Loans (other than the related Discount Fraction of the
principal portion of such payments, with respect to each Discount
Mortgage Loan) due on the related Due Date, whether or not received
on or prior to the related Determination Date, less the principal
portion of Debt Service Reductions, as defined below (other than the
related Discount Fraction of the principal portion of such Debt
Service Reductions with respect to each Discount Mortgage Loan),
which together with other Bankruptcy Losses are in excess of the
Bankruptcy Amount;
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(2) the principal portion of all proceeds of the repurchase of a
Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) (other than the related Discount
Fraction of the principal portion of such proceeds, with respect to
each Discount Mortgage Loan) as required by the Pooling and Servicing
Agreement during the preceding calendar month; and
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month (other than full and
partial Mortgagor prepayments made by the respective Mortgagors and
any amounts received in connection with a Final Disposition (as
defined below) of a Mortgage Loan described in clause (ii) below), to
the extent applied as recoveries of principal (other than the related
Discount Fraction of the principal portion of such unscheduled
collections, with respect to each Discount Mortgage Loan);
(ii) in connection with the Final Disposition of a Mortgage Loan (x)
that occurred in the preceding calendar month and (y) that did not result
in any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses or Extraordinary Losses, an amount equal to the lesser of (a) the
then-applicable Senior Percentage of the Stated Principal Balance of such
Mortgage Loan (other than the related Discount Fraction of such Stated
Principal Balance, with respect to a Discount Mortgage Loan) and (b) the
then-applicable Senior Accelerated Distribution Percentage (as defined
below) of the related unscheduled collections, including Insurance Proceeds
and Liquidation Proceeds, to the extent applied as recoveries of principal
(in each case other than the portion of such collections, with respect to a
Discount Mortgage Loan included in clause (iii) of the definition of
'Principal Only Distribution Amount' below);
(iii) the then-applicable Senior Accelerated Distribution Percentage
of the aggregate of all full and partial Mortgagor prepayments made by the
respective Mortgagors of the Mortgage Loans (other than the related
Discount Fraction of such Mortgagor prepayments, with respect to each
Discount Mortgage Loan) during the preceding calendar month;
(iv) any Excess Subordinate Principal Amount (as defined below) for
such Distribution Date; and
(v) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to clauses (i) through (iii) above) that remain
undistributed to the extent that any such amounts are not attributable to
Realized Losses which were allocated to the Class M Certificates or Class B
Certificates.
With respect to any Distribution Date, the lesser of (a) the balance of the
Available Distribution Amount remaining after the Senior Interest Distribution
Amount and the Principal Only Distribution Amount have been distributed and (b)
the sum of the amounts described in clauses (i) through (v) of the immediately
preceding paragraph is hereinafter referred to as the 'SENIOR PRINCIPAL
DISTRIBUTION AMOUNT.' With respect to any Distribution Date on which the
Certificate Principal Balance of the most subordinate class or classes of
Certificates then outstanding is to be reduced to zero and on which Realized
Losses are to be allocated to such class or classes, the 'EXCESS SUBORDINATE
PRINCIPAL AMOUNT' is equal to the amount, if any, by which (i) the amount that
would otherwise be distributable in respect of principal on such class or
classes of Certificates on such Distribution Date is greater than (ii) the
excess, if any, of the aggregate of the Certificate Principal Balance of such
class or classes of Certificates immediately prior to such Distribution Date
over the aggregate amount of Realized Losses to be allocated to such class or
classes of Certificates on such Distribution Date, as reduced by any amount
calculated pursuant to clause (v) of the definition of 'Principal Only
Distribution Amount.'
Holders of the Principal Only Certificates will be entitled to receive on
each Distribution Date, to the extent of the excess, if any, of the Available
Distribution Amount remaining after the Senior Interest Distribution Amount is
distributed, a distribution allocable to principal equal to the Principal Only
Distribution Amount. The 'PRINCIPAL ONLY DISTRIBUTION AMOUNT' is equal to the
aggregate of:
(i) the related Discount Fraction of the principal portion of the
scheduled monthly payment on each Discount Mortgage Loan due on the related
Due Date, whether or not received on or prior to the related Determination
Date, less the Discount Fraction of the principal portion of any related
Debt Service Reductions which together with other Bankruptcy Losses are in
excess of the Bankruptcy Amount;
(ii) the related Discount Fraction of the principal portion of all
unscheduled collections on each Discount Mortgage Loan received during the
preceding calendar month (other than amounts received in connection with a
Final Disposition of a Discount Mortgage Loan described in clause (iii)
below), including full and partial Mortgagor prepayments, repurchases of
Discount Mortgage Loans (or, in the case
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of a substitution, certain amounts representing a principal adjustment) as
required by the Pooling and Servicing Agreement, Liquidation Proceeds and
Insurance Proceeds, to the extent applied as recoveries of principal;
(iii) in connection with the Final Disposition of a Discount Mortgage
Loan that did not result in any Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses, an amount equal
to the lesser of (a) the applicable Discount Fraction of the Stated
Principal Balance of such Discount Mortgage Loan immediately prior to such
Distribution Date and (b) the aggregate amount of collections on such
Discount Mortgage Loan to the extent applied as recoveries of principal;
(iv) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to clauses (i) through (iii) above) that remain
undistributed; and
(v) with respect to each Final Disposition of a Discount Mortgage Loan
in connection with such Distribution Date or any prior Distribution Date,
to the extent that the amount included under clause (iii) above for such
Distribution Date was less than the amount described in (a) under clause
(iii) above (each such shortfall, a 'PRINCIPAL ONLY COLLECTION SHORTFALL'),
an amount equal to the aggregate of the Principal Only Collection
Shortfalls, less any amounts paid pursuant to this clause on a prior
Distribution Date, until paid in full; provided, that distributions
pursuant to this clause (v) shall only be made to the extent of Eligible
Funds (as described below) on any Distribution Date.
A 'FINAL DISPOSITION' of a defaulted Mortgage Loan is deemed to have
occurred upon a determination by the Master Servicer that it has received all
Insurance Proceeds, Liquidation Proceeds and ther payments or cash recoveries
which the Master Servicer reasonably and in good faith expects to be finally
recoverable with respect to such Mortgage Loan.
'ELIGIBLE FUNDS' on any Distribution Date means the portion, if any, of the
Available Distribution Amount remaining after reduction by the sum of the Senior
Interest Distribution Amount, the Senior Principal Distribution Amount
(determined without regard to clause (iv) thereof), the Principal Only
Distribution Amount (determined without regard to clause (v) thereof) and the
aggregate amount of Accrued Certificate Interest on the Class M Certificates,
Class B-1 Certificates and Class B-2 Certificates. Notwithstanding any other
provision hereof, any distribution in respect of any Principal Only Collection
Shortfall, to the extent not covered by any amounts otherwise distributable to
the Class B-3 Certificates, shall result in a reduction of the amount of
principal distributions on such Distribution Date on (i) first, the Class B-1
Certificates and Class B-2 Certificates and (ii) second, each class of the Class
M Certificates, in each case in reverse order of their payment priority.
The 'STATED PRINCIPAL BALANCE' of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts allocable to
principal that have been distributed to Certificateholders with respect to such
Mortgage Loan on or before such date, and as further reduced to the extent that
any Realized Loss thereon has been allocated to one or more classes of
Certificates on or before the date of determination.
The 'SENIOR PERCENTAGE,' which initially will equal approximately 94.99%
and will in no event exceed 100%, will be recalculated for each Distribution
Date to be the percentage equal to the aggregate Certificate Principal Balance
of the Senior Certificates (other than the Principal Only Certificates)
immediately prior to such Distribution Date divided by the aggregate Stated
Principal Balance of all of the Mortgage Loans (other than the Discount Fraction
of the Discount Mortgage Loans) immediately prior to such Distribution Date. The
'SUBORDINATE PERCENTAGE' as of any date of determination is equal to 100% minus
the Senior Percentage as of such date. The initial Senior Percentage is less
than the initial percentage interest in the Trust Fund evidenced by the classes
of Senior Certificates (including the Principal Only Certificates) in the
aggregate, because such percentage is calculated without regard to either the
Certificate Principal Balance of the Principal Only Certificates or the Discount
Fraction of the Stated Principal Balance of each Discount Mortgage Loan.
The 'SENIOR ACCELERATED DISTRIBUTION PERCENTAGE' for any Distribution Date
occurring prior to the Distribution Date in May 2002 will equal 100%. The Senior
Accelerated Distribution Percentage for any Distribution Date occurring after
the first five years following the Delivery Date will be as follows:
(i) for any Distribution Date during the sixth year after the Delivery
Date, the Senior Percentage for such Distribution Date plus 70% of the
Subordinate Percentage for such Distribution Date;
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(ii) for any Distribution Date during the seventh year after the
Delivery Date, the Senior Percentage for such Distribution Date plus 60% of
the Subordinate Percentage for such Distribution Date;
(iii) for any Distribution Date during the eighth year after the
Delivery Date, the Senior Percentage for such Distribution Date plus 40% of
the Subordinate Percentage for such Distribution Date;
(iv) for any Distribution Date during the ninth year after the
Delivery Date, the Senior Percentage for such Distribution Date plus 20% of
the Subordinate Percentage for such Distribution Date; and
(v) 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)(i)(X) 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 Certificate Principal Balance of
the Class M Certificates and Class B Certificates, is less than 50% or (Y)
the outstanding principal balance of Mortgage Loans delinquent 60 days or
more averaged over the last six months, as a percentage of the aggregate
outstanding principal balance of all Mortgage Loans averaged over the last
six months, does not exceed 2%, and
(ii) Realized Losses on the Mortgage Loans to date for such
Distribution Date, if occurring during the sixth, seventh, eighth, ninth or
tenth year (or any year thereafter) after the Delivery Date, are less than
30%, 35%, 40%, 45% or 50%, respectively, of the sum of the initial
Certificate Principal Balances of the Class M Certificates and Class B
Certificates;
or
(b)(i) the outstanding principal balance of Mortgage Loans delinquent
60 days or more averaged over the last six months, as a percentage of the
aggregate outstanding principal balance of all Mortgage Loans averaged over
the last six months, does not exceed 4%, and
(ii) Realized Losses on the Mortgage Loans to date for such
Distribution Date are less than 10% of the sum of the initial Certificate
Principal Balances of the Class M Certificates and Class B Certificates.
Notwithstanding the foregoing, upon reduction of the Certificate Principal
Balances of the Senior Certificates (other than the Principal Only 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 (after distribution of the Senior Interest Distribution Amount
as described under 'Interest Distributions'), as follows:
(a) Prior to the occurrence of the Credit Support Depletion Date (as
defined herein):
(i) the Principal Only Distribution Amount shall be distributed
to the Principal Only Certificates, until such Certificate Principal
Balance is reduced to zero;
(ii) the Senior Principal Distribution Amount shall be
distributed to the Residual Certificates, until the Certificate
Principal Balance thereof has been reduced to zero;
(iii) from the balance of the Senior Principal Distribution
Amount remaining after the distribution in clause (ii) above, an
amount equal to the sum of the following shall be distributed to the
Prepayment Lockout Certificates, in reduction of the Certificate
Principal Balance thereof:
(A) the Prepayment Lockout Certificates' pro rata share
(based on the aggregate Certificate Principal Balance thereof
relative to the aggregate Certificate Principal Balance of all
classes of Certificates (other than the Principal Only
Certificates)), of the aggregate of the collections described in
clauses (i), (ii) and (v) of the first paragraph under 'Principal
Distributions on the Senior Certificates' without any application
of the Senior Percentage or Senior Accelerated Distribution
Percentage; and
(B) the Lockout Distribution Percentage (as defined below)
of the Prepayment Lockout Certificates' pro rata share (based on
the aggregate Certificate Principal Balance thereof relative to
the aggregate Certificate Principal Balance of all classes of
Certificates (other than
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the Principal Only Certificates)) of the collections described in
clause (iii) of the first paragraph under 'Principal
Distributions on the Senior Certificates' without any application
of the Senior Accelerated Distribution Percentage;
provided that if the aggregate of the amounts set forth in clauses (i) through
(v) of the first paragraph under 'Principal Distributions on the Senior
Certificates' is more than the balance of the Available Distribution Amount
remaining after the Senior Interest Distribution Amount and the Principal Only
Distribution Amount have been distributed, the amount paid to the Prepayment
Lockout Certificates pursuant to this clause (iii) shall be reduced by an amount
equal to the Prepayment Lockout Certificates' pro rata share, based on the
aggregate Certificate Principal Balance thereof relative to the aggregate
Certificate Principal Balance of the Senior Certificates (other than the
Principal Only Certificates) of such difference; and
(iv) the balance, if any, of the Senior Principal Distribution
Amount remaining after the distributions described in clauses (ii)
and (iii) above shall be distributed as follows:
(A) first, concurrently as follows, until the Certificate
Principal Balance of the Class A-1 Certificates has been
reduced to zero:
(1) 48.189285358% and 46.794016067%, respectively, of the
amount available for distribution under this clause (A), to
the Class A-1 Certificates and Class A-6 Certificates; and
(2) 5.016698575% of the amount available for distribution
under this clause (A) shall be distributed as follows:
(a) first, to the Class A-7 Certificates, until the
Certificate Principal Balance thereof has been reduced to
zero; and
(b) second, to the Class A-8 Certificates;
(B) second, concurrently as follows, until the Certificate
Principal Balances of the Class A-2 Certificates and the
Class A-8 Certificates have been reduced to zero:
(1) 34.413000787 and 18.792983146%, respectively of the
amount available for distribution under this clause (B) to
the Class A-2 Certificates and Class A-8 Certificates; and
(2) 46.794016067% of the amount available for distribution
under this clause (B) shall be distributed as follows:
(a) first, to the Class A-6 Certificates, until the
Certificate Principal Balance thereof has been reduced to
zero; and
(b) second, to the Class A-3 Certificates.
(C) third, to the Class A-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to
zero;
(D) fourth, concurrently on a pro rata basis, to the Class
A-4 Certificates and Class A-9 Certificates, until the
Certificate Principal Balances thereof have been reduced to
zero; and
(E) fifth, to the Prepayment Lockout Certificates, until the
Certificate Principal Balance thereof has been reduced to
zero.
The 'LOCKOUT DISTRIBUTION PERCENTAGE' for any Distribution Date occurring
prior to the Distribution Date in May 2002 will be 0%. The Lockout Distribution
Percentage for any Distribution Date occurring after the first five years
following the Delivery Date will be as follows: for any Distribution Date during
the sixth year after the Delivery Date, 30%; for any Distribution Date during
the seventh year after the Delivery Date, 40%; for any Distribution Date during
the eighth year after the Delivery Date, 60%; for any Distribution Date during
the ninth year after the Delivery Date, 80%; and for any Distribution Date
thereafter, 100%.
(b) On or after the occurrence of the Credit Support Depletion Date,
all priorities relating to distributions as described above in respect of
principal among the various classes of Senior Certificates (other than the
Principal Only Certificates) will be disregarded, an amount equal to the
Discount Fraction of the principal portion of scheduled payments and
unscheduled collections received or advanced in respect of
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Discount Mortgage Loans will be distributed to the Principal Only
Certificates, and the Senior Principal Distribution Amount will be
distributed to all classes of Senior Certificates (other than the Principal
Only Certificates) pro rata in accordance with their respective outstanding
Certificate Principal Balances and the Senior Interest Distribution Amount
will be distributed as described under 'Interest Distributions.'
(c) After the reduction of the Certificate Principal Balances of the
Senior Certificates (other than the Principal Only Certificates) to zero
but prior to the Credit Support Depletion Date, the Senior Certificates
(other than the Principal Only Certificates) will be entitled to no further
distributions of principal thereon and the Available Distribution Amount
will be paid solely to the holders of the Principal Only Certificates,
Variable Strip Certificates, Class M Certificates and Class B Certificates,
in each case as described herein.
The 'CREDIT SUPPORT DEPLETION DATE' is the first Distribution Date on which
the Senior Percentage equals 100%.
The Master Servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections (not including prepayments by the
Mortgagors) received in any calendar month as included in the Available
Distribution Amount and the Senior Principal Distribution Amount for the
Distribution Date in the month of receipt, but is not obligated to do so. If the
Master Servicer so elects, such amounts will be deemed to have been received
(and any related Realized Loss shall be deemed to have occurred) on the last day
of the month prior to the receipt thereof.
PRINCIPAL DISTRIBUTIONS ON THE INSURED CERTIFICATES
General. On any Distribution Date, distributions in respect of principal on
the Insured Certificates will be distributed to the Beneficial Owners of the
Insured Certificates on a mandatory basis by random lot as described herein. No
prior notice will be provided to the Beneficial Owners of the Insured
Certificates on such distributions made by random lot. DTC will determine which
Insured Certificates will be paid, using its established random lot procedures.
Each Participant receiving such payments, and each Indirect Participant in the
chain to the Beneficial Owners, will remit payments to their customers according
to their own procedures which may or may not be by random lot. A Participant or
Indirect Participant could decide to allot Insured Certificate principal
payments to certain customers (which could include such Participant or Indirect
Participant) without allotting payments to others. Investors should ask their
Participants or Indirect Participants what allocation procedures they use.
Participants and Indirect Participants, holding Insured Certificates selected
for mandatory distributions in reduction of the Certificate Principal Balance
should be required to provide notice of such mandatory distributions to the
affected Beneficial Owners.
On each Distribution Date on which amounts are available for distribution
in reduction of the Certificate Principal Balance of the Insured Certificates,
the aggregate amount allocable to such distribution will be rounded, as
necessary, to an amount equal to an integral multiple of $1,000, except as
provided below, in accordance with the priorities and limitations set forth
herein. Such rounding will be accomplished on the first Distribution Date on
which a distribution in reduction of the Certificate Principal Balance of the
Certificates is made by withdrawing, from a non-interest bearing account to be
established on the Closing Date with a $999.99 deposit by the Underwriter (the
'Rounding Account'), the amount of funds, if any, needed to round the amount
otherwise available for such distribution upward to the next higher integral
multiple of $1,000. On each succeeding Distribution Date on which a distribution
in reduction of the Certificate Principal Balance of the Insured Certificates is
to be made, the aggregate amount allocable as principal distributions to the
Insured Certificates will be applied first to repay any funds withdrawn from the
Rounding Account for the Insured Certificates on the prior Distribution Date,
and then the remainder of such allocable amount, if any, will be similarly
rounded upward through another withdrawal from the Rounding Account and
distributed in reduction of the Certificate Principal Balance of the Insured
Certificates. This process will continue on succeeding Distribution Dates until
the outstanding Certificate Principal Balance of the Insured Certificates has
been reduced to zero. Thus, the aggregate distribution made in reduction of the
Certificate Principal Balance of the Insured Certificates on each Distribution
Date may be slightly more or less than would be the case in the absence of such
rounding procedures, but such difference will be no more than $999.99 on such
Distribution Date. Under no circumstances will the sum of all distributions made
in reduction of the Certificate Principal Balance of the Insured Certificates,
through any Distribution Date, be less than the sum that would have resulted in
the absence of such rounding procedures.
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Notwithstanding any provisions herein to the contrary, following the first
Distribution Date on which any Realized Losses were allocated to the Insured
Certificates and were not covered as required under the Policy, distributions in
reduction of the Certificate Principal Balance of the Insured Certificates would
be made pro rata among the holders of the Insured Certificates and would not be
made in integral multiples of $1,000 or mandatory distributions by random lot.
Due to the procedure for mandatory distributions described herein, there
can be no assurance that on any Distribution Date, any particular Beneficial
Owner will receive a principal distribution. Thus, the timing of distributions
in reduction of the Certificate Principal Balance with respect to any particular
Insured Certificate is highly uncertain and may be made earlier or later than
the date that may be desired by a Beneficial Owner of an Insured Certificate.
PRINCIPAL DISTRIBUTIONS ON THE CLASS M CERTIFICATES
Holders of each class of the Class M Certificates will be entitled to
receive on each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after (a) the sum of the Senior Interest
Distribution Amount, Principal Only Distribution Amount and Senior Principal
Distribution Amount is distributed, (b) reimbursement is made to the Master
Servicer for certain Advances remaining unreimbursed following the final
liquidation of the related Mortgage Loan to the extent described below under
'Advances,' (c) the aggregate amount of Accrued Certificate Interest and
principal required to be distributed on any class of Class M Certificates having
a higher payment priority on such Distribution Date is distributed to holders of
such class of Class M Certificates and (d) the aggregate amount of Accrued
Certificate Interest required to be distributed on such class of Class M
Certificates on such Distribution Date is distributed to such Class M
Certificates, a distribution allocable to principal in the sum of the following:
(i) the product of (A) the then-applicable related Class M Percentage
and (B) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on
the Mortgage Loans (other than the related Discount Fraction of the
principal portion of such payments with respect to a Discount
Mortgage Loan) due on the related Due Date, whether or not received
on or prior to the related Determination Date, less the principal
portion of Debt Service Reductions (other than the related Discount
Fraction of the principal portion of such Debt Service Reductions
with respect to a Discount Mortgage Loan) which together with other
Bankruptcy Losses are in excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of the repurchase of a
Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) (other than the related Discount
Fraction of the principal portion of such proceeds with respect to a
Discount Mortgage Loan) as required by the Pooling and Servicing
Agreement during the preceding calendar month; and
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month (other than full and
partial Mortgagor prepayments made by the respective Mortgagors and
any amounts received in connection with a Final Disposition of a
Mortgage Loan described in clause (ii) below), to the extent applied
as recoveries of principal (other than the related Discount Fraction
of the principal amount of such unscheduled collections, with respect
to a Discount Mortgage Loan);
(ii) such class's pro rata share, based on the Certificate Principal
Balance of each class of Class M Certificates and Class B Certificates then
outstanding, of all amounts received in connection with the Final
Disposition of a Mortgage Loan (other than the related Discount Fraction of
such amounts with respect to a Discount Mortgage Loan) (x) that occurred
during the preceding calendar month and (y) that did not result in any
Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses
or Extraordinary Losses, to the extent applied as recoveries of principal
and to the extent not otherwise payable to the Senior Certificates;
(iii) the portion of full and partial Mortgagor prepayments (other
than the Discount Fraction of such Mortgagor prepayments with respect to a
Discount Mortgage Loan) made by the respective Mortgagors during the
preceding calendar month allocable to such class of Class M Certificates as
described below;
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(iv) if such class is the most senior class of Certificates then
outstanding, an amount equal to the Excess Subordinate Principal Amount, if
any; and
(v) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to clauses (i) through (iii) above) that remain
undistributed to the extent that any such amounts are not attributable to
Realized Losses which were allocated to any class of Class M Certificates
with a lower payment priority or the Class B Certificates.
References herein to 'payment priority' of the Class M Certificates refer
to a payment priority among such classes as follows: first, to the Class M-1
Certificates; second, to the Class M-2 Certificates; and third, to the Class M-3
Certificates.
As to each class of Class M Certificates, on any Distribution Date, any
Accrued Certificate Interest thereon remaining unpaid from any previous
Distribution Date will be distributable to the extent of available funds.
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class B Certificates have been reduced to zero, on any Distribution Date, with
respect to the class of Class M Certificates outstanding on such Distribution
Date with the lowest payment priority, Accrued Certificate Interest thereon
remaining unpaid from any previous Distribution Date (except in the limited
circumstances provided in the Pooling and Servicing Agreement) will not be
distributable.
All Mortgagor prepayments not otherwise distributable to the Senior
Certificates will be allocated on a pro rata basis among the class of Class M
Certificates with the highest payment priority then outstanding and each other
class of Class M Certificates and Class B Certificates for which certain loss
levels established for such class in the Pooling and Servicing Agreement have
not been exceeded. The related loss level on any Distribution Date would be
satisfied as to any Class M-2 Certificates, Class M-3 Certificates or Class B
Certificates, respectively, only if the sum of the current percentage interests
in the Mortgage Pool evidenced by such class and each class, if any, subordinate
thereto were at least equal to the sum of the initial percentage interests in
the Mortgage Pool evidenced by such class and each class, if any, subordinate
thereto.
The Class M-1, Class M-2 and Class M-3 Percentages, which initially will
equal approximately 2.01%, 1.00% and 1.00%, respectively, and will in no event
exceed 100%, will each be adjusted for each Distribution Date to be the
percentage equal to the Certificate Principal Balance of the related class of
Class M Certificates immediately prior to such Distribution Date divided by the
aggregate Stated Principal Balance of all of the Mortgage Loans (other than the
related Discount Fraction of each Discount Mortgage Loan) immediately prior to
such Distribution Date. The initial Class M-1, Class M-2 and Class M-3
Percentages are greater than the initial percentage interests in the Trust Fund
evidenced by the Class M-1, Class M-2 and Class M-3 Certificates, respectively,
because the Class M-1, Class M-2 and Class M-3 Percentages are calculated
without regard to the Discount Fraction of the Stated Principal Balance of each
Discount Mortgage Loan.
As stated above under ' -- Principal Distributions on the Senior
Certificates,' the Senior Accelerated Distribution Percentage will be 100%
during the first five years after the Delivery Date (unless the Certificate
Principal Balances of the Senior Certificates (other than the Principal Only
Certificates) are reduced to zero before the end of such period), and will
thereafter equal 100% whenever the Senior Percentage exceeds the initial Senior
Percentage. Furthermore, as set forth herein, the Senior Accelerated
Distribution Percentage will exceed the Senior Percentage during the sixth
through ninth years following the Delivery Date, and scheduled reductions to the
Senior Accelerated Distribution Percentage are subject to postponement based on
the loss and delinquency experience of the Mortgage Loans. In addition, if the
Certificate Principal Balances of the Senior Certificates (other than the
Prepayment Lockout and Principal Only Certificates) have been reduced to zero,
the Prepayment Lockout Certificates will receive 100% of the Mortgagor
prepayments during the first five years after the Delivery Date and will receive
a disproportionately large percentage of prepayments thereafter during certain
periods, as described above under 'Principal Distributions on the Senior
Certificates.' Accordingly, each class of the Class M Certificates will not be
entitled to any Mortgagor prepayments for at least the first five years after
the Delivery Date (unless the Certificate Principal Balances of the Senior
Certificates (other than the Principal Only Certificates) have been reduced to
zero before the end of such period), and may receive no prepayments or a
disproportionately small portion of prepayments relative to the related Class M
Percentage during certain periods thereafter. See ' -- Principal Distributions
on the Senior Certificates' herein.
S-31
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<PAGE>
THE POLICY
The following summary of terms of the Policy to be issued by the Insurer
does not purport to be complete and is qualified in its entirety by reference to
the Policy included as an exhibit to the Pooling and Servicing Agreement.
Simultaneously with the issuance of the Certificates, the Insurer will
deliver the Policy to the Trustee for the benefit of each holder of Insured
Certificates. The premium in respect of the Policy will be paid by the
Underwriter on the Delivery Date. Under the Policy, the Insurer unconditionally
and irrevocably guarantees to the Trustee for the benefit of each holder of
Insured Certificates the full and complete payment on each Distribution Date of
(i) one full month's interest on the Certificate Principal Balance of the
Insured Certificates at the respective Pass-Through Rate indicated on the cover
hereof, net of (a) any Non-Supported Prepayment Interest Shortfalls allocated to
the Insured Certificates, to the extent covered by the Reserve Fund, and (b) any
interest shortfalls relating to the Relief Act allocated to the Insured
Certificates, (ii) the principal portion of any Realized Loss allocated to the
Insured Certificates and (iii) the Certificate Principal Balance of the Insured
Certificates to the extent unpaid on the final Distribution Date or earlier
termination of the Trust Fund pursuant to the terms of the Pooling and Servicing
Agreement (clauses (i), (ii) and (iii) together, the 'GUARANTEED
DISTRIBUTIONS').
If, by the close of business on the Business Day next succeeding the
Determination Date, the Master Servicer informs the Trustee that funds to be
deposited in the Certificate Account will be insufficient to make the Guaranteed
Distributions on the Insured Certificates for such Distribution Date, the
Trustee is required to make a claim under the Policy in the amount of such
deficiency. Payment of claims under the Policy will be made by the Insurer
following Receipt (as defined below) by the Insurer of the appropriate notice
for payment on the later to occur of (a) 12:00 noon, New York City time, on the
Business Day following Receipt of such notice for payment, and (b) 12:00 noon,
New York City time, on the date on which such Guaranteed Distribution is due.
The terms 'RECEIPT' and 'RECEIVED,' with respect to the Policy, shall mean
actual delivery to the Insurer and to its fiscal agent, if any, at or prior to
12:00 noon, New York City time, on a Business Day; delivery either on a day that
is not a Business Day or after 12:00 noon, New York City time, shall be deemed
to be Receipt on the next succeeding Business Day. If any notice or certificate
given under the Policy by the Trustee is not in proper form or is not properly
completed, executed or delivered, it shall be deemed not to have been Received,
and the Insurer or its fiscal agent shall promptly so advise the Trustee and the
Trustee may submit an amended notice.
Under the Policy, 'BUSINESS DAY' means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the City of New York, New
York or in the city in which the corporate office of the Trustee is located are
authorized or obligated by law or executive order to be closed.
The Insurer's obligations under the Policy in respect of Guaranteed
Distributions shall be discharged to the extent funds are transferred to the
Trustee as provided in the Policy whether or not such funds are properly applied
by the Trustee.
The Insurer shall be subrogated to the rights of each holder of an Insured
Certificate to receive payments of principal and interest, as applicable, with
respect to distributions on the Insured Certificates to the extent of any
payment by the Insurer under the Policy in accordance with the express
provisions of the Policy.
To the fullest extent permitted by applicable law, the Insurer agrees under
the Policy not to assert, and waives, for the benefit of each Insured
Certificateholder, all its rights (whether by counterclaim, setoff or otherwise)
and defenses (including, without limitation, the defense of fraud), whether
acquired by subrogation, assignment or otherwise, to the extent that such rights
and defenses may be available to the Insurer to avoid payment of its obligations
under the Policy.
Claims under the Policy constitute direct, unsecured and unsubordinated
obligations of the Insurer, and will rank equally with any other unsecured and
unsubordinated indebtedness of the Insurer for borrowed money. Claims against
the Insurer under the Policy and claims against the Insurer under each other
financial guarantee insurance policy issued by the Insurer constitute equal
claims against the general assets of the Insurer. The terms of the Policy cannot
be modified or altered by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Company. The Policy may not be cancelled or
revoked prior to distribution in full of all Guaranteed Distributions. The
Policy is governed by the laws of the State of New York.
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<PAGE>
The Policy is not covered by the property/casualty insurance security fund
specified in Article 76 of the New York Insurance Law.
ALLOCATION OF LOSSES; SUBORDINATION
The Subordination provided to the Senior Certificates by the Class B
Certificates and Class M Certificates and the Subordination provided to each
class of Class M Certificates by the Class B Certificates and by any class of
Class M Certificates subordinate thereto will cover Realized Losses on the
Mortgage Loans that are Defaulted Mortgage Losses, Fraud Losses, Bankruptcy
Losses (each as defined in the Prospectus) and Special Hazard Losses (as defined
herein). Any such Realized Losses which are not Excess Special Hazard Losses,
Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses will be
allocated as follows: first, to the Class B Certificates; second, to the Class
M-3 Certificates; third, to the Class M-2 Certificates; and fourth, to the Class
M-1 Certificates, in each case until the Certificate Principal Balance of such
class of Certificates has been reduced to zero; and thereafter, if any such
Realized Loss is on a Discount Mortgage Loan, to the Principal Only Certificates
in an amount equal to the related Discount Fraction of the principal portion of
such Realized Loss, and the remainder of such Realized Losses and the entire
amount of such Realized Losses on Non-Discount Mortgage Loans among all the
remaining classes of Senior Certificates 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, in each case until the Certificate
Principal Balance of such class has been reduced to zero, and the Accrued
Certificate Interest thereon, in the case of the interest portion of such
Realized Loss, by the amount so allocated as of the Distribution Date occurring
in the month following the calendar month in which such Realized Loss was
incurred. In addition, any such allocation of a Realized Loss to a Class M
Certificate may also be made by operation of the payment priority to the Senior
Certificates set forth under ' -- Principal Distributions on the Senior
Certificates' and any class of Class M Certificates with a higher payment
priority. As used herein, 'DEBT SERVICE REDUCTION' means a reduction in the
amount of the monthly payment due to certain bankruptcy proceedings, but does
not include any permanent forgiveness of principal. As used herein,
'SUBORDINATION' refers to the provisions discussed above for the sequential
allocation of Realized Losses among the various classes, as well as all
provisions effecting such allocations including the priorities for distribution
of cash flows in the amounts described herein.
Allocations of the principal portion of Debt Service Reductions to each
class of Class M Certificates and Class B Certificates will result from the
priority of distributions of the Available Distribution Amount as described
herein, which distributions shall be made first to the Senior Certificates,
second to the Class M Certificates in the order of their payment priority and
third to the Class B Certificates. An allocation of the interest portion of a
Realized Loss as well as the principal portion of Debt Service Reductions will
not reduce the level of Subordination, as such term is defined herein, until an
amount in respect thereof has been actually disbursed to the Senior
Certificateholders or the Class M Certificateholders, as applicable. The holders
of the Offered Certificates will not be entitled to any additional payments with
respect to Realized Losses from amounts otherwise distributable on any classes
of Certificates subordinate thereto (except in limited circumstances in respect
of any Excess Subordinate Principal Amount, or in the case of Principal Only
Collection Shortfalls, to the extent of Eligible Funds). Accordingly, the
Subordination provided to the Senior Certificates (other than the Principal Only
Certificates) and to each class of Class M Certificates by the respective
classes of Certificates subordinate thereto with respect to Realized Losses
allocated on any Distribution Date will be effected primarily by increasing the
Senior Percentage, or the respective Class M Percentage, of future distributions
of principal of the remaining Mortgage Loans. Because the Discount Fraction of
each Discount Mortgage Loan will not change over time, the protection from
losses provided to the Principal Only Certificates by the Class M Certificates
and Class B Certificates is limited to the prior right of the Principal Only
Certificates to receive distributions in respect of principal as described
herein. Furthermore, principal losses on the Mortgage Loans that are not covered
by Subordination will be allocated to the Principal Only Certificates only to
the extent they occur on a Discount Mortgage Loan and only to the extent of the
related Discount Fraction of such losses. Such allocation of principal losses on
the Discount Mortgage Loans may result in such losses being allocated in an
amount that is greater or less than would have been the case had such losses
been allocated in proportion to the Certificate Principal Balance of the
Principal Only Certificates. Thus, the Senior Certificates (other than the
Principal Only Certificates) will bear the entire amount of losses that are not
allocated to the Class M Certificates and Class B Certificates (other than the
amount allocable to the Principal
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Only Certificates), which losses will be allocated among all classes of Senior
Certificates (other than the Principal Only Certificates) as described herein.
Because the Principal Only Certificates are entitled to receive in
connection with the Final Disposition of a Discount Mortgage Loan, on any
Distribution Date, an amount equal to all unpaid Principal Only Collection
Shortfalls to the extent of Eligible Funds on such Distribution Date, shortfalls
in distributions of principal on any class of Class M Certificates could occur
under certain circumstances, even if such class is not the most subordinate
class of Certificates then outstanding.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses, Extraordinary Losses or other losses of a type not covered by
Subordination on Non-Discount Mortgage Loans will be allocated on a pro rata
basis among the Senior Certificates (other than the Principal Only
Certificates), Class M Certificates and Class B Certificates (any such Realized
Losses so allocated to the Senior Certificates or Class M Certificates will be
allocated without priority among the various classes of Senior Certificates
(other than the Principal Only Certificates) or Class M Certificates). The
principal portion of such losses on Discount Mortgage Loans will be allocated to
the Principal Only Certificates in an amount equal to the related Discount
Fraction thereof, and the remainder of such losses on Discount Mortgage Loans
will be allocated among the remaining Certificates on a pro rata basis. An
allocation of a Realized Loss on a 'pro rata basis' among two or more classes of
Certificates means an allocation to each such class of Certificates on the basis
of its then outstanding Certificate Principal Balance prior to giving effect to
distributions to be made on such Distribution Date in the case of an allocation
of the principal portion of a Realized Loss, or based on the Accrued Certificate
Interest thereon in respect of such Distribution Date in the case of an
allocation of the interest portion of a Realized Loss.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer or the Subservicer for Advances and expenses, including attorneys'
fees) towards interest and principal owing on the Mortgage Loan. Such amount of
loss realized and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses
are referred to herein as 'REALIZED LOSSES.'
In order to maximize the likelihood of distribution in full of the Senior
Interest Distribution Amount, Principal Only Distribution Amount and Senior
Principal Distribution Amount, on each Distribution Date, holders of Senior
Certificates have a right to distributions of the Available Distribution Amount
that is prior to the rights of the holders of the Class M Certificates and Class
B Certificates, to the extent necessary to satisfy the Senior Interest
Distribution Amount, Principal Only Distribution Amount and Senior Principal
Distribution Amount. Similarly, holders of the Class M Certificates have a right
to distributions of the Available Distribution Amount prior to the rights of
holders of the Class B Certificates, and holders of any class of Class M
Certificates with a higher payment priority have a right to distributions of the
Available Distribution Amount prior to the rights of holders of any class of
Class M Certificates with a lower payment priority.
The application of the Senior Accelerated Distribution Percentage (when it
exceeds the Senior Percentage) to determine the Senior Principal Distribution
Amount will accelerate the amortization of the Senior Certificates (other than
the Principal Only Certificates), in the aggregate, relative to the actual
amortization of the Mortgage Loans. The Principal Only Certificates will not
receive more than the Discount Fraction of any unscheduled payment relating to a
Discount Mortgage Loan. To the extent that the Senior Certificates (other than
the Principal Only Certificates) are amortized faster than the Mortgage Loans,
in the absence of offsetting Realized Losses allocated to the Class M
Certificates and Class B Certificates, the percentage interest evidenced by such
Senior Certificates in the Trust Fund will be decreased (with a corresponding
increase in the interest in the Trust Fund evidenced by the Class M Certificates
and Class B Certificates), thereby increasing, relative to their respective
Certificate Principal Balances, the Subordination afforded the Senior
Certificates (other than the Principal Only Certificates) by the Class M
Certificates and Class B Certificates collectively. In addition, if losses on
the Mortgage Loans exceed the amounts described above under ' -- Principal
Distributions on the Senior Certificates,' a greater percentage of full and
partial Mortgagor prepayments will be allocated to the Senior Certificates in
the aggregate (other than the Principal Only Certificates) than would otherwise
be the case, thereby accelerating the amortization of the Senior Certificates
(other than the Principal Only Certificates) relative to the Class M
Certificates and Class B Certificates. In the event that the Certificate
Principal Balances
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of the Senior Certificates (other than the Prepayment Lockout Certificates and
Principal Only Certificates) have been reduced to zero, the amortization of the
Prepayment Lockout Certificates during certain periods will be similarly
accelerated relative to the actual amortization of the Mortgage Loans, and will
increase the Subordination afforded the Prepayment Lockout Certificates by the
Class M Certificates and Class B Certificates collectively.
The priority of payments (including Mortgagor prepayments) among the Class
M Certificates, as described herein, also has the effect during certain periods,
in the absence of losses, of decreasing the percentage interest evidenced by any
class of Class M Certificates with a higher payment priority, thereby
increasing, relative to its Certificate Principal Balance, the Subordination
afforded to such class of the Class M Certificates by the Class B Certificates
and any class of Class M Certificates with a lower payment priority.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the 'SPECIAL HAZARD AMOUNT') through
Subordination shall initially be equal to $5,013,298. As of any date of
determination following the Cut-off Date, the Special Hazard Amount shall equal
$5,013,298 less the sum of (A) any amounts allocated through Subordination in
respect of Special Hazard Losses and (B) the Adjustment Amount. The Adjustment
Amount will be equal to an amount calculated pursuant to the terms of the
Pooling and Servicing Agreement. As used in this Prospectus Supplement, 'SPECIAL
HAZARD LOSSES' has the same meaning set forth in the Prospectus, except that
Special Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses, and Special Hazard Losses will not exceed the lesser of
the cost of repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the 'FRAUD LOSS AMOUNT') through Subordination
shall initially be equal to $10,026,596. As of any date of determination after
the Cut-off Date, the Fraud Loss Amount shall equal (X) prior to the first
anniversary of the Cut-off Date an amount equal to 2.00% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date minus the
aggregate amounts allocated through Subordination with respect to Fraud Losses
up to such date of determination and (Y) from the first to the fifth anniversary
of the Cut-off Date, an amount equal to (1) the lesser of (a) the Fraud Loss
Amount as of the most recent anniversary of the Cut-off Date and (b) 1.00% of
the aggregate principal balance of all of the Mortgage Loans as of the most
recent anniversary of the Cut-off Date minus (2) the aggregate amounts allocated
through Subordination with respect to Fraud Losses since the most recent
anniversary of the Cut-off Date up to such date of determination. On and after
the fifth anniversary of the Cut-off Date, the Fraud Loss Amount shall be zero
and Fraud Losses shall not be allocated through Subordination.
The aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses (the 'BANKRUPTCY AMOUNT') through
Subordination will initially be equal to $133,016. As of any date of
determination on or after the first anniversary of the Cut-off Date, the
Bankruptcy Amount will equal the excess, if any, of (1) the lesser of (a) the
Bankruptcy Amount as of the business day next preceding the most recent
anniversary of the Cut-off Date and (b) an amount calculated pursuant to the
terms of the Pooling and Servicing Agreement, which amount as calculated will
provide for a reduction in the Bankruptcy Amount, over (2) the aggregate amount
of Bankruptcy Losses allocated solely to the Class M Certificates or Class B
Certificates through Subordination since such anniversary.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
Master Servicer has notified the Trustee in writing that the Master Servicer is
diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (A) the related Mortgage Loan is not in default with regard to payments
due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer or a
Subservicer.
The Special Hazard Amount, Fraud Amount and Bankruptcy Amount are subject
to further reduction as described in the Prospectus under 'Subordination.'
Notwithstanding the foregoing, with respect to the Insured Certificates,
the Policy will cover all Realized Losses allocated thereto. If payments are not
made as required under the Policy, Realized Losses allocated to the Insured
Certificates will be borne by the holders of such Certificates.
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ADVANCES
Prior to each Distribution Date, the Master Servicer is required to make
Advances which were due on the Mortgage Loans on the immediately preceding Due
Date and delinquent on the business day next preceding the related Determination
Date.
Such Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, Insurance
Proceeds, Liquidation Proceeds or amounts otherwise payable to the holders of
the Class B Certificates or Class M Certificates. The purpose of making such
Advances is to maintain a regular cash flow to the Certificateholders, rather
than to guarantee or insure against losses. The Master Servicer will not be
required to make any Advances with respect to reductions in the amount of the
monthly payments on the Mortgage Loans due to Debt Service Reductions or the
application of the Relief Act or similar legislation or regulations. Any failure
by the Master Servicer to make an Advance as required under the Pooling and
Servicing Agreement will constitute an Event of Default thereunder, in which
case the Trustee, as successor Master Servicer, will be obligated to make any
such Advance, in accordance with the terms of the Pooling and Servicing
Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from either (a) late collections, Insurance Proceeds and
Liquidation Proceeds from the Mortgage Loan as to which such unreimbursed
Advance was made or (b) as to any Advance that remains unreimbursed in whole or
in part following the final liquidation of the related Mortgage Loan, from any
amounts otherwise distributable on any of the Class B Certificates or Class M
Certificates; provided, however, that any such Advances that were made with
respect to delinquencies which ultimately were determined to be Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary
Losses are reimbursable to the Master Servicer out of any funds in the Custodial
Account prior to distributions on any of the Certificates and the amount of such
losses will be allocated as described herein. In addition, if the Certificate
Principal Balances of the Class M Certificates and Class B Certificates have
been reduced to zero, any Advances previously made which are deemed by the
Master Servicer to be nonrecoverable from related late collections, Insurance
Proceeds and Liquidation Proceeds may be reimbursed to the Master Servicer out
of any funds in the Custodial Account prior to distributions on the Senior
Certificates. The effect of these provisions on any class of the Class M
Certificates is that, with respect to any Advance which remains unreimbursed
following the final liquidation of the related Mortgage Loan, the entire amount
of the reimbursement for such Advance will be borne first by the holders of the
Class B Certificates or any class of Class M Certificates having a lower payment
priority to the extent that such reimbursement is covered by amounts otherwise
distributable to such classes, and then by the holders of such class of Class M
Certificates (except as provided above) to the extent of the amounts otherwise
distributable to them.
THE INSURER
The information set forth below with respect to the Insurer has been
provided by the Insurer, and none of the Company, the Master Servicer or the
Underwriter make any representations or warranties as to the accuracy or
completeness of such information.
GENERAL
The Insurer is a monoline insurance company incorporated in 1984 under the
laws of the State of New York. The Insurer is licensed to engage in financial
guaranty insurance business in all 50 states, the District of Columbia and
Puerto Rico.
The Insurer and its subsidiaries are engaged in the business of writing
financial guaranty insurance, principally in respect of securities offered in
domestic and foreign markets. In general, financial guaranty insurance consists
of the issuance of a guaranty of scheduled payments of an issuer's
securities -- thereby enhancing the credit rating of those securities -- in
consideration for the payment of a premium to the insurer. The Insurer and its
subsidiaries principally insure asset-backed, collateralized and municipal
securities. Asset-backed securities are generally supported by residential
mortgage loans, consumer or trade receivables, securities or other assets having
an ascertainable cash flow or market value. Collateralized securities include
public utility first mortgage bonds and sale/leaseback obligation bonds.
Municipal securities consist largely of general obligation bonds, special
revenue bonds and other special obligations of state and local governments. The
Insurer insures both newly issued securities sold in the primary market and
outstanding securities sold in the secondary market that satisfy the Insurer's
underwriting criteria.
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<PAGE>
The Insurer is a wholly owned subsidiary of Financial Security Assurance
Holdings Ltd. ('HOLDINGS'), a New York Stock Exchange listed company. Major
shareholders of Holdings include Fund American Enterprises Holdings, Inc., U S
WEST Capital Corporation and The Tokio Marine Fire Insurance Co., Ltd. No
shareholder of Holdings is obligated to pay any debt of the Insurer or any claim
under any insurance policy issued by the Insurer or to make any additional
contribution to the capital of the Insurer.
The principal executive offices of the Insurer are located at 350 Park
Avenue, New York, New York 10022, and its telephone number at that location is
(212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Insurer or any of its
domestic operating insurance company subsidiaries are reinsured among such
companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, the Insurer reinsures a portion of its liabilities
under certain of its financial guaranty insurance policies with other reinsurers
under various quota share treaties and on a transaction-by-transaction basis.
Such reinsurance is utilized by the Insurer as a risk management device and to
comply with certain statutory and rating agency requirements; it does not alter
or limit the Insurer's obligations under any financial guaranty insurance
policy.
RATINGS OF CLAIMS-PAYING ABILITY
The Insurer's claims-paying ability is rated 'Aaa' by Moody's Investors
Service, Inc. and 'AAA' by Standard & Poor's, Nippon Investors Service, Inc. and
Standard & Poor's (Australia) Pty. Ltd. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies. See 'Ratings' herein.
CAPITALIZATION
The following table sets forth the capitalization of the Insurer and its
wholly owned subsidiaries on the basis of generally accepted accounting
principles as of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums)................. $ 359,972
------------
Shareholder's Equity
Common Stock.............................................................. 15,000
Additional Paid-In Capital................................................ 654,470
Unrealized Gain on Investments (net of deferred income taxes)............. 9,099
Accumulated Earnings...................................................... 136,763
------------
Total Shareholder's Equity........................................... $ 815,332
------------
Total Deferred Premium Revenue and Shareholder's Equity........................ $1,175,304
------------
------------
</TABLE>
For further information concerning the Insurer, see the 'Consolidated
Financial Statements of Financial Security Assurance Inc. and Subsidiaries,' and
the notes thereto, incorporated by reference herein. Copies of the statutory
quarterly and annual financial statements filed with the State of New York
Insurance Department by the Insurer are available on request from the State of
New York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described in the accompanying Prospectus under
'Incorporation of Certain Documents by Reference,' the financial statements of
the Insurer included in, or as exhibits to, the following document which has
been filed with the Commission by Holdings are hereby incorporated by reference
in the Registration Statement, of which this Prospectus and Prospectus
Supplement form a part:
Annual Report on Form 10-K for the period ended December 31, 1996.
All financial statements of the Insurer included in documents filed by
Holdings pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, subsequent to the date of this Prospectus
Supplement and prior to the termination of the offering of the Certificates
shall be deemed to be incorporated by
S-37
<PAGE>
<PAGE>
reference into this Prospectus Supplement and to be a part hereof from the
respective dates of filing such documents.
The Company will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon the oral or written request of such
person, a copy of any or all of the documents referred to above that have been
incorporated by reference. Requests for such copies should be directed to the
President, Residential Funding Mortgage Securities I, Inc., 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437, telephone number (612)
832-7000.
INSURANCE REGULATION
The Insurer is licensed and subject to regulation as a financial guaranty
insurance corporation under the laws of the State of New York, its state of
domicile. In addition, the Insurer and its insurance subsidiaries are subject to
regulation by insurance laws of the various other jurisdictions in which they
are licensed to do business. As a financial guaranty insurance corporation
licensed to do business in the State of New York, the Insurer is subject to
Article 69 of the New York Insurance Law which, among other things, limits the
business of each such insurer to financial guaranty insurance and related lines,
requires that each such insurer maintain a minimum surplus to policyholders,
establishes contingency, loss and unearned premium reserve requirements for each
such insurer, and limits the size of individual transactions ('single risks')
and the volume of transactions ('aggregate risks') that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable to
non-life insurance companies such as the Insurer, regulate, among other things,
permitted investments, payment of dividends, transactions with affiliates,
mergers, consolidations, acquisitions or sales of assets and incurrence of
liability for borrowings.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by the rate and timing of principal
payments on the Mortgage Loans and the amount and timing of Mortgagor defaults
resulting in Realized Losses. Such yields may be adversely affected by a higher
or lower than anticipated rate of principal payments on the Mortgage Loans in
the Trust Fund. The rate of principal payments on such Mortgage Loans will in
turn be affected by the amortization schedules of the Mortgage Loans, the rate
and timing of Mortgagor prepayments thereon, liquidations of defaulted Mortgage
Loans and purchases of Mortgage Loans due to certain breaches of representations
and warranties. The timing of changes in the rate of prepayments, liquidations
and purchases of the Mortgage Loans may, and the timing of Realized Losses will,
significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Since the rate and timing of principal payments on the Mortgage
Loans will depend on future events and on a variety of factors (as described
herein and in the Prospectus under 'Yield Considerations' and 'Maturity and
Prepayment Considerations'), no assurance can be given as to such rate or the
timing of principal payments on the Offered Certificates.
The Mortgage Loans generally may be prepaid by the Mortgagors at any time
without payment of any prepayment fee or penalty. The Mortgage Loans generally
contain due-on-sale clauses. As described under 'Description of the
Certificates -- Principal Distributions on the Senior Certificates' and
' -- Principal Distributions on the Class M Certificates' herein, during certain
periods all or a disproportionately large percentage of Mortgagor prepayments
will be allocated among the Senior Certificates (other than the Prepayment
Lockout Certificates and Principal Only Certificates), during certain periods no
Mortgagor prepayments or a disproportionately small or large portion of
Mortgagor prepayments will be distributed to the Prepayment Lockout
Certificates, and during certain periods no Mortgagor prepayments or a
disproportionately small portion of Mortgagor prepayments will be distributed to
each class of Class M Certificates. In addition to the foregoing, if on any
Distribution Date, the loss level established for the Class M-2 Certificates or
Class M-3 Certificates is exceeded and a class of Class M Certificates having a
higher payment priority is then outstanding, the Class M-2 Certificates or Class
M-3 Certificates, as the case may be, will not receive distributions in respect
of Mortgagor prepayments on such Distribution Date. Furthermore, if the
Certificate Principal Balances of the Senior Certificates (other than the
Prepayment Lockout Certificates and Principal Only Certificates) have been
reduced to zero, the Prepayment Lockout Certificates may, under certain
circumstances, receive all Mortgagor prepayments made during the preceding
calendar month to the extent not paid to the Principal Only Certificates.
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<PAGE>
<PAGE>
Prepayments, liquidations and purchases of the Mortgage Loans will result in
distributions to holders of the Offered Certificates of principal amounts which
would otherwise be distributed over the remaining terms of the Mortgage Loans.
Factors affecting prepayment (including defaults and liquidations) of mortgage
loans include changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties, changes in the value of the
mortgaged properties, mortgage market interest rates, solicitations and
servicing decisions. In addition, if prevailing mortgage rates fell
significantly below the Mortgage Rates on the Mortgage Loans, the rate of
prepayments (including refinancings) would be expected to increase. Conversely,
if prevailing mortgage rates rose significantly above the Mortgage Rates on the
Mortgage Loans, the rate of prepayments on the Mortgage Loans would be expected
to decrease.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the Mortgage Loans
will be affected by the general economic condition of the region of the country
in which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See 'Maturity and Prepayment
Considerations' in the Prospectus.
After the Certificate Principal Balances of the Class B Certificates have
been reduced to zero, the yield to maturity on the class of Class M Certificates
then outstanding with the lowest payment priority will be extremely sensitive to
losses on the Mortgage Loans (and the timing thereof) because the entire amount
of losses that are covered by Subordination will be allocated to such class of
Class M Certificates. See ' -- Class M-2 and Class M-3 Certificate Yield
Considerations' below. Furthermore, because principal distributions are paid to
certain classes of Senior Certificates and Class M Certificates before other
classes, holders of classes having a later priority of payment bear a greater
risk of losses than holders of classes having earlier priorities for
distribution of principal. With respect to the Insured Certificates, any such
losses will be covered by the Policy to the extent set forth herein.
All classes of Senior Certificates entitled to payments of principal are
subject to various priorities for payment of principal as described herein.
Distributions of principal on classes having an earlier priority of payment will
be affected by the rates of prepayment of the Mortgage Loans early in the life
of the Mortgage Pool. The timing of commencement of principal distributions and
the weighted average lives of classes of Certificates with a later priority of
payment will be affected by the rates of prepayment experienced both before and
after the commencement of principal distributions on such classes.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through Rates
on the Offered Certificates (other than the Variable Strip Certificates) are
fixed, such rates will not change in response to changes in market interest
rates. Accordingly, if market interest rates or market yields for securities
similar to the Offered Certificates were to rise, the market value of the
Offered Certificates may decline.
Investors in the Prepayment Lockout Certificates should be aware that
because the Prepayment Lockout Certificates do not receive any portion of
Mortgagor prepayments prior to the Distribution Date occurring in May 2002 and
prior to the Distribution Date occurring in May 2006 will receive a
disproportionately small portion of Mortgagor prepayments (unless the
Certificate Principal Balances of the Senior Certificates (other than the
Prepayment Lockout Certificates and Principal Only Certificates) have been
reduced to zero), the weighted average life of the Prepayment Lockout
Certificates will be longer than would otherwise be the case, and the effect on
the market value of the Prepayment Lockout Certificates of changes in market
interest rates or market yields for similar securities will be greater than for
other classes of Senior Certificates entitled to such distributions.
As described under 'Description of the Certificates -- Allocation of
Losses; Subordination' and ' -- Advances,' amounts otherwise distributable to
holders of one or more classes of the Class M Certificates may be made available
to protect the holders of the Senior Certificates and holders of any Class M
Certificates with a higher payment priority against interruptions in
distributions due to certain Mortgagor delinquencies, to the extent not covered
by Advances. Such delinquencies may affect the yields to investors on such
classes of the Class M Certificates, and, even if subsequently cured, may affect
the timing of the receipt of distributions by the holders of such classes of
Class M Certificates. Furthermore, the Principal Only Certificates will share in
the principal portion of Realized Losses on the Mortgage Loans only to the
extent that they are incurred with
S-39
<PAGE>
<PAGE>
respect to Discount Mortgage Loans and only to the extent of the related
Discount Fraction; thus, after the Class B Certificates and the Class M
Certificates are retired or in the case of Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses and Extraordinary Losses, the Senior
Certificates (other than the Insured Certificates, to the extent such losses are
covered by the Policy, and the Principal Only Certificates) may be affected to a
greater extent by losses on Non-Discount Mortgage Loans than losses on Discount
Mortgage Loans. In addition, a higher than expected rate of delinquencies or
losses will also affect the rate of principal payments on the Prepayment Lockout
Certificates or on one or more classes of the Class M Certificates if it delays
the scheduled reduction of the Senior Accelerated Distribution Percentage or
affects the allocation of prepayments among the Class M Certificates and Class B
Certificates.
The periodic increase in interest paid by the Mortgagor of a Buydown
Mortgage Loan may increase the risk of default with respect to the related
Mortgage Loan. See 'Mortgage Loan Program -- Underwriting Standards' and 'Yield
Considerations' in the Prospectus.
The amount of interest otherwise payable to holders of the Offered
Certificates will be reduced by any interest shortfalls to the extent not
covered by Subordination or by the Master Servicer or, solely with respect to
the Insured Certificates, the Policy and Reserve Fund, in each case, as
described herein, including Prepayment Interest Shortfalls and, in the case of
each class of the Class M Certificates, the interest portions of Realized Losses
allocated solely to such class of Certificates. Such shortfalls will not be
offset by a reduction in the Servicing Fees payable to the Master Servicer or
otherwise, except as described herein with respect to certain Prepayment
Interest Shortfalls. See 'Yield Considerations' in the Prospectus and
'Description of the Certificates -- Interest Distributions' herein for a
discussion of the effect of Mortgagor prepayments on the Mortgage Loans on the
yield to maturity of the Offered Certificates and certain possible shortfalls in
the collection of interest.
The yield to investors in the Offered Certificates will be affected by
Prepayment Interest Shortfalls allocable thereto in the month preceding any
Distribution Date to the extent that such shortfalls exceed the amount offset by
the Master Servicer or, solely with respect to the Insured Certificates, the
Policy and the Reserve Fund. See 'Description of the Certificates -- Interest
Distributions' herein.
In addition, the yield to maturity on each class of the Offered
Certificates will depend on, among other things, the price paid by the holders
of the Offered Certificates and the related Pass-Through Rate. The extent to
which the yield to maturity of an Offered Certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium. In general, if a class of Offered Certificates is purchased
at a premium and principal distributions thereon occur at a rate faster than
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than that anticipated at the time of purchase. Conversely, if a class of
Offered Certificates is purchased at a discount and principal distributions
thereon occur at a rate slower than that assumed at the time of purchase, the
investor's actual yield to maturity will be lower than that anticipated at the
time of purchase. For additional considerations relating to the yield on the
Certificates, see 'Yield Considerations' and 'Maturity and Prepayment
Considerations' in the Prospectus.
Sequentially Paying Certificates: The Senior Certificates (other than the
Prepayment Lockout Certificates, Principal Only Certificates and Variable Strip
Certificates) are subject to various priorities for payment of principal as
described herein. INVESTORS SHOULD BE AWARE THAT THE 'SEQUENTIAL' NATURE OF SUCH
SENIOR CERTIFICATES IS NOT RELATED TO THE NUMERICAL DESIGNATION OF ANY CLASS OF
SENIOR CERTIFICATES, BUT RATHER RELATES TO THE ALLOCATION OF PRINCIPAL TO SOME
CLASSES OF SENIOR CERTIFICATES PRIOR TO THE ALLOCATION OF PRINCIPAL TO OTHER
CLASSES OF SENIOR CERTIFICATES.
Distributions of principal on classes having an earlier priority of payment
will be affected by the rates of prepayment of the Mortgage Loans early in the
life of the Mortgage Pool. The timing of commencement of principal distributions
and the weighted average lives of classes of Certificates with a later priority
of payment will be affected by the rates of prepayment of the Mortgage Loans
experienced both before and after the commencement of principal distributions on
such classes.
The timing of distributions in reduction of the Certificate Principal
Balance with respect to any particular Senior Certificate subject to sequential
allocations of principal is highly uncertain and may be significantly earlier or
later than the date that may be desired by such Certificateholder. If
prepayments on the Mortgage Loans occur at a higher rate than anticipated, the
weighted average lives of such Senior Certificates may be shortened
significantly. Conversely, if prepayments on the Mortgage Loans occur at a lower
rate than anticipated, the weighted average lives of such Senior Certificates
may be extended significantly. Investors in the
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<PAGE>
<PAGE>
Senior Certificates subject to sequential allocations of principal that have
later priorities of payment should be aware that such later priority makes such
classes of Senior Certificates particularly sensitive to the rate and timing of
Mortgagor prepayments. Furthermore, this later priority of payment with respect
to principal makes such classes of Senior Certificates more vulnerable to losses
and interest shortfalls since the Subordination provided by the Class M
Certificates and Class B Certificates may have been reduced to zero.
The market value of the Offered Certificates, including the Senior
Certificates subject to sequential allocations of principal, could vary
significantly during the period such Certificates are outstanding, due to
changes in the weighted average lives of such Certificates and changes in market
interest rates. As a result, an investor could suffer a significant loss on its
investment if the investor sells its Certificate rather than holding it until it
is retired. If an investor sells a Certificate rather than holding it until it
is retired, any such loss would reduce the investor's yield on such Certificate.
Insured Certificates: IN ADDITION TO THE CONSIDERATIONS SET FORTH ABOVE,
INVESTORS IN THE INSURED CERTIFICATES SHOULD BE AWARE THAT SUCH CERTIFICATES MAY
NOT BE AN APPROPRIATE INVESTMENT FOR ALL PROSPECTIVE INVESTORS. The Insured
Certificates would not be an appropriate investment for any investor requiring a
distribution of a particular amount of principal or interest on a specific date
or dates or an otherwise predictable stream of cash payments. The timing of such
distributions may have a significant effect on an investor's yield on such
Certificates if the Certificate is purchased at a discount or a premium.
Investors in the Insured Certificates also should be aware that
distributions of principal to the Insured Certificates will be allocated by DTC
according to a random lot procedure. Due to this random lot procedure, there can
be no assurance that on any Distribution Date, any holder of an Insured
Certificate will receive a principal distribution. Thus, the timing of
distributions in reduction of the Certificate Principal Balance with respect to
any particular Insured Certificate is highly uncertain and may be earlier or
later that the date that may be desired by such Certificateholder.
Additionally, investors in the Insured Certificates should be aware that
the amount on deposit in the Reserve Fund is finite. If payments were not made
as required under the Policy, allocations of interest shortfalls to the Insured
Certificates in excess of the amount offset by the Master Servicer and the
Reserve Fund would affect the yield to investors in the Insured Certificates.
Furthermore, investors in the Insured Certificates should be aware that
because the Insured Certificates have a later priority of payment with respect
to principal in relation to the other classes of Senior Certificates, the effect
on the market value of the Insured Certificates of changes in market interest
rates or market yields for similar securities will be greater than would be the
effect of such changes on the market value of other classes of Senior
Certificates entitled to principal distributions. Furthermore, this later
payment priority makes the Insured Certificates particularly sensitive to the
rate and timing of principal prepayments. If prepayments on the Mortgage Loans
occur at a higher rate than anticipated, the weighted average life of the
Insured Certificates may be shortened. Conversely, if prepayments on the
Mortgage Loans occur at a lower rate than anticipated, the weighted average life
of the Insured Certificates may be extended.
Assumed Final Distribution Date: The assumed final Distribution Date with
respect to each class of the Offered Certificates is April 25, 2027, which is
the Distribution Date immediately following the latest scheduled maturity date
for any Mortgage Loan. No event of default, change in the priorities for
distribution among the various classes or other provisions under the Pooling and
Servicing Agreement will arise or become applicable solely by reason of the
failure to retire the entire Certificate Principal Balance of any class of
Certificates on or before its assumed final Distribution Date.
Weighted Average Life: Weighted average life refers to the average amount
of time that will elapse from the date of issuance of a security to the date of
distribution to the investor of each dollar distributed in reduction of
principal of such security (assuming no losses). The weighted average life of
the Offered Certificates will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
standard prepayment assumption ('SPA'), represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.20% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the
S-41
<PAGE>
<PAGE>
mortgage loans and an additional 0.20% per annum in each month thereafter until
the 30th month. Beginning in the 30th month and in each month thereafter during
the life of the mortgage loans, 100% SPA assumes a constant prepayment rate of
6% per annum each month. As used in the table below, '0% SPA' assumes prepayment
rates equal to 0% of SPA (no prepayments). Correspondingly, '250% SPA' assumes
prepayment rates equal to 250% of SPA, and so forth. SPA does not purport to be
a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Mortgage Loans that are expected to be included in the Trust Fund as
described under 'Description of the Mortgage Pool' herein and the performance
thereof. The table assumes, among other things, that:
(i) as of the date of issuance of the Offered Certificates, the
Mortgage Loans have the following characteristics:
<TABLE>
<CAPTION>
DISCOUNT NON-DISCOUNT
MORTGAGE LOANS MORTGAGE LOANS
-------------- --------------
<S> <C> <C>
Aggregate principal balance........................................... $ 59,386,263 $441,943,524
Weighted average Mortgage Rate........................................ 7.6422413215% 8.24581%
Weighted average Servicing Fee Rate................................... 0.3028255461% 0.29305%
Weighted average original term to maturity (months)................... 359 359
Weighted average remaining term to maturity (months).................. 356 358
</TABLE>
(ii) the scheduled monthly payment for each Mortgage Loan has been
based on its outstanding balance, interest rate and remaining term to
maturity, such that the Mortgage Loan will amortize in amounts sufficient
for repayment thereof over its remaining term to maturity; (iii) none of
the Unaffiliated Sellers, the Master Servicer or the Company will
repurchase any Mortgage Loan, as described under 'Mortgage Loan
Program -- Representations by Sellers' and 'Description of the
Certificates -- Assignment of the Mortgage Loans' in the Prospectus, and
neither the Master Servicer nor the Company exercises any option to
purchase the Mortgage Loans and thereby cause a termination of the Trust
Fund; (iv) there are no delinquencies or Realized Losses on the Mortgage
Loans, and principal payments on the Mortgage Loans will be timely received
together with prepayments, if any, at the respective constant percentages
of SPA set forth in the table; (v) there is no Prepayment Interest
Shortfall or any other interest shortfall in any month; (vi) payments on
the Certificates will be received on the 25th day of each month, commencing
in May, 1997; (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 April
25, 1997 (collectively, the 'STRUCTURING ASSUMPTIONS').
The actual characteristics and performance of the Mortgage Loans will
differ from the Structuring Assumptions used in preparing the table set forth
below, which is hypothetical in nature and is provided only to give a general
sense of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is very unlikely that the Mortgage Loans will prepay
at a constant level of SPA until maturity or that all of the Mortgage Loans will
prepay at the same level of SPA. Moreover, the diverse remaining terms to
maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the table at the various constant percentages of
SPA specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between such assumptions and the
actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, may materially affect the percentages of initial
Certificate Principal Balances outstanding over time and the weighted average
lives of certain classes of Offered Certificates.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of each class of Offered Certificates (other
than the Variable Strip Certificates and Residual Certificates), and sets forth
the percentages of the initial Certificate Principal Balance of each such class
of Offered Certificates that would be outstanding after each of the dates shown
at various percentages of SPA.
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<PAGE>
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
-------------------------------- --------------------------------
DISTRIBUTION DATE 0% 100% 250% 400% 500% 0% 100% 250% 400% 500%
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.. 100 100 100 100 100 100 100 100 100 100
April 25, 1998...... 99 95 89 84 80 100 100 100 100 100
April 25, 1999...... 97 84 66 48 36 100 100 100 100 100
April 25, 2000...... 96 70 35 4 0 100 100 100 100 70
April 25, 2001...... 94 57 9 0 0 100 100 100 40 0
April 25, 2002...... 92 44 0 0 0 100 100 73 0 0
April 25, 2003...... 90 33 0 0 0 100 100 42 0 0
April 25, 2004...... 88 23 0 0 0 100 100 19 0 0
April 25, 2005...... 85 15 0 0 0 100 100 4 0 0
April 25, 2006...... 83 8 0 0 0 100 100 0 0 0
April 25, 2007...... 80 3 0 0 0 100 100 0 0 0
April 25, 2008...... 77 0 0 0 0 100 94 0 0 0
April 25, 2009...... 73 0 0 0 0 100 84 0 0 0
April 25, 2010...... 70 0 0 0 0 100 74 0 0 0
April 25, 2011...... 66 0 0 0 0 100 64 0 0 0
April 25, 2012...... 62 0 0 0 0 100 56 0 0 0
April 25, 2013...... 57 0 0 0 0 100 47 0 0 0
April 25, 2014...... 52 0 0 0 0 100 39 0 0 0
April 25, 2015...... 46 0 0 0 0 100 32 0 0 0
April 25, 2016...... 41 0 0 0 0 100 25 0 0 0
April 25, 2017...... 34 0 0 0 0 100 18 0 0 0
April 25, 2018...... 27 0 0 0 0 100 11 0 0 0
April 25, 2019...... 20 0 0 0 0 100 5 0 0 0
April 25, 2020...... 11 0 0 0 0 100 0 0 0 0
April 25, 2021...... 3 0 0 0 0 100 0 0 0 0
April 25, 2022...... 0 0 0 0 0 86 0 0 0 0
April 25, 2023...... 0 0 0 0 0 65 0 0 0 0
April 25, 2024...... 0 0 0 0 0 42 0 0 0 0
April 25, 2025...... 0 0 0 0 0 17 0 0 0 0
April 25, 2026...... 0 0 0 0 0 0 0 0 0 0
April 25, 2027...... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**... 15.9 4.9 2.5 1.9 1.7 26.6 16.0 5.9 3.9 3.3
<CAPTION>
CLASS A-3 CLASS A-4
------------------------------- --------------------------------
DISTRIBUTION DATE 0% 100% 250% 400% 500% 0% 100% 250% 400% 500%
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.. 100 100 100 100 100 100 100 100 100 100
April 25, 1998...... 100 100 100 100 100 100 100 100 100 100
April 25, 1999...... 100 100 100 100 100 100 100 100 100 100
April 25, 2000...... 100 100 100 100 100 100 100 100 100 100
April 25, 2001...... 100 100 100 100 39 100 100 100 100 100
April 25, 2002...... 100 100 100 11 0 100 100 100 100 0
April 25, 2003...... 100 100 100 0 0 100 100 100 0 0
April 25, 2004...... 100 100 81 0 0 100 100 100 0 0
April 25, 2005...... 100 100 56 0 0 100 100 100 0 0
April 25, 2006...... 100 100 31 0 0 100 100 100 0 0
April 25, 2007...... 100 100 14 0 0 100 100 100 0 0
April 25, 2008...... 100 100 * 0 0 100 100 100 0 0
April 25, 2009...... 100 100 0 0 0 100 100 83 0 0
April 25, 2010...... 100 100 0 0 0 100 100 69 0 0
April 25, 2011...... 100 100 0 0 0 100 100 57 0 0
April 25, 2012...... 100 100 0 0 0 100 100 47 0 0
April 25, 2013...... 100 100 0 0 0 100 100 38 0 0
April 25, 2014...... 100 100 0 0 0 100 100 31 0 0
April 25, 2015...... 100 100 0 0 0 100 100 25 0 0
April 25, 2016...... 100 91 0 0 0 100 100 20 0 0
April 25, 2017...... 100 80 0 0 0 100 100 16 0 0
April 25, 2018...... 100 69 0 0 0 100 100 13 0 0
April 25, 2019...... 100 59 0 0 0 100 100 10 0 0
April 25, 2020...... 100 48 0 0 0 100 100 8 0 0
April 25, 2021...... 100 29 0 0 0 100 100 6 0 0
April 25, 2022...... 100 10 0 0 0 100 100 4 0 0
April 25, 2023...... 100 0 0 0 0 100 88 3 0 0
April 25, 2024...... 100 0 0 0 0 100 64 2 0 0
April 25, 2025...... 78 0 0 0 0 100 40 1 0 0
April 25, 2026...... 15 0 0 0 0 100 18 * 0 0
April 25, 2027...... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**... 28.5 22.4 8.4 4.7 3.9 29.5 27.7 15.9 5.5 4.4
</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 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.
(Table continued on next page.)
S-43
<PAGE>
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-6
-------------------------------- --------------------------------
DISTRIBUTION DATE 0% 100% 250% 400% 500% 0% 100% 250% 400% 500%
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.. 100 100 100 100 100 100 100 100 100 100
April 25, 1998...... 99 99 99 99 99 99 96 92 88 85
April 25, 1999...... 98 98 98 98 98 98 88 75 61 53
April 25, 2000...... 97 97 97 97 97 97 78 52 29 15
April 25, 2001...... 96 96 96 96 96 95 68 32 4 0
April 25, 2002...... 95 95 95 95 78 94 58 16 0 0
April 25, 2003...... 94 92 89 82 50 92 50 5 0 0
April 25, 2004...... 93 89 83 59 32 91 43 0 0 0
April 25, 2005...... 91 84 74 43 21 89 37 0 0 0
April 25, 2006...... 90 79 64 32 14 87 32 0 0 0
April 25, 2007...... 88 73 53 24 9 85 28 0 0 0
April 25, 2008...... 86 67 44 18 6 83 24 0 0 0
April 25, 2009...... 84 61 37 13 4 80 20 0 0 0
April 25, 2010...... 82 56 30 10 3 78 16 0 0 0
April 25, 2011...... 79 51 25 7 2 75 13 0 0 0
April 25, 2012...... 77 47 21 5 1 71 9 0 0 0
April 25, 2013...... 74 42 17 4 1 68 6 0 0 0
April 25, 2014...... 71 38 14 3 1 64 3 0 0 0
April 25, 2015...... 68 34 11 2 * 60 1 0 0 0
April 25, 2016...... 64 30 9 1 * 56 0 0 0 0
April 25, 2017...... 60 27 7 1 * 51 0 0 0 0
April 25, 2018...... 56 23 6 1 * 46 0 0 0 0
April 25, 2019...... 52 20 4 1 * 40 0 0 0 0
April 25, 2020...... 47 17 3 * * 34 0 0 0 0
April 25, 2021...... 41 14 3 * * 28 0 0 0 0
April 25, 2022...... 36 12 2 * * 21 0 0 0 0
April 25, 2023...... 29 9 1 * * 13 0 0 0 0
April 25, 2024...... 22 6 1 * * 4 0 0 0 0
April 25, 2025...... 15 4 * * * 0 0 0 0 0
April 25, 2026...... 7 2 * * * 0 0 0 0 0
April 25, 2027...... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**... 20.5 15.2 11.4 8.5 6.7 18.5 7.3 3.3 2.4 2.1
<CAPTION>
CLASS A-7 CLASS A-8
------------------------------- --------------------------------
DISTRIBUTION DATE 0% 100% 250% 400% 500% 0% 100% 250% 400% 500%
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.. 100 100 100 100 100 100 100 100 100 100
April 25, 1998...... 93 76 50 23 6 100 100 100 100 100
April 25, 1999...... 86 26 0 0 0 100 100 95 88 84
April 25, 2000...... 79 0 0 0 0 100 97 84 72 49
April 25, 2001...... 70 0 0 0 0 100 91 74 28 0
April 25, 2002...... 61 0 0 0 0 100 87 51 0 0
April 25, 2003...... 52 0 0 0 0 100 83 30 0 0
April 25, 2004...... 41 0 0 0 0 100 79 13 0 0
April 25, 2005...... 29 0 0 0 0 100 76 3 0 0
April 25, 2006...... 17 0 0 0 0 100 73 0 0 0
April 25, 2007...... 3 0 0 0 0 100 71 0 0 0
April 25, 2008...... 0 0 0 0 0 99 66 0 0 0
April 25, 2009...... 0 0 0 0 0 98 59 0 0 0
April 25, 2010...... 0 0 0 0 0 96 52 0 0 0
April 25, 2011...... 0 0 0 0 0 95 45 0 0 0
April 25, 2012...... 0 0 0 0 0 93 39 0 0 0
April 25, 2013...... 0 0 0 0 0 92 33 0 0 0
April 25, 2014...... 0 0 0 0 0 90 28 0 0 0
April 25, 2015...... 0 0 0 0 0 88 22 0 0 0
April 25, 2016...... 0 0 0 0 0 85 17 0 0 0
April 25, 2017...... 0 0 0 0 0 83 13 0 0 0
April 25, 2018...... 0 0 0 0 0 80 8 0 0 0
April 25, 2019...... 0 0 0 0 0 78 4 0 0 0
April 25, 2020...... 0 0 0 0 0 74 0 0 0 0
April 25, 2021...... 0 0 0 0 0 71 0 0 0 0
April 25, 2022...... 0 0 0 0 0 60 0 0 0 0
April 25, 2023...... 0 0 0 0 0 45 0 0 0 0
April 25, 2024...... 0 0 0 0 0 29 0 0 0 0
April 25, 2025...... 0 0 0 0 0 12 0 0 0 0
April 25, 2026...... 0 0 0 0 0 0 0 0 0 0
April 25, 2027...... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**... 5.9 1.5 1.0 0.8 0.7 24.2 13.0 5.0 3.4 2.9
</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 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.
(Table continued from previous page and continued on next page.)
S-44
<PAGE>
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE FOLLOWING
PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS A-9 CLASS A-10
-------------------------------- --------------------------------
DISTRIBUTION DATE 0% 100% 250% 400% 500% 0% 100% 250% 400% 500%
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage........ 100 100 100 100 100 100 100 100 100 100
April 25, 1998...... 100 100 100 100 100 99 97 94 92 90
April 25, 1999...... 100 100 100 100 100 98 92 83 75 70
April 25, 2000...... 100 100 100 100 100 97 86 70 56 48
April 25, 2001...... 100 100 100 100 100 96 80 59 42 33
April 25, 2002...... 100 100 100 100 0 95 74 49 32 23
April 25, 2003...... 100 100 100 0 0 93 68 41 24 16
April 25, 2004...... 100 100 100 0 0 92 63 35 18 11
April 25, 2005...... 100 100 100 0 0 90 58 29 13 8
April 25, 2006...... 100 100 100 0 0 89 54 24 10 5
April 25, 2007...... 100 100 100 0 0 87 50 20 7 4
April 25, 2008...... 100 100 100 0 0 85 46 17 5 2
April 25, 2009...... 100 100 83 0 0 83 42 14 4 2
April 25, 2010...... 100 100 69 0 0 80 38 11 3 1
April 25, 2011...... 100 100 57 0 0 78 35 9 2 1
April 25, 2012...... 100 100 47 0 0 75 32 8 2 1
April 25, 2013...... 100 100 38 0 0 72 29 6 1 *
April 25, 2014...... 100 100 31 0 0 69 26 5 1 *
April 25, 2015...... 100 100 25 0 0 66 23 4 1 *
April 25, 2016...... 100 100 20 0 0 62 20 3 * *
April 25, 2017...... 100 100 16 0 0 58 18 3 * *
April 25, 2018...... 100 100 13 0 0 54 16 2 * *
April 25, 2019...... 100 100 10 0 0 49 13 2 * *
April 25, 2020...... 100 100 8 0 0 44 11 1 * *
April 25, 2021...... 100 100 6 0 0 39 9 1 * *
April 25, 2022...... 100 100 4 0 0 33 8 1 * *
April 25, 2023...... 100 88 3 0 0 27 6 * * *
April 25, 2024...... 100 64 2 0 0 21 4 * * *
April 25, 2025...... 100 40 1 0 0 13 3 * * *
April 25, 2026...... 100 18 * 0 0 6 1 * * *
April 25, 2027...... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years**... 29.5 27.7 15.9 5.5 4.4 20.0 11.5 6.5 4.4 3.7
<CAPTION>
CLASSES M-1, M-2 AND M-3
-------------------------------
DISTRIBUTION DATE 0% 100% 250% 400% 500%
- -------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial
Percentage........ 100 100 100 100 100
April 25, 1998...... 99 99 99 99 99
April 25, 1999...... 98 98 98 98 98
April 25, 2000...... 97 97 97 97 97
April 25, 2001...... 96 96 96 96 96
April 25, 2002...... 95 95 95 95 95
April 25, 2003...... 94 92 89 87 84
April 25, 2004...... 93 89 83 76 72
April 25, 2005...... 91 84 74 64 58
April 25, 2006...... 90 79 64 50 43
April 25, 2007...... 88 73 53 38 29
April 25, 2008...... 86 67 44 28 20
April 25, 2009...... 84 61 37 21 14
April 25, 2010...... 82 56 30 15 9
April 25, 2011...... 79 51 25 11 6
April 25, 2012...... 77 47 21 8 4
April 25, 2013...... 74 42 17 6 3
April 25, 2014...... 71 38 14 4 2
April 25, 2015...... 68 34 11 3 1
April 25, 2016...... 64 30 9 2 1
April 25, 2017...... 60 27 7 2 1
April 25, 2018...... 56 23 6 1 *
April 25, 2019...... 52 20 4 1 *
April 25, 2020...... 47 17 3 1 *
April 25, 2021...... 41 14 3 * *
April 25, 2022...... 36 12 2 * *
April 25, 2023...... 29 9 1 * *
April 25, 2024...... 22 6 1 * *
April 25, 2025...... 15 4 * * *
April 25, 2026...... 7 2 * * *
April 25, 2027...... 0 0 0 0 0
Weighted Average
Life in Years**... 20.5 15.2 11.4 9.6 8.9
</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 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.
(Table continued from previous page.)
S-45
<PAGE>
<PAGE>
VARIABLE STRIP CERTIFICATES AND PRINCIPAL ONLY CERTIFICATE YIELD CONSIDERATIONS
Because the Principal Only Certificates will be purchased at a discount,
the yield on the Principal Only Certificates will be adversely affected by
slower than expected payments of principal (including prepayments, defaults,
liquidations and purchases of Mortgage Loans due to a breach of a representation
and warranty) on the Discount Mortgage Loans.
The yield to maturity on the Variable Strip Certificates will be extremely
sensitive to both the timing of receipt of principal prepayments and the overall
rate of principal prepayments and defaults on the Mortgage Loans, which rate may
fluctuate significantly over time. Investors in the Variable Strip Certificates
should fully consider the risk that a rapid rate of principal prepayments on the
Mortgage Loans could result in the failure of such investors to fully recover
their investments. Because the Pool Strip Rates on the Discount Mortgage Loans
equal 0.00%, the yield to investors on the Variable Strip Certificates will not
be affected by prepayments on the Discount Mortgage Loans.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Variable Strip Certificates and Principal Only Certificates to
various constant rates of prepayment on the Mortgage Loans by projecting the
monthly aggregate payments on the Variable Strip Certificates and Principal Only
Certificates and computing the corresponding pre-tax yields to maturity on a
corporate bond equivalent basis, based on the Structuring Assumptions including
the assumptions regarding the characteristics and performance of the Mortgage
Loans which differ from the actual characteristics and performance thereof and
assuming the aggregate purchase price set forth below. Any differences between
such assumptions and the actual characteristics and performance of the Mortgage
Loans and of the Certificates may result in yields being different from those
shown in such tables. Discrepancies between assumed and actual characteristics
and performance underscore the hypothetical nature of the tables, which are
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE PRINCIPAL ONLY
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF SPA
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE 0% 100% 250% 400% 500%
- ------------------------------------------------------------------ --- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$826,496..................................................... 2.2% 4.2 % 7.8 % 11.4% 13.6%
</TABLE>
PRE-TAX YIELD TO MATURITY OF THE VARIABLE STRIP
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF SPA
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE 0% 100% 250% 400% 500%
- ----------------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$7,294,348.................................................. 27.7% 22.7% 15.0% 7.2 % 1.8 %
</TABLE>
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Variable Strip Certificates and
Principal Only Certificates, as applicable, would cause the discounted present
value of such assumed stream of cash flows to equal the assumed purchase price
listed in the tables. With respect to the Variable Strip Certificates, accrued
interest is included in the assumed purchase price and is used in computing the
yields shown. These yields do not take into account the different interest rates
at which investors may be able to reinvest funds received by them as
distributions on the Variable Strip Certificates or Principal Only Certificates
and thus do not reflect the return on any investment in the Variable Strip
Certificates or Principal Only Certificates when any reinvestment rates other
than the discount rates set forth in the preceding tables are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the Variable
Strip Certificates and Principal Only Certificates is likely to differ from
those shown in the tables above, even if the average prepayment rate on all of
the Mortgage Loans equals the constant percentages of SPA indicated in the
tables above over any given time period or over the entire life of the
Certificates. A lower than anticipated rate of Mortgagor prepayments on the
Discount Mortgage Loans will have a material adverse effect on the yield to
maturity of the Principal Only Certificates. The rate and timing of Mortgagor
prepayments on the Discount
S-46
<PAGE>
<PAGE>
Mortgage Loans may differ from the rate and timing of Mortgagor prepayments on
the Mortgage Pool. In addition, because the Discount Mortgage Loans have Net
Mortgage Rates that are lower than the Net Mortgage Rates of the Non-Discount
Mortgage Loans, and because Mortgage Loans with lower Net Mortgage Rates are
likely to have lower Mortgage Rates, the Discount Mortgage Loans are generally
likely to prepay under most circumstances at a lower rate than the Non-Discount
Mortgage Loans. In addition, holders of the Variable Strip Certificates
generally have rights to relatively larger portions of interest payments on
Mortgage Loans with higher Mortgage Rates; thus, the yield on the Variable Strip
Certificates will be adversely affected to a greater extent than on the other
Offered Certificates if the Mortgage Loans with higher Mortgage Rates prepay
faster than the Mortgage Loans with lower Mortgage Rates. Because Mortgage Loans
having higher Pool Strip Rates generally have higher Mortgage Rates, such
Mortgage Loans are generally more likely to be prepaid under most circumstances
than are Mortgage Loans having lower Pool Strip Rates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Variable Strip Certificates and
Principal Only Certificates will conform to the yields described herein.
Moreover, the various remaining terms to maturity and Mortgage Rates of the
Mortgage Loans could produce slower or faster principal distributions than
indicated in the preceding table at the various constant percentages of SPA
specified, even if the weighted average remaining term to maturity and Mortgage
Rates of the Mortgage Loans are as assumed. Investors are urged to make their
investment decisions based on their determinations as to anticipated rates of
prepayment under a variety of scenarios.
For additional considerations relating to the yield on the Certificates,
see 'Yield Considerations' and 'Maturity and Prepayment Considerations' in the
Prospectus.
CLASS M-2 AND CLASS M-3 CERTIFICATE YIELD CONSIDERATIONS
If the Certificate Principal Balance of the Class B Certificates has been
reduced to zero, the yield to maturity on the Class M-3 Certificates will become
extremely sensitive to losses on the Mortgage Loans (and the timing thereof)
that are covered by Subordination, because the entire amount of such losses will
be allocated to the Class M-3 Certificates. The aggregate initial Certificate
Principal Balance of the Class B Certificates is equal to approximately 1.00% of
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date. If
the Certificate Principal Balances of the Class B Certificates and Class M-3
Certificates have been reduced to zero, the yield to maturity on the Class M-2
Certificates will become extremely sensitive to losses on the Mortgage Loans
(and the timing thereof) that are covered by Subordination, because the entire
amount of such losses will be allocated to the Class M-2 Certificates. The
aggregate initial Certificate Principal Balance of the Class M-3 Certificates
and Class B Certificates is equal to approximately 2.00% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date.
Defaults on mortgage loans may be measured relative to a default standard
or model. The model used in this Prospectus Supplement, the standard default
assumption ('SDA'), represents an assumed rate of default each month relative to
the then outstanding performing principal balance of a pool of new mortgage
loans. A default assumption of 100% SDA assumes constant default rates of 0.02%
per annum of the then outstanding principal balance of such mortgage loans in
the first month of the life of the mortgage loans and an additional 0.02% per
annum in each month thereafter until the 30th month. Beginning in the 30th month
and in each month thereafter through the 60th month of the life of the mortgage
loans, 100% SDA assumes a constant default rate of 0.60% per annum each month.
Beginning in the 61st month and in each month thereafter through the 120th month
of the life of the mortgage loans, 100% SDA assumes that the constant default
rate declines each month by 0.0095% per annum, and that the constant default
rate remains at 0.03% per annum in each month after the 120th month. For the
purposes of the tables below, it is assumed that there is no delay between the
default and liquidation of the mortgage loans. As used in the table below, '0%
SDA' assumes default rates equal to 0% of SDA (no defaults). Correspondingly,
'100% SDA' assumes default rates equal to 100% of SDA, and so forth. SDA does
not purport to be a historical description of default experience or a prediction
of the anticipated rate of default of any pool of mortgage loans, including the
Mortgage Loans.
The following tables indicate the sensitivity of the yield to maturity on
the Class M-2 Certificates and Class M-3 Certificates to various rates of
prepayment and varying levels of aggregate Realized Losses by projecting the
monthly aggregate cash flows on the Class M-2 Certificates and Class M-3
Certificates and computing the corresponding pre-tax yield to maturity on a
corporate bond equivalent basis. The tables are based on the Structuring
Assumptions (other than assumption (iv)), including the assumptions regarding
the
S-47
<PAGE>
<PAGE>
characteristics and performance of the Mortgage Loans, which differ from the
actual characteristics and performance thereof, and assuming further that (i)
defaults and final liquidations on the Mortgage Loans occur on the last day of
each month at the respective SDA percentages set forth in the tables, (ii) each
liquidation results in a Realized Loss allocable to principal equal to the
percentage indicated (the 'LOSS SEVERITY PERCENTAGE') times the principal
balances of the Mortgage Loans assumed to be liquidated, (iii) there are no
delinquencies on the Mortgage Loans, and principal payments on the Mortgage
Loans (other than those on Mortgage Loans assumed to be liquidated) will be
timely received together with prepayments, if any, at the respective constant
percentages of SPA set forth in the table before giving effect to defaults in
such periods, (iv) there are no Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses, (v) clauses (a)(i),
(b)(i) and (b)(ii) in the definition of 'Senior Accelerated Distribution
Percentage' are not applicable and (vi) the purchase prices of the Class M-2
Certificates and Class M-3 Certificates will be $4,825,301 and $4,787,702,
respectively, including accrued interest. Investors should also consider the
possibility that aggregate losses incurred may not in fact be materially reduced
by higher prepayment speeds because mortgage loans that would otherwise
ultimately default and be liquidated may be less likely to be prepaid. In
addition, investors should be aware that the following tables are based upon the
assumption that the Class M-2 Certificates and Class M-3 Certificates are priced
at a discount. Since prepayments will occur at par, the yield on the Class M-2
Certificates and Class M-3 Certificates may increase due to such prepayments,
even if losses occur. Any differences between such assumptions and the actual
characteristics and performance of the Mortgage Loans and of the Certificates
may result in yields different from those shown in such tables. Discrepancies
between assumed and actual characteristics and performance underscore the
hypothetical nature of the tables, which are provided only to give a general
sense of the sensitivity of yields in varying Realized Loss and prepayment
scenarios.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS M-2 CERTIFICATES AND CLASS M-3 CERTIFICATES
TO PREPAYMENTS AND REALIZED LOSSES
CLASS M-2 CERTIFICATES
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
PERCENTAGE LOSS SEVERITY ------------------------------------------------
OF SDA PERCENTAGE 0% 100% 250% 400% 500%
- ------------------------------------ ------------- ------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
0%............................... N/A 8.02% 8.09% 8.17% 8.22% 8.25%
100%............................... 30% 8.02% 8.11% 8.17% 8.22% 8.25%
200%............................... 30% 6.01% 8.04% 8.18% 8.22% 8.25%
300%............................... 30% (17.35%) 0.38% 7.69% 8.23% 8.25%
400%............................... 30% (29.98%) (24.33%) 1.11% 7.49% 8.23%
</TABLE>
CLASS M-3 CERTIFICATES
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
PERCENTAGE LOSS SEVERITY -----------------------------------------------------
OF SDA PERCENTAGE 0% 100% 250% 400% 500%
- --------------------------------- ------------- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
0%............................ N/A 8.11% 8.19% 8.28% 8.35% 8.38%
100%............................ 30% 7.07% 8.15% 8.29% 8.35% 8.38%
200%............................ 30% (21.34%) (3.26%) 4.47% 7.77% 8.39%
300%............................ 30% (39.70%) (34.96%) (23.81%) 0.07% 4.13%
400%............................ 30% (53.80%) (50.06%) (42.89%) (31.14%) (5.97%)
</TABLE>
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Class M-2 Certificates or Class
M-3 Certificates, as applicable, would cause the discounted present value of
such assumed stream of cash flows to equal the assumed purchase price referred
to above, and converting such rate to a semi-annual corporate bond equivalent
yield. Accrued interest, if any, is included in the assumed purchase price and
is used in computing the corporate bond equivalent yields shown. These yields do
not take into account the different interest rates at which investors may be
able to reinvest funds received by them as distributions on the Class M-2
Certificates or Class M-3 Certificates, and thus do not reflect the return on
any investment in the Class M-2
S-48
<PAGE>
<PAGE>
Certificates or Class M-3 Certificates when any reinvestment rates other than
the discount rates set forth in the preceding tables are considered.
The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Certificates in the aggregate under each of the
scenarios in the preceding tables, expressed as a percentage of the aggregate
outstanding principal balance of the Mortgage Loans as of the Cut-off Date:
AGGREGATE REALIZED LOSSES
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
PERCENTAGE LOSS SEVERITY ------------------------------------------------
OF SDA PERCENTAGE 0% 100% 250% 400% 500%
- --------------------------------------- ------------- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
100%.................................. 30% 1.17% 0.93% 0.69% 0.52% 0.44%
200%.................................. 30% 2.31% 1.83% 1.35% 1.04% 0.88%
300%.................................. 30% 3.40% 2.69% 2.00% 1.54% 1.31%
400%.................................. 30% 4.45% 3.54% 2.63% 2.03% 1.73%
</TABLE>
Notwithstanding the assumed Percentages of SDA, Loss Severity Percentages
and prepayment rates reflected in the preceding table, it is highly unlikely
that the Mortgage Loans will be prepaid or that Realized Losses will be incurred
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the pre-tax yields to maturity on
the Class M-2 Certificates and Class M-3 Certificates are likely to differ from
those shown in the tables. There can be no assurance that the Mortgage Loans
will prepay at any particular rate or that Realized Losses will be incurred at
any particular level or that the yield on the Class M-2 Certificates or Class
M-3 Certificates will conform to the yields described herein. Moreover, the
various remaining terms to maturity of the Mortgage Loans could produce slower
or faster principal distributions than indicated in the preceding tables at the
various constant percentages of SPA specified, even if the weighted average
remaining term to maturity of the Mortgage Loans is as assumed.
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment and Realized Losses under a
variety of scenarios. Investors in the Class M-2 Certificates and particularly
in the Class M-3 Certificates should fully consider the risk that Realized
Losses on the Mortgage Loans could result in the failure of such investors to
fully recover their investments. For additional considerations relating to the
yield on the Certificates, see 'Yield Considerations' and 'Maturity and
Prepayment Considerations' in the Prospectus.
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
The Residual Certificateholders' after-tax rate of return on their Residual
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their Residual
Certificates during the early years of the Trust Fund's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the Mortgage Pool.
The Residual Certificateholders should consult their tax advisors as to the
effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See 'Certain Federal Income Tax
Consequences' herein and in the Prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement dated as of April 1, 1997, among the Company, the Master Servicer, and
Bankers Trust Company, as Trustee. Reference is made to the
S-49
<PAGE>
<PAGE>
Prospectus for important information in addition to that set forth herein
regarding the terms and conditions of the Pooling and Servicing Agreement and
the Offered Certificates. The Trustee will appoint Norwest Bank Minnesota,
National Association to serve as Custodian in connection with the Certificates.
The Offered Certificates will be transferable and exchangeable at the corporate
trust office of the Trustee, which will serve as Certificate Registrar and
Paying Agent. The Company will provide a prospective or actual Certificateholder
without charge, on written request, a copy (without exhibits) of the Pooling and
Servicing Agreement. Requests should be addressed to the President, Residential
Funding Mortgage Securities I, Inc., 8400 Normandale Lake Boulevard, Suite 600,
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
Group, Inc. and an affiliate of the Company, will act as master servicer for the
Certificates pursuant to the Pooling and Servicing Agreement. For a general
description of Residential Funding and its activities, see 'Residential Funding
Corporation' in the Prospectus.
The following tables set forth certain information concerning the
delinquency experience (including pending foreclosures) on one- to four-family
residential mortgage loans that generally complied with Residential Funding's
published loan purchase criteria at the time of purchase by Residential Funding
and were being master serviced by Residential Funding on December 31, 1994,
December 31, 1995 and December 31, 1996. The tables set forth information for
the total mortgage loan portfolio and for mortgage loans underwritten under a
reduced loan documentation program described under 'Mortgage Loan
Program -- Underwriting Standards' in the Prospectus. The indicated periods of
delinquency are based 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, 1994 AT DECEMBER 31, 1995 AT DECEMBER 31, 1996
--------------------- ---------------------- ----------------------
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................ 90,308 $23,562,318 112,237 $26,941,302 146,508 $33,114,316
Period of Delinquency
31 to 59 days.................. 1,373 343,184 2,805 514,373 3,510 690,823
60 to 89 days.................. 431 100,943 835 118,095 658 131,079
90 days or more(1)............. 357 94,041 383 67,761 339 73,888
Foreclosures Pending................ 763 217,244 1,100 279,192 1,307 310,246
------ ----------- ------- ----------- ------- -----------
Total Delinquent Loans.............. 2,924 $ 755,412 5,123 $ 979,421 5,814 $ 1,206,036
------ ----------- ------- ----------- ------- -----------
------ ----------- ------- ----------- ------- -----------
Percent of Loan Portfolio........... 3.238% 3.206% 4.564% 3.635% 3.968% 3.642%
</TABLE>
- ------------
(1) Does not include foreclosures pending.
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<PAGE>
<PAGE>
TOTAL REDUCED LOAN DOCUMENTATION LOAN PORTFOLIO DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AT DECEMBER 31, 1994 AT DECEMBER 31, 1995 AT DECEMBER 31, 1996
-------------------- -------------------- --------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF OF AMOUNT OF OF AMOUNT OF
LOANS LOANS LOANS LOANS LOANS LOANS
------ ---------- ------ ---------- ------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Reduced Loan Documentation
Loan Portfolio....................... 23,962 $5,192,295 28,892 $5,656,221 36,853 $6,743,555
Period of Delinquency
31 to 59 days........................ 442 104,501 960 150,607 868 157,926
60 to 89 days........................ 107 29,184 437 37,083 188 34,898
90 days or more(1)................... 123 34,527 132 21,165 85 22,521
Foreclosures Pending...................... 306 94,399 379 101,224 437 118,154
------ ---------- ------ ---------- ------ ----------
Total Delinquent Loans.................... 978 $ 262,611 1,908 $ 310,079 1,578 $ 333,498
------ ---------- ------ ---------- ------ ----------
------ ---------- ------ ---------- ------ ----------
Percent of Reduced Loan Documentation Loan
Portfolio............................... 4.081% 5.058% 6.604% 5.482% 4.282% 4.945%
</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, 1994, December 31, 1995 and December 31, 1996 with respect to the mortgage
loans referred to above. For purposes of the following tables, Average Portfolio
Balance for the period indicated is based on end of month balances divided by
the number of months in the period indicated, the Foreclosed Loans Ratio is
equal to the aggregate principal balance of Foreclosed Loans divided by the
Total Loan Portfolio at the end of the indicated period, and the Gross Loss
Ratios and Net Loss Ratios are computed by dividing the Gross Loss or Net Loss
respectively during the period indicated by the Average Portfolio Balance during
such period.
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 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
------------ ------------ ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total Loan Portfolio........................................... $ 23,562,318 $ 26,941,302 $33,114,316
Average Portfolio Balance...................................... $ 23,080,841 $ 24,788,360 $22,555,827
Foreclosed Loans(1)............................................ $ 149,334 $ 121,254 $ 104,480
Liquidated Foreclosed Loans(2)................................. $ 323,801 $ 253,774 $ 301,063
Foreclosed Loans Ratio......................................... 0.634% 0.450% .316%
Gross Loss(3).................................................. $ 98,625 $ 84,755 $ 93,738
Gross Loss Ratio............................................... 0.427% 0.342% .416%
Covered Loss(4)................................................ $ 84,869 $ 54,502 $ 61,479
Net Loss(5).................................................... $ 13,756 $ 30,253 $ 32,259
Net Loss Ratio................................................. 0.060% 0.122% .143%
Excess Recovery(6)............................................. $ 221 $ 515 $ 471
</TABLE>
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<PAGE>
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,
1994 1995 1996
------------ ------------ ---------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total Reduced Loan Documentation
Loan Portfolio......................................... $5,192,295 $5,656,221 $ 6,743,555
Average Portfolio Balance................................... $5,265,539 $5,313,835 $ 4,613,898
Foreclosed Loans(1)......................................... $ 61,337 $ 38,036 $ 30,288
Liquidated Foreclosed Loans(2).............................. $ 142,353 $ 97,935 $ 87,458
Foreclosed Loans Ratio...................................... 1.181% 0.672% .449%
Gross Loss(3)............................................... $ 48,896 $ 36,696 $ 32,984
Gross Loss Ratio............................................ 0.929% 0.691% .715%
Covered Loss(4)............................................. $ 42,715 $ 22,345 $ 21,725
Net Loss(5)................................................. $ 6,181 $ 14,351 $ 11,259
Net Loss Ratio.............................................. 0.117% 0.270% .244%
Excess Recovery(6).......................................... $ 89 $ 217 $ 220
</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.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicing Fees for each Mortgage Loan are payable out of the interest
payments on such Mortgage Loan. The Servicing Fees in respect of each Mortgage
Loan will be at least 0.28% per annum and not more than 0.33% per annum of the
outstanding principal balance of such Mortgage Loan, with a weighted average
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Servicing Fee of approximately 0.2942% per annum. The Servicing Fees consist of
(a) servicing compensation payable to the Master Servicer in respect of its
master servicing activities and (b) subservicing and other related compensation
payable to the Subservicer (including such compensation paid to the Master
Servicer as the direct servicer of a Mortgage Loan for which there is no
Subservicer). The primary compensation to be paid to the Master Servicer in
respect of its master servicing activities will be 0.03% per annum of the
outstanding principal balance of each Mortgage Loan, except that with respect to
approximately 28.4% of the Mortgage Loans (by aggregate principal balance as of
the Cut-off Date), such amount will be 0.08% per annum. As described in the
Prospectus, a Subservicer is entitled to servicing compensation in a minimum
amount equal to 0.250% per annum of the outstanding principal balance of each
Mortgage Loan serviced by it. The Master Servicer is obligated to pay certain
ongoing expenses associated with the Trust Fund and incurred by the Master
Servicer in connection with its responsibilities under the Pooling and Servicing
Agreement. See 'The Pooling and Servicing Agreement -- Servicing and Other
Compensation and Payment of Expenses' in the Prospectus for information
regarding other possible compensation to the Master Servicer and Subservicers
and for information regarding expenses payable by the Master Servicer.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by holders of
Certificates evidencing a specified percentage of all undivided interests in the
Trust Fund may be taken by holders of Certificates entitled in the aggregate to
such percentage of the Voting Rights. 98% of all Voting Rights will be allocated
among all holders of the Certificates (other than the Variable Strip
Certificates and Residual Certificates) in proportion to their then outstanding
Certificate Principal Balances, 1% of all Voting Rights will be allocated among
the holders of the Variable Strip Certificates and 1% of all Voting Rights will
be allocated among the 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.
Notwithstanding the foregoing, so long as there does not exist a failure by
the Insurer to make a required payment under the Policy, the Insurer shall have
the right to exercise all rights of the holders of the Insured Certificates
under the Pooling and Servicing Agreement without any consent of such holders,
and such holders may exercise such rights only with the prior written consent of
the Insurer except as provided in 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 Offered Certificates are
described in 'The Pooling and Servicing Agreement -- Termination; Retirement of
Certificates' in the Prospectus. The Master Servicer or the Company will have
the option, on any Distribution Date on which the aggregate Stated Principal
Balance of the Mortgage Loans is less than 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date, either (i) to purchase all
remaining Mortgage Loans and other assets in the Trust Fund, thereby effecting
early retirement of the Offered Certificates or (ii) to purchase, in whole but
not in part, the Certificates. Any such purchase of Mortgage Loans and other
assets of the Trust Fund shall be made at a price equal to the sum of (a) 100%
of the unpaid principal balance of each Mortgage Loan (or the fair market value
of the related underlying Mortgaged Properties with respect to defaulted
Mortgage Loans as to which title to such Mortgaged Properties has been acquired
if such fair market value is less than such unpaid principal balance) (net of
any unreimbursed Advance attributable to principal) as of the date of repurchase
plus (b) accrued interest thereon at the Net Mortgage Rate to, but not
including, the first day of the month in which such repurchase price is
distributed. Distributions on the Certificates in respect of any such optional
termination will be paid, first, to the Senior Certificates, second, to the
Class M Certificates in the order of their payment priority and, third, to the
Class B Certificates. The proceeds of any such distribution may not be
sufficient to distribute the full amount to each class of Certificates if the
purchase price is based in part on the fair market value of the underlying
Mortgaged Property and such fair market value is less than 100% of the unpaid
principal balance of the related Mortgage Loan. Any such purchase of the
Certificates will be made at a price equal to 100% of the Certificate Principal
Balance thereof plus (except with respect to the Principal Only Certificates)
the sum of one month's interest thereon at the then-applicable Pass-Through Rate
(or, with respect to the Variable Strip Certificates, one month's interest on
the
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<PAGE>
related Notional Amount thereof) and any previously unpaid Accrued Certificate
Interest. Upon the purchase of such Certificates or at any time thereafter, at
the option of the Master Servicer or the Company, the Mortgage Loans may be
sold, thereby effecting a retirement of the Certificates and the termination of
the Trust Fund, or the Certificates so purchased may be held or resold by the
Master Servicer or the Company.
Upon presentation and surrender of the Offered Certificates in connection
with the termination of the Trust Fund or a purchase of Certificates under the
circumstances described above, the holders of the Offered Certificates will
receive an amount equal to the Certificate Principal Balance of such class plus
one month's interest thereon at the applicable Pass-Through Rate (or, with
respect to the Variable Strip Certificates, one month's interest on the related
Notional Amount thereof), plus any previously unpaid Accrued Certificate
Interest (reduced, as described above, in the case of the termination of the
Trust Fund resulting from a purchase of all the assets of the Trust Fund).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, 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 REMIC and each class of Senior
Certificates (other than the Residual Certificates), the Class M Certificates
and the Class B Certificates will represent ownership of 'regular interests' in
the REMIC and will generally be treated as debt instruments issued by the REMIC.
See 'Certain Federal Income Tax Consequences -- REMICs' in the Prospectus.
For federal income tax reporting purposes, the Class A-2, Class A-9, Class
A-10, Class A-11, Class M-2 and Class M-3 Certificates will and the Class A-3
Certificates may be treated as having been issued with original issue discount.
All other classes of Offered Certificates will be treated as not having been
issued with original issue discount for federal income tax reporting purposes.
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 250% SPA.
No representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See 'Certain Federal Income Tax Consequences -- General' and
' -- REMICs -- Taxation of Owners of REMIC Regular Certificates -- Original
Issue Discount' in the Prospectus.
Purchasers of the Variable Strip 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 applicable to, prepayable securities such as the Variable
Strip 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 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 the Variable Strip 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 Variable Strip Certificates should be
treated as issued with original issue discount or that the Variable Strip
Certificates should be governed by some other method not yet set forth in
regulations. Prospective purchasers of the Variable Strip Certificates are
advised to consult their tax advisors concerning the tax treatment of such
Certificates.
The Master Servicer believes that a reasonable application of the
principles of the OID Regulations to the Variable Strip Certificates, generally
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.
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If the method of computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to any
holder of a Variable Strip Certificate, the amount of original issue discount
allocable to such period would be zero, and such Certificateholder will be
permitted to offset such amounts only against the respective future income (if
any) from the related Certificate. Although uncertain, a holder of a Variable
Strip Certificate may be permitted to deduct a loss to the extent that his or
her respective remaining basis in such Certificate exceeds the maximum amount of
future payments to which such Certificateholder is entitled, assuming no further
prepayments of the Mortgage Loans. Although the matter is not free from doubt,
any such loss might be treated as a capital loss.
In certain circumstances OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
Certificate may be able to select a method for recognizing original issue
discount that differs from that used by the Master Servicer in preparing reports
to the Certificateholders and the IRS.
Certain classes of the Offered Certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
such a class of Certificates will be treated as holding a certificate with
amortizable bond premium will depend on such Certificateholder's purchase price
and the distributions remaining to be made on such Certificate at the time of
its acquisition by such Certificateholder. Holders of such classes of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See 'Certain Federal Income Tax
Consequences -- REMICs -- Taxation of Owners of REMIC Regular Certificates' and
' -- Premium' in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and 'real estate assets' under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as 'interest on obligations secured by mortgages on real property' under
Section 856(c)(3)(B) of the Code generally to the extent that such Offered
Certificates are treated as 'real estate assets' under Section 856(c)(5)(A) of
the Code. Moreover, the Offered Certificates (other than the Residual
Certificates) will be 'qualified mortgages' within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein. However, prospective
investors in Offered Certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Code should note that, notwithstanding
such treatment, any repurchase of such a Certificate pursuant to the right of
the Master Servicer or the Company to repurchase such Offered Certificates may
adversely affect any REMIC that holds such Offered Certificates if such
repurchase is made under circumstances giving rise to a Prohibited Transaction
Tax. Recently enacted legislation repealed, effective for taxable years
beginning after December 31, 1995, the provisions of Section 593(d) of the Code
allowing the reserve method of accounting for bad debts. See 'The Pooling and
Servicing Agreement -- Termination' herein and 'Certain Federal Income Tax
Consequences -- REMICs -- Characterization of Investments in REMIC Certificates'
in the Prospectus.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see 'Certain Federal Income Tax
Consequences -- REMICs' in the Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES
The IRS has issued REMIC Regulations under the provisions of the Code that
significantly affect holders of Residual Certificates. The REMIC Regulations
impose certain general restrictions on the transfer or acquisition of certain
residual interests, including the Residual Certificates. The Pooling and
Servicing Agreement includes certain other provisions regarding the transfer of
Residual Certificates, including (i) the requirement that any transferee of a
Residual Certificate provide an affidavit representing that such transferee (a)
is not a 'disqualified organization,' (b) is not acquiring the Residual
Certificate on behalf of a 'disqualified organization' and (c) will maintain
such status and will obtain a similar affidavit from any person to whom such
transferee shall subsequently transfer a Residual Certificate, (ii) a provision
that any transfer of a Residual Certificate to a 'disqualified person' shall be
null and void and (iii) a grant to the Master Servicer of the right, without
notice to the holder or any prior holder, to sell to a purchaser of its choice
any Residual Certificate that shall become owned by a 'disqualified
organization' despite (i) and (ii) above. In addition, pursuant to the Pooling
and Servicing Agreement, the Residual Certificates may not be transferred to
non-United States persons.
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The REMIC Regulations also provide that a transfer to a 'United States
person' (as defined below) 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, unless
'no significant purpose of the transfer was to impede the assessment or
collection of tax.' Based on the REMIC Regulations, the Residual Certificates
may constitute noneconomic residual interests during some or all of their terms
for purposes of the REMIC Regulations and, accordingly, unless no 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. 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 whose income is subject to United
States federal income tax regardless of its source, or a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. See 'Certain
Federal Income Tax Consequences -- REMICs -- Taxation of Owners of REMIC
Residual Certificates -- Noneconomic REMIC Residual Certificates' in the
Prospectus.
Recently enacted legislation made certain changes to the treatment of
residual interests in REMICs. In particular, such legislation: (i) repealed the
special rules for residual interests having 'significant value' held by thrift
institutions, and (ii) provides that (A) excess inclusions will not be permitted
to be offset by the alternative tax net operating loss deduction and (B)
alternative minimum taxable income may not be less than the taxpayer's excess
inclusions. The last rule has the effect of preventing nonrefundable tax credits
from reducing the taxpayer's income tax to an amount lower than the tentative
minimum tax on excess inclusions.
The Residual Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
REMIC that significantly exceeds the amount of cash distributions received by
such Residual Certificateholders from the REMIC 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's term as a result of their ownership of the 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 if 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.
An individual, trust or estate that holds (whether directly or indirectly
through certain pass-through entities) a Residual Certificate, may have
significant additional gross income with respect to, but may be subject to
limitations on the deductibility of, servicing and trustee's fees and other
administrative expenses properly allocable to the REMIC in computing such
Certificateholder's regular tax liability and will not be able to deduct such
fees or expenses to any extent in computing such Certificateholder's alternative
minimum tax liability. Such expenses will be allocated for federal income tax
information reporting purposes entirely to the Residual Certificates. See
'Certain Federal Income Tax Consequences -- REMICs -- Taxation of Owners of
REMIC Residual Certificates -- Possible Pass-Through of Miscellaneous Itemized
Deductions' in the Prospectus.
On December 24, 1996, the IRS released final 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 Residual Certificate issued after January 4, 1995 is not treated
as a security and thus may not be marked to market. Prospective purchasers of a
Residual Certificate should consult their tax advisors regarding the possible
application of the mark-to-market requirement to Residual Certificates.
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Residential Funding will be designated as the 'tax matters person' with
respect to the Trust Fund as defined in the REMIC Provisions (as defined in the
Prospectus), and in connection therewith will be required to hold not less than
0.01% of the Residual Certificates.
Purchasers of the Residual Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in such
Residual Certificates.
For further information regarding the federal income tax consequences of
investing in the Residual Certificates, see 'Certain Yield and Prepayment
Considerations -- Additional Yield Considerations Applicable Solely to the
Residual Certificates' herein and 'Certain Federal Income Tax
Consequences -- REMICs -- Taxation of Owners of REMIC Residual Certificates' in
the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting Agreement,
dated April 21, 1997 (the 'UNDERWRITING AGREEMENT'), the Underwriter has agreed
to purchase and the Company has agreed to sell to the Underwriter the
Underwritten Certificates, except that a de minimis portion of the Residual
Certificates will be retained by Residential Funding, and such portion is not
offered hereby. It is expected that delivery of the Underwritten Certificates
(other than the Residual Certificates) will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, and that the delivery of
the Residual Certificates will be made at the office of the Underwriter, New
York, New York on or about April 25, 1997, against payment therefor in
immediately available funds. Proceeds to the Company from the sale of the
Underwritten Certificates, before deducting expenses payable by the Company,
will be approximately 99.35% of the aggregate Certificate Principal Balance of
the Underwritten Certificates plus accrued interest thereon from the Cut-off
Date.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Underwritten Certificates is subject to,
among other things, the receipt of certain legal opinions and to the conditions,
among others, that no stop order suspending the effectiveness of the Company's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Underwritten Certificates (other than the Insured
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. The Underwriter may effect such transactions by selling the
Underwritten Certificates (other than the Insured Certificates) to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriter for whom they act as
agent. In connection with the sale of the Underwritten Certificates (other than
the Insured 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 Underwritten Certificates (other than the Insured
Certificates) may be deemed to be underwriters and any profit on the resale of
the Underwritten Certificates (other than the Insured Certificates) positioned
by them may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933.
The Underwriter intends to sell a portion of the Insured Certificates to
EDJ. The Insured Certificates may be offered by the Underwriter or EDJ from time
to time to the public in one or more negotiated transactions, or otherwise, at
varying prices to be determined at the time of sale. The Underwriter may effect
such transactions by selling a portion of the Insured Certificates to or through
EDJ or other dealers, and EDJ or such other dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter. EDJ may effect such transactions by selling a portion of the
Insured Certificates to or through other dealers, and such other dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from EDJ. In connection with the sale of the Insured Certificates,
the Underwriter may be deemed to have received compensation from the Company in
the form of underwriting compensation. The Underwriter, EDJ and any other
dealers that participate with the Underwriter or EDJ in the distribution of the
Insured Certificate may be deemed to be underwriters and any profit on the
resale of the Insured 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 that under limited circumstances the Underwriter will indemnify
the Company, against certain civil liabilities under the Securities Act of 1933,
as amended, or contribute to payments required to be made in respect thereof.
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The Variable Strip Certificates, Principal Only Certificates and Class M
Certificates may be offered by the Company from time to time directly or through
an underwriter or agent in one or more negotiated transactions, or otherwise, at
varying prices to be determined at the time of sale. Proceeds to the Company
from any sale of the Variable Strip Certificates, Principal Only Certificates or
Class M Certificates will equal the purchase price paid by the purchaser
thereof, net of any expenses payable by the Company and any compensation payable
to any such underwriter or agent.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
'Description of the Certificates -- Reports to Certificateholders,' which will
include information as to the outstanding principal balance of the Offered
Certificates. There can be no assurance that any additional information
regarding the Offered Certificates will be available through any other source.
In addition, the Company is not aware of any source through which price
information about the Offered Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Offered
Certificates may adversely affect the liquidity of the Offered Certificates,
even if a secondary market for the Offered Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon for
the Company by Thacher Proffitt & Wood, New York, New York and for the
Underwriter by Brown & Wood LLP, New York, New York.
RATINGS
It is a condition of the issuance of the Senior Certificates (other than
the Variable Strip Certificates and Principal Only Certificates), Class M-1
Certificates and Class M-2 Certificates that they be rated 'AAA', 'AA' and 'A',
respectively, by each of Standard & Poor's and Fitch. It is a condition of the
issuance of the Variable Strip Certificates and Principal Only Certificates that
they be rated 'AAAr' by Standard & Poor's and 'AAA' by Fitch. It is a condition
of the issuance of the Class M-3 Certificates that they be rated not lower than
'BBB' by Fitch.
Standard & Poor's ratings on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under the
Pooling and Servicing Agreement. Standard & Poor's ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. Standard & Poor's rating on the Certificates does not, however,
constitute a statement regarding frequency of prepayments on the mortgages. See
'Certain Yield and Prepayment Considerations' herein. The 'r' of the 'AAAr'
rating of the Variable Strip Certificates and Principal Only Certificates by
Standard & Poor's is attached to highlight derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an 'r' symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The ratings assigned by Fitch to mortgage pass-through certificates also
address the likelihood of the receipt by Certificateholders of all distributions
to which such Certificateholders are entitled. The rating process addresses the
structural and legal aspects associated with the Certificates, including the
nature of the underlying mortgage loans. The ratings assigned to mortgage
pass-through certificates do not represent any assessment of the likelihood or
rate of Mortgagor prepayments. The ratings do not address the possibility that
Certificateholders might suffer a lower than anticipated yield.
The Company has not requested a rating on the Senior Certificates, Class
M-1 Certificates and Class M-2 Certificates by any rating agency other than
Standard & Poor's and Fitch or on the Class M-3 Certificates by any rating
agency other than Fitch. However, there can be no assurance as to whether any
other rating agency will rate the Senior Certificates or Class M Certificates,
or, if it does, what rating would be assigned by any such other rating agency. A
rating on the Certificates by another rating agency, if assigned at all, may be
lower than
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<PAGE>
the ratings assigned to the Senior Certificates, Class M-1 Certificates and
Class M-2 Certificates by Standard & Poor's and Fitch and the Class M-3
Certificates by Fitch.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. The ratings of the Variable Strip Certificates do not
address the possibility that the holders of such Certificates may fail to fully
recover their initial investments. In the event that the ratings initially
assigned to the Offered Certificates are subsequently lowered for any reason, no
person or entity is obligated to provide any additional support or credit
enhancement with respect to the Offered Certificates.
LEGAL INVESTMENT
The Senior Certificates and Class M-1 Certificates will constitute
'mortgage related securities' for purposes of SMMEA so long as they are rated in
at least the second highest rating category by one of the Rating Agencies, and,
as such, are legal investments for certain entities to the extent provided in
SMMEA. SMMEA provides, however, that states could override its provisions on
legal investment and restrict or condition investment in mortgage related
securities by taking statutory action on or prior to October 3, 1991. Certain
states have enacted legislation which overrides the preemption provisions of
SMMEA. The Class M-2 Certificates and Class M-3 Certificates will not constitute
'mortgage related securities' for purposes of SMMEA.
The Company makes no representations as to the proper characterization of
any class of the Offered Certificates for legal investment or other purposes, or
as to the ability of particular investors to purchase any class of the Offered
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Offered Certificates.
Accordingly, all institutions whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent any class of the Offered Certificates constitutes a
legal investment or is subject to investment, capital or other restrictions.
See 'Legal Investment Matters' in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a 'PLAN'), any insurance company
(whether through its general or separate accounts) or any other person investing
Plan Assets of any Plan, as defined under 'ERISA Considerations -- Plan Asset
Regulations' in the Prospectus, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Offered Certificates (other than the
Class M Certificates or Residual Certificates) by or on behalf of, or with Plan
Assets of, a Plan may qualify for exemptive relief under the Exemption, as
described under 'ERISA Considerations -- Prohibited Transaction Exemptions' in
the Prospectus. However, the Exemption contains a number of conditions which
must be met for the Exemption to apply, 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.
The Small Business Job Protection Act of 1996 added a new Section 401(c) to
ERISA, which provides certain exemptive relief from the provisions of Part 4 of
Title I of ERISA and Section 4975 of the Code, including the prohibited
transaction restrictions imposed by ERISA and the related excise taxes imposed
by the Code, for transactions involving an insurance company general account.
Pursuant to Section 401(c) of ERISA, the Department of Labor ('DOL') is required
to issue final regulations ('401(C) REGULATIONS') no later than December 31,
1997 which are to provide guidance for purposes of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan Assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an insurance
company general account constitute Plan Assets, unless (i) as otherwise provided
by the
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<PAGE>
Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan Assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan Assets of any Plan invested in
such separate account. Insurance Companies contemplating the investment of
general account assets in the Offered Certificates should consult with their
legal advisors with respect to the applicability of Section 401(c) of ERISA,
including the general account's ability to continue to hold the Offered
Certificates after the date which is 18 months after the date the 401(c)
Regulations become final.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not likely apply to the purchase, sale
or holding of the Class M Certificates (due to the subordinate nature thereof)
or the Residual Certificates, transfers of such certificates to a Plan, to a
trustee or other person acting on behalf of any Plan, or to any other person
using the assets of any Plan to effect such acquisition will not be registered
by the Trustee unless the transferee provides the Company, the Trustee and the
Master Servicer with an opinion of counsel satisfactory to the Company, the
Trustee and the Master Servicer, which opinion will not be at the expense of the
Company, the Trustee or the Master Servicer, that the purchase of such
certificates by or on behalf of such Plan is permissible under applicable law,
will not constitute or result on a non-exempt prohibited transaction under ERISA
or Section 4975 of the Code and will not subject the Company, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the Pooling
and Servicing Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Offered
Certificates by or on behalf of such Plan is permissible under applicable law,
will not constitute or result in a non-exempt prohibited transaction under ERISA
or Section 4975 of the Code, will not subject the Company, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the Pooling
and Servicing Agreement, and the following statements are correct: (i) the
transferee is an insurance company and the source of funds used to purchase such
Offered Certificates is an 'insurance company general account' (as such term is
defined in PTCE 95-60), (ii) the conditions set forth in Sections I and III of
PTCE 95-60 have been satisfied and (iii) there is no Plan with respect to which
the amount of such general account's reserves and liabilities for contracts held
by or on behalf of such Plan and all other Plans maintained by the same employer
(or any 'affiliate' thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Offered Certificates.
Any fiduciary or other investor of Plan Assets that proposes to acquire or
hold the Offered 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 the ERISA and the Code to the proposed investment. See 'ERISA
Considerations' in Prospectus.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1996 and 1995 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, 1996, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
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<PAGE>
MORTGAGE PASS-THROUGH CERTIFICATES
RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
DEPOSITOR
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, excluding any interest retained by
Residential Funding Mortgage Securities I, Inc. (the "COMPANY") or any other
entity specified in the related Prospectus Supplement, in a trust fund
consisting primarily of a segregated 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." See "Index of Principal Definitions" for the meanings of
capitalized terms and acronyms.
The Mortgage Loans and certain other assets described herein under "The
Mortgage Pools" 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 and the Excess Spread, if any, pursuant to a Pooling
and Servicing Agreement as described herein under "The Mortgage Pools." 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. See
"Description of the Certificates--Distributions." 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 LIMITED REPRESENTATIONS AND WARRANTIES MADE BY THE
COMPANY OR AS OTHERWISE DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT. THE
MASTER SERVICER (THE "MASTER SERVICER") FOR EACH SERIES OF CERTIFICATES WILL
BE IDENTIFIED IN THE RELATED PROSPECTUS SUPPLEMENT. THE PRINCIPAL OBLIGATIONS
OF THE MASTER SERVICER WILL BE 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, certificate insurance policy, surety bond 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 will depend on the
priority of payment of such class and the rate and timing of principal
payments (including prepayments, defaults, liquidations and repurchases) on
the Mortgage Loans and other assets in the Trust Fund. 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."
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENTS IN THE
CERTIFICATES, SEE "RISK FACTORS," COMMENCING HEREIN ON PAGE 9.
One or more separate elections may be made to treat a Trust Fund as a "real
estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. 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, if applicable. See "Certain Federal Income Tax
Consequences."
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, GMAC MORTGAGE CORPORATION
("GMAC MORTGAGE") 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 MORTGAGE 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 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 21, 1996.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended, with respect to the Certificates (the
"REGISTRATION STATEMENT"). The Company is also subject to certain of the
information requirements of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), and, accordingly, will file reports thereunder with the
Commission. The Registration Statement and the exhibits thereto, and reports
and other information filed by the Company pursuant to the Exchange Act can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain
of its Regional Offices located as follows: Midwest Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and
Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material can also be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
REPORTS TO CERTIFICATEHOLDERS
Monthly reports which contain information concerning the Trust Fund for a
series of Certificates will be sent by or on behalf of the Master Servicer or
the Trustee to each holder of record of the Certificates of the related
series. See "Description of the Certificates--Reports to Certificateholders."
The Company will file with the Commission such periodic reports with respect
to the Trust Fund for a series of Certificates as are required under the
Exchange Act.
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 Exchange Act, 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.
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<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information, or to make any representations, other than those contained in
this Prospectus or the related Prospectus Supplement and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any dealer, salesman, or any other person.
Neither the delivery of this Prospectus or the related Prospectus Supplement
nor any sale made hereunder or thereunder shall under any circumstances create
an implication that there has been no change in the information herein or
therein since the date hereof. This Prospectus and the related Prospectus
Supplement are not an offer to sell or a solicitation of an offer to buy any
security in any jurisdiction in which it is unlawful to make such offer or
solicitation.
TABLE OF CONTENTS
<TABLE>
<S> <C>
ADDITIONAL INFORMATION...................................................... 2
REPORTS TO CERTIFICATEHOLDERS............................................... 2
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE........................... 2
SUMMARY OF PROSPECTUS....................................................... 4
RISK FACTORS................................................................ 9
Limited Liquidity.......................................................... 9
Limited Obligations........................................................ 9
Limitations, Reduction and Substitution of Credit Enhancement.............. 9
Investment in the Mortgage Loans........................................... 10
Yield and Prepayment Considerations........................................ 10
THE MORTGAGE POOLS.......................................................... 11
General.................................................................... 11
The Mortgage Loans......................................................... 12
MORTGAGE LOAN PROGRAM....................................................... 16
Underwriting Standards..................................................... 16
Qualifications of Sellers.................................................. 19
Representations by Sellers................................................. 19
Subservicing............................................................... 23
DESCRIPTION OF THE CERTIFICATES............................................. 25
General.................................................................... 25
Form of Certificates....................................................... 26
Assignment of Trust Fund Assets............................................ 28
Review of Mortgage Loans................................................... 28
Spread..................................................................... 30
Payments on Mortgage Loans; Deposits to Certificate Account................ 30
Withdrawals from the Custodial Account..................................... 33
Distributions.............................................................. 34
Principal and Interest on the Certificates................................. 34
Example of Distributions................................................... 35
Advances................................................................... 36
Prepayment Interest Shortfalls............................................. 37
Reports to Certificateholders.............................................. 37
Collection and Other Servicing Procedures.................................. 38
Realization Upon Defaulted Mortgage Loans.................................. 40
SUBORDINATION............................................................... 41
DESCRIPTION OF CREDIT ENHANCEMENT........................................... 43
General.................................................................... 43
Letters of Credit.......................................................... 45
Mortgage Pool Insurance Policies........................................... 45
Special Hazard Insurance Policies.......................................... 46
Bankruptcy Bonds........................................................... 47
Reserve Funds.............................................................. 47
Certificate Insurance Policies; Surety Bonds............................... 48
</TABLE>
<TABLE>
<S> <C>
Maintenance of Credit Enhancement.......................................... 48
Reduction or Substitution of Credit Enhancement............................ 49
PURCHASE OBLIGATIONS........................................................ 50
INSURANCE POLICIES ON MORTGAGE LOANS........................................ 50
Primary Mortgage Insurance Policies........................................ 50
Standard Hazard Insurance on Mortgaged Properties.......................... 51
THE COMPANY................................................................. 52
RESIDENTIAL FUNDING CORPORATION............................................. 53
THE POOLING AND SERVICING AGREEMENT......................................... 53
Servicing and Other Compensation and Payment of Expenses................... 53
Evidence as to Compliance.................................................. 54
Certain Matters Regarding the Master Servicer and the Company.............. 54
Events of Default.......................................................... 55
Rights Upon Event of Default............................................... 56
Amendment.................................................................. 56
Termination; Retirement of Certificates.................................... 57
The Trustee................................................................ 58
YIELD CONSIDERATIONS........................................................ 58
MATURITY AND PREPAYMENT CONSIDERATIONS...................................... 61
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS..................................... 62
The Mortgage Loans......................................................... 63
Tax Aspects of Cooperative Ownership....................................... 64
Environmental Legislation.................................................. 70
Soldiers' and Sailors' Civil Relief Act of 1940............................ 70
Default Interest and Limitations on Prepayments............................ 70
Forfeitures in Drug and RICO Proceedings................................... 71
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................... 71
General.................................................................... 71
REMICs..................................................................... 72
STATE AND OTHER TAX CONSEQUENCES............................................ 88
ERISA CONSIDERATIONS........................................................ 88
Plan Asset Regulations..................................................... 89
Prohibited Transaction Exemption........................................... 89
Tax-Exempt Investors....................................................... 91
Consultation with Counsel.................................................. 92
LEGAL INVESTMENT MATTERS.................................................... 92
USE OF PROCEEDS............................................................. 93
METHODS OF DISTRIBUTION..................................................... 93
LEGAL MATTERS............................................................... 94
FINANCIAL INFORMATION....................................................... 94
INDEX OF PRINCIPAL DEFINITIONS.............................................. 95
</TABLE>
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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 identified 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.
Certificates................ Each series of Certificates will represent in the
aggregate the entire beneficial ownership
interest, excluding any interest retained by the
Company or any other entity specified in the
related Prospectus Supplement, in a pool (the
"MORTGAGE POOL") of certain Mortgage Loans or
interests therein (which may include Mortgage
Securities as defined herein), and certain other
assets as described below. Each series of
Certificates 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"). As 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, may have a stated principal balance, no
stated principal balance or a notional amount and
may 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 of 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 (each, a "STRIP CERTIFICATE")
entitled to (i) principal distributions, with
disproportionate, nominal or no interest
distributions, or (ii) interest distributions,
with disproportionate, nominal or no principal
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distributions. In addition, a series may include
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. In
addition, a 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 in the manner described
in the related Prospectus Supplement. One or more
classes of Certificates in a series may be
entitled to receive principal payments pursuant
to an amortization schedule under the
circumstances described in the related Prospectus
Supplement.
If so specified 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 the
Mortgage Loans. See "Subordination." If so
specified in the related Prospectus Supplement, a
series of Certificates may include one or more
classes of Certificates (collectively, the
"MEZZANINE CERTIFICATES") which are Subordinate
Certificates but which are senior to other
classes of Subordinate Certificates in respect of
such distributions or losses. In addition,
certain classes of Senior Certificates may be
senior to other classes of Senior Certificates in
respect of such distributions or losses. The
Certificates will be issued in fully-registered
certificated or book-entry form in the authorized
denominations specified in the related Prospectus
Supplement. 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 by the Company, the Master
Servicer, GMAC Mortgage or any of their
affiliates.
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 who, as specified in the
related Prospectus Supplement, may or may not be
affiliated with the Company including GMAC
Mortgage Corporation of PA and Homecomings
Financial Network, Inc., each affiliates of the
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<PAGE>
Company. 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
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.
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 on the outstanding principal
balance of such class, on the 25th day (or, if
such day is not a business day, the next 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 specifies, interest
distributions on any class of Certificates may be
reduced on account of negative amortization on
the Mortgage Loans, with the Deferred Interest
(as defined herein) allocable to such class added
to the principal balance thereof, which Deferred
Interest will thereafter bear interest at the
applicable Pass-Through Rate. 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. See "Description of the
Certificates--Distributions." Strip Certificates
that are entitled to distributions of principal
only will not receive distributions in respect of
interest. Interest that has accrued but is not
yet payable on any Accrual Certificates will be
added to the principal balance of such class on
the related Distribution Date, and will
thereafter bear interest at the applicable Pass-
Through Rate. 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 any Prepayment Interest
Shortfalls. See "Description of the Certificates"
and "Maturity and Prepayment Considerations."
Principal Distributions..... Except as otherwise specified in the related
Prospectus Supplement, principal distributions on
the Certificates of each series will be
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<PAGE>
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 the percentage
interests represented by such class, in the
priority and manner 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 class of
Certificates, 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."
Yield and Prepayment The Mortgage Loans supporting a series of
Considerations.............. Certificates will have unique characteristics
that will affect the yield to maturity and the
rate of payment of principal on such
Certificates. See "Yield Considerations" and
"Maturity and Prepayment Considerations" herein
and in the related Prospectus Supplement.
Credit Enhancement.......... If so specified in the related 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,
certificate insurance policy, surety bond 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 certain losses are first allocated to any
Subordinate Certificates up to a specified limit
or in the form of Overcollateralization. Any form
of credit enhancement typically 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--
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<PAGE>
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.
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.
Rating...................... 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"). See "Ratings" in the
related Prospectus Supplement.
Legal Investment............ Unless otherwise specified in the related
Prospectus Supplement, each class of Certificates
offered hereby and by the related Prospectus
Supplement that is rated in one of the two
highest rating categories by at least one Rating
Agency will constitute "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as
amended ("SMMEA"), for so long as it sustains
such a rating. See "Legal Investment Matters."
ERISA Considerations........ A fiduciary of an employee benefit plan and
certain other plans and arrangements, including
individual retirement accounts and annuities,
Keogh plans, and collective investment funds,
insurance company general or separate accounts
and certain other entities in which such plans,
accounts, annuities or arrangements are invested,
which is subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Internal
Revenue Code of 1986 (the "CODE"), and any other
person contemplating purchasing a Certificate
with Plan Assets (as defined herein), should
carefully review with its legal counsel 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. See "ERISA
Considerations" herein and in the related
Prospectus Supplement.
Certain Federal Income Tax
Consequences............... Certificates of each series offered hereby will
constitute "regular interests" or "residual
interests" in a Trust Fund, or a portion thereof,
treated as a REMIC under Sections 860A through
860G of the Code, unless otherwise specified in
the related Prospectus Supplement. See "Certain
Federal Income Tax Consequences" herein and in
the related Prospectus Supplement.
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<PAGE>
RISK FACTORS
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 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) 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.
If an affiliate of the Company has originated any Mortgage Loan, such
affiliate will only have an obligation with respect to the representations and
warranties of the Seller, as described herein. 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 Mortgage or any of their affiliates. Proceeds of the
assets included in the related Trust Fund (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 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 may 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; a Certificate Insurance Policy; a Surety
Bond; Overcollateralization 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 enhancement 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, as set forth in the related Prospectus
Supplement, indicates that the then-current rating thereof will not be
adversely affected. The rating of any series of Certificates by any Rating
Agency may be lowered following the initial issuance thereof as a result of
the downgrading or nonperformance 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. None of the Company, the Master Servicer, GMAC
Mortgage or 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 or Substitution of Credit Enhancement."
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<PAGE>
Investment in the Mortgage Loans. An investment in securities such as the
Certificates which generally represent interests in mortgage loans may be
affected by, among other things, a decline in real estate values and changes
in the borrowers' financial condition. No assurance can be given that values
of the Mortgaged Properties have remained or will remain at their levels on
the dates of origination of the related Mortgage Loans. If the residential
real estate market should experience an overall decline in property values
such that the outstanding balances of the Mortgage Loans, and any secondary
financing on the Mortgaged Properties, in a particular Mortgage Pool become
equal to or greater than the value of the Mortgaged Properties, the actual
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. In addition, in the
case of Mortgage Loans that are subject to negative amortization, due to the
addition to principal balance of Deferred Interest, the principal balances of
such Mortgage Loans could be increased to an amount equal to or in excess of
the value of the underlying Mortgaged Properties, thereby increasing the
likelihood of default. To the extent that such losses are not covered by the
applicable credit enhancement, holders of Certificates and the owner of the
Excess Spread, if any, of the series evidencing interests in the related
Mortgage Pool will bear all risk of loss resulting from default by the
borrowers under the Mortgage Loans (each, a "Mortgagor") 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 Mortgagor, as to which the Mortgagor is generally qualified on
the basis of the initial payment amount. In some instances, the Mortgagors may
not be able to make their loan payments as such payments increase and thus the
likelihood of default will increase. In addition to the foregoing, certain
geographic regions of the United States from time to time will experience
weaker regional economic conditions and housing markets, and, consequently,
will experience higher rates of loss and delinquency than will be experienced
on mortgage loans generally. For example, a region's economic condition and
housing market may be directly, or indirectly, adversely affected by natural
disasters or civil disturbances such as earthquakes, hurricanes, floods,
eruptions or riots. The economic impact of any of these types of events may
also be felt in areas beyond the region immediately affected by the disaster
or disturbance. The Mortgage Loans underlying certain series of Certificates
may be concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar mortgage-
backed securities without such concentration. Moreover, as described below,
any Mortgage Loan for which a breach of a representation or warranty exists
will remain in the related Trust Fund in the event that a Seller is unable, or
disputes its obligation, to repurchase such Mortgage Loan and such a breach
does not also constitute a breach of a representation made by Residential
Funding, the Company or the Master Servicer. In such event, any resulting
losses generally 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 or by the
obtaining of secondary financing by the Mortgagor. 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.
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<PAGE>
THE MORTGAGE POOLS
GENERAL
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Pool will consist primarily of conventional Mortgage Loans, excluding
any interest retained by the Company or any other entity specified in the
related Prospectus Supplement, evidenced by promissory notes (the "MORTGAGE
NOTES") secured by first mortgages or first deeds of trust or other similar
security instruments creating a first lien on one- to four-family residential
properties, or interests in such Mortgage Loans (which may include Mortgage
Securities). The Mortgaged Properties will consist primarily of owner-occupied
attached or detached one-family dwelling units, two- to four-family dwelling
units, condominiums, townhouses, row houses, individual units in planned-unit
developments and certain other dwelling units, and the fee, leasehold or other
interests in the underlying real property. The Mortgaged Properties may
include vacation, second and non-owner-occupied homes. If specified in the
related Prospectus Supplement relating to a series of Certificates, a Mortgage
Pool may contain cooperative apartment loans ("COOPERATIVE LOANS") evidenced
by promissory notes ("COOPERATIVE NOTES") secured by security interests in
shares issued by cooperatives and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling
units in the related buildings. As used herein, unless the context indicates
otherwise, "Mortgage Loans" includes Cooperative Loans, "Mortgaged Properties"
includes shares in the related cooperative and the related proprietary leases
or occupancy agreements securing Cooperative Notes, "Mortgage Notes" includes
Cooperative Notes and "MORTGAGES" includes a security agreement with respect
to a Cooperative Note.
If specified in the related Prospectus Supplement, a Mortgage Pool will
contain Mortgage Loans that, in addition to being secured by the related
Mortgaged Properties, are secured by other collateral owned by the related
Mortgagors or are supported by third-party guarantees secured by collateral
owned by the related guarantors. Such Mortgage Loans are collectively referred
to herein as "ADDITIONAL COLLATERAL LOANS," and such collateral is
collectively referred to herein as "ADDITIONAL COLLATERAL." Additional
Collateral may consist of marketable securities, insurance policies,
annuities, certificates of deposit, cash, accounts or other personal property
and, in the case of Additional Collateral owned by any guarantor, may consist
of real estate. Unless otherwise specified in the related Prospectus
Supplement, the security agreements and other similar security instruments
related to the Additional Collateral for a Mortgage Pool will, in the case of
Additional Collateral consisting of personal property, create first liens
thereon, and, in the case of Additional Collateral consisting of real estate,
create first or second liens thereon. Additional Collateral, or the liens
thereon in favor of the related Additional Collateral Loans, may be greater or
less in value than the principal balances of such Additional Collateral Loans,
the Appraised Values of the underlying Mortgaged Properties or the
differences, if any, between such principal balances and such Appraised
Values, and the requirements that Additional Collateral be maintained may be
terminated upon the reduction of the Loan-to-Value Ratios or principal
balances of the related Additional Collateral Loans to certain pre-determined
amounts. Additional Collateral (including any related third-party guarantees)
may be provided either in addition to or in lieu of Primary Insurance Policies
for the Additional Collateral Loans in a Mortgage Pool, as specified in the
related Prospectus Supplement. Guarantees supporting Additional Collateral
Loans may be guarantees of payment or guarantees of collectability and may be
full guarantees or limited guarantees. If a Mortgage Pool includes Additional
Collateral Loans, the related Prospectus Supplement will specify the nature
and extent of such Additional Collateral Loans and of the related Additional
Collateral. If specified in such Prospectus Supplement, the Trustee, on behalf
of the related Certificateholders, will have only the right to receive certain
proceeds from the disposition of any such Additional Collateral consisting of
personal property and the liens thereon will not be assigned to the Trustee.
No assurance can be given that values of the Additional Collateral have
remained or will remain at their levels on the Cut-off Date or as to the
timing of collections thereunder from the disposition of such Additional
Collateral. No assurance can be given as to the amount of proceeds, if any,
that might be realized from the disposition of the Additional Collateral for
any of the Additional Collateral Loans. See "Certain Legal Aspects of the
Mortgage Loans and Related Matters--Anti-Deficiency Legislation and Other
Limitations on Lenders" herein.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among those purchased by the Company, either directly or
through its affiliates, including Residential Funding, from affiliates
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<PAGE>
of the Company including Homecomings Financial Network, Inc. and GMAC Mortgage
Corporation of PA ("AFFILIATED SELLERS"), or from banks, savings and loan
associations, mortgage bankers, investment banking firms, the FDIC and other
mortgage loan originators or sellers not affiliated with the Company
("UNAFFILIATED 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 Securities. 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.
Unless otherwise specified in the applicable Prospectus Supplement, 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 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
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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 one, three or six months, one, three, five or seven years subsequent
to the initial payment date, and thereafter at either one, three or 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 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 interest adjustment date referred
to in the related Prospectus Supplement, and thereafter on each interest
adjustment 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
- --------
* The index (the "INDEX") for a particular Mortgage Pool will be specified in
the related Prospectus Supplement and may include one of the following
indexes: (i) the weekly average yield on U.S. Treasury securities adjusted to
a constant maturity of either three months, six months or one year, (ii) the
weekly auction average investment yield of U.S. Treasury bills of six months,
(iii) the daily Bank Prime Loan rate made available by the Federal Reserve
Board, (iv) the cost of funds of member institutions for the Federal Home Loan
Bank of San Francisco, or (v) the interbank offered rates for U.S. dollar
deposits in the London market, each calculated as of a date prior to each
scheduled interest rate adjustment date which will be specified in the related
Prospectus Supplement.
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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 purchase Mortgage Loans, the Loan-to-Value Ratio is defined
generally as the ratio, expressed as a percentage, of the principal amount of
the Mortgage Loan at origination to the lesser of (1) the appraised value
determined in an appraisal obtained at origination of such Mortgage Loan and
(2) the sales price for the related Mortgaged Property, except that in the
case of certain employee or preferred customer loans, the denominator of such
ratio may be the sales price. In the case of certain non-purchase Mortgage
Loans including refinance, 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 either the
appraised value determined in an appraisal obtained at the time of
refinancing, modification or conversion or, if no such appraisal has been
obtained, the value of the related Mortgaged Property which value generally
will be supported by either (i) a representation by the related Seller (as
described below) as to such value, (ii) a broker's price opinion, automated
appraisal, drive-by appraisal or other certification of value, (iii) an
appraisal obtained within twelve months prior to such refinancing,
modification or conversion or (iv) the sales price, if the Mortgaged Property
was purchased within the previous twelve months. The denominator of the ratio
described in the preceding sentence or the second preceding sentence, as the
case may be, is hereinafter referred to as the "APPRAISED VALUE." In
connection with a representation by the related Seller as to the value of the
Mortgaged Property, the Seller generally will represent and warrant that
either (i) the current value of the related Mortgaged Property at the time of
refinancing, modification or conversion was not less than the appraised value
of such property at the time of the origination of the original 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. Certain Mortgage
Loans which are subject to negative amortization will have Loan-to-Value
Ratios that will increase after origination as a result of such negative
amortization. In the case of seasoned Mortgage Loans, the values used in
calculating Loan-to-Value Ratios may no longer be accurate valuations of the
Mortgaged Properties. Certain Mortgaged Properties may be located in regions
where property values have declined significantly since the time of
origination. In addition, a Loan-to-Value calculation does not take into
account any secondary financing. Under the Company's underwriting standards, a
Seller is generally permitted to provide secondary financing to a Mortgagor
contemporaneously with the origination of a Mortgage Loan, provided that the
combined Loan-to-Value Ratio is not greater than 100%. Secondary financing is
readily available and may be obtained by a Mortgagor from a lender including
the Seller at any time (including at origination).
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 that have been consolidated and/or have
had various terms changed, mortgage loans that 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 at any time thereafter.
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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 one or more
specified periods during the life of such Mortgage Loans (each, a "CONVERTIBLE
MORTGAGE LOAN"), generally not later than ten years subsequent to the date of
origination. 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 specified in the related Prospectus Supplement, certain of the Mortgage
Loans may be subject to temporary buydown plans ("BUY-DOWN MORTGAGE LOANS")
pursuant to which the monthly payments made by the Mortgagor during the early
years of the Mortgage Loan (the "BUY-DOWN 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 "BUY-DOWN FUNDS") contributed by the
seller of the Mortgaged Property or another source and placed in a custodial
account (the "BUY-DOWN ACCOUNT"), (ii) if the Buy-Down Funds are contributed
on a present value basis, investment earnings on such Buy-Down 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 Buy-Down 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 Buy-Down Mortgage Loans.
The related Prospectus Supplement will provide material information
concerning the types and characteristics of the Mortgage Loans included in the
related Mortgage Pool. A Current Report on Form 8-K (a "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 (the "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
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. In addition to or in lieu of the Master
Servicer for a series of Certificates, the related Prospectus Supplement may
identify a certificate administrator (the "CERTIFICATE ADMINISTRATOR") for the
Trust Fund. The Certificate Administrator may be an affiliate of the Company
or the Master Servicer. All references herein to "Master Servicer" and any
discussions of the servicing and administration functions of the Master
Servicer will also apply to the Certificate Administrator to the extent
applicable.
The Company will make certain limited representations and warranties
regarding the Mortgage Loans except as otherwise specified herein, but its
assignment of the Mortgage Loans to the Trustee will be without
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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 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.
With respect to the Company's underwriting standards, as well as any other
underwriting standards that may be applicable to any Mortgage Loans, such
underwriting standards generally include a set of specific criteria pursuant
to which the underwriting evaluation is made. However, the application of such
underwriting standards does not imply that each specific criterion was
satisfied individually. Rather, a Mortgage Loan will be considered to be
originated in accordance with a given set of underwriting standards if, based
on an overall qualitative evaluation, the loan is in substantial compliance
with such underwriting standards. For example, a Mortgage Loan may be
considered to comply with a set of underwriting standards, even if one or more
specific criteria included in such underwriting standards were not satisfied,
if other factors compensated for the criteria that were not satisfied or if
the Mortgage Loan is considered to be in substantial compliance with the
underwriting standards.
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
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originated pursuant to underwriting standards determined by a mortgage
insurance company or third party origination system acceptable to Residential
Funding. The Company, or Residential Funding on behalf of the Company, may
accept a certification from such insurance company or a confirmation by such
third party as to a Mortgage Loan's insurability in a mortgage pool as of the
date of certification or confirmation as evidence of a Mortgage Loan
conforming to applicable underwriting standards. Such certifications or
confirmations will likely have been issued before the purchase of the Mortgage
Loan by Residential Funding or the Company.
The level of review by Residential Funding or the Company, if any, of any
Mortgage Loan for conformity with the applicable underwriting standards will
vary depending on any one of a number of factors, including (i) factors
relating to the experience and status of the Seller, and (ii) characteristics
of the specific Mortgage Loan, including the principal balance, the Loan-to-
Value Ratio, the loan type or loan program, and (iii) the applicable credit
score of the related Mortgagor used in connection with the origination of the
Mortgage Loan (as determined based on a credit scoring model acceptable to the
Company). Generally, such credit scoring models provide a means for evaluating
the information about a prospective borrower that is available from a credit
reporting agency. The underwriting criteria applicable to any program under
which the Mortgage Loans may be originated and reviewed may provide that
qualification for the loan, or the availability of certain loan features (such
as maximum loan amount, maximum Loan-to-Value Ratio, property type and use,
and documentation level) may depend on the borrower's credit score.
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 Homecomings Financial Network, Inc., with underwriting
standards generally in accordance with the Guide or as otherwise agreed to by
the Company. However, in certain limited circumstances, such Mortgage Loans
may be employee or preferred customer loans with respect to which, in
accordance with such affiliate's mortgage loan programs, income, asset and
employment verifications and appraisals may not have been required. With
respect to Mortgage Loans made under any employee loan program maintained by
Residential Funding, or its affiliates, in certain limited circumstances
preferential interest rates may be allowed, and Primary Insurance Policies may
not be required in connection with a Loan-to-Value Ratio over 80%. As to any
series of Certificates representing interests in such Mortgage Loans, credit
enhancement may be provided covering losses on such Mortgage Loans to the
extent that such losses would be covered by Primary Insurance Policies if
obtained, in the form of a corporate guaranty or in certain other forms
described herein under "Description of Credit Enhancement." 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
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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, Buy-
Down 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 Buy-Down 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 Loan-to-
Value Ratio must meet applicable guidelines, the borrower must have a good
credit history and the borrower's eligibility for such program may be
determined by use of a credit scoring model.
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.
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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, each Seller (other
than the Federal Deposit Insurance Corporation (the "FDIC") and investment
banking firms) will have been approved by Residential Funding for
participation in Residential Funding's loan purchase program. In determining
whether to approve a seller for participation in the loan purchase program,
Residential Funding generally will consider, among other things, the financial
status (including the net worth) of the seller, the previous experience of the
seller in originating mortgage loans, the prior delinquency and loss
experience of the seller, the underwriting standards employed by the seller
and the quality control and, if applicable, the servicing operations
established by the seller. There can be no assurance that any Seller presently
meets any qualifications or will continue to meet any qualifications at the
time of inclusion of mortgage loans sold by it in the Trust Fund for a series
of Certificates, or thereafter. If a Seller becomes subject to the direct or
indirect control of the FDIC or if a Seller's net worth, financial performance
or delinquency and foreclosure rates deteriorate, such institution may
continue to be treated as a Seller. Any such event may adversely affect the
ability of any such Seller to repurchase Mortgage Loans in the event of a
breach of a representation or warranty which has not been cured.
Residential Funding generally monitors which Sellers are under control of
the FDIC or are insolvent, otherwise in receivership or conservatorship or
financially distressed. Such Seller may make no representations and warranties
with respect to Mortgage Loans sold by it. The FDIC (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 FDIC 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 FDIC
may have no obligation to repurchase any Mortgage Loan for a breach of a
representation and warranty.
Unless otherwise specified in the related Prospectus Supplement, the
qualifications required of Sellers for approval by Residential Funding as
participants in its loan purchase programs may not apply to Sellers in
Designated Seller Transactions. To the extent the Seller in a Designated
Seller Transaction fails to or is unable to repurchase any Mortgage Loan due
to a breach of representation and warranty, neither the Company, Residential
Funding nor any other entity will have assumed the representations and
warranties and any related losses will be borne by the Certificateholders or
by the credit enhancement, if any.
REPRESENTATIONS BY SELLERS
Each Seller generally will make certain representations and warranties with
respect to the Mortgage Loans sold by such Seller. 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, or another form of coverage in lieu of
title insurance as specified in the related Prospectus Supplement) and any
required hazard and primary mortgage insurance were effective at
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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 Buy-Down
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) to the best of the Seller's
knowledge, each Mortgaged Property is free from damage and in good repair; (v)
there are no delinquent tax or, to the best of the Seller's knowledge,
assessment liens against the Mortgaged Property; (vi) each Mortgage Loan is
current as to all required payments; (vii) if a Primary Insurance Policy is
required with respect to a Mortgage Loan, such Mortgage Loan is the subject of
such a policy; and (viii) each Mortgage Loan was made in compliance with, and
is enforceable under, all applicable local, state and federal laws in all
material respects. In the event of a breach of a Seller's representation or
warranty that materially adversely affects the interests of the
Certificateholders in a Mortgage Loan, the related Seller will be obligated to
repurchase such Mortgage Loan as described below. However, there can be no
assurance that a Seller will honor its obligation to repurchase any Mortgage
Loan as to which such a breach of a representation or warranty arises. Any
costs associated with enforcing the Seller's obligation to repurchase such
Mortgage Loan will be borne by the related Trust Fund.
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 or if an alternative form of
coverage in lieu of title insurance was obtained, 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) except in the case of
Cooperative Loans, either a policy of title insurance in the form and amount
required by the Guide or an equivalent protection 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) to the
best of Residential Funding's knowledge, if required, 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 Buy-Down Mortgage Loan; (v)
to the best of Residential Funding's knowledge, each Mortgaged Property is
free of damage and is in good repair; (vi) each Mortgage Loan complied
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in all material respects with all applicable local, state and federal laws at
the time of origination; (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 as of the related Cut-off Date and was not
so delinquent more than once during the twelve-month period prior to the Cut-
off Date; and (viii) there is no delinquent tax or, to the best of Residential
Funding's knowledge, 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 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 generally 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, if
applicable, the Excluded Spread).
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.
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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. 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, using 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.
The Master Servicer will be entitled to reimbursement for any costs and
expenses incurred in pursuing such a purchase or substitution obligation,
including but not limited to any costs or expenses associated with litigation.
In instances where a Seller is unable, or disputes its obligation, to purchase
affected 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 or
coverage of certain loss amounts. Any such settlement could lead to losses on
the Mortgage Loans which would be borne by the related credit enhancement, and
to the extent not available, on the related Certificates. Furthermore, 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. 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
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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,
and to the extent not available, to the related Certificates.
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
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 Corporation of PA 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; and maintaining accounting records relating
to the Mortgage Loans. A Subservicer may also be required to supervise
foreclosures and under certain circumstances inspect and manage Mortgaged
Properties. 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
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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 or Master Servicer may also be entitled to collect
and retain, as part of its servicing compensation, any late charges or
prepayment penalties, as 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 generally 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.
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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 Commission
as an exhibit to a 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. 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.
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. 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 Excluded Spread or other interest retained by the
Company or any of its affiliates with respect to each such Mortgage Loan; (ii)
such assets including, without limitation, all payments and collections in
respect of the Mortgage Loans or Mortgage Securities due after the related
Cut-off Date, as from time to time are identified as deposited in respect
thereof in the Custodial Account and in the related Certificate Account; (iii)
property acquired by foreclosure of such Mortgage Loans or deed in lieu of
foreclosure and certain proceeds from the disposition of any related
Additional Collateral; (iv) hazard insurance policies and Primary Insurance
Policies, if any, and certain proceeds thereof; and (v) any combination, as
and to the extent specified in the related Prospectus Supplement, of a Letter
of Credit, Purchase Obligation, Mortgage Pool Insurance Policy, Special Hazard
Insurance Policy, Bankruptcy Bond, Certificate Insurance Policy, Surety 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.
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 may be Senior Certificates that are
senior in right of payment to any class or classes of Mezzanine Certificates
and to any other class or classes of 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) one or more classes of Strip Certificates 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" and "very accurately defined maturity classes"), or on the basis of
collections from designated portions of the Mortgage Pool, which series may
include one or more classes of 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, Certificate Insurance Policy,
Surety Bond or other credit enhancement as described under "Description of
Credit Enhancement," or by the subordination of one or more classes of
Certificates as described under "Subordination" or by any combination of the
foregoing.
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FORM OF CERTIFICATES
As specified in the related Prospectus Supplement, the Certificates of each
series will be issued either as physical certificates or in book-entry form.
If issued as physical certificates, the Certificates will be in fully
registered form only in the denominations specified in the related Prospectus
Supplement, and will be transferable and exchangeable at the corporate trust
office of the person appointed under the related Pooling and Servicing
Agreement to register the Certificates (the "CERTIFICATE REGISTRAR"). 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. 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, a transfer agent) as the registered
holder thereof, except as otherwise indicated in the related Prospectus
Supplement.
If issued in book-entry form, certain classes of a series of Certificates
will be initially issued through the book-entry facilities of The Depository
Trust Company ("DTC"), or Cedel Bank, SA ("CEDEL") or the Euroclear System
("EUROCLEAR") (in Europe) if they are participants of such systems, or
indirectly through organizations which are participants in such systems, or
through such other depository or facility as may be specified in the related
Prospectus Supplement. As to any such class of Certificates so issued ("BOOK-
ENTRY CERTIFICATES"), the record holder of such Certificates will be DTC's
nominee. CEDEL and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in CEDEL's and Euroclear's
names on the books of their respective depositaries (the "DEPOSITARIES"),
which in turn will hold such positions in customers' securities accounts in
the depositaries' names on the books of DTC. DTC is a limited-purpose trust
company organized under the laws of the State of New York, which holds
securities for its participating organizations ("DTC PARTICIPANTS," and
together with the CEDEL and Euroclear 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,
"INDIRECT PARTICIPANTS") have indirect access to DTC's clearance system.
Unless otherwise specified in the related Prospectus Supplement, no person
acquiring an interest in any Book-Entry Certificate (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 Indirect Participants. Any Beneficial Owner that desires to
purchase, sell or otherwise transfer any interest in Book-Entry Certificates
may do so only through DTC, either directly if such Beneficial Owner is a
Participant or indirectly through Participants and, if applicable, Indirect
Participants. Pursuant to the procedures of DTC, transfers of the beneficial
ownership of any Book-Entry Certificates will be required to be made in
minimum denominations specified in the related Prospectus Supplement. The
ability of a Beneficial Owner to pledge Book-Entry 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.
Because of time zone differences, the securities account of a CEDEL or
Euroclear participant as a result of a transaction with a DTC Participant
(other than a depositary holding on behalf of CEDEL or Euroclear) will be
credited during a subsequent securities settlement processing day (which must
be a business day for CEDEL or Euroclear, as the case may be) immediately
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear Participant or CEDEL Participants on such business day. Cash
received in CEDEL or Euroclear as a result of sales of securities by or
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through a CEDEL Participant or Euroclear Participant to a DTC Participant
(other than the depositary for CEDEL or Euroclear) will be received with value
on the DTC settlement date, but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in
DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant Depositaries; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver
instructions directly to the Depositaries.
CEDEL, as a professional depository, holds securities for its participating
organizations ("CEDEL PARTICIPANTS") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary
Institute.
Euroclear was created to hold securities for participants of Euroclear
("EUROCLEAR PARTICIPANTS") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities
and cash. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "EUROCLEAR OPERATOR"), under contract
with Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"CLEARANCE COOPERATIVE"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative. The Clearance Cooperative establishes policy for Euroclear on
behalf of Euroclear Participants. The Euroclear Operator is the Belgian branch
of a New York banking corporation which is a member bank of the Federal
Reserve System. As such, it is regulated and examined by the Board of
Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear Operator are governed by the
Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively,
the "TERMS AND CONDITIONS"). The Terms and Conditions govern transfers of
securities and cash within Euroclear, withdrawals of securities and cash from
Euroclear, and receipts of payments with respect to securities in Euroclear.
All securities in Euroclear are held on a fungible basis without attribution
of specific certificates to specific securities clearance accounts.
Distributions in respect of the Book-Entry 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 Indirect
Participants. 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 Book-
Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Participants to whose account the Book-Entry
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
Certificateholders of any Class to the extent that Participants authorize such
actions. None of the Master
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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 Book-Entry Certificates,
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
ASSIGNMENT OF TRUST FUND ASSETS
At the time of issuance of a series of Certificates, the Company will cause
the Mortgage Loans or Mortgage Securities and any other assets being included
in the related Trust Fund to be assigned to the Trustee or its nominee (which
may be the Custodian) together with, if 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 and any Excluded
Spread). The Trustee will, concurrently with such assignment, deliver a series
of Certificates to the Company in exchange for the Mortgage Loans or Mortgage
Securities. 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).
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) (as described below) certain legal documents relating to such
Mortgage Loan that are in possession of the Company, including: (i) 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); (ii)
the Mortgage (except for any Mortgage not returned from the public recording
office) with evidence of recording indicated thereon or, in the case of a
Cooperative Loan, on the related financing statement; (iii) 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 (iv)
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 or nominee'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.
REVIEW OF MORTGAGE LOANS
The Trustee or the Custodian will hold such documents in trust for the
benefit of the Certificateholders, and generally within 45 days after receipt
thereof, will review such documents. Unless otherwise provided in the
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related Prospectus Supplement, if any such document is found to be defective
in any material respect, the Trustee or the Custodian shall promptly notify
the Master Servicer and the Company, the former of which shall notify the
related Subservicer or Seller, as the case may be. If such Subservicer or
Seller does not cure the omission or defect within 60 days after notice is
given to the Master Servicer, such 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, except in the case
of a Designated Seller Transaction, 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
(each, a "CUSTODIAN") pursuant to a custodial agreement to maintain possession
of and review documents relating to the Mortgage Loans as the agent of the
Trustee. The identity of such Custodian, if any, will be set forth in the
related Prospectus Supplement.
With respect to the Mortgage Loans in a Mortgage Pool, except in the case of
a Designated Seller Transaction or as to Mortgage Loans underlying any
Mortgage Securities or unless otherwise specified in the related Prospectus
Supplement, the Company will make certain limited representations and
warranties as to the types and geographical concentrations of such Mortgage
Loans and as to the accuracy, in all material respects, of certain identifying
information 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 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.
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 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 or substitution 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.
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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.
SPREAD
The Company, the Master Servicer or any of their affiliates, or such other
entity as may be specified in the related Prospectus Supplement may retain or
be paid a portion of interest due with respect to the related Mortgage Loans
or Mortgage Securities. The payment of any such portion of interest will be
disclosed in the related Prospectus Supplement. This payment may be in
addition to any other payment (such as the servicing fee) that any such entity
is otherwise entitled to receive with respect to the Mortgage Loans or
Mortgage Securities. Any such payment in respect of the Mortgage Loans or
Mortgage Securities will represent a specified portion of the interest payable
thereon and as specified in the related Prospectus Supplement, will either be
part of the assets transferred to the related Trust Fund (the "EXCESS SPREAD")
or will be excluded from the assets transferred to the related Trust Fund (the
"EXCLUDED SPREAD"). The interest portion of a Realized Loss or Extraordinary
Loss and any partial recovery of interest in respect of the Mortgage Loans or
Mortgage Securities will be allocated between the owners of any Excess Spread
or Excluded Spread and the Certificateholders entitled to payments of interest
as provided in the applicable Pooling and Servicing Agreement.
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 certain payments and collections received by it subsequent
to the Cut-off Date (other than payments due on or before the Cut-off
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Date), as specifically set forth in the related Pooling and Servicing
Agreement, which (except as otherwise provided therein) generally will include
the following:
(i) all payments on account of principal of 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 or guaranty 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 Buy-Down 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 any Rating Agency that rated any
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 a financial
institution which has debt obligations that meet certain rating criteria, (iv)
in the case of the Certificate Account, a trust account or accounts maintained
with the Trustee, or (v) such other account or accounts acceptable to any
applicable Rating Agency (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"). 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 and assets
serviced or master serviced by the Master Servicer that have been deposited
into the Custodial Account.
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Unless otherwise set forth in the related Prospectus Supplement, not later
than the business day preceding each Distribution 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: (i) the amount of any advances made by the Master
Servicer as described herein under "--Advances," (ii) any payments under any
Letter of Credit, and any amounts required to be transferred to the
Certificate Account from a Reserve Fund, as described under "Description of
Credit Enhancement" below, (iii) 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 "Insurance Policies on Mortgage Loans"
below, (iv) any distributions received on any Mortgage Securities included in
the Trust Fund and (v) any other amounts as set forth in the related Pooling
and Servicing Agreement.
The portion of any payment received by the Master Servicer in respect of a
Mortgage Loan that is allocable to Excess Spread or Excluded Spread, as
applicable, will generally be deposited into the Custodial Account, but any
Excluded Spread 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 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. Except as 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 as additional servicing compensation. The
amount of any loss incurred in connection with any such investment must be
deposited in the Custodial Account or in the Certificate Account, as the case
may be, by the Master Servicer out of its own funds upon realization of such
loss.
With respect to each Buy-Down Mortgage Loan, the Subservicer will deposit
the related Buy-Down Funds provided to it in a Buy-Down 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 Buy-Down Mortgage Loans provide for the contribution of Buy-Down
Funds in an amount equal to or exceeding either (i) the total payments to be
made from such funds pursuant to the related buydown plan or (ii) if such Buy-
Down Funds are to be deposited on a discounted basis, that amount of Buy-Down
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 Buy-Down Mortgage Loan. Neither the Master Servicer nor the
Company will be obligated to add to any such discounted Buy-Down Funds any of
its own funds should investment earnings prove insufficient to maintain the
scheduled level of payments. To the extent that any 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 Buy-Down Mortgage Loan, the Subservicer will withdraw from the Buy-
Down 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 Buy-
Down Funds (and, if applicable, investment earnings thereon) for each Buy-Down
Mortgage Loan that, when added to the amount due from the Mortgagor on such
Buy-Down Mortgage Loan, equals the full monthly payment which would be due on
the Buy-Down Mortgage Loan if it were not subject to the buydown plan. The
Buy-Down Funds will in no event be a part of the related Trust Fund.
If the Mortgagor on a Buy-Down Mortgage Loan prepays such Mortgage Loan in
its entirety during the Buy-Down Period, the Subservicer will withdraw from
the Buy-Down Account and remit to the Mortgagor or such other designated party
in accordance with the related buydown plan any Buy-Down Funds remaining in
the Buy-Down Account. If a prepayment by a Mortgagor during the Buy-Down
Period together with Buy-Down Funds will result in full prepayment of a Buy-
Down Mortgage Loan, the Subservicer will generally be required to withdraw
from the Buy-Down Account and remit to the Master Servicer the Buy-Down Funds
and investment
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earnings thereon, if any, which together with such prepayment will result in a
prepayment in full; provided that Buy-Down Funds may not be available to cover
a prepayment under certain Mortgage Loan programs. Any Buy-Down 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 Buy-Down Account after prepayment or after
termination of the Buy-Down Period will be remitted to the related Mortgagor
or such other designated party pursuant to the agreement relating to each Buy-
Down Mortgage Loan (the "BUY-DOWN AGREEMENT"). If the Mortgagor defaults
during the Buy-Down Period with respect to a Buy-Down Mortgage Loan and the
property securing such Buy-Down 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 Buy-Down Account the Buy-
Down 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 (except as otherwise provided
therein) generally will include the following:
(i) to make deposits to the Certificate Account in the amounts and in the
manner provided in the Pooling and Servicing Agreement and described above
under "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 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 repossession 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, or any other party named in the
related Prospectus Supplement, all amounts allocable to the Excluded
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 to any 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
(including reimbursement in connection with enforcing any
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repurchase, substitution or indemnification obligation of any Seller) or
against which it or the Company is indemnified pursuant to the Pooling and
Servicing Agreement; and
(ix) to withdraw any amount deposited in the Custodial Account that was
not required to be deposited therein.
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, distribution 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"). Such distributions will
be made 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"). 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. 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. Except as otherwise provided in the related Pooling and Servicing
Agreement, the final distribution in retirement of the Certificates will be
made only upon presentation and surrender of such Certificates at the office
or agency of the Trustee specified in the notice to such Certificateholders.
Distributions will be made to each Certificateholder in accordance with such
holder's Percentage Interest in a particular class. 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.
PRINCIPAL AND INTEREST ON THE CERTIFICATES
The method of determining, and the amount of, distributions of principal and
interest (or, where applicable, of principal only or interest only) on a
particular series of Certificates will be described in the related Prospectus
Supplement. Distributions of interest on each class of Certificates will be
made prior to distributions of principal thereon. Each class of Certificates
(other than certain classes of Strip Certificates) may have a different Pass-
Through Rate, which may be a fixed, variable or adjustable Pass-Through Rate,
or any combination of two or more such Pass-Through Rates. The related
Prospectus Supplement will specify the Pass-Through Rate or Rates for each
class, or the initial Pass-Through Rate or Rates and the method for
determining the Pass-Through Rate or Rates. If so specified in the related
Prospectus Supplement, interest on any class of Certificates for any
Distribution Date may be limited to the extent of available funds for such
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, interest on the Certificates will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
On each Distribution Date for a series of Certificates, the Trustee or the
Master Servicer on behalf of the Trustee will distribute or cause the Paying
Agent to distribute, as the case may be, to each holder of record on the
Record Date of a class of Certificates, an amount equal to the Percentage
Interest represented by the Certificate held by such holder multiplied by such
class's Distribution Amount. The "DISTRIBUTION AMOUNT" for a class of
Certificates for any Distribution Date will be the portion, if any, of the
Principal Distribution Amount (as defined in the related Prospectus
Supplement) allocable to such class for such Distribution Date, 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 amount of such class specified in the
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applicable Prospectus Supplement, less certain interest shortfalls, 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, Prepayment Interest
Shortfalls (as defined herein), 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)
shall be 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 unless otherwise set forth
in the related Prospectus Supplement.
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
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 July 1996:
<TABLE>
<CAPTION>
DATE NOTE DESCRIPTION
- ---- ---- -----------
<S> <C> <C>
July 1............ (A) Cut-off Date.
July 2-31......... (B) Subservicers receive any Principal Prepayments and
applicable interest thereon.
July 31........... (C) Record Date.
August 1.......... (D) The due date for payments on a Mortgage Loan (the "DUE
DATE").
August 16......... (E) Subservicers remit to the Master Servicer scheduled
payments of principal and interest due on August 1 and
received or advanced by them.
August 20......... (F) Determination Date.
August 26......... (G) Distribution Date.
</TABLE>
Succeeding months follow the pattern of (B) through (G), except that for
succeeding months, (B) will also include the first day of such month. Certain
series of Certificates may have different prepayment periods, Cut-off Dates,
Record Dates, Due Dates, remittance dates, Determination Dates and/or
Distribution Dates than those set forth above.
- --------
(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 July
1, 1996, after deducting principal payments due on or before such date.
Those principal payments due on or before July 1, and the accompanying
interest payments, and any Principal Prepayments received as of the close
of business on July 1, 1996 are not part of the Mortgage Pool and will not
be passed through to Certificateholders.
(footnotes continued on next page)
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(footnotes continued from previous page)
(B) Any principal payments received in advance of the scheduled Due Date and
not accompanied by a payment of interest for any period following the date
of payment ("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 as described in (F)
below. 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 August 26 will be made to Certificateholders of record at
the close of business on July 31.
(D) Scheduled principal and interest payments are due from Mortgagors.
(E) Payments due on August 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 July balances (with the
exception of interest from the date of prepayment of any Mortgage Loan
prepaid in full during July and interest on the amount of partial
Principal Prepayments in July). Funds required to be remitted from the
Subservicing Accounts to the Master Servicer will be so remitted on August
16 (because August 18, 1996 is not a business day) 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 July will have been remitted to the Master Servicer
within five business days of receipt).
(F) On August 20, the Master Servicer will determine the amounts of principal
and interest which will be passed through on August 26 to the holders of
each class of Certificates. The Master Servicer will be obligated to
distribute those payments due August 1 which have been received from
Subservicers prior to and including August 16, as well as all Principal
Prepayments received on Mortgage Loans in July (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
August 26 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 August 26 (because August 25, 1996 is not a business day, the next
succeeding business day), the amounts determined on August 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 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), for the benefit of the Certificateholders, 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 Determination Date on the Mortgage Loans, 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. The amount of any Advance will be
determined based on the amount payable under the Mortgage Loan as adjusted
from time to time and as may be modified as described below under "--
Collection and Other Servicing Practices," and no Advance will be required in
connection with any reduction in amounts payable pursuant to the Relief Act or
as a result of certain actions taken by a bankruptcy court. 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 relating to Advances
described herein.
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Advances are intended to maintain a regular flow of scheduled interest and
principal payments to related Certificateholders. 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, such funds will be required to
be replaced on or before any future Distribution Date to the extent that funds
in the Certificate Account on such Distribution Date would be less than
payments required to be made to Certificateholders. Any Advances 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 and Insurance 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 may also be
reimbursable from cash otherwise distributable to Certificateholders 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 may also be reimbursable out of amounts
otherwise distributable to holders of the Subordinate Certificates, if any.
The Master Servicer may also be obligated to make Servicing 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 may be 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 by another entity, a letter of
credit or other method as may be 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.
PREPAYMENT INTEREST SHORTFALLS
When a Mortgagor prepays a Mortgage Loan in full between scheduled Due Dates
for such Mortgage Loan, the Mortgagor pays interest on the amount prepaid only
to but not including the date on which such Principal Prepayment is made.
Similarly, Liquidation Proceeds from a Mortgaged Property will not include
interest for any period after the date on which the liquidation took place.
The shortfall between a full month's interest due with respect to a Mortgage
Loan and the amount of interest paid or recovered with respect thereto in the
event of a prepayment or liquidation is referred to as a "PREPAYMENT INTEREST
SHORTFALL." If so specified in the related Prospectus Supplement, to the
extent funds are available from the Servicing Fee, the Master Servicer may
make an additional payment to Certificateholders with respect to any Mortgage
Loan that prepaid in full during the related prepayment period equal to the
amount, if any, necessary to assure that, on the related Distribution Date,
the Available Distribution Amount would include with respect to each such
Mortgage Loan an amount equal to interest at the Mortgage Rate (less the
Servicing Fee and Excluded Spread, if any) for such Mortgage Loan from the
date of such prepayment to the related Due Date (such amount, "COMPENSATING
INTEREST"). Unless otherwise specified in the related Prospectus Supplement,
Compensating Interest will be limited to the aggregate amount (or any portion
thereof) of the Servicing Fee received by the Master Servicer in that month in
relation to the Mortgage Loans or in any other manner, and, if so limited, may
not be sufficient to cover the Prepayment Interest Shortfall. If so disclosed
in the related Prospectus Supplement, Prepayment Interest Shortfalls may be
applied to reduce interest otherwise payable with respect to one or more
classes of Certificates of a series. See "Yield Considerations."
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Master Servicer will forward or cause to be
forwarded to each Certificateholder of record a statement or statements with
respect to the related Trust Fund setting forth the
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information described in the related Pooling and Servicing Agreement. Except
as otherwise provided in the related Pooling and Servicing Agreement, such
information generally will include the following (as applicable):
(i) the amount, if any, of such distribution allocable to principal;
(ii) the amount, if any, of such distribution allocable to interest and
the amount, if any, of any shortfall in the amount of interest and
principal;
(iii) the aggregate unpaid principal balance of the Mortgage Loans after
giving effect to the distribution of principal on such Distribution Date;
(iv) the outstanding principal balance or notional amount of each class
of Certificates 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 property 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 percentage of the outstanding principal balances of the Senior
Certificates, 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) if applicable, the Special Hazard Amount, Fraud Loss Amount and
Bankruptcy Amount as of the close of business on the applicable
Distribution Date and a description of any change in the calculation of
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;
(xii) the servicing fee payable to the Master Servicer and the
Subservicer; and
(xiii) 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) or (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, to the extent described in the related Pooling and Servicing
Agreement, within a reasonable period of time after the end of each calendar
year, the Master Servicer will furnish a report to each person that was a
holder of record of any class of Certificates at any time during such calendar
year. Such report 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 year.
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 called for under the
Mortgage Loans and will, consistent with the related Pooling and
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Servicing Agreement and any applicable insurance policy or other credit
enhancement, follow such collection procedures as it follows with respect to
mortgage loans serviced by it that are comparable to the Mortgage Loans. The
Master Servicer may, in its discretion, waive any prepayment charge in
connection with the prepayment of a Mortgage Loan or extend the Due Dates for
payments due on a Mortgage Note, provided that the insurance coverage for such
Mortgage Loan or any coverage provided by any alternative credit enhancement
will not be adversely affected thereby. 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 certain instances in which a Mortgage Loan is in default (or if default
is reasonably foreseeable), and if determined by the Master Servicer to be in
the best interests of the related Certificateholders, the Master Servicer may
permit certain modifications of the Mortgage Loan rather than proceeding with
foreclosure. In making such determination, the estimated Realized Loss that
might result if such Mortgage Loan were liquidated would be taken into
account. Such modifications may have the effect of reducing the Mortgage Rate
or extending the final maturity date of the Mortgage Loan. Any such modified
Mortgage Loan may remain in the related Trust Fund, and the reduction in
collections resulting from such modification may result in reduced
distributions of interest (or other amounts) on, or may extend the final
maturity of, one or more classes of the related Certificates.
In connection with any significant partial prepayment of a Mortgage Loan,
the Master Servicer, to the extent not inconsistent with the terms of the
Mortgage Note and local law and practice, may permit the Mortgage Loan to be
re-amortized such that the monthly payment is recalculated as an amount that
will fully amortize the remaining principal amount thereof by the original
maturity date based on the original Mortgage Rate, provided that such re-
amortization shall not be permitted if it would constitute a modification of
the Mortgage Loan for federal income tax purposes.
In any case in which property subject to a Mortgage Loan (other than an ARM
Loan described below) is being conveyed by the Mortgagor, 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.
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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.
The Master Servicer will be 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.
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.
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. If a REMIC election has been made, any Mortgaged Property so
acquired by the Trust Fund must be disposed of in accordance with applicable
federal income tax regulations and consistent with the status of the Trust
Fund as a REMIC. To the extent provided in the related Pooling and Servicing
Agreement, 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
receipt and will be available at such time to the extent provided in the
related Pooling and Servicing Agreement, for making payments to
Certificateholders.
With respect to a Mortgage Loan in default, the Master Servicer may pursue
foreclosure (or similar remedies) concurrently with pursuing any remedy for a
breach of a representation and warranty. However, the Master Servicer is not
required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. If such Mortgage
Loan is an Additional Collateral Loan, the Master Servicer (or the related
Subservicer, if the lien on the Additional Collateral for such Additional
Collateral Loan is not assigned to the Trustee on behalf of the
Certificateholders) may proceed against the related Mortgaged Property or the
related Additional Collateral first or may proceed against both concurrently
(as permitted by applicable law and the terms under which such Additional
Collateral is held, including any third-party guarantee). Upon the first to
occur of final liquidation 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. 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 the related Certificateholders, 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
enhancement, the Master Servicer may take
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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 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 the then-current Certificateholders of any outstanding
class 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 event
that any such class of Certificates to which such Realized Loss was allocated
is no longer outstanding, such subsequent recovery shall be distributed to the
persons who were the holders of such class of Certificates when it was
retired. 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 "Insurance Policies on Mortgage
Loans."
For a discussion of legal rights and limitations associated with the
foreclosure of a Mortgage Loan, see "Certain Legal Aspects of Mortgage Loans."
SUBORDINATION
GENERAL
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. Subordination
of the Subordinate Certificates of any Senior/Subordinate Series 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.
With respect to any Senior/Subordinate Series, 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, with respect to any such series, 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 described in the related Prospectus Supplement, prior to allocation of
any amounts to the Subordinate Certificates.
With respect to any defaulted Mortgage Loan that is finally liquidated, the
amount of loss realized, if any (as described in the related Pooling and
Servicing Agreement, a "REALIZED LOSS"), will equal the portion of the
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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. 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 received or not, 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 any Certificates on or before
such date.
If so provided in the Pooling and Servicing Agreement, the Master Servicer
may be permitted, under certain circumstances, to purchase any Mortgage Loan
that is three or more months delinquent in payments of principal and interest,
at the Purchase Price. Any Realized Loss subsequently incurred in connection
with any such Mortgage Loan will be borne by the then-current
Certificateholders of the class or classes that would have borne such Realized
Loss if such Mortgage Loan had not been so purchased.
In the event of any Realized Losses not in excess of the limitations
described below (other than Extraordinary Losses), the rights of the
Subordinate Certificateholders to receive distributions will be subordinate to
the rights of the Senior Certificateholders and the owner of the Excess Spread
and as to certain classes of Subordinate Certificates, may be subordinate to
the rights of other Subordinate Certificateholders.
Except as noted below, Realized Losses will be allocated to the Subordinate
Certificates of the related series until the outstanding principal balances
thereof have been reduced to zero. Additional Realized Losses, if any, will be
allocated to the Senior Certificates. If such series includes more than one
class of Senior Certificates, such additional Realized Losses will be
allocated either on a pro rata basis among all of the Senior Certificates in
proportion to their respective outstanding 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 principal
balances, 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 or as otherwise
specified in the related Prospectus Supplement. Each of the Special Hazard
Amount, Fraud Loss Amount and Bankruptcy Amount may be subject to periodic
reductions and may be subject to further reduction or termination, without the
consent of the Certificateholders, upon the written confirmation from each
applicable Rating Agency, as set forth in the related Prospectus Supplement,
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 outstanding principal balance thereof as of the Distribution Date
following the calendar month in which such Realized Loss was incurred.
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 outstanding principal balance of each such
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class (or, if applicable, the related notional amount). The outstanding
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 Principal
Prepayments 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 set forth 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 percentage of the
outstanding principal balances of the Senior Certificates), 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 outstanding 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 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.
With respect to any Senior/Subordinate Series, the terms and provisions of
the subordination may vary from those described above. Any such variation and
any additional credit enhancement will be described in the related Prospectus
Supplement.
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, interest collections
on the Mortgage Loans may exceed interest payments on the Certificates for the
related Distribution Date. To the extent such excess interest is applied as
principal payments on the Certificates, the effect will be to reduce the
principal balance of the Certificates relative to the outstanding balance of
the Mortgage Loans, thereby creating "OVERCOLLATERALIZATION" and additional
protection to the Certificateholders, as specified in the related Prospectus
Supplement.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
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 losses,
"DEFAULTED MORTGAGE LOSSES"); (ii) of a type generally covered by a Special
Hazard Insurance Policy (any such losses, "SPECIAL HAZARD LOSSES"); (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 losses, "BANKRUPTCY LOSSES"); and
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(iv) incurred on defaulted Mortgage Loans as to which there was fraud in the
origination of such Mortgage Loans (any such losses, "FRAUD LOSSES"). Unless
otherwise specified in the related Prospectus Supplement, credit support will
not provide protection against all risks of loss and will not guarantee
repayment of the entire outstanding principal balance of the Certificates and
interest thereon. If losses occur that exceed the amount covered by credit
support or are of a type that is not covered by the credit support,
Certificateholders will bear their allocable share of deficiencies. In
particular, Defaulted Mortgage Losses, Special Hazard Losses, Bankruptcy
Losses and Fraud Losses in excess of the amount of coverage provided therefor
and 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 specified in the applicable Prospectus Supplement, 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 Certificates as described under
"Subordination," or in the form of a Certificate Insurance Policy, a Letter of
Credit, Mortgage Pool Insurance Policies, 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. In addition,
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 related Prospectus Supplement. In addition, coverage
with respect to Special Hazard Losses may be provided by a Special Hazard
Insurance Policy, coverage with respect to Bankruptcy Losses may be provided
by a Bankruptcy Bond and coverage with respect to Fraud Losses may be provided
by a mortgage repurchase bond. Certain coverage may also be provided by
representations made by Residential Funding or the Company. If so specified in
the related Prospectus Supplement, limited credit enhancement may be provided
to cover Defaulted Mortgage Losses with respect to Mortgage Loans with Loan-
to-Value Ratios at origination of over 80% which are not insured by a Primary
Insurance Policy, to the extent that such losses would be covered under a
Primary Insurance Policy if obtained, or may be provided in lieu of title
insurance coverage, in the form of a corporate guaranty or in certain other
forms described in this section. Credit support may also be provided in the
form of an insurance policy covering the risk of collection and adequacy of
any Additional Collateral provided in connection with any Additional
Collateral Loan, subject to the limitations set forth in any such insurance
policy. As set forth in the Pooling and Servicing Agreement, credit support
may apply to all of the Mortgage Loans or to certain Mortgage Loans contained
in a Mortgage Pool.
Each Prospectus Supplement will include a description of (a) the amount
payable under the credit enhancement arrangement, if any, provided with
respect to a series, (b) any conditions to payment thereunder not otherwise
described herein, (c) the conditions under which the amount payable under such
credit support may be reduced and under which such credit support may be
terminated or replaced and (d) the material provisions of any agreement
relating to such credit support. Additionally, each Prospectus Supplement will
set forth certain information with respect to the issuer of any third-party
credit enhancement (the "CREDIT ENHANCER"), if applicable. The Pooling and
Servicing Agreement or other documents may be modified in connection with the
provisions of any credit enhancement arrangement to provide for reimbursement
rights, control rights or other provisions that may be required by the Credit
Enhancer. To the extent provided in the applicable Prospectus Supplement and
the Pooling and Servicing Agreement, the credit enhancement arrangements may
be periodically modified, reduced and substituted for based on the performance
of or 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, bonds or other instruments
described in this Prospectus or any Prospectus Supplement and the coverage
thereunder do not purport to be complete and are qualified in their entirety
by reference to the actual forms of such policies, copies of which generally
will be exhibits to the Form 8-K to be filed with the Commission in connection
with the issuance of the related series of Certificates.
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LETTERS 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. The Letter of Credit Bank, the amount available under the
Letter of Credit with respect to each component of credit enhancement, the
expiration date of the Letter of Credit, and a more detailed description of
the Letter of Credit will be specified in the related Prospectus Supplement.
On or before each Distribution Date, the Letter of Credit Bank will be
required to make certain payments after notification from the Trustee, to be
deposited in the related Certificate Account with respect to the coverage
provided thereby. The Letter of Credit may also provide for the payment of
Advances.
MORTGAGE POOL INSURANCE POLICIES
Any insurance policy covering losses on a pool of Mortgage Loans (each, a
"MORTGAGE POOL INSURANCE POLICY") obtained by the Company for a Trust Fund
will be issued by the Pool Insurer. Each Mortgage Pool Insurance Policy,
subject to the limitations described below and in the Prospectus Supplement,
if any, will 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 outstanding 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 outstanding 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
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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 that (a)
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 (b) 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, (ii) failure to construct a
Mortgaged Property in accordance with plans and specifications or (iii)
bankruptcy, except if specified in the related Prospectus Supplement an
endorsement to the Mortgage Pool Insurance Policy provides for insurance
against any such loss. 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 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 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 the related Certificateholders. In addition, unless
the Master Servicer determines 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 "Insurance Policies on
Mortgage Loans--Standard Hazard Insurance on Mortgaged Properties," the hazard
policies covering the Mortgage Loans typically exclude from coverage physical
damage resulting from a number of causes and, even when the damage is covered,
may afford recoveries which are significantly less than full replacement cost
of such losses. Additionally, 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 "--Special Hazard Insurance Policies"
below. As a result, certain hazard risks will not be insured against and may
be borne by Certificateholders.
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses (a "SPECIAL HAZARD
INSURANCE POLICY") obtained for a Trust Fund will be issued by the insurer
named in the related Prospectus Supplement (the "SPECIAL HAZARD INSURER").
Each Special Hazard Insurance Policy subject to limitations described below
and in the related Prospectus Supplement, if any, will protect the related
Certificateholders from Special Hazard Losses which are (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. See "Insurance Policies on Mortgage Loans." A Special Hazard
Insurance Policy will not cover losses occasioned by war, civil
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insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear
reaction, chemical contamination or waste by the Mortgagor. 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 Special Hazard Insurer, the amount that the Special
Hazard Insurer will pay will be the amount under (ii) above reduced by the net
proceeds of the sale of the property. If the unpaid principal balance plus
accrued interest and certain expenses is paid by the Special Hazard 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 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.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a Mortgagor, a bankruptcy court may
establish the value of the Mortgaged Property of such Mortgagor (and, if
specified in the related Prospectus Supplement, any related Additional
Collateral) at an amount less than the then outstanding principal balance of
the Mortgage Loan secured by such Mortgaged Property (such difference, a
"DEFICIENT VALUATION"). The amount of the secured debt could then be reduced
to such value, and, thus, the holder of such Mortgage Loan would become an
unsecured creditor to the extent the outstanding principal balance of such
Mortgage Loan exceeds the value assigned to the Mortgaged Property (and any
related Additional Collateral) by the bankruptcy court. In addition, certain
other modifications of the terms of a Mortgage Loan can result from a
bankruptcy proceeding, including a reduction in the amount of the Monthly
Payment on the related Mortgage Loan (a "DEBT SERVICE REDUCTION"). 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 resulting from proceedings under the federal
Bankruptcy Code obtained for a Trust Fund will be issued by an insurer named
in the related Prospectus Supplement. The level of coverage under each
Bankruptcy Bond will be set forth in the related Prospectus Supplement.
RESERVE FUNDS
If so specified in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "RESERVE FUND") any
combination of cash or Permitted Investments in specified amounts, or any
other instrument satisfactory to the Rating Agency or Agencies, which will be
applied and maintained in the
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manner and under the conditions specified in the related Pooling and Servicing
Agreement. 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 Certificates, from the Excess Spread, Excluded Spread or otherwise. To
the extent that the funding of the Reserve Fund is dependent on amounts
otherwise payable on related Certificates, Excess Spread, Excluded 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. 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 specified in the related Prospectus
Supplement, any such Reserve Fund will not be deemed to be part of the related
Trust Fund. A Reserve Fund may provide coverage to more than one series of
Certificates, if set forth in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, 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
the corresponding payments to the Certificateholders. Such delays 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.
CERTIFICATE INSURANCE POLICIES; SURETY BONDS
If so specified in the related Prospectus Supplement, the Company may obtain
one or more certificate insurance policies (each, a "CERTIFICATE INSURANCE
POLICY") or guaranties or one or more surety bonds (each, a "SURETY BOND"),
issued by insurers or other parties acceptable to the Rating Agency or
Agencies rating the Certificates offered, as specified in the related
Prospectus Supplement, insuring the holders of one or more classes of
Certificates the payment of amounts due in accordance with the terms of such
class or classes of Certificates. Any Certificate Insurance Policy, Surety
Bond or guaranty will have the characteristics described in, and will be
subject to such limitations and exceptions set forth in, the related
Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
If 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 credit enhancement 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." The Master Servicer, on behalf of itself,
the Trustee and Certificateholders, will be required to provide information
required for the Trustee to draw under any applicable credit enhancement.
In the event the related insurer ceases to be a "QUALIFIED INSURER" because
it ceases to be qualified under applicable 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 comparable replacement insurance
policy with a total coverage equal to the then outstanding coverage of such
policy. If the cost of the replacement policy is greater than the cost of such
policy, the coverage of the replacement policy will, unless otherwise agreed
to by the Company, be reduced to a level such that its premium
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rate does not exceed the premium rate on the original insurance policy. In the
event that a Pool Insurer ceases to be a Qualified Insurer because it ceases
to be approved as an insurer by the Federal Home Loan Mortgage Corporation
("FREDDIE MAC"), the Federal National Mortgage Association ("FANNIE MAE") or
any successor entity, the Master Servicer will review, not less often than
monthly, the financial condition of such 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 will 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 in market value of the Certificates associated with any
reduction or withdrawal in rating by an applicable Rating Agency shall be
borne by the Certificateholders.
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 Insurance Policy are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any Letter of Credit, Mortgage
Pool Insurance Policy 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.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
Unless otherwise specified in the Prospectus Supplement, the amount of
credit support provided with respect to any series of Certificates and
relating to various types of losses incurred may be reduced under certain
specified circumstances. In most cases, the amount available as credit support
will be subject to periodic reduction on a non-discretionary basis in
accordance with a schedule or formula set forth in the related Pooling and
Servicing Agreement. Additionally, in most cases, such credit support 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 thereby. Furthermore, in the event that the credit rating of any
obligor under any applicable credit enhancement is downgraded, the credit
rating of each class of the related Certificates may be downgraded to a
corresponding level, and, unless otherwise specified in the related Prospectus
Supplement, neither the Master Servicer nor the Company will 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 each class 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 and any amount by which the credit enhancement is reduced will not
be available for distributions in future periods.
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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.
INSURANCE POLICIES ON MORTGAGE LOANS
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below) and, in certain cases, a Primary Insurance Policy
or an alternative form of coverage, as described below. The descriptions of
any insurance policies set forth 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.
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%
generally will be covered by a primary mortgage guaranty insurance policy (a
"PRIMARY INSURANCE POLICY") insuring against default on such Mortgage Loan up
to an amount set forth in the related Prospectus Supplement, 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. Alternatively, coverage of the type that would
be provided by a Primary Insurance Policy if obtained may be provided by
another form of credit enhancement as described herein under "Description of
Credit Enhancement." However, the foregoing standard may vary significantly
depending on the characteristics of the Mortgage Loans and the applicable
underwriting standards. A Mortgage Loan will not be considered to be an
exception to the foregoing standard if no Primary Insurance Policy was
obtained at origination but the Mortgage Loan has amortized to an 80% or less
Loan-to-Value Ratio level as of the applicable Cut-off Date. Unless otherwise
specified in the Prospectus Supplement, the Company will have the ability to
cancel any Primary Insurance Policy if the Loan-to-Value Ratio of the Mortgage
Loan is reduced to 80% or less (or a lesser specified percentage) based on an
appraisal of the Mortgaged Property after the related Closing Date or as a
result of principal payments that reduce the principal balance of the Mortgage
Loan after such Closing 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.
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While the terms and conditions of the Primary Insurance Policies issued by
one primary mortgage guaranty insurer (a "PRIMARY INSURER") will differ
generally from those in Primary Insurance Policies issued by other Primary
Insurers, each Primary Insurance Policy generally will pay either: (i) the
insured percentage of the loss on the related Mortgaged Property; (ii) the
entire amount of such 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. The amount of the
loss as calculated under a Primary Insurance Policy covering a Mortgage Loan
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 received by the insured (other than the
proceeds of hazard insurance) that are derived from the related Mortgaged
Property, (ii) hazard insurance proceeds received by the insured 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.
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 (unless an exception to such standard applies or
alternate credit enhancement is provided as described in the related
Prospectus Supplement), 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 or covered by alternate credit
enhancement as described 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.
STANDARD HAZARD INSURANCE ON MORTGAGED PROPERTIES
The terms of the Mortgage Loans (other than Cooperative Loans) require each
Mortgagor to maintain a hazard insurance policy covering the related Mortgaged
Property and providing for coverage at least equal to that of the standard
form of fire insurance policy with extended coverage customary in the state in
which the property is located. Such coverage generally will be in an amount
equal to the lesser of the principal balance of such Mortgage Loan or 100% of
the insurable value of the improvements securing the Mortgage Loan. The
Pooling and Servicing Agreement will provide that the Master Servicer or
Servicer shall cause such hazard policies to be maintained or shall obtain a
blanket policy insuring against losses on the Mortgage Loans. 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.
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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.
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. 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 generally 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.
THE COMPANY
The Company is an indirect wholly-owned subsidiary of GMAC Mortgage, which
is a wholly-owned subsidiary of General Motors Acceptance Corporation. 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. 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 Certificates do not represent an interest in or an obligation of the
Company. The Company's only obligations with respect to a series of
Certificates will be pursuant to certain limited representations and
warranties made by the Company or as otherwise provided in the related
Prospectus Supplement.
The Company maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 700, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
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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,
including affiliates, that meet its seller/servicer eligibility requirements
and services mortgage loans for its own account and for others. Residential
Funding's principal executive offices are located at 8400 Normandale Lake
Boulevard, Suite 700, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000. Residential Funding conducts operations from its headquarters
in Minneapolis and from offices located in California, Colorado, Connecticut,
New York, Florida, Georgia, Maryland, North Carolina, Rhode Island and Texas.
At March 31, 1996, Residential Funding was master servicing a loan portfolio
of approximately $28.9 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
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 Excess Spread or Excluded
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
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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. In addition,
certain reasonable duties of the Master Servicer may be performed by an
affiliate of the Master Servicer who will be entitled to compensation
therefor.
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).
EVIDENCE AS TO COMPLIANCE
Each Pooling and Servicing Agreement will provide that the Master Servicer
will, with respect to each series of Certificates, deliver to the Trustee, on
or before the date in each year specified in the related Pooling and Servicing
Agreement, an officer's certificate stating that (i) a review of the
activities of the Master Servicer during the preceding calendar year relating
to its servicing of mortgage loans and its performance under pooling and
servicing agreements, including such Pooling and Servicing Agreement has been
made under the supervision of such officer, (ii) to the best of such officer's
knowledge, based on such review, the Master Servicer has complied in all
material respects with the minimum servicing standards set forth in the
Uniform Single Attestation Program for Mortgage Bankers and has fulfilled all
its obligations under such Pooling and Servicing Agreement throughout such
year, or, if there has been material noncompliance with such servicing
standards or a material default in the fulfillment of any such obligation,
such statement shall include a description of such noncompliance or specify
each such default known to such officer and the nature and status thereof and
(iii) to the best of such officers' knowledge, each Subservicer has complied
in all material respects with the minimum servicing standards set forth in the
Uniform Single Attestation Program for Mortgage Bankers and has fulfilled all
of its material obligations under its Subservicing Agreement in all material
respects throughout such year, or, if there has been material noncompliance
with such servicing standards or a material default in the fulfillment of such
obligations, such statement shall include a description of such noncompliance
or specify each such default, as the case may be, known to such officer and
the nature and status thereof. In addition, each Pooling and Servicing
Agreement will provide that the Master Servicer will cause a firm of
independent public accountants which is a member of the American Institute of
Certified Public Accountants to furnish a report stating its opinion that, on
the basis of an examination conducted by such firm substantially in accordance
with standards established by the American Institute of Certified Public
Accountants, the assertions made regarding compliance with the minimum
servicing standards set forth in the Uniform Single Attestation Program for
Mortgage Bankers during the preceding calendar year are fairly stated in all
material respects, subject to such exceptions and other qualifications that,
in the opinion of such firm, such accounting standards require it to report.
In rendering such statement, such firm may rely, as to matters relating to the
direct servicing of mortgage loans by Subservicers, on comparable statements
prepared in connection with examinations conducted in similar manners.
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.
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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.
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 Fannie Mae or Freddie Mac 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.
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 five 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
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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. 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 voting rights in the related Trust Fund
(except as otherwise provided for in the related Pooling and Servicing
Agreement with respect to the Credit Enhancer) the Trustee shall, by written
notification to the Master Servicer and to the Company or the Trustee, as
applicable, terminate all of the rights and obligations of the Master Servicer
under the Pooling and Servicing Agreement (other than any rights of the Master
Servicer as Certificateholder) covering such Trust Fund and in and to the
Mortgage Loans and the proceeds thereof, whereupon the Trustee or, upon notice
to the Company and with the Company's consent, its designee will succeed to
all responsibilities, duties and liabilities of the Master Servicer under such
Pooling and Servicing Agreement (other than the obligation to purchase
Mortgage Loans under certain circumstances) and will be entitled to similar
compensation arrangements. In the event that the Trustee would be obligated to
succeed the Master Servicer but is unwilling so to act, it may appoint (or if
it is unable so to act, it shall appoint) or petition a court of competent
jurisdiction for the appointment of, a Fannie Mae- or Freddie Mac-approved
mortgage servicing institution with a net worth of at least $10,000,000 to act
as successor to the Master Servicer 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.
No Certificateholder will have any right under a Pooling and Servicing
Agreement to institute any proceeding with respect to such Pooling and
Servicing Agreement (except as otherwise provided for in the related Pooling
and Servicing Agreement with respect to the Credit Enhancer) unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates of any class
evidencing not less than 25% of the aggregate Percentage Interests
constituting such class have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for 60 days after
receipt of such request and indemnity has neglected or refused to institute
any such proceeding. 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.
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Company, the
Master Servicer and the Trustee, without the consent of the related
Certificateholders (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 (except that (a) the
Certificate Account Deposit Date may not occur later than the related
Distribution Date, (b) such change may not adversely affect in any material
respect the interests of any Certificateholder, as evidenced by an opinion of
counsel, and (c) such change may not adversely affect the then-current rating
of any rated classes of Certificates, as evidenced by a letter from each
applicable Rating Agency as specified in the related Prospectus Supplement;
(iv) if a REMIC election has
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been made with respect to the related Trust Fund, to modify, eliminate or add
to any of its provisions (a) to the extent 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 (1) such action is necessary
or desirable to maintain such qualification or to avoid or minimize such risk,
and (2) such action will not adversely affect in any material respect the
interests of any, or (b) to restrict the transfer of the REMIC Residual
Certificates, provided that the Company has determined that such change would
not adversely affect the applicable ratings of any classes of the
Certificates, as evidenced by a letter from each applicable Rating Agency as
specified in the related Prospectus Supplement, 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, so long as such action will not adversely affect in any material
respect the interests of any Certificateholder, or (vi) to amend specified
provisions that are not material to holders of any class of Certificates
offered hereunder.
The Pooling and Servicing Agreement may also be amended by the Company, the
Master Servicer and the Trustee (except as otherwise provided for in the
related Pooling and Servicing Agreement with respect to the Credit Enhancer)
with the consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such Pooling
and Servicing Agreement or of modifying in any manner the rights of the
related Certificateholders, 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
percentage of Certificates of any class the holders of which are required to
consent to any such amendment unless the holders of all Certificates of such
class have consented to the change in such percentage.
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.
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 the related Certificateholders of all amounts held in the
Certificate Account or by the Master Servicer and required to be paid to such
Certificateholders 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 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 may 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.
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.
If the Certificateholders are permitted to terminate the trust under the
applicable Pooling and
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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 any such entity to
purchase the Mortgage Loans and related property will be subject to the
criteria, and will be at the price, set forth in the related Prospectus
Supplement. 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.
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 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.
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).
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, unless otherwise
specified in the Prospectus Supplement, 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.
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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 Excess Spread or Excluded Spread) of the related Mortgage Loans (the "NET
MORTGAGE RATE") for the month preceding the Distribution Date. An adjustable
Pass-Through Rate may be calculated by reference to an index or otherwise. The
aggregate payments of interest on a class of 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 amount of Certificates
entitled to payments of interest only) 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
addition, if the index used to determine the Pass-Through Rate for the
Certificates is different than the Index applicable to the Mortgage Rates, the
yield on the Certificates will be sensitive to changes in the index related to
the Pass-Through Rate and the yield on the Certificates may be reduced by
application of a cap on the Pass-Through Rate based on the weighted average of
the Net Mortgage Rates.
In general, if a Certificate is purchased at a premium over its face amount
and payments of principal on the related Mortgage Loans occur at a rate faster
than assumed at the time of purchase, the purchaser's actual yield to maturity
will be lower than that anticipated at the time of purchase. Conversely, if a
class of Certificates is purchased at a discount from its face amount 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 disproportionate payments of
interest. 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, 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 that 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, prepayments in full
will reduce the amount of interest distributed in the following month to
holders of Certificates entitled to distributions of interest because the
resulting Prepayment Interest Shortfall will not be covered by Compensating
Interest. See "Description of the Certificates--Prepayment Interest
Shortfalls." 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
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specified in the related Prospectus Supplement, the effect of a partial
prepayment on a Mortgage Loan will be to reduce the amount of interest
distributed 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. See "Description of the Certificates--Prepayment Interest
Shortfalls." Neither full or partial principal prepayments nor Liquidation
Proceeds will be distributed until the Distribution Date in the month
following receipt. See "Maturity and Prepayment Considerations."
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. The yield on any class of
Certificates and the timing of principal payments thereon may also be affected
by certain modifications or actions that may be approved by the Master
Servicer as described herein under "Description of the Certificates--
Collection and Other Servicing Practices," in connection with a Mortgage Loan
that is in default (or if a default is reasonably foreseeable).
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 monthly payments following the adjustment of the
Mortgage Rate. In addition, the periodic increase in the amount paid by the
Mortgagor of a Buy-Down Mortgage Loan during or at the end of the applicable
Buy-Down 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 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 of
Certificates will lengthen the weighted average life thereof and may adversely
affect yield to holders thereof. 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 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.
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."
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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, the timing and rate of repurchases and the
timing and amount of liquidations with respect to the related 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 nor any of their
affiliates will be obligated to refinance or repurchase any Mortgage Loan or
to sell the Mortgaged Property.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The Prospectus Supplement for each series of Certificates
may describe one or more such prepayment standards or models and may contain
tables setting forth the projected yields to maturity on each class of
Certificates and/or the weighted average life of each class of Certificates
and the percentage of the original principal amount of each class of
Certificates of such series that would be outstanding on specified payment
dates for such series based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans are
made at rates corresponding to various percentages of the prepayment standard
or model. There is no assurance that prepayment of the Mortgage Loans
underlying a series of Certificates will conform to any level of the
prepayment standard or model specified in the related Prospectus Supplement.
A number of factors, including homeowner mobility, economic conditions,
changes in mortgagors' housing needs, job transfers, unemployment, mortgagors'
equity in the properties securing the mortgages, servicing decisions,
enforceability of due-on-sale clauses, mortgage market interest rates,
mortgage recording taxes, solicitations and the availability of mortgage
funds, and the obtaining of secondary financing by the Mortgagor, may 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 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.
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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 or the Master Servicer may
encourage the refinancing of Mortgage Loans, including defaulted Mortgage
Loans, that would permit creditworthy borrowers to assume the outstanding
indebtedness of such Mortgage Loans.
All statistics known to the Company that have been compiled with respect to
prepayment experience on mortgage loans indicate that while some mortgage
loans may remain outstanding until their stated maturities, a substantial
number will be paid prior to their respective stated maturities.
The rate of prepayment with respect to conventional fixed-rate mortgage
loans has fluctuated significantly in recent years. For example, published
principal balance information for Freddie Mac and Fannie Mae 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 (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
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 state law (which laws may differ substantially from state
to state), the summaries do not purport to be complete, to reflect the laws of
any particular state or to encompass the laws of all states in which the
Mortgaged Properties may be situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Mortgage Loans.
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THE MORTGAGE LOANS
General
The Mortgage Loans (other than Cooperative Loans) will be secured by deeds
of trust, mortgages or deeds to secure debt depending upon the prevailing
practice in the state in which the related Mortgaged Property is located. In
some states, a mortgage, deed of trust or deed to secure debt creates a lien
upon the real property encumbered by the mortgage. In other states, the
mortgage, deed of trust or deed to secure debt conveys legal title to the
property to the mortgagee subject to a condition subsequent (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 with respect to such instruments depends on their
terms and in some cases on the terms of separate subordination or inter-
creditor 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 trustor, who is the borrower/homeowner;
the beneficiary, who is the lender; and a third-party grantee called the
trustee. Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale, to the
trustee to secure payment of the obligation. A deed to secure debt typically
has two parties, pursuant to which the borrower, or grantor, conveys title to
the real property to the grantee, or lender, generally with a power of sale,
until such time as the debt is repaid. The trustee's authority under a deed of
trust and the mortgagee's authority under a mortgage are governed by the law
of the state in which the real property is located, the express provisions of
the deed of trust, mortgage or deed to secure debt and, in certain deed of
trust, transactions, the directions of the beneficiary.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans may include Cooperative Loans. Each debt
instrument (a "COOPERATIVE NOTE") evidencing a Cooperative Loan will be
secured by a security interest in shares issued by the related corporation (a
"COOPERATIVE") that owns the related apartment building, which is a
corporation entitled to be treated as a housing cooperative under federal tax
law, and in the related proprietary lease or occupancy agreement granting
exclusive rights to occupy a specific dwelling unit in the Cooperative's
building. The security agreement will create a lien upon, or grant a security
interest in, the Cooperative shares and proprietary leases or occupancy
agreements, the priority of which will depend on the terms of the particular
security agreement as well as the order of recordation of the agreement (or
the filing of the financing statements related thereto) in the appropriate
recording office or the taking of possession of the Cooperative shares,
depending on the law of the state in which the Cooperative is located. Such a
lien or security interest is not, in general, prior to liens in favor of the
cooperative corporation for unpaid assessments or common charges.
Unless otherwise specified in the related Prospectus Supplement, all
Cooperative buildings relating to the Cooperative Loans are located in the
State of New York. Generally, each Cooperative owns in fee or has a leasehold
interest in all the real property and owns in fee or leases the building and
all separate dwelling units therein. The Cooperative is directly responsible
for property management and, in most cases, payment of real estate taxes,
other governmental impositions and hazard and liability insurance. If there is
an underlying mortgage (or mortgages) on the Cooperative's 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 mortgagor or lessee, as
the case may be, is also responsible for fulfilling such mortgage or rental
obligations. An underlying mortgage loan is ordinarily obtained by the
Cooperative in connection with either the construction or purchase of the
Cooperative's building or the obtaining of capital by the Cooperative. The
interest of the occupant under proprietary leases or occupancy agreements as
to which that Cooperative is the landlord is generally subordinate
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to the interest of the holder of an underlying mortgage and to the interest of
the holder of a land lease. If the Cooperative is unable to meet the payment
obligations (i) arising under an underlying mortgage, the mortgagee holding an
underlying mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements or (ii) arising under
its land lease, the holder of the landlord's interest under the land lease
could terminate it and all subordinate proprietary leases and occupancy
agreements. In addition, an underlying mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity.
The inability of the Cooperative to refinance a mortgage and its consequent
inability to make 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 an underlying mortgage or the
termination of the underlying lease could eliminate or significantly diminish
the value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of shares of the Cooperative or, in the case of
the Mortgage Loans, the collateral securing the Cooperative Loans.
Each Cooperative is owned by shareholders (referred to as tenant-
stockholders) who, through ownership of stock or shares in the Cooperative,
receive proprietary leases or occupancy agreements which confer exclusive
rights to occupy specific dwellings. Generally, a tenant-stockholder of a
Cooperative must make a monthly rental payment to the Cooperative pursuant to
the proprietary lease, which rental payment represents such tenant-
stockholder's pro rata share of the Cooperative's payments for its underlying
mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a Cooperative and accompanying
occupancy rights may be financed through a Cooperative Loan evidenced by a
Cooperative Note and secured by an assignment of and a security interest in
the occupancy agreement or proprietary lease and a security interest in the
related shares of the related Cooperative. The lender 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 Cooperative Note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of Cooperative shares. See "--Foreclosure
on Shares of Cooperatives" below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "TENANT-STOCKHOLDER" (as defined in Section 216(b)(2) of the
Code of a corporation that qualifies as a "COOPERATIVE HOUSING CORPORATION"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his or her taxable year to the corporation
representing his or her proportionate share of certain interest expenses and
certain real estate taxes allowable as a deduction under Section 216(a) of the
Code to the corporation under Sections 163 and 164 of the Code. In order for a
corporation to qualify under Section 216(b)(1) of the Code for its taxable
year in which such items are allowable as a deduction to the corporation, such
section requires, among other things, that at least 80% of the gross income of
the corporation be derived from its tenant-stockholders. By virtue of this
requirement, the status of a corporation for purposes of Section 216(b)(1) of
the Code must be determined on a year-to-year basis. Consequently, there can
be no assurance that Cooperatives relating to the Cooperative Loans will
qualify under such section for any particular year. In the event that such a
Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Section 216(a) of the Code with respect to those years. In view of
the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Section 216(b)(1) of the Code, the likelihood
that such a failure would be permitted to continue over a period of years
appears remote.
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Foreclosure on Mortgage Loans
Although a deed of trust or a deed to secure debt may also be foreclosed by
judicial action, foreclosure of a deed of trust or a deed to secure debt is
generally accomplished by a non-judicial trustee's sale under a specific
provision in the deed of trust which authorizes the trustee or lender, as
applicable, 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, in some states, the trustee or lender, as applicable, must provide
notice to any other individual having an interest of record in the real
property, including any junior lienholders. If the deed of trust is not
reinstated within a specified period, a notice of sale must be posted in a
public place and, in most states, published for a specific period of time in
one or more newspapers. In addition, some states' laws require that a copy of
the notice of sale be posted on the property and sent to all parties having an
interest of record in the real property.
Foreclosure of a mortgage generally is 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 result from difficulties in locating and
serving necessary parties, including borrowers located outside the
jurisdiction in which the mortgaged property is located. 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 a mortgage, a deed of trust or deed to
secure debt, 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 may have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the
foreclosure proceedings, it is uncommon for a third party to purchase the
property at a foreclosure sale. Rather, it is common for the lender to
purchase the property from the trustee or 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. Generally, the lender will
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending 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. In some cases, a deficiency judgment may be pursued in
lieu of foreclosure. Any loss may be reduced by the receipt of any mortgage
insurance proceeds or other forms of credit enhancement for a series of
Certificates. See "Description of Credit Enhancement."
Foreclosure on Shares of Cooperatives
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, 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's building incurred by such
tenant-stockholder. Generally, 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
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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 or occupancy agreement, establishes the rights and
obligations of both parties in the event of a default by the tenant-
stockholder on its obligations under the proprietary lease or occupancy
agreement. A default by the tenant-stockholder under the proprietary lease or
occupancy agreement will usually constitute a default under the security
agreement between the lender and the tenant-stockholder.
The recognition agreement 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 shares and the
proprietary lease or occupancy agreement allocated to the dwelling, 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 board of directors
of the Cooperative as required by the proprietary lease before transferring
the Cooperative shares and 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.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
A foreclosure on the Cooperative shares is accomplished by public sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code
(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 creditors
selling similar collateral in the same area 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, a deed to secure
debt or foreclosure of a mortgage, the borrower and foreclosed junior lienors
or other parties are given a statutory period (generally ranging from six
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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 or a deed to secure debt.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage or a
deed to secure debt. In some states (including California), statutes limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
the borrower following foreclosure. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the net amount realized upon the public sale of the real property and
the amount due to the lender. In the case of a Mortgage Loan secured by a
property owned by a trust where the Mortgage Note is executed on behalf of the
trust, a deficiency judgment against the trust following foreclosure or sale
under a deed of trust, even if obtainable under applicable law, may be of
little value to the mortgagee or beneficiary if there are no trust assets
against which such deficiency judgment may be executed. Some state statutes
require the beneficiary or mortgagee to exhaust the security afforded under a
deed of trust, deed to secure debt or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, in those states permitting
such election, is that lenders will usually proceed against the security first
rather than bringing a personal action against the borrower. Finally, in
certain other states, statutory provisions limit any deficiency judgment
against the borrower following a foreclosure to the excess of the outstanding
debt over the fair value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or mortgagee
from obtaining a large deficiency judgment against the borrower as a result of
low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on Cooperative Shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its collateral
and/or enforce a deficiency judgment. For example, under the federal
bankruptcy law, all actions against the debtor, the debtor's property and any
co-debtor are automatically stayed upon the filing of a bankruptcy petition.
Moreover, a court having federal bankruptcy jurisdiction may permit a debtor
through its Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default in respect of a mortgage loan on such 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 which is not the principal
residence of the debtor may be modified. These courts have allowed
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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. Courts with federal bankruptcy jurisdiction similarly
may be able to modify the terms of a Cooperative Loan.
Certain tax liens arising under the Code may, in certain circumstances, have
priority over the lien of a mortgage, deed to secure debt or deed of trust.
This may have the effect of delaying or interfering with the enforcement of
rights with respect to a defaulted Mortgage Loan.
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.
Certain of the Mortgage Loans may be subject to special rules, disclosure
requirements and other provisions that were added to the federal Truth-in-
Lending Act by the Homeownership and Equity Protection Act of 1994 (such
Mortgage Loans, "HIGH COST LOANS"), if such Mortgage Loans were originated on
or after October 1, 1995, are not mortgage loans made to finance the purchase
of the mortgaged property and have interest rates or origination costs in
excess of certain prescribed levels. Purchasers or assignees of any High Cost
Loan, including any Trust Fund, could be liable for all claims and subject to
all defenses arising under such provisions that the borrower could assert
against the originator thereof. Remedies available to the borrower include
monetary penalties, as well as recision rights if the appropriate disclosures
were not given as required.
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 has been 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 prohibit 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.
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Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the
lender undertake affirmative and expensive actions to determine the causes for
the borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have required that lenders reinstate
loans or recast payment schedules in order to accommodate borrowers who are
suffering from temporary financial disability. In other cases, courts have
limited the right of the lender to foreclose if the default under the mortgage
instrument is not monetary, such as the borrower failing to adequately
maintain the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under deeds of
trust, deeds to secure debt or mortgages receive notices in addition to the
statutorily prescribed minimum. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that the sale by a trustee
under a deed of trust, or under a deed to secure a debt or a 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 ("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 impose 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.
Unless otherwise set forth in the related Prospectus Supplement, each
Seller, or another specified party, will have represented that each 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, (i) state-chartered banks
may originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to the origination
of alternative mortgage instruments by national banks, (ii) 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 (iii) 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 also provides
that any state may reject applicability of the provisions of Title VIII by
adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
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ENVIRONMENTAL LEGISLATION
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Most environmental statutes create obligations for any
party that can be classified as the "owner" or "operator" of a "facility"
(referring to both operating facilities and to real property). Under the laws
of some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, a lender may be liable, as an "owner"
or "operator," for costs arising out of releases or threatened releases of
hazardous substances that require remedy at a mortgaged property, if agents or
employees of the lender have become sufficiently involved in the operations of
the borrower or, subsequent to a foreclosure, in the management of the
property. Such liability may arise regardless of whether the environmental
damage or threat was caused by a prior owner.
Under federal and certain state laws, contamination of a property may give
rise to a lien on the property to assure the payment of costs of clean-up.
Under federal law and in several states, such a lien has priority over the
lien of an existing mortgage against such property. If a lender is or becomes
directly liable following a foreclosure, it may be precluded from bringing an
action for contribution against the owner or operator who created the
environmental hazard. Such clean-up costs may be substantial. It is possible
that such costs could become a liability of the related Trust Fund and
occasion a loss to Certificateholders in certain circumstances described above
if such remedial costs were incurred.
Except as otherwise specified in the applicable Prospectus Supplement, at
the time the Mortgage Loans were originated, no environmental assessment or a
very limited environment assessment of the Mortgaged Properties will have been
conducted.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Relief Act, a borrower who enters military service
after the origination of such borrower's mortgage loan (including a borrower
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 borrower's active duty
status, unless a court orders otherwise upon application of the lender. The
Relief Act applies to borrowers who are members of the Air Force, Army,
Marines, Navy, National Guard, Reserves or Coast Guard, and officers of the
U.S. Public Health Service assigned to duty with the military. Because the
Relief Act applies to borrowers who enter military service (including
reservists who are called to active duty) after origination of the related
mortgage loan, no information can be provided as to the number of Mortgage
Loans that may be affected by the Relief Act. With respect to Mortgage Loans
included in a Trust Fund, 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 such 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 or any 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.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to pay
a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance
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penalties. In certain states, there are or may be specific limitations upon
the late charges which a lender may collect from a borrower for delinquent
payments. Certain states also limit the amounts that a lender may collect from
a borrower as an additional charge if the loan is prepaid. In addition, the
enforceability of provisions that provide for prepayment fees or penalties
upon an involuntary prepayment is unclear under the laws of many states. Most
conventional single-family mortgage loans may be prepaid in full or in part
without penalty. The regulations of the Federal Home Loan Bank Board, as
succeeded by the OTS, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by
exercise of a due-on-sale clause. A mortgagee to whom a prepayment in full has
been tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to Mortgage Loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements
of the Mortgage Loans.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of drug-
related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at
the time of execution of the mortgage, "reasonably without cause to believe"
that the property was used in, or purchased with the proceeds of, illegal drug
or RICO activities.
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 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. In addition, the
authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. 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 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 or in a Prospectus Supplement. 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 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 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
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such an election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC. If a REMIC election will not be made for a
Trust Fund, the federal income consequences of the purchase, ownership and
disposition of the related Certificates will be set forth in the related
Prospectus Supplement. 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 through 1273 and Section
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.
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.
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The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections. In addition, in some instances Mortgage Loans
(including Additional Collateral Loans) may not be treated entirely as assets
described in the foregoing sections. If the assets of a REMIC include
Additional Collateral Loans, the non-real property collateral, while itself
not an asset of the REMIC, could cause the Mortgage Loans not to qualify for
one or more of such characterizations. If so, the related Prospectus
Supplement will describe the Mortgage Loans (including Additional Collateral
Loans) that may not be so treated. The REMIC Regulations do provide, however,
that payments on Mortgage Loans held pending distribution are considered part
of the Mortgage Loans for purposes of Sections 593(d) and 856(c)(5)(A) of the
Code.
Tiered REMIC Structures
For certain series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("TIERED REMICS") for federal income tax purposes. Upon 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
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actual prepayment rate and the prepayment assumption. The prepayment
assumption is to be determined in a manner prescribed in Treasury regulations;
as noted above, those regulations have not been issued. The Conference
Committee Report (the "COMMITTEE REPORT") accompanying the Tax Reform Act of
1986 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 Internal Revenue Service ("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 herein) 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
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out of interest paid on the first Distribution Date. It is unclear how an
election to do so would be made under the OID Regulations and whether such an
election could be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which
is the amount of the payment, and the denominator of which is the stated
redemption price at maturity of such REMIC Regular Certificate. Under the OID
Regulations, original issue discount of only a de minimis amount (other than
de minimis original issue discount attributable to a so-called "teaser"
interest rate or an initial interest holiday) will be included in income as
each payment of stated principal is made, based on the product of the total
amount of such de minimis original issue discount and a fraction, the
numerator of which is the amount of such principal payment and the denominator
of which is the outstanding stated principal amount of the REMIC Regular
Certificate. The OID Regulations also would permit a Certificateholder to
elect to accrue de minimis original issue discount into income currently based
on a constant yield method. See "--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 (1) 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 (2) using
a discount rate equal to the original yield to maturity of the Certificate.
For these purposes, the original yield to maturity of the Certificate will be
calculated based on its issue price and assuming that distributions on the
Certificate will be made in all accrual periods based on the 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.
The OID Regulations suggest that original issue discount with respect to
securities that represent multiple uncertificated REMIC regular interests, in
which ownership interests will be issued simultaneously to the same buyer and
which may be required under the related Pooling and Servicing Agreement to be
transferred together, should be computed on an aggregate method. In the
absence of further guidance from the IRS, original issue discount with respect
to securities that represent the ownership of multiple uncertificated REMIC
regular interests
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will be reported to the IRS and the Certificateholders on an aggregate method
based on a single overall constant yield and the prepayment assumption stated
in the related Prospectus Supplement, treating all such uncertificated regular
interests as a single debt instrument as set forth in the OID Regulations, so
long as the Pooling and Servicing Agreement requires that such uncertificated
regular interests be transferred together.
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 "--
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 "--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
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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.
In addition, 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 "--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
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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 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 herein) 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 REMIC Residual Certificateholder 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
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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.
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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 related Certificateholder and decreased (but not below
zero) by distributions made, and by net losses allocated, to such related
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 such 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.
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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 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 "--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
herein) 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."
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% of the anticipated weighted average life of the REMIC and
on any required or permitted clean up calls or required qualified liquidation
provided for in the REMIC's organizational documents.
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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; except
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. Any such 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" for additional
restrictions applicable to transfers of certain REMIC Residual Certificates to
foreign persons.
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Mark-to-Market Rules
On December 28, 1993, the IRS released temporary regulations (the "MARK-TO-
MARKET REGULATIONS") relating to the requirement that a securities dealer mark
to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-
market requirement, a "negative value" REMIC Residual Certificate is not
treated as a security and thus generally may not be marked to market. This
exclusion from the mark-to-market requirement is expanded to include all REMIC
Residual Certificates under proposed Treasury regulations published January 4,
1995 which provide that any REMIC Residual Certificate issued after January 4,
1995 will not be treated as a security and therefore generally may not be
marked to market. Prospective purchasers of a REMIC Residual Certificate
should consult their tax advisors regarding the possible application of the
mark-to-market requirement to REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single
class grantor trust, all or a portion of such fees and expenses should be
allocated to the 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 with their tax advisors
prior to making an investment in such 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
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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, including provisions (a)
requiring any transferee of a REMIC Residual Certificate to provide an
affidavit representing that it is not a "disqualified organization" and is not
acquiring the REMIC Residual Certificate on behalf of a "disqualified
organization," undertaking to maintain such status and agreeing to obtain a
similar affidavit from any person to whom it shall transfer the REMIC Residual
Certificate, (b) providing that any transfer of a REMIC Residual Certificate
to a "disqualified person" shall be null and void and (c) granting to the
Master Servicer the right, without notice to the holder or any prior holder,
to sell to a purchaser of its choice any REMIC Residual Certificate that shall
become owned by a "disqualified organization" despite (a) and (b) above.
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 Freddie Mac), (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.
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-
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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 Certificateholders on the sale will not be deductible, but instead
will be added to such REMIC Residual Certificateholders 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" (the "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
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property (the "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 the 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.
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 Certificateholder's adjusted basis
in such Certificate, such 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 REMIC Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Trustee will file REMIC federal income tax returns on behalf
of the related REMIC and the entity identified as the REMIC Administrator in
the related Pooling and Servicing Agreement (the "REMIC ADMINISTRATOR") will
prepare such REMIC federal income tax returns and will be designated as and
will act as the "tax matters person" for the REMIC in all respects, and may
hold a nominal amount of REMIC Residual Certificates.
As the tax matters person, the REMIC Administrator, subject to certain
notice requirements and various restrictions and limitations, generally will
have the authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review
of items of income, deduction, gain or loss of the REMIC, as well as the
REMIC's classification. REMIC Residual Certificateholders generally will 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 REMIC Administrator, as tax matters person,
and the IRS concerning any such REMIC item. Adjustments made to the REMIC tax
return may require a REMIC Residual Certificateholders to make corresponding
adjustments on its return, and an audit of the REMIC's tax return, or the
adjustments resulting from such an audit, could result in an audit of such
Certificateholder's return. No REMIC will be registered as a tax shelter
pursuant to
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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 REMIC Administrator 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 REMIC Administrator. 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 REMIC
Administrator 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
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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 tax
advisors with respect to the various tax consequences of investments in the
Certificates offered hereby.
ERISA CONSIDERATIONS
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 and
annuities ("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.
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PLAN ASSET REGULATIONS
An investment of Plan Assets in Certificates may cause the underlying
Mortgage Loans and Mortgage Securities 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
Section 4975 of 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 an entity (such as a Trust Fund) or may
be deemed merely to include a Plan's interest in the instrument evidencing
such equity interest (such as a Certificate). 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, the term "plan assets" ("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/or Section
4975 of 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 Plan 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 such 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 Plan 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 Plan 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 Plan 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 result
in 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 Residential Funding 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 of certain secured obligations such as
Mortgage Loans which are held in a trust and the purchase, sale and holding of
pass-through certificates issued by such 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
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the Underwriter or placement agent, provided that certain conditions set forth
in the Exemption are satisfied. For purposes of this section, 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 a Plan 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 a Plan or with Plan Assets must be
rated in one of the three highest generic rating categories by Standard &
Poor's Ratings Services, Moody's Investors Service, Inc., Duff & Phelps, Inc.
or Fitch Investors Service, L.P. Fourth, the Trustee cannot be an affiliate of
any other member of the "Restricted Group" which consists of any Underwriter,
the Company, the Master Servicer, any Subservicer, the Trustee and any
mortgagor with respect to assets of a Trust Fund constituting more than 5% of
the aggregate unamortized principal balance of the 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
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
or Plan Asset investor must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities Act of 1933,
as amended.
A fiduciary of or other investor of Plan Assets 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, and 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 excise 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 assets of a Trust
Fund or (b) an affiliate of such a person, (2) the direct or indirect
acquisition or disposition in the secondary market of Certificates by a Plan
or with Plan Assets and (3) the holding of Certificates by a Plan or with Plan
Assets.
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Additionally, 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 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. 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, and 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 excise 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 (or a Disqualified Person) with
respect to an investing Plan (or Plans holding interests in the investing
entity holding Plan Assets) by virtue of providing services to the Plan or
such Plan Assets (or by virtue of having certain specified relationships to
such a person) solely as a result of the ownership of Certificates by a Plan
or such Plan Asset investor.
Before purchasing a Certificate, a fiduciary or other investor of Plan
Assets should itself confirm that (a) the Certificates constitute
"certificates" for purposes of the Exemption and (b) 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 Asset investor should consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates
with Plan Assets.
Any fiduciary or other Plan Asset investor that 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 ("PTCE") 83-1
("PTCE 83-1") for certain transactions involving mortgage pool investment
trusts. However, PTCE 83-1 does not provide exemptive relief with respect to
Certificates evidencing interests in Trust Funds which include Cooperative
Loans. In addition, such fiduciary or other Plan Asset investor should
consider the availability of PTCE 95-60, regarding investments by insurance
company general accounts, PTCE 90-1, regarding investments by insurance
company pooled separate accounts, PTCE 96-23, regarding transactions effected
by "in-house asset managers," PTCE 91-38, regarding investments by bank
collective investment funds, and PTCE 84-14, regarding transactions effected
by "qualified professional asset managers." 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. There can be no assurance
that any of these exemptions will apply with respect to any particular Plan's
or other Plan Asset investor's investment in the Certificates or, even if an
exemption were deemed to apply, that any exemption would apply to all
prohibited transactions that may occur in connection with such an investment.
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."
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CONSULTATION WITH COUNSEL
Any fiduciary or other investor of Plan Assets 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, and continues to
be, rated in one of the two highest rating categories by at least one
nationally recognized statistical rating organization will constitute
"mortgage related securities" for purposes of 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 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. (S)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 Office of Thrift Supervision
(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 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
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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
nationally recognized statistical rating organization, 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.
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In addition, if specified in the related Prospectus Supplement, a series of
Certificates may be offered in whole or in part to the Seller of the related
Mortgage Loans 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, including certain federal income tax 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. The Certificates do not represent an interest in or
an obligation of the Company. The Company's only obligations with respect to a
series of Certificates will be to repurchase the Mortgage Loans upon any
breach of certain limited representations and warranties made by the Company,
or as otherwise provided in the applicable Prospectus Supplement.
94
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
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<S> <C>
Accrual Certificates....................................................... 5
Additional Collateral...................................................... 11
Additional Collateral Loans................................................ 11
Advance.................................................................... 36
Affiliated Sellers......................................................... 12
Appraised Value............................................................ 14
ARM Loans.................................................................. 13
Balloon Amount............................................................. 14
Balloon Loans.............................................................. 14
Bankruptcy Amount.......................................................... 42
Bankruptcy Losses.......................................................... 43
Beneficial Owner........................................................... 26
Book-Entry Certificates.................................................... 26
Buydown Account............................................................ 15
Buydown Agreement.......................................................... 33
Buydown Funds.............................................................. 15
Buydown Mortgage Loans..................................................... 15
Buydown Period............................................................. 15
CEDEL...................................................................... 26
CEDEL Participants......................................................... 27
Certificate Account........................................................ 31
Certificate Administrator.................................................. 15
Certificate Insurance Policy............................................... 48
Certificate Registrar...................................................... 26
Certificateholder.......................................................... 26
Certificates............................................................... 1
Clearance Cooperative...................................................... 27
Closing Date............................................................... 74
Code....................................................................... 8
Commission................................................................. 15
Committee Report........................................................... 74
Company.................................................................... 1
Compensating Interest...................................................... 37
Contributions Tax.......................................................... 86
Convertible Mortgage Loan.................................................. 15
Cooperative................................................................ 63
Cooperative Loans.......................................................... 11
Cooperative Note .......................................................... 63
Cooperative Notes.......................................................... 11
Credit Enhancer............................................................ 44
Custodial Account.......................................................... 22
Custodian.................................................................. 29
Debt Service Reduction..................................................... 47
Defaulted Mortgage Losses.................................................. 43
Deferred Interest.......................................................... 13
Deficient Valuation........................................................ 47
Deleted Mortgage Loan...................................................... 21
Depositaries............................................................... 26
Designated Seller Transaction.............................................. 12
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
Determination Date......................................................... 35
Disqualified Persons....................................................... 88
Distribution Amount........................................................ 34
Distribution Date.......................................................... 6
DOL........................................................................ 89
DOL Regulations............................................................ 89
DTC........................................................................ 26
DTC Participants........................................................... 26
Due Date................................................................... 35
Eligible Account........................................................... 31
ERISA...................................................................... 8
ERISA Plans................................................................ 88
Euroclear.................................................................. 26
Euroclear Operator......................................................... 27
Euroclear Participants..................................................... 27
Excess Spread.............................................................. 30
Exchange Act............................................................... 2
Excluded Spread............................................................ 30
Exemption.................................................................. 89
Extraordinary Losses....................................................... 44
Fannie Mae................................................................. 49
FDIC....................................................................... 19
Form 8-K................................................................... 15
Fraud Losses............................................................... 44
Fraud Loss Amount.......................................................... 42
Freddie Mac................................................................ 49
Garn-St Germain Act........................................................ 68
GMAC MORTGAGE.............................................................. 1
Guide...................................................................... 16
High Cost Loans............................................................ 68
Holder..................................................................... 26
Index...................................................................... 13
Indirect Participants...................................................... 26
Insurance Proceeds......................................................... 31
IRAs....................................................................... 88
IRS........................................................................ 74
Issue Premium.............................................................. 80
Letter of Credit........................................................... 45
Letter of Credit Bank...................................................... 45
Liquidated Mortgage Loan................................................... 40
Liquidation Proceeds....................................................... 31
Loan-to-Value Ratio........................................................ 14
Manager.................................................................... 12
Mark-to-Market Regulations................................................. 83
Master Commitments......................................................... 16
Master Servicer............................................................ 1
Mezzanine Certificates..................................................... 5
Mortgage Loans............................................................. 1
Mortgage Notes............................................................. 11
Mortgage Pool.............................................................. 4
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
Mortgage Pool Insurance Policy............................................. 45
Mortgage Rate.............................................................. 13
Mortgage Securities........................................................ 6
Mortgaged Properties....................................................... 5
Mortgages.................................................................. 11
Net Mortgage Rate.......................................................... 59
Nonrecoverable Advance..................................................... 33
Note Margin................................................................ 13
OID Regulations............................................................ 72
OTS........................................................................ 92
Overcollateralization...................................................... 43
Participants............................................................... 26
Parties in Interest........................................................ 88
Pass-Through Rate.......................................................... 4
Paying Agent............................................................... 34
Payment Date............................................................... 34
Percentage Interest........................................................ 34
Permitted Investments...................................................... 31
Plan Assets................................................................ 89
Plans...................................................................... 88
Policy Statement........................................................... 92
Pool Insurer............................................................... 33
Pooling and Servicing Agreement............................................ 4
Prepayment Assumption...................................................... 74
Prepayment Interest Shortfall.............................................. 37
Primary Insurance Policy................................................... 50
Primary Insurer............................................................ 51
Principal Prepayments...................................................... 36
Prohibited Transactions Tax................................................ 85
PTCE....................................................................... 91
PTCE 83-1.................................................................. 91
Purchase Obligation........................................................ 50
Purchase Price............................................................. 21
Qualified Insurer.......................................................... 48
Qualified Retirement Plans................................................. 88
Qualified Substitute Mortgage Loan......................................... 21
Rating Agency.............................................................. 8
Realized Loss.............................................................. 41
Record Date................................................................ 34
Registration Statement..................................................... 2
REMIC...................................................................... 1
REMIC Administrator........................................................ 86
REMIC Provisions........................................................... 71
REMIC Regular Certificates................................................. 72
REMIC Regulations.......................................................... 72
REMIC Residual Certificates................................................ 72
REO Mortgage Loan.......................................................... 40
Reserve Fund............................................................... 47
Residential Funding........................................................ 4
RICO....................................................................... 71
Seller..................................................................... 23
</TABLE>
97
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Sellers.................................................................... 12
Senior Certificates........................................................ 5
Senior/Subordinate Series.................................................. 25
Servicing Advances......................................................... 33
Single Certificate......................................................... 38
SMMEA...................................................................... 8
Special Hazard Amount...................................................... 42
Special Hazard Insurance Policy............................................ 46
Special Hazard Insurer..................................................... 46
Special Hazard Losses...................................................... 43
Stated Principal Balance................................................... 42
Strip Certificate.......................................................... 4
Subordinate Amount......................................................... 43
Subordinate Certificates................................................... 5
Subservicers............................................................... 15
Subservicing Account....................................................... 30
Subservicing Agreement..................................................... 23
Surety Bond................................................................ 48
Tax Exempt Investor........................................................ 91
Tax-Favored Plans.......................................................... 88
Terms and Conditions....................................................... 27
Tiered REMICs.............................................................. 73
Title V.................................................................... 69
Title VIII................................................................. 69
Trust Fund................................................................. 1
Trustee.................................................................... 4
UBTI....................................................................... 91
UCC........................................................................ 66
Unaffiliated Sellers....................................................... 12
</TABLE>
98
