Direct Dial: (212) 912-7450
June 23, 1998
BY EDGAR
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
Attention: Filing Desk
Re: Residential Funding Mortgage Securities I, Inc. Registration Statement on
Form S-3 relating to Mortgage Pass-Through Certificates, to be combined
with Registration Statement 333-39665 pursuant to Rule 429
Ladies and Gentlemen:
On behalf of Residential Funding Mortgage Securities I, Inc. (the
"Registrant"), we have caused to be filed with you electronically under EDGAR,
the captioned registration statement on Form S-3. In addition, we have been
advised that payment of the filing fee, in the amount of $4,425,000, has been
made to you today by the Registrant by wire transfer in federal same day funds.
The primary objective of the above-captioned Registration Statement is to
register an additional $15,000,000,000 of Certificates, to be combined with the
remaining amount registered under the Registrant's existing Registration
Statement No. 333-39665, and to make various changes to update the descriptions
of the Registrant's programs as well as the tax and other legal matters
disclosure. Separate
<PAGE>
Securities and Exchange Commission
June 23, 1998
hard copies, marked to show changes from the previous base prospectus, have been
sent to the examiners.
<PAGE>
Securities and Exchange Commission
June 23, 1998
If you require any additional information, please call the
undersigned at the above number, Marlo Young at 212-912-7950 or Michael Shur at
212-912-8397. Please acknowledge receipt of this letter and the enclosures by
date-stamping the enclosed copy of this letter and returning it in the self
addressed stamped envelope.
Very truly yours,
/s/ Stephen S. Kudenholdt
Stephen S. Kudenholdt
Enclosures
cc:
Mark Green
Office 12: Mail Stop 3-10
Washington, D.C. 20549
<PAGE>
REGISTRATION NO. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_____________________________
RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
(Exact name of registrant as specified in governing instruments)
Delaware
(State of Incorporation)
75-2006294
(I.R.S. Employer Identification Number)
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Address and telephone number of Registrant's principal executive offices)
Bruce J. Paradis, President
Residential Funding Mortgage Securities I, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
(612) 832-7000
(Name, address and telephone number of agent for service)
__________________
Copies to:
Robert L. Schwartz, Esq.
GMAC Mortgage Corporation
3031 West Grand Boulevard
Detroit, Michigan 48232
Stephen S. Kudenholdt, Esq. Katherine I. Crost, Esq.
Paul D. Tvetenstrand, Esq. Orrick, Herrington & Sutcliffe
Thacher Proffitt & Wood 666 Fifth Avenue
Two World Trade Center New York, New York 10103-0001
New York, New York 10048
================================================================================
Approximate date of commencement of proposed sale to the public: From time
to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]_________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]__________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
Title of Securities Being to be Registered Price Offering Registration
Registered (1) Per Unit (2) Price (2) Fee (1)
____________________________________________________________________________________________________________________________________
Mortgage Pass-Through $15,000,000,000 100% $15,000,000,000 $ 4,425,000
Certificates (Issuable in Series)
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
</TABLE>
(1) $4,749,039,825.05 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the Registrant under Registration Statement No.
333-39665 referred to below and not previously sold are consolidated in this
Registration Statement pursuant to Rule 429. All registration fees in connection
with such unsold amount of Mortgage Pass-Through Certificates have been
previously paid by the Registrant under the foregoing Registration Statement.
Accordingly, the total amount registered under the Registration Statement as so
consolidated as of the date of this filing is $19,749,039,825.05.
(2) Estimated solely for the purpose of calculating the registration fee.
________________________
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the prospectus which is part
of this Registration Statement is a combined prospectus and includes all the
information currently required in a prospectus relating to the securities
covered by Registration Statement No. 333-39665 previously filed by the
Registrant. This Registration Statement which relates to $19,749,039,825.05
aggregate principal amount of Mortgage Pass-Through Certificates, constitutes
Post-Effective Amendment No. 1 to Registration Statement 333-39665.
===============================================================================
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes (i) a basic prospectus, (ii) an
illustrative form of prospectus supplement for use in an offering of Mortgage
Pass-Through Certificates consisting of senior and subordinate certificate
classes ("Version 1") and (iii) an illustrative form of prospectus supplement
for use in an offering of Mortgage Pass-Through Certificates which provides for
credit support in the form of a letter of credit ("Version 2").
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
Subject to completion dated June 23, 1998
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[10].
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 GROUP, INC. ("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 __, 1998.
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (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: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048 and electronically through
the Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's Web Site (http://www.sec.gov).
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." Reports
forwarded to holders will contain financial information that has not been
examined or reported upon by an independent certified public accountant. 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 600, Minneapolis,
Minnesota 55437, or by telephone at (612) 832-7000.
2
<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
ADDITIONAL INFORMATION.........................................................3
REPORTS TO CERTIFICATEHOLDERS..................................................3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..............................3
SUMMARY OF PROSPECTUS..........................................................6
RISK FACTORS..................................................................10
Limited Liquidity....................................................10
Limited Obligations..................................................10
Limitations, Reduction and Substitution of Credit Enhancement........10
Investment in the Mortgage Loans.....................................10
Yield and Prepayment Considerations..................................11
THE MORTGAGE POOLS............................................................11
General ............................................................11
The Mortgage Loans...................................................12
MORTGAGE LOAN PROGRAM.........................................................16
Underwriting Standards...............................................16
Qualifications of Sellers............................................18
Representations by Sellers...........................................18
Subservicing.........................................................21
DESCRIPTION OF THE CERTIFICATES...............................................23
General ............................................................23
Form of Certificates.................................................23
Assignment of Trust Fund Assets......................................25
Review of Mortgage Loans.............................................25
Spread ............................................................26
Payments on Mortgage Loans; Deposits to Certificate Account..........27
Withdrawals from the Custodial Account...............................29
Distributions........................................................29
Principal and Interest on the Certificates...........................30
Example of Distributions.............................................30
Advances ............................................................31
Prepayment Interest Shortfalls.......................................32
Reports to Certificateholders........................................32
Collection and Other Servicing Procedures............................33
Realization Upon Defaulted Mortgage Loans............................34
SUBORDINATION.................................................................36
General ............................................................36
Overcollateralization................................................37
DESCRIPTION OF CREDIT ENHANCEMENT.............................................38
General ............................................................38
Letters of Credit....................................................38
Mortgage Pool Insurance Policies.....................................39
Special Hazard Insurance Policies....................................40
Bankruptcy Bonds.....................................................40
Reserve Funds........................................................41
Certificate Insurance Policies; Surety Bonds.........................41
Maintenance of Credit Enhancement....................................41
Reduction or Substitution of Credit Enhancement......................42
OTHER FINANCIAL OBLIGATIONS RELATED TO THE CERTIFICATES.......................42
Swaps and Yield Supplement Agreements................................42
Purchase Obligations.................................................42
3
<PAGE>
INSURANCE POLICIES ON MORTGAGE LOANS..........................................43
Primary Mortgage Insurance Policies..................................43
Standard Hazard Insurance on Mortgaged Properties....................44
THE COMPANY...................................................................44
RESIDENTIAL FUNDING CORPORATION...............................................45
THE POOLING AND SERVICING AGREEMENT...........................................45
Servicing and Other Compensation and Payment of Expenses.............45
Evidence as to Compliance............................................45
Certain Matters Regarding the Master Servicer and the Company........46
Events of Default....................................................47
Rights Upon Event of Default.........................................47
Amendment............................................................47
Termination; Retirement of Certificates..............................48
The Trustee..........................................................48
YIELD CONSIDERATIONS..........................................................49
MATURITY AND PREPAYMENT CONSIDERATIONS........................................50
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.......................................52
The Mortgage Loans...................................................52
Environmental Legislation............................................57
Soldiers' and Sailors' Civil Relief Act of 1940......................58
Default Interest and Limitations on Prepayments......................59
Forfeitures in Drug and RICO Proceedings.............................59
Negative Amortization Loans..........................................59
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................60
General ............................................................60
REMICs ............................................................60
STATE AND OTHER TAX CONSEQUENCES..............................................72
ERISA CONSIDERATIONS..........................................................72
Plan Asset Regulations...............................................72
Prohibited Transaction Exemption.....................................73
Insurance Company General Accounts...................................74
Representations from Investing Plans.................................75
Tax-Exempt Investors.................................................75
Consultation with Counsel............................................75
LEGAL INVESTMENT MATTERS......................................................75
USE OF PROCEEDS...............................................................76
METHODS OF DISTRIBUTION.......................................................76
LEGAL MATTERS.................................................................78
FINANCIAL INFORMATION.........................................................78
INDEX OF PRINCIPAL DEFINITIONS................................................79
4
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Certificates contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of such series. Capitalized terms used in this summary that are not
otherwise defined shall have the meanings ascribed thereto in this Prospectus.
An index indicating where certain terms used herein are defined appears at the
end of this Prospectus.
Securities Offered.............. Mortgage Pass-Through Certificates.
Company......................... Residential Funding Mortgage Securities I,
Inc. See "The Company."
Master Servicer................. The entity 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
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 certain 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-
5
<PAGE>
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 and HomeComings Financial Network, Inc., each
affiliates of the Company. Mortgage Loans secured by Mortgaged Properties
located in Puerto Rico are sometimes referred to herein as "Puerto Rico
Mortgage Loans." 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 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
6
<PAGE>
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
Considerations............... The Mortgage Loans supporting a series of
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--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................ If so specified in the related Prospectus
Supplement, certain classes of Certificates offered hereby and by the
related Prospectus Supplement that are 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 such classes
sustain 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
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plans, bank collective investment funds, insurance company general and
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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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 Swap, Yield Supplement
Agreement, 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."
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,
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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.
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
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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 Mortgage Loans--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 of the
Company including HomeComings Financial Network, Inc. and GMAC Mortgage
Corporation ("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 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")
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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 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
____________________________________________
* 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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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. In the case of certain Mortgage Loans seasoned for over twelve months,
the Loan-to-Value Ratio may be determined at the time of purchase from the
related Seller based on the ratio of the current loan amount to the current
value of the related Mortgaged Property which value may be supported by either
(i) a statistical analysis, (ii) a broker's price opinion or (iii) an appraisal
obtained within 120 days of the purchase date (such Loan-to-Value Ratio may be
significantly lower than the ratio determined at origination). The denominator
of the applicable ratio described in the preceding three sentences 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 certain seasoned Mortgage Loans, the values used in calculating
Loan-to-Value Ratios may no longer be accurate valuations of the Mortgaged
Properties, particularly where the Loan-to-Value Ratio was not determined at the
time of purchase as described above. 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.
If so specified in the related Prospectus Supplement, a portion of the
proceeds of a Mortgage Loan may be held by the originator and used to reimburse
the Mortgagor for certain costs of construction of or improvements to the
related Mortgaged Property. The Appraised Value of any such Mortgaged Property
will be based on the assumption that such construction has been completed (no
inspections of such Mortgaged Property will be made). If the construction is not
completed, the actual value of the related Mortgaged Property could be adversely
affected and, even if the escrowed proceeds are applied to reduce the principal
balance of the Mortgage Loan, the actual loan-to-value ratio of the Mortgage
Loan could be higher than that assumed at the time of origination of the
Mortgage Loan. In addition, the application of any unused proceeds could cause
the rate of payment of principal on such Mortgage Loan to be faster than that
assumed.
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.
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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
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 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."
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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, excluding the underwriting standards relating to the expanded criteria
program, the alternate program and the home equity program (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 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
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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 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
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 verify that the property 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.
Alternatively, property valuations may be made under various other methods, as
described above under "The Mortgage Pools--The Mortgage Loans."
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 will be varied in
appropriate cases, including "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-
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to-Value Ratio with respect to such Mortgage Loan will be higher than the
Loan-to-Value Ratio set forth with respect thereto in the related Prospectus
Supplement.
In its evaluation of mortgage loans which have more than twelve 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. Certain Mortgage Loans seasoned for over twelve
months may be underwritten for purchase by Residential Funding based on the
borrower's credit score and payment history, with no current income
verification, and under alternative property valuation methods described above
under "The Mortgage Pools--The 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 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
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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 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
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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.
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 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
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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 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 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.
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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.
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
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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 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
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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 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.
With respect to any Puerto Rico Mortgage Loans, the Mortgages with
respect to such Mortgage Loans either (i) secure a specific obligation for the
benefit of a specified person (a "Direct Puerto Rico Mortgage") or (ii) secure
an instrument transferable by endorsement (an "Endorsable Puerto Rico
Mortgage"). Endorsable Puerto Rico Mortgages do not require an assignment to
transfer the related lien. Rather, transfer of such mortgages follows an
effective endorsement of the related Mortgage Note and, therefore, delivery of
the assignment referred to in clause (iii) of the second preceding paragraph
would be inapplicable. Direct Puerto Rico Mortgages, however, require an
assignment to be recorded with respect to any transfer of the related lien and
such assignment would be delivered to the Trustee (or the Custodian).
Review of Mortgage Loans
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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 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.
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.
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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 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
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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.
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 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
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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
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)
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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. Unless otherwise specified in the
related Prospectus Supplement, interest on the Certificates will accrue during
each calendar month and will be payable on the Distribution Date in the
following calendar month. 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 amount to be
distributed to such class for such Distribution Date in respect of principal,
plus, if such class is entitled to payments of interest on such Distribution
Date, interest accrued during the related interest accrual period at the
applicable Pass-Through Rate on the principal balance or notional amount of such
class specified in the 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 June 1998:
Date Note Description
June 1............. (A) Cut-off Date.
June 2-30.......... (B) Subservicers receive any Principal
Prepayments and applicable interest
thereon.
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June 30............ (C) Record Date.
June 2-July 1...... (D) The due dates for payments on a
Mortgage Loan (each, a "Due Date"
and collectively, the "Due Period").
July 17............ (E) Subservicers remit to the Master
Servicer scheduled payments of
principal and interest due during the
related Due Period and received or
advanced by them.
July 20............ (F) Determination Date.
July 27............ (G) Distribution Date.
Succeeding months follow the pattern of (B) through (G), except that for
succeeding months, (B) will also include the first day of such month. Certain
series of Certificates may have different prepayment periods, Cut-off Dates,
Record Dates, Due Periods, 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 June 1
after deducting principal payments due on or before such date. Those
principal payments due on or before June 1 and the accompanying interest
payments, and any Principal Prepayments received as of the close of
business on June 1 are not part of the Mortgage Pool and will not be passed
through to Certificateholders.
(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 July 27 (because July 25, 1998 is not a business day) will
be made to Certificateholders of record at the close of business on June
30.
(D) Scheduled principal and interest payments are due from Mortgagors.
(E) Payments due from Mortgagors during the related Due Period 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 principal balances immediately prior to such payments. Funds required
to be remitted from the Subservicing Accounts to the Master Servicer will
be so remitted on July 17 (because July 18, 1998 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 December will have been
remitted to the Master Servicer within five business days of receipt).
(F) On July 20, the Master Servicer will determine the amounts of principal and
interest which will be passed through on July 27 to the holders of each
class of Certificates. The Master Servicer will be obligated to distribute
those payments due during the related Due Period which have been received
from Subservicers prior to and including July 17, as well as all Principal
Prepayments received on Mortgage Loans in June (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 July 27 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 July 27, the amounts determined on July 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.
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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.
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 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):
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(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 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. The Master Servicer may also waive or modify any
term of a Mortgage Loan so long as the Master Servicer has determined that such
waiver or modification is not materially adverse to any Certificateholders,
taking into account any estimated loss that may result absent such action. 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.
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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. See "Certain Legal Aspects of Mortgage
Loans--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
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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 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. 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 distributions of subsequent
recoveries, together with any other reimbursement amounts, exceed the total
amount of the Realized Loss that was allocated to such class. 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."
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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 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. Unless otherwise specified in the related
Prospectus Supplement, 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.
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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 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.
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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 (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.
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
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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 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
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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 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--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.
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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 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. If so specified in the related
Prospectus Supplement, amounts in a Reserve Fund may be available only to cover
specific types of losses, or losses on specific Mortgage Loans. 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 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.
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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.
OTHER FINANCIAL OBLIGATIONS RELATED TO THE CERTIFICATES
Swaps and Yield Supplement Agreements
The Trustee on behalf of the Trust may enter into interest rate swaps
and related caps, floors and collars to minimize the risk of Certificateholders
from adverse changes in interest rates (collectively, "Swaps"), and other yield
supplement agreements or similar yield maintenance arrangements that do not
involve swap agreements or other notional principal contracts (collectively,
"Yield Supplement Agreements").
An interest rate Swap is an agreement between two parties
("Counterparties") to exchange a stream of interest payments on an agreed
hypothetical or "notional" principal amount. No principal amount is exchanged
between the Counterparties to an interest rate Swap. In the typical Swap, one
party agrees to pay a fixed rate on a notional principal amount, while the
Counterparty pays a floating rate based on one or more reference interest rates
such as the London Interbank Offered Rate ("LIBOR"), a specified bank's prime
rate or U.S. Treasury Bill rates. Interest rate Swaps also permit Counterparties
to exchange a floating rate obligation based upon one reference interest rate
(such as LIBOR) for a floating rate obligation based upon another referenced
interest rate (such as U.S. Treasury Bill rates).
The Swap market has grown substantially in recent years with a
significant number of banks and financial service firms acting both as
prinicpals and as agents utilizing standardized Swap documentation. Caps, floors
and collars are more recent innovations, and they are less liquid than other
Swaps.
Yield Supplement Agreements may be entered into to supplement the
interest rate or other rates on one or more classes of the Certificates of any
series.
There can be no assurance that the Trust will be able to enter into or
offset Swaps or enter into Yield Supplement Agreements at any specific time or
at prices or on other terms that are advantageous. In addition, although the
terms of the Swaps and Yield Supplement Agreements may provide for termination
under certain circumstances, there can be no assurance that the Trust will be
able to terminate a Swap or Yield Supplement Agreement when it would be
economically advantageous to the Trust Fund to do so.
Purchase Obligations
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Certain types of Mortgage Loans and certain classes of Certificates of
any series, as specified in the related Prospectus Supplement, may be subject to
a purchase obligation (a "Purchase Obligation") that would become applicable on
one or more specified dates, or upon the ocurrence of one or more specified
events, or on demand made by or on behalf of the applicable Certificateholders.
A Purchase Obligation may be in the form of a conditional or unconditional
purchase commitment, liquidity facility, remarketing agreement, maturity
guaranty, put option or demand feature. The terms and conditions of each
Purchase Obligation, including the purchase price, timing and payment procedure,
will be described in the related Prospectus Supplement. A Purchase Obligation
with respect to Mortgage Loans may apply to those Mortgage Loans or to the
related Certificates. Each Purchase Obligation may be a secured or unsecured
obligation of the provider thereof, which may include a bank or other financial
institution or an insurance company. Each Purchase Obligation will be evidenced
by an instrument delivered to the Trustee for the benefit of the applicable
Certificateholders of the related series. Unless otherwise specified in the
related Prospectus Supplement, each Purchase Obligation with respect to Mortgage
Loans will be payable solely to the Trustee for the benefit of the
Certificateholders of the related series. Other Purchase Obligations may be
payable to the Trustee or directly to the holders of the Certificates to which
such obligation relate.
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. Primary Insurance Policies may be required to be obtained and
paid for by the Mortgagor, or may be paid for by the Servicer.
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.
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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.
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.
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The Company maintains its principal office at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000.
RESIDENTIAL FUNDING CORPORATION
Unless otherwise specified in the related Prospectus Supplement,
Residential Funding, an affiliate of the Company, will act as the Master
Servicer or Manager for a series of Certificates.
Residential Funding buys conventional mortgage loans under several loan
purchase programs from mortgage loan originators or sellers nationwide,
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 600, 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, New York, Florida, Georgia
and Maryland.
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 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).
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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.
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
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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 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
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
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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 modify
the provisions regarding the transferability 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 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
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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.
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.
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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 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 risk of loss may also be greater on mortgage loans with
Loan-to-Value Ratios greater than 80% and with no Primary Insurance Policies.
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).
The risk of loss on Mortgage Loans made on Puerto Rico Mortgage Loans
may be greater than on Mortgage Loans that are made to Mortgagors who are United
States residents and citizens or that are secured by properties located in the
United States. See "Certain Legal Aspects of Mortgage Loans."
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.
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.
A Subservicer may allow the refinancing of a Mortgage Loan in any Trust
Fund by accepting prepayments thereon and permitting a new loan to the same
borrower secured by a mortgage on the same property, which may be originated by
the Subservicer or the Master Servicer or any of their respective affiliates or
by an unrelated entity. 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. Targeted solicitations may be based on a
variety of factors, including the credit of the borrower or the location of the
mortgaged property. In addition, Subservicers or the Master Servicer may
encourage assumptions of Mortgage Loans, including defaulted Mortgage Loans,
under which creditworthy borrowers assume the outstanding indebtedness of such
Mortgage Loans which may be removed from the related Mortgage Pool. As a result
of such programs, with respect to the Mortgage Pool underlying any Trust Fund
(i) the rate of principal prepayments of the Mortgage Loans in such Mortgage
Pool may be higher than would otherwise be the case, and (ii) in some cases, the
average credit or collateral quality of the Mortgage Loans remaining in the
Mortgage Pool may decline.
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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. The Company is not aware
of any historical prepayment experience with respect to mortgage loans secured
by properties located in Puerto Rico and, accordingly, prepayments on such loans
may not occur at the same rate or be affected by the same factors as other
mortgage loans.
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.
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. 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
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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 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.
Foreclosure on Mortgage Loans
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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, in which case the mortgagor's debt will be
extinguished unless the lender purchases the property for a lesser amount in
order to preserve its right against a borrower to seek a deficiency judgment and
such remedy is available under state law and the related loan documents. In the
same states, there is a statutory minimum purchase price which the lender may
offer for the property and generally, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender. Thereafter, subject to the right of the borrower in some
states to remain in possession during the redemption period, the lender will
assume the burdens of ownership, including obtaining hazard insurance, paying
taxes and making such repairs at its own expense as are necessary to render the
property suitable for sale. 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 Mortgaged Properties Located in the Commonwealth of Puerto Rico
Under the laws of the Commonwealth of Puerto Rico the foreclosure of a
real estate mortgage usually follows an ordinary "civil action" filed in the
Superior Court for the district where the mortgage property is located. If the
defendant does not contest the action filed, a default judgment is rendered for
the plaintiff and the mortgaged property is sold at public auction, after
publication of the sale for two weeks, by posting written notice in three public
places in the municipality where the auction will be held, in the tax collection
office and in the public school of the municipality where the mortgagor resides,
if known. If the residence of the mortgagor is not known, publication in one of
the newspapers of general circulation in the Commonwealth of Puerto Rico must be
made at least once a week for two weeks. There may be as many as three public
sales of the mortgaged property. If the defendant contests the foreclosure, the
case may be tried and judgment rendered based on the merits of the case.
There are no redemption rights after the public sale of a foreclosed
property under the laws of the Commonwealth of Puerto Rico. Commonwealth of
Puerto Rico law provides for a summary proceeding for the foreclosure of a
mortgage, but it is very seldom used because of concerns regarding the validity
of such actions. The process may be expedited if the mortgage can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale
upon foreclosure of a mortgaged property that (a) is subject to a mortgage loan
that was obtained for a purpose other than the financing or refinancing of the
acquisition, construction or improvement of such property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of such property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of such property. The mortgagor can claim this sum of money from the mortgagee
at any time prior to the public sale or up to one year after such sale. Such
payment would reduce the amount of sales proceeds available to satisfy the
Mortgage Loan and may increase the amount of the loss.
Foreclosure on Shares of Cooperatives
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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
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 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. In some states, the right to redeem is an equitable
right. The equity of redemption, which is a non-statutory right that must be
exercised prior to a foreclosure sale, should be distinguished from statutory
rights of redemption. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The rights
of redemption would defeat the title of any purchaser subsequent to foreclosure
or sale under a deed of trust or a deed to secure debt. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has
expired.
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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 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
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against the originator thereof. Remedies available to the borrower include
monetary penalties, as well as recission 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.
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, including
cooperative 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, adjustable rate cooperative 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
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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.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), and under state law in certain
states, a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property may
become liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996 (the "Conservation Act") amended, among other things, the provisions of
CERCLA with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws in certain circumstances may impose
liability on a secured party which takes a deed-in-lieu of foreclosure,
purchases a mortgaged property at a foreclosure sale, or operates a mortgaged
property on which contaminants other than CERCLA hazardous substances are
present, including petroleum, agricultural chemicals, hazardous wastes,
asbestos, radon, and lead-based paint. Such cleanup costs may be substantial. It
is possible that such cleanup costs could become a liability of a Trust Fund and
reduce the amounts otherwise distributable to the holders of the related series
of Certificates. Moreover, certain federal statutes and certain states by
statute impose a lien for any cleanup costs incurred by such state on the
property that is the subject of such cleanup costs (an "Environmental Lien").
All subsequent liens on such property generally are subordinated to such an
Environmental Lien and, in some states, even prior recorded liens are
subordinated to Environmental Liens. In the latter states, the security interest
of the Trustee in a related parcel of real property that is subject to such an
Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Neither the Company nor any Master
Servicer will be required by any Agreement to undertake any such evaluations
prior to foreclosure or accepting a deed-in-lieu of foreclosure. The Company
does not make any representations or warranties or assume any liability with
respect to the absence or effect of contaminants on any related real property or
any casualty resulting from the presence or effect of contaminants. However, the
Company will not be obligated to foreclose on related real property or accept a
deed-in-lieu of foreclosure if it knows or reasonably believes that there are
material contaminated conditions on such property. A failure so to foreclose may
reduce the amounts otherwise available to Certificateholders of the related
series.
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
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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 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.
Negative Amortization Loans
A recent case held that state restrictions on the compounding of
interest are not preempted by the provisions of the Depository Institutions
Deregulation and Monetary Control Act of 1980 ("DIDMC") and as a result, a
mortgage loan that provided for negative amortization violated New Hampshire's
requirement that first mortgage loans provide for computation of interest on a
simple interest basis. The court did not address the applicability of the
Alternative Mortgage Transaction Parity Act of 1982, which authorizes a lender
to make residential mortgage loans that provide for negative amortization. As a
result, the enforceability of compound interest on mortgage loans that provide
for negative amortization is unclear. The case, which was decided by the First
Circuit Court of Appeals, is binding authority only on Federal District Courts
in Maine, New Hampshire, Massachusetts, Rhode Island and Puerto Rico.
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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 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 LLP, 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 "real estate assets" within
the meaning of Section 856(c)(4)(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
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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)(4)(A) of the Code. In addition, the REMIC Regular Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3)(C) of the Code if
transferred to another REMIC on its startup day in exchange for regular or
residual interests therein. The determination as to the percentage of the
REMIC's assets that constitute assets described in the foregoing sections of the
Code will be made with respect to each calendar quarter based on the average
adjusted basis of each category of the assets held by the REMIC during such
calendar quarter. The Master Servicer will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances Mortgage Loans (including Additional Collateral
Loans) may not be treated entirely as assets described in the foregoing
sections. If 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 Section 856(c)(4)(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 LLP, 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 "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code,
and "loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates
General
Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The 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.
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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 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
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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 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 (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, plus (ii) the daily portions of original issue discount for all days
during such accrual period prior to such day minus (iii) any principal payments
made during such accrual period prior to such day with respect to such
Certificate.
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 may not be revoked without the consent
of the IRS.
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 may
result in discount being included in income at a slower rate than discount would
be required to be included in income using the method described above.
Section 1276(b)(3) of the 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
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than one installment. Until regulations are issued by the Treasury Department,
certain rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the basis
of a constant yield method, (ii) in the case of a REMIC Regular Certificate
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total amount of stated interest remaining to be paid
on the REMIC Regular Certificate as of the beginning of the accrual period, or
(iii) in the case of a REMIC Regular Certificate issued with original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the original issue discount accrued in the accrual period bears to
the total original issue discount remaining on the REMIC Regular Certificate at
the beginning of the accrual period. Moreover, the Prepayment Assumption used in
calculating the accrual of original issue discount is to be used in calculating
the accrual of market discount. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a REMIC Regular Certificate
purchased at a discount in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
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
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.
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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 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"
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.
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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.
A 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 Residual 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. 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
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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 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, brokers and underwriters) at which a substantial
amount of the REMIC Residual Certificates were sold. If less than a substantial
amount of a particular class of REMIC Residual Certificates is sold for cash on
or prior to the Closing Date, the issue price of such class will be treated as
the fair market value of such class on the Closing Date. The "long-term Federal
rate" is an average of current yields on Treasury securities with a remaining
term of greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (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."
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions; provided, however, that for purposes
of (ii), alternative minimum taxable income is determined without regard to the
special rule that taxable income cannot be less than excess inclusions. The
latter rule has the effect of preventing nonrefundable tax credits from reducing
the taxpayer's income tax to an amount lower than the alternative minimum tax on
excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions 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
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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.
Mark-to-Market Rules
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 REMIC Residual Certificate acquired on or after January 4, 1995
is not treated as a security and thus 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
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
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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 taxable years beginning after
December 31, 1997, notwithstanding the preceding two sentences, in the case of a
REMIC Residual Certificate held by an "electing large partnership," all
interests in such partnership shall be treated as held by disqualified
organizations (without regard to whether the record holders of the partnership
furnish statements described in the preceding sentence) and the amount that is
subject to tax under the second preceding sentence is excluded from the gross
income of the partnership allocated to the partners (in lieu of allocating to
the partners a deduction for such tax paid by the partners).
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, (iii) any
organization described in Section 1381(a)(2)(C) of the Code, (iv) an "electing
large partnership" (as described in Section 775 of the Code) or (v) any other
person so designated by the Trustee based upon an opinion of counsel that the
holding of an ownership interest in a REMIC Certificate by such person may cause
the related Trust Fund or any person having an ownership interest in the REMIC
Certificate (other than such person) to incur a liability for any federal tax
imposed under the Code that would not otherwise be imposed but for the transfer
of an ownership interest in a REMIC Certificate to such person. 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.
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--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.
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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 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
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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 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,
any state thereof or the District of Columbia (except, in the case of a
partnership, to the extent provided in regulations), or an estate whose income
is subject to United States federal income tax regardless of its source, or a
trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust. To
the extent prescribed in regulations by the Secretary of the Treasury, which
regulations have not yet been issued, a trust which was in existence on August
20, 1996 (other than a trust treated as owned by the grantor under subpart E of
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part I of subchapter J of chapter 1 of the Code), and which was treated as a
United States person on August 19, 1996, may elect to continue to be treated as
a United States person notwithstanding the previous sentence. 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.
New Withholding Regulations
The Treasury Department has issued new regulations (the "New
Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their tax advisors regarding the New Regulations.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"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
Sections 404 and 406 of ERISA impose certain fiduciary and prohibited
transaction restrictions on employee pension and welfare benefit plans subject
to ERISA ("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, bank
collective investment funds and insurance company general and separate accounts
in which such ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on individual
retirement accounts 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) and if no election has been under Section 410(d) of
the Code, church plans (as defined in Section 3(33) 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 tax-qualified 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, collectively, "Parties in Interest") who
have certain specified relationships to the Plans, unless a statutory or
administrative exemption is available. Certain Parties in Interest that
participate in a prohibited transaction may be subject to a penalty (or an
excise tax) imposed pursuant to Section 502(i) of ERISA or Section 4975 of the
Code, unless a statutory or administrative exemption is available with respect
to any such transaction.
Plan Asset Regulations
An investment of Plan Assets in Certificates may cause the underlying
Mortgage Loans, Mortgage Securities or any other assets 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
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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 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, a Trust Fund, including the
Mortgage Loans, Mortgage Securities or any other assets held in such 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, Mortgage
Securities or any other assets held in a Trust Fund were to constitute Plan
Assets, then any party exercising management or discretionary control with
respect to 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, Mortgage Securities or any other
assets held in a Trust Fund were to constitute Plan Assets, then the acquisition
or holding of Certificates by, on behalf of a Plan or with Plan Assets, as well
as the operation of such Trust Fund, may constitute or result in a prohibited
transaction under ERISA and the Code.
Prohibited Transaction Exemption
The DOL has issued an individual exemption, Prohibited Transaction
Exemption ("PTE") 94-29, 59 Fed. Reg. 14674 (March 29, 1994) as amended by PTE
97-34, 62 Fed. Reg. 39021 (July 21, 1997) (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
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 Credit Rating Co. or Fitch IBCA, Inc.
(collectively, the "Exemption Rating Agencies"). Fourth, the Trustee cannot be
an affiliate of any other member of the "Restricted Group" which consists of any
Underwriter, the 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
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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. In addition, except as
otherwise specified in the related Prospectus Supplement, the exemptive relief
afforded by the Exemption may not apply to any Certificates where the related
Trust Fund contains a Swap.
The Exemption also requires that each Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of Certificates by or on behalf of a Plan or
with Plan Assets; and (iii) certificates in such other investment pools must
have been purchased by investors other than Plans for at least one year prior to
any acquisition of Certificates by or on behalf of a Plan or with Plan Assets.
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(a) 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 Sections 4975(a)
and (b) of the Code by reason of 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.
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(a) 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
Sections 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 with respect to an
investing Plan (or a Plan 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 Plan's ownership of Certificates.
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 a Plan 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 DOL
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 Asset 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
or certain types of Mortgage Securities. In addition, such fiduciary or other
Plan Asset investor should consider the availability of other class exemptions
granted by the DOL, which provide relief from certain of the prohibited
transaction provisions of ERISA and the related excise tax provisions of Section
4975 of the Code, including Sections
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I and III of PTCE 95-60, regarding transactions by insurance company general
accounts. The related Prospectus Supplement may contain additional information
regarding the application of the Exemption, PTCE 83-1, PTCE 95-60 or other DOL
class 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.
Insurance Company General Accounts
In addition to any exemptive relief that may be available under PTCE
95-60 for the purchase and holding of the Certificates by an insurance company
general account, the Small Business Job Protection Act of 1996 added a new
Section 401(c) to ERISA, which provides 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 Section 4975 of the Code, for transactions involving an
insurance company general account. Pursuant to Section 401(c) of ERISA, the DOL
published proposed regulations on December 22, 1997, but the required final
regulations (the "401(c) Regulations") have not been issued as of the date
hereof. The 401(c) Regulations are to provide guidance for the purpose of
determining, in cases where insurance policies or annuity contracts supported by
an insurer's general account are issued to or for the benefit of a 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 or 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 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 or annuity contracts 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 Certificates should consult with their legal
counsel with respect to the applicability of Sections I and III of PTCE 95-60
and Section 401(c) of ERISA, including the general account's ability to continue
to hold the Certificates after the date which is 18 months after the date the
401(c) Regulations become final.
Representations from Investing Plans
The exemptive relief afforded by the Exemption will not apply to the
purchase, sale or holding of any class of Subordinate Certificates or REMIC
Residual Certificates. To the extent Certificates are Subordinate Certificates
or the related Trust Fund contains a Swap, except as otherwise specified in the
related Prospectus Supplement, 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 Plan Assets 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 or with Plan Assets is permissible under applicable law,
will not constitute or result in any non-exempt prohibited transaction under
ERISA or Section 4975 of the 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, except as
otherwise specified in the related Prospectus Supplement, the transferee may
provide a certification of facts substantially to the effect that the purchase
of such Certificates by or on behalf of such Plan or with Plan Assets is
permissible under applicable law, will not constitute or result in a non-exempt
prohibited transaction under ERISA or Section 4975 of the 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
conditions are met: (a) the source of funds used to purchase such Certificates
is an "insurance company general account" (as such term is defined in PTCE 95-
60), and (b) the conditions set forth in Sections I and III of PTCE 95-60 have
been satisfied as of the date of the acquisition of such Certificates.
Tax-Exempt Investors
A Plan that is exempt from federal income taxation pursuant to Section
501 of the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to federal
income tax. See "Certain Federal Income Tax Consequences-- Taxation of Owners of
REMIC Residual Certificates-- Excess Inclusions."
Consultation with Counsel
There can be no assurance that the Exemption or any other DOL exemption
will apply with respect to any particular Plan that acquires the Certificates
or, even if all of the conditions specified therein were satisfied, that the
exemption would apply to all transactions involving a Trust Fund. Prospective
Plan investors should consult with their legal counsel concerning the impact of
ERISA and the Code and the potential consequences to their specific
circumstances prior to making an investment in the Certificates.
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Any fiduciary or other investor of Plan Assets that proposes to acquire
or hold Certificates on behalf of a Plan or with Plan Assets should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code to the proposed investment and the Exemption
and the availability of exemptive relief under PTCE 83-1, Sections I and III of
PTCE 95-60 or any other DOL class exemption.
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. If so specified in the related
Prospectus Supplement, certain classes that are, and continue to be, rated in
one of the two highest rating categories by at least one nationally recognized
statistical rating organization will constitute "mortgage related securities"
for purposes of 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. SS24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.
On April 23, 1998, the Federal Financial Institutions Examination
Council issued a revised supervisory policy statement (the "1998 Policy
Statement") applicable to all depository institutions, setting forth guidelines
for investments in "high-risk mortgage securities." The 1998 Policy Statement
has been adopted by the Federal Reserve Board, the Office of the Comptroller of
the Currency, the FDIC, the National Credit Union Administration (the "NCUA")
and the Office of Thrift Supervision (the "OTS") with an effective date of May
26, 1998. The 1998 Policy Statement rescinds a 1992 policy statement that had
required, prior to purchase, a depository institution 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. The 1998 Policy Statement eliminates former constraints on
investing in certain "high-risk" mortgage derivative products and substitutes
broader guidelines for evaluating and monitoring investment risk.
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 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. The OTS is, however, proposing to adopt revised requirements based
on the 1998 Policy Statement. In addition, the NCUA 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.
Prospective investors in the Certificates, including in particular the
classes of Certificates that do not constitute "mortgage related securities" for
purposes of SMMEA, should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of 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.
75
<PAGE>
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage Loans
underlying the Certificates or will be used by the Company for general corporate
purposes. The Company expects that it will make additional sales of securities
similar to the Certificates from time to time, but the timing and amount of any
such additional offerings will be dependent upon a number of factors, including
the volume of mortgage loans purchased by the Company, prevailing interest
rates, availability of funds and general market conditions.
METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus
Supplements will be offered in series through one or more of the methods
described below. The Prospectus Supplement prepared for each series will
describe the method of offering being utilized for that series and will state
the net proceeds to the Company from such sale.
The Company intends that Certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
series of Certificates may be made through a combination of two or more of these
methods. Such methods are as follows:
1. by negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. by placements by the Company with institutional investors through
dealers; and
3. by direct placements by the Company with institutional investors.
In addition, if specified in the related Prospectus Supplement, a
series of Certificates may be offered in whole or in part 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.
76
<PAGE>
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 LLP, 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.
77
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
1998 Policy Statement.........................................................76
401(C) Regulations............................................................74
Accrual Certificates...........................................................6
Additional Collateral.........................................................11
Additional Collateral Loans...................................................11
Advance .....................................................................32
Affiliated Sellers............................................................12
Appraised Value...............................................................14
ARM Loans.....................................................................12
Balloon Amount................................................................13
Balloon Loans.................................................................13
Bankruptcy Amount.............................................................36
Bankruptcy Losses.............................................................38
Beneficial Owner..............................................................24
Book-Entry Certificates.......................................................23
Buy-Down Account..............................................................14
Buy-Down Agreement............................................................28
Buy-Down Funds................................................................14
Buy-Down Mortgage Loans.......................................................14
Buy-Down Period...............................................................14
CEDEL .....................................................................23
CEDEL Participants............................................................24
CERCLA .....................................................................57
Certificate Account...........................................................27
Certificate Administrator.....................................................15
Certificate Insurance Policy..................................................41
Certificate Registrar.........................................................23
Certificateholder.............................................................23
Certificates...................................................................1
Clearance Cooperative.........................................................24
Closing Date..................................................................62
Code ......................................................................8
Commission.....................................................................3
Committee Report..............................................................61
Company ......................................................................1
Compensating Interest.........................................................32
Conservation Act..............................................................58
Contributions Tax.............................................................70
Convertible Mortgage Loan.....................................................14
Cooperative...................................................................52
Cooperative Loans.............................................................11
Cooperative Note..............................................................52
Cooperative Notes.............................................................11
Counterparties................................................................42
Credit Enhancer...............................................................38
Custodial Account.............................................................20
Custodian.....................................................................26
Debt Service Reduction........................................................40
Defaulted Mortgage Losses.....................................................38
Deferred Interest.............................................................13
Deficient Valuation...........................................................40
Deleted Mortgage Loan.........................................................20
Depositaries..................................................................24
Designated Seller Transaction.................................................12
Determination Date............................................................30
DIDMC .....................................................................59
Direct Puerto Rico Mortgage...................................................25
Disqualified Persons..........................................................72
Distribution Amount...........................................................30
Distribution Date..............................................................7
DOL .....................................................................72
DOL Regulations...............................................................72
DTC .....................................................................23
DTC Participants..............................................................24
Due Date .....................................................................31
Due Period....................................................................31
Eligible Account..............................................................28
Endorsable Puerto Rico Mortgage...............................................25
Environmental Lien............................................................58
ERISA ......................................................................8
ERISA Plans...................................................................72
Euroclear.....................................................................23
Euroclear Operator............................................................24
Euroclear Participants........................................................24
Excess Spread.................................................................26
Exchange Act...................................................................3
Excluded Spread...............................................................26
Exemption.....................................................................73
Exemption Rating Agencies.....................................................73
Extraordinary Losses..........................................................38
Fannie Mae....................................................................41
FDIC .....................................................................18
Form 8-K .....................................................................14
Fraud Loss Amount.............................................................36
Fraud Losses..................................................................38
Freddie Mac...................................................................41
Garn-St Germain Act...........................................................56
GMAC Mortgage..................................................................1
Guide .....................................................................16
High Cost Loans...............................................................56
Holder .....................................................................23
Index .....................................................................13
Indirect Participants.........................................................24
Insurance Proceeds............................................................27
IRS .....................................................................62
Issue Premium.................................................................66
Letter of Credit..............................................................38
Letter of Credit Bank.........................................................38
LIBOR .....................................................................42
Liquidated Mortgage Loan......................................................34
Liquidation Proceeds..........................................................27
Loan-to-Value-Ratio...........................................................13
Manager .....................................................................12
Mark-to-Market Regulations....................................................68
Master Commitments............................................................16
Master Servicer................................................................1
Mezzanine Certificates.........................................................6
Mortgage Loans.................................................................1
Mortgage Notes................................................................11
Mortgage Pool..................................................................6
Mortgage Pool Insurance Policy................................................39
Mortgage Rate.................................................................12
Mortgage Securities............................................................7
Mortgaged Properties...........................................................7
Mortgages.....................................................................11
Mortgagor.....................................................................10
NCUA .....................................................................76
Net Mortgage Rate.............................................................49
Nonrecoverable Advance........................................................29
Note Margin...................................................................13
OID Regulations...............................................................60
OTS .....................................................................76
Overcollateralization.........................................................37
Participants..................................................................24
Parties in Interest...........................................................72
Pass-Through Rate..............................................................6
Paying Agent..................................................................29
Payment Date..................................................................29
Percentage Interest...........................................................30
Permitted Investments.........................................................28
Plan Assets...................................................................72
Plans .....................................................................72
Pool Insurer..................................................................29
Pooling and Servicing Agreement................................................6
Prepayment Assumption.........................................................61
Prepayment Interest Shortfall.................................................32
Primary Insurance Policy......................................................43
Primary Insurer...............................................................43
Principal Prepayments.........................................................31
Prohibited Transactions Tax...................................................70
PTCE .....................................................................74
PTCE 83-1.....................................................................74
PTE .....................................................................73
Puerto Rico Mortgage Loans.....................................................7
Purchase Obligation...........................................................42
Purchase Price................................................................19
Qualified Insurer.............................................................41
Qualified Substitute Mortgage Loan............................................20
Rating Agency..................................................................8
Realized Loss.................................................................36
Record Date...................................................................29
Registration Statement.........................................................3
REMIC ......................................................................1
REMIC Administrator...........................................................70
REMIC Provisions..............................................................60
REMIC Regular Certificates....................................................60
REMIC Regulations.............................................................60
REMIC Residual Certificates...................................................60
REO Mortgage Loan.............................................................34
Reserve Fund..................................................................41
Residential Funding............................................................6
RICO .....................................................................59
Seller .....................................................................21
Sellers .....................................................................12
Senior Certificates............................................................6
Senior/Subordinate Series.....................................................23
Servicing Advances............................................................29
Single Certificate............................................................33
SMMEA ......................................................................8
Special Hazard Amount.........................................................36
Special Hazard Insurance Policy...............................................40
Special Hazard Insurer........................................................40
Special Hazard Losses.........................................................38
Stated Principal Balance......................................................36
Strip Certificate..............................................................6
Subordinate Amount............................................................37
Subordinate Certificates.......................................................6
Subservicers..................................................................15
Subservicing Account..........................................................27
Subservicing Agreement........................................................21
Surety Bond...................................................................41
Swaps .....................................................................42
Tax-Exempt Investor...........................................................75
Tax-Favored Plans.............................................................72
Terms and Conditions..........................................................24
The Mortgage Pools.............................................................1
Tiered REMICs.................................................................61
Title V .....................................................................57
Title VIII....................................................................57
Trust Fund.....................................................................1
Trustee ......................................................................6
UBTI .....................................................................75
UCC .....................................................................55
Unaffiliated Sellers..........................................................12
Yield Supplement Agreements...................................................42
78
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
<PAGE>
VERSION 1
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JUNE 19, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________, 19__)
$______________________
RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
COMPANY
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 19__-S_
$__________ ____% Class A-1 Certificates
$__________ ____% Class A-2 Certificates
$________ ____% Class A-3 Certificates
$__________ ____% Class A-4 Certificates
$__________ ____% Class A-5 Certificates
$__________ ____% Class A-6 Certificates
$______ Variable Rate Class A-7 Certificates
The Series 19__-S__ Mortgage Pass-Through Certificates offered hereby (the
"Senior Certificates") will consist of seven classes: (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, (ii) Class A-5 Certificates (the "Fixed Strip Certificates"),
(iii) Class A-6 Certificates and (iv) Class A-7 Certificates (the "Variable
Strip Certificates"). In addition to the Senior Certificates, the Series 19__-S_
Mortgage Pass-Through Certificates will also consist of two classes of
subordinate certificates which are designated as the Class M Certificates and
Class B Certificates (together, the "Subordinate Certificates") and two classes
of residual certificates which are designated as the Class R-I Certificates and
Class R-II Certificates (the "Residual Certificates" and, together with the
Senior Certificates and the Subordinate Certificates, the "Certificates"). Only
the Senior Certificates are offered hereby.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS
<PAGE>
-2-
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
The Senior Certificates in the aggregate will evidence an initial undivided
interest of approximately _____% in a trust fund (the "Trust Fund") consisting
primarily of a pool of certain conventional fixed-rate one- to four-family first
mortgage loans (the "Mortgage Loans") to be deposited by Residential Funding
Mortgage Securities I, Inc. (the "Company") into the Trust Fund for the benefit
of the Certificateholders. Certain characteristics of the Mortgage Loans are
described herein under "Description of the Mortgage Pool."
Distributions on the Senior Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next business day,
commencing on ____________, 19__ (each, a "Distribution Date"). As more fully
described herein, interest distributions on the Senior Certificates will be
based on the Certificate Principal Balance thereof (or the Notional Amount (as
defined herein) in the case of the Variable Strip Certificates) and the then
applicable Pass-Through Rate thereof, which will be variable for the Variable
Strip Certificates and fixed for all other classes of Certificates.
Distributions in respect of principal of the Senior Certificates will be
allocated among the various classes of the Senior Certificates as described
herein under "Description of the Certificates--Principal Distributions." The
rights of the holders of the Subordinate Certificates to receive distributions
with respect to the Mortgage Loans will be subordinated to the rights of the
holders of the Senior Certificates. Certain losses incurred due to defaults on
the Mortgage Loans and not covered by the Subordinate Certificates will be
allocated on a pro rata basis between the Class A-1, Class A-5 and Class A-6
Certificates (the "Tiered Certificates") and the Class A-2, Class A-3, Class A-4
and Variable Strip Certificates. Any such losses so allocated to the Tiered
Certificates will be allocated first to the Class A-6 Certificates until the
Certificate Principal Balance thereof is reduced to zero, and then on a pro rata
basis to the Class A-1 Certificates and Class A-5 Certificates.
The yield to maturity on the Senior Certificates will depend on the rate of
payment of principal (including prepayments, defaults and liquidations) on the
Mortgage Loans. The Mortgage Loans may be prepaid in full or in part at any time
without penalty. The yield to investors on the Senior Certificates will be
adversely affected by any shortfalls in interest collected on the Mortgage Loans
due to prepayments, liquidations or otherwise. The yield to investors on the
Variable Strip Certificates and, in particular, on the Fixed Strip Certificates,
will be extremely sensitive to the rate of principal payments (including
prepayments) and defaults on the Mortgage Loans and may fluctuate significantly
over time. A rapid rate of principal payments on the Mortgage Loans could result
in the failure of such investors to recover their initial investments. See
"Certain Yield and Prepayment Considerations" herein and "Yield Considerations"
in the Prospectus.
<PAGE>
-3-
There is currently no secondary market for the Senior Certificates.
__________________________________ (the "Underwriter") intends to make a
secondary market in the Senior Certificates, but is not obligated to do so.
There can be no assurance that a secondary market for the Senior Certificates
will develop or, if it does develop, that it will continue. The Senior
Certificates will not be listed on any securities exchange.
It is a condition of the issuance of the Senior Certificates that they be
rated "___" by _____________________________ and "____" by
____________________________________.
As described herein, two separate "real estate mortgage investment conduit"
("REMIC") elections will be made in connection with the Trust Fund for federal
income tax purposes. Each class of Senior Certificates will constitute "regular
interests" in the related REMIC. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE SENIOR CERTIFICATES. THE SENIOR CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER, GMAC MORTGAGE GROUP, INC. OR
ANY OF THEIR AFFILIATES. NEITHER THE SENIOR 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 Senior
Certificates, see "Risk Factors" in the Prospectus commencing on page _.
The Senior Certificates will be purchased from the Company by the
Underwriter and will be offered by the Underwriter from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Company from the sale of the
Senior Certificates will be equal to _________% of the initial aggregate
principal balance of the Senior Certificates, plus accrued interest thereon from
___________ 1, 19__ (the "Cut-off Date"), net of any expenses payable by the
Company. The Senior Certificates are offered by the Underwriter subject to prior
sale, when, as and if delivered to and
<PAGE>
-4-
accepted by the Underwriter and subject to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject any order in whole or in part. It is expected that delivery of the Senior
Certificates will be made on or about ____________, 19__ at the office of
__________________________________, _______________, _____________________
against payment therefor in immediately available funds.
[Name of Underwriter]
[Date of Prospectus Supplement]
<PAGE>
-5-
THE SENIOR CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT
TO ITS PROSPECTUS DATED ____________, 19__, OF WHICH THIS PROSPECTUS SUPPLEMENT
IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS
CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED
HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS
PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE SENIOR CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UNTIL __________, 19__, ALL DEALERS EFFECTING TRANSACTIONS IN THE
SENIOR CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
-6-
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Title of Securities.....................................
Mortgage Pass-Through Certificates, Series 19__-S__.
Company.................................................
Residential Funding Mortgage Securities I, Inc. (the "Company"), an
affiliate of Residential Funding Corporation, and an indirect wholly-
owned subsidiary of GMAC Mortgage Group, Inc. ("GMAC Mortgage"). See
"The Company" in the Prospectus.
Master Servicer.........................................
Residential Funding Corporation (the "Master Servicer" or "Residential
Funding"), an affiliate of the Company and an indirect wholly-owned
subsidiary of GMAC Mortgage. See "Pooling and Servicing Agreement--The
Master Servicer" herein and "Residential Funding Corporation" in the
Prospectus.
Trustee.................................................
_____________________, ___ ___________________ (the "Trustee").
Cut-off Date............................................
____________ 1, 19__.
Delivery Date...........................................
On or about ____________, 19__.
Denominations...........................................
The Senior Certificates will be offered in registered form, in minimum
denominations of $______ (or $_____ in the case of a Fixed Strip
Certificate or a Variable Strip Certificate) and integral multiples of
$_____ in excess thereof.
The Mortgage Pool.......................................
The Mortgage Pool will consist of a pool of fixed-rate, fully
amortizing, level monthly payment mortgage loans (the "Mortgage
Loans") with an aggregate principal balance as of the Cut-off Date of
approximately
<PAGE>
-7-
$___________. The Mortgage Loans are secured by first liens on one- to
four-family residential real properties (each, a "Mortgaged
Property"). The Mortgage Loans have terms to maturity of not more than
__ years from the date of origination or modification, and a weighted
average remaining term to maturity of approximately ___ months as of
the Cut-off Date. The Mortgage Loans will bear interest at Mortgage
Rates of at least ____% per annum but not more than _____% per annum,
with a weighted average Mortgage Rate of approximately _______% per
annum as of the Cut-off Date. For a further description of the
Mortgage Loans, see "Description of the Mortgage Pool" herein.
The Senior Certificates.................................
The Senior Certificates evidence an initial interest of approximately
_____% in a trust fund (the "Trust Fund") consisting primarily of the
Mortgage Pool. The Senior Certificates will have the following
Pass-Through Rates and Certificate Principal Balances as of the
Cut-off Date:
Class A-1 Certificates ____% $__________
Class A-2 Certificates ____% $__________
Class A-3 Certificates ____% $__________
Class A-4 Certificates ____% $__________
Class A-5 Certificates ____% $__________
Class A-6 Certificates ____% $__________
Class A-7 Certificates Variable Rate $__________
The Senior Certificates will be issued pursuant to a Pooling and
Servicing Agreement, to be dated as of the Cut-off Date, among the
Company, the Master Servicer, and the Trustee (the "Pooling and
Servicing Agreement"). Pass-Through Rate on the Senior
Certificates............................... The Pass-Through Rate on
all classes of the Senior Certificates, other than the Variable Strip
Certificates, is fixed. The Pass-Through Rate on the Variable Strip
Certificates on each
<PAGE>
-8-
Distribution Date will equal the weighted aver age, as determined on
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. The Pool Strip Rate on each Mortgage Loan is equal to
the Net Mortgage Rate thereon minus ____%. 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 and primary servicing fees
accrue (the "Servicing Fee Rate"). The Pool Strip Rates on the
Mortgage Loans range between _% and _____%. The initial Pass-Through
Rate on the Variable Strip Certificates is approximately _____%.
Interest Distributions..................................
Holders of each class of Senior Certificates will be entitled to
receive distributions in an amount equal to the Accrued Certificate
Interest (as defined below) on such class on each Distribution Date,
to the extent of the Available Distribution Amount (as defined herein)
for such Distribution Date.
With respect to any Distribution Date, Accrued Certificate Interest
will be equal to (a) in the case of each class of Senior Certificates,
other than the Variable Strip Certificates, one month's interest
accrued on the Certificate Principal Balance of the Certificates of
such class, at the Pass-Through Rate on such class, and (b) in the
case of the Variable Strip Certificates, one month's interest accrued
on the Notional Amount (as defined below) of the Variable Strip
Certificates at the then applicable Pass-Through Rate on such class
for such Distribution Date; in each case less any interest shortfalls
not covered by the Subordination (as defined herein), including any
Prepayment Interest Shortfall (as defined herein and allocated as
described herein) and interest shortfalls relating to the Relief Act
(as defined herein), if any, for such Distribution Date.
<PAGE>
-9-
The Notional Amount of the Variable Strip Certificates as of any date
of determination is equal to the aggregate Certificate Principal
Balance of the Certificates of all classes, including the Subordinate
Certificates, as of such date.
If the Available Distribution Amount for any Distribution Date is less
than the aggregate amount of Accrued Certificate Interest required to
be distributed on the Senior Certificates on such date (the "Senior
Interest Distribution Amount"), the shortfall will be allocated among
each affected class as described herein (the portion of such shortfall
so allocated to the Tiered Certificates (as defined herein) will be
allocated first to the Class A-6 Certificates to the extent described
herein), and will be distributable to holders of the Certificates of
such classes on subsequent Distribution Dates, to the extent of
available funds. Any such amount so carried forward will not bear
interest.
Principal Distributions.................................
Holders of the Senior Certificates will be entitled to receive on each
Distribution Date, in the manner and priority set forth herein, to the
extent of the portion of the Available Distribution Amount remaining
after the Senior Interest Distribution Amount is distributed to the
holders of the Senior Certificates, a distribution allocable to
principal which will, as more fully described herein, include (i) the
Senior Percentage (as defined below) of scheduled principal payments
due on the Mortgage Loans and of the principal portion of any
unscheduled collections of principal (other than mortgagor prepayments
and amounts received in connection with a Final Disposition (as
defined herein) of a Mortgage Loan described
<PAGE>
-10-
in clause (ii) below), including repurchases of the Mortgage Loans,
(ii) in connection with the Final Disposition of a Mortgage Loan that
did not incur any Excess Special Hazard Losses, Excess Fraud Losses,
Excess Bankruptcy Losses and Extraordinary Losses (as defined herein),
an amount equal to the lesser of (a) the Senior Percentage of the
Stated Principal Balance (as defined herein) of such Mortgage Loan and
(b) the Senior Accelerated Distribution Percentage (as defined herein)
of the related collections, including any Insurance Proceeds and
Liquidation Proceeds, to the extent applied as recoveries of
principal; (iii) the Senior Accelerated Distribution Percentage (as
defined below) of mortgagor prepayments and (iv) the Excess
Subordinate Principal Amount (as defined herein), if any, for such
Distribution Date. Distributions in respect of principal of the Senior
Certificates on any Distribution Date will be allocated to the classes
then entitled to such distributions, as described herein. See
"Description of the Certificates--Principal Distributions" herein.
The Senior Percentage initially will be approximately _____% and will
be recalculated after each Distribution Date as described herein to
reflect the entitlement of the holders of the Senior Certificates to
subsequent distributions allocable to principal. The Senior
Accelerated Distribution Percentage for each Distribution Date
occurring during the first five years after the Delivery Date will
equal ___%. Commencing in ___________ 19__, the Senior Accelerated
Distribution Percentage will decline annually, subject to certain
limitations, in accordance with the schedule described herein until,
commencing in ___________, it will equal the then applicable Senior
Percentage; however, the Senior Accelerated Distribution Percentage
will be 100% for any Distribution Date on
<PAGE>
-11-
which the then applicable Senior Percentage is greater than the
initial Senior Percentage. See "Description of the
Certificates--Allocation of Losses; Subordination" herein.
Advances................................................
The Master Servicer is required to make advances ("Advances") in
respect of delinquent payments of principal and interest on the
Mortgage Loans, subject to the limitations described herein. See
"Description of the Certificates--Advances" herein and in the
Prospectus.
Allocation of Losses;
Subordination.........................................
Neither the Senior Certificates nor the Mortgage Loans are insured or
guaranteed by any governmental agency or instrumentality or by the
Company, the Master Servicer, GMAC Mortgage or any affiliate thereof.
Subject to the limitations set forth below, Realized Losses on the
Mortgage Loans will be allocated to the Subordinate Certificates prior
to allocation to the Senior Certificates. The subordination provided
by the Subordinate Certificates will cover Realized Losses on the
Mortgage Loans from Defaulted Mortgage Losses, Special Hazard Losses,
Fraud Losses and Bankruptcy Losses (each as defined in the
Prospectus). The aggregate amounts of Realized Losses which may be
allocated to the Subordinate Certificates to cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses are initially limited to
$__________, $_________ and $_______, respectively. All of the
foregoing amounts are subject to periodic reduction as described
herein. In the event the Certificate Principal Balance of the
Subordinate Certificates is reduced to zero, all additional losses
will be borne by the Senior Certificateholders. In addition, any
Special Hazard Losses, Fraud Losses and Bankruptcy Losses, in excess
of the respective amounts of coverage therefor will be borne by the
holders of Senior Certificates and Subordinate
<PAGE>
-12-
Certificates on a pro rata basis. Any Default Losses (as defined
herein) incurred on the Mortgage Loans and not covered by the
Subordinate Certificates will be allocated on a pro rata basis between
the Class A-1, Class A-5 and Class A-6 Certificates (the "Tiered
Certificates") and the Class A-2, Class A-3, Class A-4 and Variable
Strip Certificates. Any such losses so allocated to the Tiered
Certificates will be allocated first to the Class A-6 Certificates
until the Certificate Principal Balance thereof is reduced to zero and
then on a pro rata basis to the Class A-1 Certificates and the Class
A-5 Certificates. However, the credit enhancement provided to the
Class A-1 Certificates and Class A-5 Certificates by the Class A-6
Certificates will in no event cover Special Hazard Losses, Bankruptcy
Losses or Fraud Losses. Because principal distributions are paid to
certain classes of Senior Certificates before other classes, holders
of classes of Senior Certificates having a later priority of payment
bear a greater risk of such losses than holders of classes of Senior
Certificates having earlier priorities for distribution of principal.
See "Description of the Certificates--Allocation of Losses;
Subordination" herein.
Subordinate Certificates................................
The Class M Certificates and Class B Certificates (together, the
"Subordinate Certificates") have aggregate initial Certificate
Principal Balances of approximately $__________ and $__________,
respectively and a Pass-Through Rate of ____%. The Subordinate
Certificates are not being offered hereby. The Company expects that
the Subordinate Certificates will be privately placed directly or
indirectly with one or more institutional investors.
Residual Certificates...................................
The Residual Certificates are designated as the Class R-I and Class
R-II Certificates. The Residual Certificates have no Certificate
<PAGE>
-13-
Principal Balance and no Pass-Through Rate. Absent any delinquencies
or losses on the Mortgage Loans, holders of the Class R-I Certificates
will receive monthly distributions equal to interest at ____% per
annum on the Certificate Principal Balance of the Variable Strip
Certificates. In addition, the Residual Certificates represent the
right to receive certain distributions, if any, of amounts which are
in excess of the amounts required to be distributed to all other
classes of Certificates, including the Subordinate Certificates,
following the retirement of all of the Senior Certificates and the
Subordinate Certificates. The Residual Certificates are not being
offered hereby.
Residential Funding initially will retain the Residual Certificates;
however, the Residual Certificates may be sold at any time in
accordance with the terms of the Pooling and Servicing Agreement.
Optional Termination....................................
At its option, on any Distribution Date when the 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 other than the Residual 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 of principal payments on the Senior Certificates collectively
will depend on the rate and timing of principal payments (including
prepayments, defaults and
<PAGE>
-14-
liquidations) on the Mortgage Loans. As is the case with
mortgage-backed securities generally, the Senior Certificates are
subject to substantial inherent cash-flow uncertainties because the
Mortgage Loans may be prepaid at any time. Generally, when prevailing
interest rates are increasing, prepayment rates on mortgage loans tend
to decrease, resulting in a reduced return of principal to investors
at a time when reinvestment at such higher prevailing rates would be
desirable. Conversely, when prevailing interest rates are declining,
prepayment rates on mortgage loans tend to increase, resulting in a
greater return of principal to investors at a time when reinvestment
at comparable yields may not be possible.
[The multiple class structure of the Senior Certificates results in
the allocation of prepayments among certain classes as follows [to be
included as appropriate]:]
[Sequentially paying classes: [All] classes of the Senior Certificates
are subject to various priorities for payment of principal as
described herein. Distributions on classes having an earlier priority
of payment will be immediately affected by the prepayment speed of the
Mortgage Loans early in the life of the Mortgage Pool. Distributions
on classes with a later priority of payment will not be directly
affected by the prepayment speed until such time as principal is
distributable on such classes; however, the timing of commencement of
principal distributions and the weighted average lives of such classes
will be affected by the prepayment speed experienced both before and
after the commencement of principal distributions on such classes.]
[PAC Certificates: Principal distributions on the PAC Certificates
will be payable in
<PAGE>
-15-
amounts determined based on schedules as described herein, provided
that the prepayment speed of the Mortgage Loans each month remains
between approximately ___% SPA and ___% SPA. However, as discussed
herein, actual principal distributions may be greater or less than the
described amounts. If the prepayment speed of the Mortgage Loans is
consistently higher than ____% of SPA, then the Companion Certificates
will be retired before all of the PAC Certificates are retired, and
the rate of principal distributions and the weighted average lives of
the remaining PAC Certificates will become significantly more
sensitive to changes in the prepayment speed of the Mortgage Loans and
principal distributions thereon will be more likely to deviate from
the described amounts.]
[TAC Certificates: Principal distributions on the TAC Certificates
would be payable in amounts determined based on schedules as described
herein, if the prepayment speed of the Mortgage Loans were to remain
at a constant level of approximately ___% SPA. However, as discussed
herein, actual principal distributions are likely to deviate from the
described amounts, because it is highly unlikely that the actual
prepayment speed of the Mortgage Loans each month will remain at or
near ___% SPA. If the Companion Certificates are retired before all of
the TAC Certificates are retired, the rate of principal distributions
and the weighted average lives of the remaining TAC Certificates will
become significantly more sensitive to changes in the prepayment speed
of the Mortgage Loans, and principal distributions thereon will be
more likely to deviate from the described amounts.]
[Companion Certificates: Because of the application of amounts
available for principal distributions among the Senior Certificates in
any given month, first to the [PAC] [TAC]
<PAGE>
-16-
Certificates up to the described amounts and then to the Companion
Certificates, the rate of principal distributions and the weighted
average lives of the Companion Certificates will be extremely
sensitive to changes in the prepayment speed of the Mortgage Loans.
The weighted average lives of the Companion Certificates will be
significantly more sensitive to changes in the prepayment speed than
that of either the [PAC] [TAC] Certificates or a fractional undivided
interest in the Mortgage Loans.]
[Subordination features: As described herein, during certain periods
all or a disproportionately large percentage of principal prepayments
on the Mortgage Loans will be allocated among the Senior Certificates,
and during certain periods none or a disproportionately small
percentage (or, as compared to the Class [B] Certificates during
certain periods, a disproportionately large percentage) of such
prepayments will be distributed on the Class [M] Certificates. As a
result, the weighted average lives of the Class [M] Certificates will
be extended and, as a relative matter, the subordination afforded the
[Senior] Certificates by the Class [M] Certificates (together with the
Class [B] Certificates) will be increased. [Similar descriptions to be
added to other classes with subordination features.]]
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.
Special Yield
Considerations........................................
The yield to maturity on each respective class of the Senior
Certificates will depend on the
<PAGE>
-17-
rate and timing of principal payments (including prepayments, defaults
and liquidations) on the Mortgage Loans and the allocation thereof
(and of any losses on the Mortgage Loans) to reduce the Certificate
Principal Balance (or Notional Amount) of such class, as well as other
factors such as the Pass-Through Rate (and any adjustments thereto)
and the purchase price for such Certificates. The yield to investors
on any class of Senior 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.
In general, if a class of Senior Certificates is purchased at a
premium and principal distributions thereon occur at a rate faster
than anticipated at the time of purchase, the investor's actual yield
to maturity will be lower than that assumed at the time of purchase.
Conversely, if a class of Senior Certificates is purchased at a
discount and principal distributions thereon occur at a rate slower
than that assumed at the time of purchase, the investor's actual yield
to maturity will be lower than that originally anticipated.
The Senior Certificates were structured based on a number of
assumptions, including a prepayment assumption of ___% SPA and
weighted average lives corresponding thereto as set forth herein under
"Special Prepayment Considerations." The yield assumptions for the
respective classes that are to be offered hereunder will vary as
determined at the time of sale.
<PAGE>
-18-
[The multiple class structure of the Senior Certificates causes the
yield of certain classes to be particularly sensitive to changes in
the prepayment speed of the Mortgage Loans and other factors, as
follows [to be included as appropriate]:]
[Interest strip and inverse floater classes: The yield to investors on
the [identify classes] will be extremely sensitive to the rate and
timing of principal payments on the Mortgage Loans (including
prepayments, defaults and liquidations), which may fluctuate
significantly over time. A rapid rate of principal payments on the
Mortgage Loans could result in the failure of investors in the
[identify interest strip and inverse floater strip classes] to recover
their initial investments, and a slower than anticipated rate of
principal payments on the Mortgage Loans could adversely affect the
yield to investors on the [identify non-strip inverse floater
classes].]
[Variable Strip Certificates: In addition to the foregoing, the yield
on the Variable Strip Certificates will be materially adversely
affected to a greater extent than the yields on the other Senior
Certificates if the Mortgage Loans with higher Mortgage Rates prepay
faster than the Mortgage Loans with lower Mortgage Rates, because
holders of the Variable Strip Certificates generally have rights to
relatively larger portions of interest payments on the Mortgage Loans
with higher Mortgage Rates than on Mortgage Loans with lower Mortgage
Rates.]
[Adjustable rate (including inverse floater) classes: The yield on the
[identify floating rate classes] will be sensitive, and the yield on
the [identify inverse floater classes] will be extremely sensitive, to
fluctuations in the level of [the index]. The Pass-Through Rate on the
[identify inverse floater classes] will
<PAGE>
-19-
vary inversely with, and at a multiple of, [the index].]
[Inverse floater companion classes: In addition to the foregoing, in
the event of relatively low prevailing interest rates (including [the
index]) and relatively high rates of principal prepayments over an
extended period, while investors in the [identify inverse floater
companion classes] may then be experiencing a high current yield on
such Certificates, such yield may be realized only over a relatively
short period, and it is unlikely that such investors would be able to
reinvest such principal prepayments on such Certificates at a
comparable yield.]
[Subordination features: The yield to maturity on the Class [M]
Certificates will be extremely sensitive to losses due to defaults on
the Mortgage Loans (and the timing thereof), to the extent such losses
are not covered by the Class [B] Certificates, because the entire
amount of such losses (rather than a pro rata portion thereof) will be
allocable to the Class [M] Certificates, as described herein. [Similar
descriptions to be added for other classes with subordination
features.]]
[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 their term that substantially exceed the principal and interest
payable thereon during such periods. [In addition, such distributions
will be reduced to the extent that they are subject to United States
federal income tax withholding.]]
See "Certain Yield and Prepayment Considerations" [, especially
"-__________
<PAGE>
-20-
Yield Considerations," "-__________ Yield Considerations" and
"-Additional Yield Considerations Applicable Solely to the Residual
Certificates" and "Certain Federal Income Tax Consequences"] herein,
and "Yield Considerations" in the Prospectus.
Certain Federal Income
Tax Consequences......................................
Two separate REMIC elections will be made with respect to the Trust
Fund. Upon the issuance of the Senior Certificates, _______
_______________, counsel to the Company, will deliver its opinion
generally to the effect that, assuming compliance with all provisions
of the Pooling and Servicing Agreement, "REMIC I" and "REMIC II" will
each qualify as a REMIC under Sections 860A through 860G of the
Internal Revenue Code of 1986 (the "Code").
The assets of "REMIC I" will consist of the Mortgage Loans and the
other assets in the Trust Fund. The Uncertificated REMIC I Regular
Interest A (as defined below), Uncertificated REMIC I Regular Interest
B (as defined below), Class A-2, Class A-3, Class A-4, Variable Strip
and Subordinate Certificates will be regular interests in REMIC I and
will be treated as debt instruments of REMIC I for federal income tax
purposes. The Uncertificated REMIC I Regular Interest A has a
principal balance equal to the aggregate Certificate Principal Balance
of the Class A-1 and Class A-5 Certificates and bears interest thereon
at the rate of ____% per annum. The Uncertificated REMIC I Regular
Interest B has a principal balance equal to the aggregate Certificate
Principal Balance of the Class A-6 Certificates and bears interest
thereon at the rate of ____% per annum. The Class R-I Certificates
will be the "residual interests" in REMIC I.
<PAGE>
-21-
The assets of "REMIC II" will consist of the Uncertificated REMIC I
Regular Interest A and Uncertificated REMIC I Regular Interest B. The
Class A-1, Class A-5 and Class A-6 Certificates will be regular
interests in REMIC II and will be treated as debt instruments of REMIC
II for federal income tax purposes. The Class R-II Certificates will
be the "residual interests" in REMIC II.
The Fixed Strip Certificates and Variable Strip Certificates will be
treated for federal income tax reporting purposes as having been
issued with original issue discount. If the method for computing
original issue discount described in the Prospectus results in a
negative amount for any period, a Fixed Strip Certificateholder and a
Variable Strip Certificateholder will be permitted to offset such
amounts only against the respective future income from such Fixed
Strip Certificate or Variable Strip Certificate, as the case may be.
Although uncertain, a Fixed Strip Certificateholder and a Variable
Strip Certificateholder may be permitted to deduct a loss to the
extent that their respective remaining basis in such Fixed Strip
Certificate or Variable Strip Certificate exceeds the maximum amount
of future payments to which such Fixed Strip Certificateholder and
Variable Strip Certificateholder are entitled, assuming no further
prepayments of the Mortgage Loans. The prepayment assumption that will
be used in determining the rate of accrual of market discount and
original issue discount for federal income tax purposes will be equal
to ___% SPA (as defined herein). No representation is made that the
Mortgage Loans will prepay at that rate or at any other rate.
For further information regarding the federal income tax consequences
of investing in the Senior Certificates, see "Certain Federal
<PAGE>
-22-
Income Tax Consequences" herein and in the Prospectus.
ERISA Considerations....................................
A fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should review carefully with
its legal advisors whether the purchase or holding of Certificates
could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. It is not clear whether (a) a
Fixed Strip Certificate or a Variable Strip Certificate, as interests
representing a nominal amount of principal, (b) any Certificate, to
the extent representing the right to receive payments of principal and
interest only after such receipt by other classes of Certificates, (c)
a Class A-1, Class A-5 or Class A-6 Certificate, as an interest in a
Tiered REMIC (as defined in the Prospectus), or (d) a Class A-6
Certificate, to the extent that Realized Losses are allocated to such
Certificates prior to any such allocation to other classes of Senior
Certificates, would be a "mortgage pool pass-through certificate" for
purposes of PTCE 83-1 as described in the Prospectus. In addition,
because it is not clear that the Class A-6 Certificates will qualify
for the foregoing prohibited transaction exemption (or any other
exemption that might be available), because such Certificates are
subject to the allocation of Realized Losses prior to the allocation
thereof to other classes of Senior Certificates, transfers of the
Class A-6 Certificates to any plan as described above will not be
registered unless the transferee provides an opinion of counsel
satisfactory to the Master Servicer, the Company and the Trustee that
the purchase of the Class A-6 Certificates by or on behalf of such
plan is permissible under applicable law and will not subject the
Master Servicer, the Company or the Trustee to any
<PAGE>
-23-
obligation in addition to those undertaken in the Pooling and
Servicing Agreement. See "ERISA Considerations" in the Prospectus.
Rating..................................................
It is a condition of the issuance of the Senior Certificates that they
be rated "___" by ________ ________________ and "___" by
_________________________. 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
rating of the Fixed Strip Certificates or Variable Strip Certificates
does not address the possibility that the holders of such Certificates
may fail to fully recover their initial investment. See "Certain Yield
and Prepayment Considerations" and "Rating" herein and "Yield
Considerations" in the Prospectus.
Legal Investment........................................
The Senior Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") 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 that states may override its provisions on legal
investment and restrict or condition investment in mortgage related
securities, by taking statutory action prior to October 3, 1991.
Certain states have enacted, and other states may enact, legislation
which overrides the preemption provisions of SMMEA. See "Legal
Investment Matters" in the Prospectus and "Rating" herein.
The predecessor to the Office of Thrift Supervision ("OTS") issued a
bulletin, entitled, "Mortgage Derivative Products and
<PAGE>
-24-
Mortgage Swaps", which is applicable to thrift institutions regulated
by the OTS. The bulletin established guidelines for the investment by
savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to
the bulletin, such "high-risk" mortgage derivative securities include
securities such as the Class A-6 Certificates, Fixed Strip
Certificates and Variable Strip Certificates. In addition, on March
21, 1991, the National Credit Union Administration issued proposed
regulations governing federal credit union investments which, if
adopted in their current form, would prohibit investment in (or
retention of) certain specified types of securities, including certain
classes of the Senior Certificates. Similar policy statements have
been issued by regulators having jurisdiction over other types of
depository institutions.
The Company makes no representations as to the proper characterization
of any class of the Senior Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any
class of the Senior Certificates under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity
of any class of the Senior Certificates.
Accordingly, all institutions whose investment activities are subject
to legal investment laws and regulations or to review by regulatory
authorities should consult with their own legal advisors in
determining whether and to what extent the Senior Certificates, and
particularly the Class A-6 Certificates, Fixed Strip Certificates and
Variable Strip Certificates constitute legal investments under SMMEA
or are subject to restrictions on investment,
<PAGE>
-25-
capital requirements or otherwise. See "Legal Investment Matters" in
the Prospectus.
<PAGE>
-26-
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 $____________. 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 ___ 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 more fully described
herein and in the Prospectus. No Unaffiliated Seller sold more than ____% of the
Mortgage Loans to Residential Funding. ____% of the Mortgage Loans were
purchased from, and are or will be subserviced by, __________________, which is
not an affiliate of the Company. ____% of the Mortgage Loans are or will be
subserviced by __________________, which is not an affiliate of the Company.
Pursuant to the terms of the Pooling and Servicing Agreement, the Company
will assign the representations and warranties made by the related Sellers of
the Mortgage Loans to the Trustee for the benefit of the Certificateholders and
will also make certain limited representations and warranties regarding the
Mortgage Loans as of the date of issuance of the Certificates. To the best of
the Company's knowledge, none of the Mortgage Loans were sold to Residential
Funding by Unaffiliated Sellers that are institutions which are currently under
the control of the Resolution Trust Corporation or otherwise in receivership or
conservatorship or involved in other insolvency or bankruptcy proceedings, or
are no longer in existence. To the extent that any Seller of the Mortgage Loans
does not repurchase a Mortgage Loan in the event of a breach of its
representations and warranties with respect to such Mortgage Loan, neither the
Company nor Residential Funding will be required to repurchase such Mortgage
Loan unless such breach also constitutes a breach of one of the Company's or
Residential Funding's representations and warranties with respect to such
Mortgage Loan and such breach materially and adversely affects the interests of
the Certificateholders in any such Mortgage Loan. In addition, neither the
Company nor Residential Funding will be required to repurchase any Mortgage Loan
in the event of a breach of its representations and warranties with respect to
such Mortgage Loan if the substance of any such breach also constitutes fraud in
the origination of such affected Mortgage Loan. A limited amount of losses on
Mortgage Loans as to which there was fraud in the origination of such Mortgage
Loans will be covered by the Subordination (as defined herein) provided by the
Class M Certificates and Class B Certificates as described herein under
"Description of the Certificates--Allocation of Losses; Subordination."
<PAGE>
-27-
None of the Mortgage Loans will have been originated prior to
__________________ or will have a maturity date later than __________________.
No Mortgage Loan will have a remaining term to maturity as of the Cut-off Date
of less than ____ months. The weighted average remaining term to maturity of the
Mortgage Loans as of the Cut-off Date will be approximately ____ months. The
weighted average original term to maturity of the Mortgage Loans as of the
Cut-off Date will be approximately ____ months.
As of the Cut-off Date, no Mortgage Loan will be one month or more
delinquent in payment of principal and interest.
_____ Mortgage Loans, constituting ____% of the Mortgage Pool, will be
Buydown Mortgage Loans.
Included below is a table showing the "Credit Scores" for certain
Mortgagors. Credit Scores are obtained by many mortgage lenders in connection
with mortgage loan applications to help assess a borrower's credit-worthiness.
Credit Scores are obtained from credit reports provided by various credit
reporting organizations, each of which may employ differing computer models and
methodologies. The Credit Score is designed to assess a borrower's credit
history at a single point in time, using objective information currently on file
for the borrower at a particular credit reporting organization. Information
utilized to create a Credit Score may include, among other things, payment
history, delinquencies on accounts, levels of outstanding indebtedness, length
of credit history, types of credit, and bankruptcy experience. Credit Scores
range from approximately 350 to approximately 840, with higher scores indicating
an individual with a more favorable credit history compared to an individual
with a lower score. However, a Credit Score purports only to be a measurement of
the relative degree of risk a borrower represents to a lender, i.e., a borrower
with a higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, it should be noted that
Credit Scores were developed to indicate a level of default probability over a
two-year period, which does not correspond to the life of a mortgage loan.
Furthermore, Credit Scores were not developed specifically for use in connection
with mortgage loans, but for consumer loans in general, and assess only the
borrower's past credit history. Therefore, a Credit Score does not take into
consideration the differences between mortgage loans and consumer loans
generally, or the specific characteristics of the related mortgage loan (for
example, the Loan-to- Value Ratio, the collateral for the mortgage loan, or the
debt to income ratio). There can be no assurance that the Credit Scores of the
Mortgagors will be an accurate predictor of the likelihood of repayment of the
related Mortgage Loans.
<TABLE>
<CAPTION>
Credit Score Distribution
Number of Percent of
Credit Score Range Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
.................................................. $ %
..................................................
<PAGE>
-28-
..................................................
..................................................
..................................................
..................................................
..................................................
..................................................
..................................................
..................................................
..................................................
..................................................
Not Available (1).................................
Subtotal with Credit Score........................
Total Pool........................................
</TABLE>
- ------------
(1) Mortgage loans indicated as having a Credit Score that is "not
available" include Mortgage Loans where the Credit Score was not
provided by the related Seller and Mortgage Loans where no credit
history can be obtained from the related Mortgagor.
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Cut-off Date (except as otherwise indicated):
Mortgage Rates
<TABLE>
<CAPTION>
Number of Percentage
Mortgage Rates (%) Mortgage Loans Principal Balance of Mortgage Pool
<S> <C> <C> <C>
............................. $ %
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
Total.............. $ . %
=== ============ ======
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage Loans
will be approximately ______% per annum.
</TABLE>
<PAGE>
-29-
<TABLE>
Original Mortgage Loan Principal Balances
<CAPTION>
Original Mortgage Loan Number of Unpaid Percentage of
Principal Balance Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
$............................ $ %
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
.............................
............................. .
---- -------------- -----
Total............. $ . %
=== ============ ======
</TABLE>
<PAGE>
-30-
As of the Cut-off Date, the average unpaid principal balance of the
Mortgage Loans will be approximately $_______.
<TABLE>
Original Loan-To-Value Ratios
<CAPTION>
Percentage of
Number of Mortgage Pool
Loan-to-Value Ratio (%) Mortgage Loans Principal Balance
<S> <C> <C> <C>
............................. $ %
.............................
.............................
.............................
.............................
.............................
.............................
.............................
............................. .
Total................... $ . %
=== ============ =======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will have been approximately
- ----%.
<TABLE>
Geographic Distributions of Mortgaged Properties
<CAPTION>
Number of Percentage of
State Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
California................... $ %
Connecticut..................
Illinois.....................
New Jersey...................
New York.....................
Other (1).................... .
--- ------------- ----
Total.............. $ . %
=== ============ ======
<PAGE>
-31-
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
</TABLE>
No more than ____% of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than ____%
of the Mortgage Loans will be secured by Mortgaged Properties located in any one
zip code area outside California.
<TABLE>
Mortgaged Property Types
<CAPTION>
Percentage of
Number of Mortgage Pool
Property Mortgage Loans Principal Balance
<S> <C> <C> <C>
Single-family detached....... $ %
Planned Unit Developments
(detached)...................
Two- to four-family units....
Condo Low-Rise (less than 5
stories).....................
Condo Mid-Rise (5 to 8
stories).....................
Condo High-Rise (9 stories or
more)........................
Townhouse....................
Planned Unit Developments
(attached)...................
Leasehold.................... .
---- -------------- ----
Total............. $ . %
=== ============ =======
</TABLE>
<PAGE>
-32-
[In connection with each Mortgage Loan that is 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 leasehol d estates is readily
marketable; the lease is recorded and no party is in any way in breach of any
provision of such lease; the leasehold is in full force and effect and is not
subject to any prior lien or encumbrance by which the leasehold could be
terminated or subject to any charge or penalty; and the remaining term of the
lease does not terminate less than ten years after the maturity date of each
such Mortgage Loan.]
<TABLE>
Mortgage Loan Purposes
<CAPTION>
Percentage of
Number of Mortgage Pool
Loan Purpose Mortgage Loans Principal Balance
<S> <C> <C> <C>
Purchase..................... $ %
Rate/Term Refinance..........
Equity Refinance............. .
--- ------------- ----
Total............... $ . %
=== ============ ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of equity
refinance Mortgage Loans will have been ____ %. The weighted average
Loan-to-Value Ratio at origination of rate and term refinance Mortgage Loans
will have been ____%.
<TABLE>
Mortgage Loan Documentation
<CAPTION>
Percentage of
Number of Mortgage Pool
Type of Program Mortgage Loans Principal Balance
<S> <C> <C> <C>
Full......................... $ %
Reduced...................... .
--- ------------- ----
Total............... $ . %
=== ============ ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans which were underwritten under a reduced loan documentation program will
have been ____%. No more than ____% of such reduced loan documentation Mortgage
Loans will be secured by Mortgaged Properties located in California.
<TABLE>
Occupancy Types
<CAPTION>
Number of Percentage of
Occupancy Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
Primary Residence............ $ %
Second/Vacation..............
Non Owner-occupied........... .
---- ---------------- ----
Total.............. $ . %
=== ============ ======
</TABLE>
<PAGE>
-33-
Primary Mortgage Insurance and Primary Hazard Insurance
Each Mortgage Loan is required to be covered by a standard hazard insurance
policy (a "Primary Haz ard Insurance Policy"). In addition, to the best of the
Company's knowledge each Mortgage Loan with a Loan-to-Value Ratio at origination
in excess of 80% will be insured by a primary mortgage insurance policy covering
the amount of such Mortgage Loan in excess of 75% of the value of the related
Mortgaged Property used in determining such Loan-to-Value Ratio (a "Primary
Insurance Policy"). Approximately ___% of the Mortgage Loans, by aggregate
principal balance as of the Cut-off Date, were required to be covered by Primary
Insurance Policies at origination and, to the best of the Company's knowledge,
such Mortgage Loans are so cov ered. Substantially all of such Primary Insurance
Policies were issued by General Electric Mortgage Insurance Corporation, PMI
Mortgage Insurance Company, United Guaranty Residential Insurance Company or
Mortgage Guaranty Insurance Corporation (together with the other primary
mortgage guaranty insurers for the Mortgage Loans, the "Primary Insurers"). The
Master Servicer shall keep or cause to be kept in full force and effect each
such Primary Insurance Policy until the principal balance of the related
Mortgage Loan secured by a Mortgaged Property is reduced to 80% or less of the
Appraised Value in the case of such a Mortgage Loan having a Loan-to-Value Ratio
at origination in excess of 80%, 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 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 pric e. Each Primary Insurer has been approved as a primary mortgage
guaranty insurer by the Federal Home Loan Mortgage Corporation ("FHLMC") and has
a claims-paying ability currently acceptable to the Rating Agencies that will
rate the Certificates; however, there is no assurance as to the actual ability
of any Primary Insurer to pay claims.
Additional Information
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Senior
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Company deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the Mortgage Pool prior to the issuance of the Senior Certificates.
The Company believes that the information set forth herein will be substantially
representative of the characteristics of the Mortgage Pool as they will be
constituted at the time the Senior Certificates are issued although the range of
Mortgage Rates and maturities and certain other characteristics of the Mortgage
Loans in the Mortgage Pool may vary.
A Current Report on Form 8-K containing a detailed description of the
Mortgage Loans will be available to purchasers of the Senior 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 Senior Certificates. The Current Report on Form 8-K will specify
the aggregate principal balance of the Mortga ge Loans in the Mortgage Pool
outstanding as of the Cut-off Date and will set forth the geographic
concentrations of the Mortgage Loans and the other approximate information
presented in this Prospectus Supplement.
DESCRIPTION OF THE CERTIFICATES
General
The Series 19__-S_ Mortgage Pass-Through Certificates offered hereby (the
"Senior Certificates") will consist of seven classes: (i) Class A-1
Certificates, Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, (ii) Class A-5 Certificates (the "Fixed Strip Certificates"),
(iii) Class A-6 Certificates and (iv) Class A-7 Certificates (the "Variable
Strip Certificates"). In addition to the Senior Certificates, the Series 19__-S_
Mortgage Pass-Through Certificates will also consist of two classes of
subordinate certificates which are designa
<PAGE>
-34-
ted as the Class M Certificates and Class B Certificates (together, the
"Subordinate Certificates") and two classes of residual certificates which are
designated as the Class R-I Certificates and Class R-II Certificates (the
"Residu al Certificates") and which are not offered hereby.
The Senior Certificates (together with the Subordinate Certificates and
Residual 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 all proceeds thereof.
Interest Distributions
Holders of each class of Senior Certificates will be entitled to receive
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 (as defined below) for such Distribution Date, provided however, in the
case of the Tiered Certificates, that following the Credit Support Depletion
Date such distributions shall be made in the priority set forth in the eighth
paragraph under the heading "Principal Distributions". With respect to any
Distribution Date, Accrued Certificate Interest will be equal to (a) in the case
of each class of Senior Certificates other than the Variable Strip Certificates,
one month's interest accrued on the Certificate Principal Balance of the
Certificates of such class at the Pass-Through Rate on such class and (b) in the
case of the Variable Strip Certificates, one month's interest accrued on the
Notional Amount of the Certificates of such class at the then applicable
Pass-Through Rate on such class for such Distribution Date; in each case less
interest shortfalls, if any, for such Distribution Date not covered by the
Subordination provided by the Subordinate Certificates, including in each case
(i) any Prepayment Interest Shortfall (as defined below), (ii) the interest
portions of Realized Losses (including Special Hazard Losses) in excess of the
Special Hazard Amount ("Excess Special Hazard Losses"), Fraud Losses in excess
of the Fraud Loss Am ount ("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 covered by the Subordination
(which with respect to the pro rata portion thereof allocated to the Tiered
Certificates, to the extent such losses are Default Losses, will be allocated
first to the Class A-6 Certificates and second to the Class A-1 Certificates and
Class A-5 Certificates) (iii) the interest portion of any Advances that were
made with respect to delinquencies that were ultimately determined to be Exc ess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses and (iv) interest shortfalls relating to the Relief Act,
allocated as described below. The Variable Strip Certificates will not receive
any interest distributions with respect to their Certificate Principal Balance.
Accrued Certificate Interest is calculated on the basis of a 360-day year
consisting of twelve 30-day months.
The Prepayment Interest Shortfall for any Distribution Date is equal to the
aggregate shortfall, if any, in collections of interest (adjusted to the related
Net Mortgage Rates) resulting from mortgagor prepayments on the Mortgage Loans
during the preceding calendar month. Such shortfalls will result because
interest on prepayments in full is distributed only to the date of prepayment,
and because no interest is distributed on prepayments in part, as such
prepayments are applied to reduce the outstanding principal balance of the
related Mortgage Loan as of the Due Date in the month of prepayment. Prepayment
Interest Shortfalls, the interest portions of Realized Losses not covered by the
Subordination, interest shortfalls relating to the Relief Act (as defined
herein) or similar legislation and other interest shortfalls not covered by the
Subordination provided by the Subordinate Certificates on any Distribution Date
will be allocated among the holders of all classes of Certificates (including
the Subordi nate and Residual Certificates), in proportion to the respective
amounts of Accrued Certificate Interest for such Distribution Date on each such
class, before taking into account any such reduction (except with respect to
interest portions of such Realized Losses that are Default Losses that are
allocated as described in the preceding paragraph). Such interest shortfalls
will not be offset by a reduction of the servicing compensation of the Master
Servicer or otherwise.
<PAGE>
-35-
The Available Distribution Amount for any Distribution Date is equal to the
aggregate amount of scheduled payments on the Mortgage Loans due on the related
Due Date and received on or prior to the related Determinat ion Date, after
deduction of the related master servicing fees and any subservicing fees
(collectively, the "Servicing Fees"), certain unscheduled payments, including
mortgagor prepayments on the Mortgage Loans, Insurance Proceeds, Liquidation
Proceeds and proceeds from repurchases of the Mortgage Loans occurring duri ng
the preceding calendar month, and all Advances made for such Distribution Date,
in each case net of amounts reimbursable therefrom to the Master Servicer and
any Subservicer. In addition to the foregoing amounts, with respect to
unscheduled collections, not including mortgagor prepayments, the Master
Servicer may elect to treat such amounts as included in the Available
Distribution Amount for the Distribution Date in the month of receipt, but is
not obligated to do so. With respect to any Distribution Date (i) the Due Date
is the first day of the month in which such Distribution Date occurs, and (ii)
the Determination Date is the 20th day of the month in which such Distribution
Date occurs or, if such day is not a business day, the immediately succeeding
business day.
If the Available Distribution Amount for any Distribution Date is less than
the aggregate amount of the Accrued Certificate Interest required to be
distributed on the Senior Certificates on such date (the "Senior Interest
Distribution Amount"), the shortfall will be allocated among the holders of all
classes of Senior Certificates pro rata based on the Accrued Certificate
Interest of each such Distribution Date, and will be distributable to holders of
the Certificates of such classes, on subsequent Distribution Dates, to the
extent of available funds, provided however, that following the Credit Support
Depletion Date distributions will be made to the Tiered Certificates in the prio
rity set forth in the eighth paragraph under the heading "Principal
Distributions" and therefore the pro rata portion of such shortfall that is
allocated to the Tiered Certificates will be allocated first to the Class A-6
Certificates. Shortfalls could occur, for example, if losses realized on the
Mortgage Loans in the Trust Fund were exceptionally high and were concentrated
in a particular month and if advances by the Master Servicer did not cover the
shortfall. Any such amount so carried forward will not bear interest.
The Pass-Through Rate on each class of Senior Certificates, other than the
Variable Strip Certificates, is set forth on the cover hereof and is fixed for
each Distribution Date. The Pass-Through Rate on the Fixed Strip Certificates is
equivalent to a fixed interest rate of approximately _____% on the aggregate
Certificate Principal Balance of all of the Class A-1 and Fixed Strip
Certificates. The Pass-Through Rate on the Variable Strip Certificates for each
Distribution Date will equal the weighted average, as determined as of the Due
Date in the month preceding the month in which such Distribution Date occurs, of
the Pool Strip Rates on each of the Mortgage Loans in the Mortgage Pool. The
Pool Strip Rate on any Mortgage Loan is equal to the Net Mortgage Rate thereon
minus ___%. The Net Mortgage Rate on each Mortgage Loan is equal to the Mortgage
Rate thereon minus the Servicing Fee Rate. The initial Pass-Through Rate on the
Class A-7 Certificates is approximately _____%.
As described herein, the Accrued Certificate Interest allocable to each
class of Senior Certificates is based on the Certificate Principal Balance
thereof or in the case of the Variable Strip Certificates, on the Notional Am
ount. The Certificate Principal Balance of any 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 dee med to have occurred in connection
with allocations of Realized Losses (as defined herein) in the manner described
herein. The Notional Amount of the Variable Strip Certificates as of any date of
determination is equal to the aggregate Certificate Principal Balance of the
Certificates of all classes (including the Variable Strip Certificates and
Subordinate Certificates) as of such date. Reference to the Notional Amount of a
Variable Strip Certificate is solely for convenience in certain calculations and
does not represent the right to receive any distributions allocable to principal
other than such class's initial Certificate Principal Balance.
Principal Distributions
Holders of the Senior Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the Available Distribution
Amount remaining after the Senior Interest Distribution Amount is distributed to
such holders, a distribution allocable to principal in the following amount:
<PAGE>
-36-
(i) the product of (A) the then applicable Senior Percentage and (B)
the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly
payments on the Mortgage Loans due on the related Due Date,
whether or not received on or prior to the related
Determination Date, less the principal portion of Debt Service
Reductions (as defined below) which together with other
Bankruptcy Losses are in excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of the
repurchase of any Mortgage Loan as required by the Pooling and
Servicing Agreement during the preceding calendar month;
(3) the principal portion of all other unscheduled
collections received during the preceding calendar month
(other than full and partial Principal Prepayments made by the
respective mortgagors and any amounts received in connection
with a Final Disposition (as defined below) of a Mortgage Loan
described in clause (ii) below), to the extent applied as
recoveries of principal;
(ii) in connection with the Final Disposition of a Mortgage Loan (x)
that occurred in the preceding calendar month and (y) that did not result
in any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses or Extraordinary Losses, an amount equal to the lesser of (a) the th
en-applicable Senior Percentage of the Stated Principal Balance of such
Mortgage Loan and (b) the then-applicable Senior Accelerated Distribution
Percentage (as defined below) of the related collections, including
Insurance Proceeds and Liquidation Proceeds, to the extent applied as
recoveries of principal ;
(iii) the then applicable Senior Accelerated Distribution Percentage
of the aggregate of all full and partial Principal Prepayments made by the
respective mortgagors during the preceding calendar month;
(iv) any Excess Subordinate Principal Amount (as defined below) for
such Distribution Date;
(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 are allocated to the Subordinate Certificates.
With respect to any Distribution Date on which the Certificate Principal
Balance of the most subordinate class or classes of Certificates then
outstanding is to be reduced to zero and on which Realized Losses are to be
allocated to such class or classes, the "Excess Subordinate Principal Amount" is
equal to the amount, if any, by which (i) the amount that would otherwise be
distributable in respect of principal on such 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.
A "Final Disposition" of a defaulted Mortgage Loan is deemed to have
occurred upon a determination by the Master Servicer that it has received all
Insurance Proceeds, Liquidation Proceeds and other payments or cash recoveries
which the Master Servicer reasonably and in good faith expects to be finally
recoverable with respect to such Mortgage Loan.
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts allocable to
principal that have been
<PAGE>
-37-
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 _____% and
will in no event exceed 100%, will be adjusted for each Distribution Date to be
the percentage equal to the aggregate Certificate Principal Balance of the
Senior Certificates immediately prior to such Distribution Date divided by the
aggregate Stated Principal Balance of all of the Mortgage Loans immediately
prior to such Distribution Date. The Subordi nate Percentage as of any date of
determination is equal to 100% minus the Senior Percentage as of such date.
The Senior Accelerated Distribution Percentage for any Distribution Date
occurring during the first five years following the Delivery Date after the
Delivery Date will equal 100%. Thereafter, the Senior Accelerated Distribution
Percentage will be subject to gradual reduction as described in the following
paragraph. This disproportionate allocation of certain unscheduled payments in
respect of principal will have the effect of accelerating the amortization of
the Senior Certificates while, in the absence of Realized Losses allocated to
the Subordinate Certificates, increasing the proportionate interest in the Trust
Fund evidenced by the Subordinate Certificates. Increasing the proportionate
interest of the Subordinate Certificates relative to that of the Senior
Certificates is intended to preserve the availability of the subordination
provided by the Subordinate Certificates.
The Senior Accelerated Distribution Percentage for any Distribution Date
occurring after the first five years will be as follows: for any Distribution
Date falling in the sixth year after the Delivery Date, the Senior Percentage
for such Distribution Date plus 70% of the Subordinate Percentage (as defined
below) for such Distribution Date; for any Distribution Date falling in the
seventh year after the Delivery Date, the Senior Percentage for such
Distribution Date plus 60% of the Subordinate Percentage for such Distribution
Date; for any Distribution Date falling in the eighth year after the Delivery
Date, the Senior Percentage for such Distribution Date plus 40% of the
Subordinate Percentage for such Distribution Date; for any Distribution Date
falling in 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 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%). The scheduled reductions in the Senior Accelerated
Distribution Percentage occurring in the sixth and subsequent years after the
Delivery Date will be postponed on the Distribution Date on which such reduction
is scheduled to occur if certain criteria regarding the delinquency and loss
experience of the Mortgage Loans are not met. See "Subordination" in the
Prospectus.
On each Distribution Date occurring prior to the Credit Support Depletion
Date, (i) the product of (a) the Senior Principal Distribution Amount times (b)
the Variable Strip Percentage (as defined below) will be distributed in
reduction of the Certificate Principal Balance of the Variable Strip
Certificates, and (ii) the excess of the Senior Principal Distribution Amount
over the amount described in clause (i) of this sentence shall be distributed to
the other Senior Certificates as follows: first, concurrently to the Class A-1,
Class A-5 and Class A-6 Certificates, with the amount to be distributed
allocated as between such classes on a pro rata basis in proportion to the
respective Certificate Principal Balances thereof, until the Certificate
Principal Balance of each such class is reduced to zero; second, to the Class
A-2 Certificates until the Certificate Principal Balance thereof is reduced to
zero; thir d, to the Class A-3 Certificates until the Certificate Principal
Balance thereof is reduced to zero; and fourth, to the Class A-4 Certificates
until the Certificate Principal Balance thereof is reduced to zero.
On each Distribution Date occurring on or after the Credit Support
Depletion Date, all priorities relating to sequential distributions in respect
of principal among the various classes of Certificates will be disregarded, and
the Senior Principal Distribution Amount will be distributed to all classes of
Certificates pro rata in accordance with their respective outstanding
Certificate Principal Balances; provided, that the aggregate amount
distributable to the Class A-1, Class A-5 and Class A-6 Certificates (the
"Tiered Certificates") in respect of Accrued Certific ate Interest thereon and
in respect of their pro rata portion of the Senior Principal Distribution Amount
shall be distributed among the Tiered Certificates in the amounts and priority
as follows: first to the Class A-1 Certificates
<PAGE>
-38-
and the Class A-5 Certificates, up to an amount equal to, and pro rata based on,
the Accrued Certificate Interest thereon; second to the Class A-1 Certificates
and the Class A-5 Certificates, up to an amount equal to the Optimal Principal
Distribution Amount thereof (as defined below), on a pro rata basis based on,
and in reduction of, the Certificate Principal Balances thereof; third to the
Class A-6 Certificates, up to an amount equal to the Accrued Certificate
Interest thereon; and fourth to the Class A-6 Certificates the remainder of the
amount so distributable among the Tiered Certificates.
The "Credit Support Depletion Date" is the first Distribution Date on which
the Senior Percentage equ als 100%. With respect to any Distribution Date, the
"Variable Strip Percentage" is equal to a fraction, express ed as a percentage,
the numerator of which is the Certificate Principal Balance of the Variable
Strip Certificates as of the Cut-off Date and the denominator of which is the
aggregate Certificate Principal Balance of all classes of Senior Certificates as
of the Cut-off Date. The "Optimal Principal Distribution Amount" is equal to the
product of (a) the then applicable Optimal Percentage and (b) the amounts
described in clauses (i), (ii) and (iii) of the eighth preceding paragraph. The
"Optimal Percentage" is equal to a fraction, expressed as a percentage, the
numerator of which is the aggregate Certificate Principal Balance of the Class
A-1 Certificates and the Class A-5 Certificates immediately prior to the
applicable Distribution Date and the denominator of which is the aggregate
Certificate Principal Balance of all Senior Certificates immediately prior to
such Distribution Date.
The Master Servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unschedule d 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 mo nth 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.
Allocation of Losses; Subordination
Any Realized Losses which are not Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses will be allocated
first to the Subordinate Certificates until the Certificate Principal Balance of
the Subordinate Certificates has been reduced to zero, and then except as
provided below on a pro rata basis to the Senior Certificates based on their
then outstanding Certificate Principal Balance or the Accrued Certificate
Interest thereon, as applicable. Any allocation of a Realized Loss (other than a
Debt Service Reduction) to a Senior Certificate will be made by reducing the
Certificate Principal Balance thereof, in the case of the principal portion of
such Realized Loss, and the Accrued Certificate Interest thereon, in the case of
the interest portion of such Realized Loss, by the amount so allocated as of the
Distribution Date occurring in the month following the calendar month in which
such Realized Loss was incurred. Allocations of Realized Losses which are
Default Losses (as defined below) to Senior Certificates will be made on a pro
rata basis, based on their then outstanding Certificate Principal Balances, or
the Accrued Certificate Interest thereon, as applicable, between the Tiered
Certificates and the Class A-2, Class A-3, Class A-4 and Variable Strip
Certificates. Any such Realized Losses so allocated to the Tiered Certificates
will be allocated first to the Class A-6 Certificates until the Certificate
Principal Balance thereof is reduced to zero and then to the Class A-1
Certificates and Class A-5 Certificates on a pro rata basis. "Default Losses"
are Realized Losses that are attributable to the Mortgagor's failure to make any
payment of principal or interest as required under the Mortgage Note, and do not
include Special Hazard Losses (or any other loss resulting from damage to a
Mortgaged Property), Bankruptcy Losses, Fraud Losses, or other losses of a type
not covered by the Subordination. Allocations of Debt Service Reductions to the
Subordinate Certificates will result from the priority of distributions to the
Senior Certificateholders of the Available Distribution Amount as described
under the captions "Interest Distributions" and "Principal Distributions"
herein. An allocation of the interest portion of a Realized Loss as well as the
principal portion of Debt Service Reductions will not be treated as
Subordination, as such term is defined herein, until an amount in respect
thereof has been actually disbursed to the Senior Certificateholders. Any Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses will be allocated on a pro rata basis between the Sen ior
Certificates and the Subordinate Certificates (any such Realized Losses so
allocated to the Senior Certificates
<PAGE>
-39-
, as well as any Realized Losses that are not Default Losses which are allocated
to the Senior Certificates, will be allocated without priority among the various
classes of Senior Certificates).
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 Bala nce 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." As used herein, "Debt Service
Reductions" means reductions in the amount of monthly payments due to certain
bankruptcy proceedings, but does not include any forgiveness of principal.
In order to maximize the likelihood of distribution in full of the Senior
Interest Distribution Amount and the Senior Principal Distribution Amount,
holders of Senior Certificates will have a prior right, on each Distribu tion
Date, to the Available Distribution Amount, to the extent necessary to satisfy
the Senior Interest Distribution Amount and the Senior Principal Distribution
Amount. The Senior Principal Distribution Amount is subject to adjustment on
each Distribution Date to reflect the then applicable Senior Percentage and the
Senior Accelerated Distribution Percentage, as described herein under "Principal
Distributions", each of which may be increased (to not more than 100%) in the
event of delinquencies or Realized Losses on the Mortgage Loans. The application
of the Senior Accelerated Distribution Percentage (when it exceeds the Senior
Percentage) to determine the Senior Principal Distribution Amount, together with
amounts, if any, paid on Senior Certificates in respect of Unrecovered Senior
Portions, will accelerate the amortization of the Senior Certificates relative
to the actual amortization of the Mortgage Loans. To the extent that the Senior
Certificates are amortized faster than the Mortgage Loans, the percentage
interest evidenced by the Senior Certificates in the Trust Fund will be
decreased (with a corresponding increase in the interest in the Trust Fund
evidenced by the Subordinate Certificates), thereby increasing, as a relative
matter, the Subordination afforded by the Subordinate Certificates. Similarly,
holders of Class A-1 Certificates and Class A-5 Certificates will have a prior
right, on each Distribution Date occurring on or after the Credit Support
Depletion Date, to that portion of the Available Distribution Amount allocated
to the Tiered Certificates, to the extent necessary to satisfy the Accrued
Certificate Interest on the Class A-1 Certificates and Class A-5 Certificates
and the Optimal Principal Distribution Amount. Therefore, any shortfalls in the
amounts that would otherwise be distributable to Class A-1 Certificateholders
and Class A-5 Certificateholders, whether resulting from Mortgage Loan
delinquencies or Realized Losses will be borne by the holders of the Class A-6
Certificates.
The total amount of Realized Losses which may be allocated solely to the
Subordinate Certificates thro ugh the operation of the subordination provisions
described above ("Subordination") in connection with Special Hazard Losses (the
"Special Hazard Amount") will equal $_________ less the sum of (A) any amounts
allocated solely to the Subordinate Certificates through Subordination in
respect of Special Hazard Losses and (B) the Adjustment Amount. The Adjustment
Amount on each anniversary of the Cut-off Date will be equal to the amount, if
any, by which the Special Hazard Amount, without giving effect to the deduction
of the Adjustment Amount for such anniversary, exceeds the greater of (i) 1%
(or, if greater than 1%, the highest percentage of Mortgage Loans, by principal
balance, in any California zip code area) times the aggregate principal balance
of all of the Mortgage Loans in the Mortgage Pool on such anniversary and (ii)
twice the principal balance of the single Mortgage Loan in the Mortgage Pool
having the largest principal balance. As used in this Prospectus Suppleme nt,
"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 total amount of Realized Losses which may be allocated to the
Subordinate Certificates in connection with Fraud Losses (the "Fraud Loss
Amount") from Subordination shall initially be equal to $_________. As of any
date of determination after the Cut-off Date the Fraud Loss Amount shall equal
(X) prior to the first anniversary
<PAGE>
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of the Cut-off Date an amount equal to ____% of the aggregate principal balance
of all of the Mortgage Loans as of the Cut-off Date minus the aggregate amounts
allocated solely to the Subordinate Certificates through Subordination with
respect to Fraud Losses up to such date of determination, and (Y) from the first
through 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) ____% 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 solely to the Subordinate Certificates through
Subordination with respect to Fraud Losses since the most recent anniversary of
the Cut-off Date up to such date of determination. After the fifth anniversary
of the Cut-off Date the Fraud Los s Amount shall be zero and no allocation
solely to the Subordinate Certificates through Subordination shall be made with
respect to Fraud Losses.
The total amount of Realized Losses which may be allocated solely to the
Subordinate Certificates in connection with Bankruptcy Losses (the "Bankruptcy
Amount") from Subordination will equal $_______ less the sum of any amounts
allocated solely to the Subordinate Certificates through Subordination for such
losses up to such date of determination. As of any day 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
(the "Relevant Anniversary") and (b) the greater of (A) 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, if delinquency
rates and losses on the Mortgage Loans do not exceed certain levels as set forth
in the Pooling and Servicing Agreement and (B) the excess of (i) the aggregate
of all monthly payments on the largest Mortgage Loan in the Mortgage Pool
secured by a non-primary residence over the remaining term of such Mortgage Loan
over (ii) the aggregate of all monthly payments that would be made on such
Mortgage Loan over such remaining term if the related Mortgage Rate were equal
to 6% per annum, over (2) the aggregate amount of Bankruptcy Losses allocated
solely to the Subordinate 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.
Advances
Prior to each Distribution Date, the Master Servicer is required to make
Advances (out of its own funds, advances made by a Subservicer, or funds held in
the Custodial Account (as described in the Prospectus) for future distribution
or withdrawal) with respect to any payments of principal and interest (net of
the related Servicing Fees) which were due on the Mortgage Loans on the
immediately preceding Due Date and delinquent on the business day next preceding
the related Determination Date.
Such Advances are required to be made only to the extent they are deemed by
the Master Servicer to be recoverable from related late collections, Insurance
Proceeds, Liquidation Proceeds or amounts otherwise payable to the holders of
the Subordinate 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
Mortga ge Loans due to Debt Service Reductions or the application of the Relief
Act or similar legislation. 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.
<PAGE>
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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 following
the final liquidation of the related Mortgage Loan, from amounts otherwise
distributable on the Subordinate Certificates; provided however that only the
Subordinate Percentage of such Advances are reimbursable from amounts otherwise
distributable on the Subordinate Certificates in the event that such Advances
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 and the Senior Percentage of such Advances which may not be
so reimbursed from amoun ts otherwise distributable on the Subordinate
Certificates may be reimbursed to the Master Servicer out of any funds in the
Custodial Account or Certificate Account prior to distributions on the Senior
Certificates. In the latter event, the aggregate amount otherwise distributable
on the Senior Certificates will be reduced by an amount equ al to the Senior
Percentage of such Advances. In addition, if the Certificate Principal Balance
of the Subordinate Certificates has 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
or Certificate Account prior to distributions on the Senior Certificates.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
General
The effective yield to the holders of Senior Certificates will be lower
than the yield otherwise produced by the applicable Pass-Through Rate and
purchase price because monthly distributions will not be made to such holders
until the 25th day (or if such day is not a business day, then on the next
succeeding business day) of the month following the month in which interest
accrues on the Mortgage Loans (without any additional distribution s of interest
or earnings thereon in respect of such delay). See "Yield Considerations" in the
Prospectus.
The yield to maturity and the aggregate amount of distributions on the
Senior Certificates will be directly related to the rate of payment of principal
on the Mortgage Loans. Such yield may be adversely affected by a higher or lower
than anticipated rate of payment of principal on the Mortgage Loans in the Trust
Fund. The rate of payment of principal on such Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans, the rate of
principal prepayments thereon by the Mortgagors, liquidations of defaulted
Mortgage Loans and purchases of Mortgage Loans due to certain breaches of
representations. The Mortgage Loans may be prepaid by the Mortgagors at any time
without payment of any prepayment fee or penalty. All of the Mortgage Loans
contain due-on-sale clauses. As described under "Description of the
Certificates--Principal Distributions" herein, all or a disproportionate
percentage of principal prepayments on the Mortgage Loans will be distributed to
the Senior Certificates during not less than the first nine years after the
Delivery Date. Factors affecting prepay ment of mortgage loans include changes
in mortgagors' housing needs, job transfers, mortgage market interest rates,
unemployment, mortgagors' net equity in the mortgaged properties, changes in the
value of mortgaged properties and servicing decisions.
The yield to maturity on the Variable Strip Certificates and, in
particular, on the Fixed Strip Certificates, which classes are expected to be
sold at substantial premiums, will be extremely sensitive to both the timing of
receipt of prepayments and the overall rate of principal prepayments and
defaults on the Mortgage Loans, which rate may fluctuate significantly from time
to time. The yield to maturity on the Fixed Strip Certificates is particularly
sensitive to the rate of principal payments because the Certificate Principal
Balance of the Fixed Stri p Certificates is paid down on a pro rata basis with
the Certificate Principal Balance of the Class A-1 Certificates and Class A-6
Certificates before distributions to other classes of Senior Certificates. The
yields to investors on all of the Senior Certificates will also be adversely
affected by any interest shortfalls of a type not covered by Subordination,
including Prepayment Interest Shortfalls. In addition, holders of 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 materially adversely affected to a greater
extent
<PAGE>
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than on the other Senior Certificates if the Mortgage Loans with the higher
Mortgage Rates prepay faster than the rate assumed by investors. There can be no
assurance that the Mortgage Loans will prepay at any particular rate or that the
cash flows on the Fixed Strip Certificates or Variable Strip Certificates will
conform to the cash flows described herein. Investors in the Fixed Strip
Certificates and Variable Strip Certificates should fully consider the
associated risks, including the risk that a rapid rate of prepayments on the
Mortgage Loans could result in the failure of such investors to fully recover
their investments.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through Rates
on the Senior Certific ates (other than the Variable Strip Certificates) are
fixed, such rates will not change in response to changes in market interest
rates. The Pass-Through Rate on the Variable Strip Certificates is based on the
weighted average of the Pool Strip Rates on the Mortgage Loans, and such rates
will also not change in response to changes in market interest rates.
Accordingly, if market interest rates or market yields for securities similar to
the Senior Certificates were to rise, the market value of the Senior
Certificates may decline. 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 prepayment on the Mortgage Loans would be expected
to decrease.
The rate of defaults on the Mortgage Loans will also affect the rate of
payment of principal 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 equity refinance or limited
documentation mortgage loans may be higher than for other types of Mortgage
Loans. In addition, the rate of defaults and prepayments on Preferred Customer
Loans may increase as the result of any increase in the related Mortgage Rates.
Prepayments, liquidations and purchases of the Mortgage Loans will result in
distributions to Senior Certificateholders of principal amounts which would
otherwise be distributed over the remaining terms of the Mortgage Loans.
Furthermore, the rate 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 econo my exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values. See "Maturity
and Prepayment Considerations" in the Prospectus. Since the rates of payment of
principal on the Mortgage Loans will depend on future events and on a variety of
factors (as described more fully herein and in the Prospectus under "Yield
Considerations" and "Maturity and Prepayment Considerations"), no assurance can
be given as to such rate or the rate of principal prepayments on the Senior
Certificates.
The periodic increase in the interest paid by the Mortgagor of a Buydown
Mortgage Loan during or at the end of the applicable Buydown Period may create a
greater financial burden for the Mortgagor, who might not have otherwise
qualified for a mortgage under Residential Funding's underwriting guidelines,
and may accordingly increase the risk of default with respect to the related
Mortgage Loan. See "Mortgage Loan Program--Underwriting Standards; Loss and
Delinquency Experience" in the Prospectus.
The amount of interest otherwise payable to holders of the Senior
Certificates will be reduced by any interest shortfalls not covered by
Subordination, including Prepayment Interest Shortfalls. Such shortfalls will
not be offset by a reduction in the Servicing Fees payable to the Master
Servicer or otherwise. See "Yield Considerations" in the Prospectus and
"Description of the Certificates--Interest Distributions" and "Additional
Considerations" herein for a discussion of the effect of principal prepayments
on the Mortgage Loans on the yiel d to maturity of the Senior Certificates and
certain possible shortfalls in the collection of interest.
The timing of changes in the rate of prepayments, liquidations and
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. Because all or a
disproportionate percentage of principal prepayments will be allocated to the
Senior Certificates during not less than the first nine years after the Delivery
Date, the rate of prepayments on the Mortgage Loans during this period may
significantly affect the yield to mat urity of the Senior Certificates.
<PAGE>
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In addition, the yield to maturity of the Senior Certificates will depend
on the price paid by the holders of the Senior Certificates and the related
Pass-Through Rate. The extent to which the yield to maturity of a Sen ior
Certificate may vary from the anticipated yield thereon will depend upon the
degree to which it is purchased at a discount or premium and the degree to which
the timing of payments thereon is sensitive to prepayments. Bec ause principal
distributions are paid to certain classes of Senior Certificates before other
classes, holders of classes of Senior Certificates having a later priority of
payment bear a greater risk of losses than holders of classes of Senior
Certificates having earlier priorities for distribution of principal. In
addition, the Class A-6 Certificates bear a greater risk of losses than the
other Tiered Certificates because Default Losses on the Mortgage Loans not cov
ered by the Subordination which are allocated to the Tiered Certificates are
allocated first to the Class A-6 Certificates prior to allocation to the Class
A-1 and Class A-5 Certificates to the extent described herein. For additional
considerations relating to the yield on the Certificates, see "Yield
Considerations" and "Maturity and Prepayment Considerations" in the Prospectus.
The assumed final Distribution Date with respect to each class of Senior
Certificates is _____ __, 20__. The assumed final Distribution Date is the
Distribution Date immediately following the latest scheduled maturity date of
any Mortgage Loan in the Mortgage Pool.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security until a dollar amount in payment of
principal equal to the original principal balance of such security (less losses)
is distributed to the investor. The weighted average life of the Senior
Certificates will be influenced by among other things, the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization, prepayments or liquidations.
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 loan s. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the mortgage loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month and in each month thereafter during the life of
the mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per annum
each month. As used in the table below, "0% SPA" assumes prepayment rates equal
to 0% of SPA. Correspondingly, "___% SPA" assumes prepayment rates equal to ___%
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 assumptions
regarding the characteristics of the Mortgage Loans and of the Certificates as
follows: (i) as of the date of issuance of the Senior Certificates, the
aggregate principal balance of the Mortgage Loans is approximately $____________
and each Mortgage Loan has a Mortgage Rate of _____%, an original term of ___
months, a remaining term to maturity of ___ months and a related Servicing Fee
of ___%, (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 by its remaining term to maturity, (iii) in the aggregate, the Senior
Certificates represent an initial interest of _____% in the Mortgage Loans, (iv)
the Senior Certificates will have the following Pass-Through Rates and initial
Certificate Principal Balances as of the Cut-off Date: Class A-1, ____%,
$__________; Class A-2, ____%, $__________; Class A-3, ____%, $__________; Class
A-4, ____%, $__________; Class A-5, _______%, $______; Class A-6, _____%,
$_________; Class A-7, ___%, $______, (v) the Subordinate Certificates represent
an initial interest of ____% in the Mortgage Loans, have a Pass-Through Rate of
____% and have an initial Certificate Principal Balance of approximately
$__________, (vi) the Unaffiliated Sellers, the Master Servicer or the Company
will not repurchase any Mortgage Loan, as described under "Mortgage Loan
Program--Representations by Sellers" and "Description of the
Certificates--Assignment of the Mortgage Loans" in the Prospectus, and the
Master Servicer will not exercise its option to purchase the Mortgage Loans and
thereby cause a termination of the Trust Fund, (vii) there are no delinquencies
and principal payments on the Mortgage Loans will be timely received at the
respective percentages of SPA set forth in the table, (viii)
<PAGE>
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there is no Prepayment Interest Shortfall or any other interest shortfall in any
month, (ix) payments on the Mortgage Loans earn no reinvestment return, and (x)
there are no additional ongoing Trust Fund expenses payable out of the Trust
Fund. SOME OF THE FOREGOING ASSUMPTIONS REGARDING THE CHARACTERISTICS OF THE
MORTGAGE LOANS AND THE CERTIFICATES DIFFER FROM THE ACTUAL CHARACTERISTICS
THEREOF.
The discrepancies between the assumptions used in constructing the tables
and the actual characteristics of the Mortgage Loans and the Certificates
underscore the hypothetical nature of the table beginning on page S-_ _, which
is provided to give a general sense of principal cash flows under varying
prepayment scenarios. Likewise, 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. Any difference between such
assumptions and the actual characteristics of the Mortgage Loans or of the
Certificates, or the actual prepayment experience of the Mortgage Loans may
result in percentages of the initial Certificate Principal Balance outstanding
and weighted average lives of the classes of Senior Certificates different from
those shown. 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 ___ months.
The assumed Pass-Through Rate on the Fixed Strip Certificates was
calculated to be approximately equ al to (i) the excess, as of the Cut-off Date,
of (a) ___% of the aggregate assumed Certificate Principal Balances of the
Tiered Certificates, over (b) the sum of (1) ___% of the assumed Certificate
Principal Balance of the Class A-1 Certificates and (2) _____% of the assumed
Certificate Principal Balance of the Class A-6 Certificates divided by (ii) the
assumed Certificate Principal Balance of the Fixed Strip Certificates.
Based upon the foregoing assumptions, the following table indicates the
projected weighted average life of each class of Senior Certificates and sets
forth the percentages of the initial Certificate Principal Balance of each such
class of Senior Certificates that would be outstanding after each of the dates
shown at various percentages of SPA.
<PAGE>
-45-
<TABLE>
Percent of Initial Certificate Principal Balance Outstanding
at the Following Percentages of SPA
<CAPTION>
Class A-1 Class A-2 Class A-3
<S> <C> <C> <C>
DISTRIBUTION DATE % % % % % % % % % % % % % % %
----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage
Weighted Average Life in Years (**)....
* Indicates a number that is greater than zero but less than .5%.
** The weighted average life of a Certificate of any class is determined
by (i) multiplying the amount of each distribution in reduction of
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii)
adding the results, and (iii) dividing the sum by the initial
Certificate Principal Balance of the Certificate.
</TABLE>
This table has been prepared based on the assumptions described on pages
S-__ and S-__ (including the assumptions regarding the characteristics of the
Mortgage Loans and the Certificates which differ in certain respects from the
actual characteristics thereof) and should be read in conjunction therewith.
<PAGE>
-46-
<TABLE>
Percent of Initial Certificate Principal Balance Outstanding
at the Following Percentages of SPA
<CAPTION>
Class A-4 Class A-5 Class A-6
<S> <C> <C> <C>
DISTRIBUTION DATE % % % % % % % % % % % % % % %
----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Initial Percentage
Weighted Avg. Life in Years (**)
* Indicates an amount that is greater than zero but less than .5%.
** The weighted average life of a Certificate of any class is determined
by (i) multiplying the amount of each distribution in reduction of
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii)
adding the results, and (iii) dividing the sum by the initial
Certificate Principal Balance of the Certificate.
</TABLE>
This table has been prepared based on the assumptions described on
pages S-__ and S-__ (including the assumptions regarding the characteristics of
the Mortgage Loans and the Certificates which differ in certain respects from
the actual characteristics thereof) and should be read in conjunction therewith.
(Table continued from previous page.)
<PAGE>
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Fixed Strip Certificates and Variable Strip Certificates Yield Considerations
The following tables indicate the sensitivity of the yield on the Fixed
Strip Certificates and Variable Strip Certificates to various rates of
prepayment by projecting the monthly aggregate payments of principal and
interest on the Fixed Strip Certificates and Variable Strip Certificates and the
corresponding pre-tax yields on a corporate bon d equivalent basis, based on
distributions being made on the Mortgage Loans that are assumed to be included
in the Trust Fund, as described in the assumptions stated in clauses (i) through
(x) of the fourth paragraph preceding the table commencing on page S-__
(including the assumptions regarding the characteristics of the Mortgage Loans
and the Certificates, which differ in certain respects from the actual
characteristics thereof), and assuming, further, that (i) principal prepayments
on the Mortgage Loans will be received at the respective percentages of SPA set
forth in the following table, (ii) the Certificates will be purchased on
____________, 19__, and (iii) payments on the Fixed Strip Certificates and the
Variable Strip Certificates will be received on the 25th day of each month,
commencing ___________ 25, 19__.
Pre-Tax Yield to Maturity on the Fixed
Strip Certificates and the Variable Strip Certificates
at the Following Percentages of SPA
Assumed Fixed Strip Certificates
Purchase
Price % % % % %
Assumed Variable Strip Certificates
Purchase
Price % % % % %
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Fixed Strip Certificates and Vari able
Strip Certificates, would cause the discounted present value of such assumed
streams of cash flows to equal the assumed purchase prices listed as percentages
of the original Certificate Principal Balances in the table for the Fixe d Strip
Certificates and Variable Strip Certificates, respectively. Yields shown are
corporate bond equivalent and are based on the assumed prices given in the
tables. The prices shown do not include accrued interest but an amount of
accrued interest consistent with the assumptions was computed and was used to
arrive at these yields. Implicit in the use of any discounted present value or
internal rate of return calculation such as these is the assumption that cash
flows are reinvested at the discount rate or internal rate of return. Thus these
calculations do not take into account the different interest rates at which
investors may be able to reinvest funds received by them as distributed on the
Fixe d Strip Certificates or Variable Strip Certificates. Consequently these
yields do not purport to reflect the return on any investment in the Fixed Strip
Certificates or Variable Strip Certificates when such reinvestment rates are
considered.
The preceding tables are based on a set of assumptions that vary from other
information provided herein. The differences between such assumptions and the
actual characteristics of the Mortgage Loans and of the Certifica tes may result
in actual yields being different from those shown in such tables. For example,
the Pass-Through Rate on the Fixed Strip Certificates is chosen to be
approximately equivalent to the formula given in the second paragraph
immediately preceding the table entitled "Percent of Initial Certificate
Principal Balance Outstanding." This formula references various Certificate
Principal Balances for the purposes of making the computations for the
subsequent tables. The actual Pass-Through Rate computed by applying the formula
using actual Certificate
<PAGE>
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Principal Balances may vary from these assumptions. Likewise, the Pass-Through
Rate on the Variable Strip Certificates, which is assumed to be fixed throughout
the life of the Certificates, will actually be likely to change from one period
to the next, and the rate assumed may be different from the actual initial
Pass-Through Rate on the Variable Strip Certificates. Such discrepancies between
assumed and actual characteristics underscore the hypothetical nature of the
tables, which are provided to give a general sense of the sensitivity of yields
in varying prepayment scenarios.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the Mortgage Loans will prepay at a constant
rate until maturity or that all of the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determinin g yields, the pre-tax yields on the Fixed Strip
Certificates and Variable Strip Certificates are likely to differ from those
shown in such table, even if all of the Mortgage Loans prepay at the indicated
percentages of SPA over any given time period or over the entire life of the
Certificates. No representation is made as to the actual rate of prin cipal
payment on the Mortgage Loans for any period or over the life of the Senior
Certificates or as to the yield on the Senior Certificates. In addition, 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 352 months. Investor s 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 Certificates Yield Considerations
The following tables indicate the sensitivity of the yields to maturity on
the Class M Certificates to vari ous rates of prepayment and varying levels of
aggregate Realized Losses by projecting the monthly aggregate cash flows on the
Class M Certificates and computing the corresponding pre-tax yields to maturity
on a corporate bond equivalent basis. The tables are based on the assumptions
described in the fourth paragraph preceding the table enti tled "Percent of
Initial Certificate Principal Balance Outstanding at the Following Percentages
of SPA" under the heading "Certain Yield and Prepayment Considerations--General"
herein, including the assumptions regarding the characteristics and performance
of the Mortgage Loans, which differ from the actual characteristics and
performance thereof, and assuming further that (i) defaults and final
liquidations occur on the last day of each month at the respective SDA
percentages set forth in the tables, (ii) each liquidation results in a Realized
Loss allocable to principal equal to the percentage indicated (the "Loss
Severity Percentage") times the principal balances of the Mortgage Loans assumed
to be liquidated, (iii) there are no delinquencies on the Mortgage Loans, and
principal payments on the Mortgage Loans (other than those on Mortgage Loans
assumed to be liquidated) will be timely received together with prepayments, if
any, at the respective constant percentages of SPA set forth in the tables bef
ore giving effect to defaults in such periods, (iv) there are no Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary
Losses, and (v) the purchase prices of the Class M Certificates will be
$____________, including accrued interest. Investors should also consider the
possibility that aggregate losses incu rred may not in fact be materially
reduced by higher prepayment speeds because mortgage loans that would otherw ise
ultimately default and be liquidated may be less likely to be prepaid. 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.
<PAGE>
-49-
Sensitivity of Pre-Tax Yield to Maturity of the Class M Certificates
to Prepayments and Realized Losses
<TABLE>
Class M Certificates
<CAPTION>
Loss
Percentage Severity Percentage of SPA
of SDA Percentage % % % %
_____________________________________________________
<S> <C> <C> <C> <C> <C> <C>
___% N/A.................... % % % % %
___% ___%................... % % % % %
___% ___%................... % % % % %
___% ___%................... % % % % %
___% ___%................... % % % % %
</TABLE>
Each pre-tax yield to maturity set forth in the preceding table 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 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 corp orate 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 Certificates, and thus do not
reflect the return on any investment in the Class M Certificates when any
reinvestment rates other than the discount rates 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 table, expressed as a percentage of the aggregate
outstanding principal balance of the Mortgage Loans as of the Cut-off Date:
<TABLE>
Aggregate Realized Losses
<CAPTION>
Loss
Percentage Severity Percentage of SPA
of SDA Percentage % % % % %
---------- ---------- -- -- --- --- -
<S> <C> <C> <C> <C> <C> <C>
---% ---%................... % % % % %
---% ---%................... % % % % %
---% ---%................... % % % % %
---% ---%................... % % % % %
</TABLE>
<PAGE>
-50-
Notwithstanding the assumed Percentages of SDA, Loss Severity Percentages
and prepayment rates reflected in the preceding tabl es, 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 Certifica tes are likely to differ from those shown in the tables.
There can be no assurance that the Mortgage Loans will prepay at any particular
rate or that Realized Losses will be incurred at any particular level or that
the yields on the Class M Certificates will conform to the yields describe d
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.
POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") dated as of __________ 1,
19__, among the Company, the Master Servicer, and _____________________, as
Trustee. Reference is made to the Prospectus for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement and the Senior Certificates. The Trustee will
appoint ____________________________________________ to serve as Custodia n in
connection with the Certificates. The Senior Certificates will be transferable
and exchangeable at the corporate trust office of the Trustee, which will serve
as Certificate Registrar and Paying Agent. The Company will provide a
prospective or actual Certificateholder without charge, on written request, a
copy (without exhibits) of the Pooling and Servicing Agreement. Requests should
be addressed to the President, Residential Funding Mortgage Securities I, Inc.,
8400 Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. In
addition to the circumstances described in the Prospectus, the Company may
terminate the Trustee for cause under certain circumstances. See "The Pooling
and Servicing Agreement -- The Trustee" in the Prospectus.
The Master Servicer
Residential Funding, an indirect wholly-owned subsidiary of GMAC Mortgage
and an affiliate of the Company, will act as master servicer for the
Certificates pursuant to the Pooling and Servicing Agreement. For a general
description of Residential Funding and its activities, see "Residential Funding
Corporation" in the Prospectus.
The following tables set forth certain information concerning the
delinquency experience (including pending foreclosures) on one- to four-family
residential mortgage loans that generally complied with Residential Funding's
published loan purchase criteria at the time of purchase by Residential Funding
and were being master serviced by Residential Funding on December 31, 19__ and
December 31, 19__. The tables set forth information for the total mortgage loan
portfolio and mortgage loans underwritten under a reduced loan documentation
program described under "Mortgage Loan Program--Underwriting Standards; Loss and
Delinquency Experience" 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 31
days past due on a contractual basis. Total Loan Portfolio Delinquency
Experience
<TABLE>
<CAPTION>
At December 31, 19 At December 31, 19 At December 31, 19
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........................
Period of Delinquency
31 to 59 days......................
60 to 89 days......................
90 days or more (1)................
Foreclosures Pending........................
Total Delinquent Loans......................
Percent of Loan Portfolio
(1) Does not include foreclosures pending.
</TABLE>
<PAGE>
-51-
<TABLE>
Total Reduced Loan Documentation Loan Portfolio Delinquency Experience
<CAPTION>
At December 31, 19 At December 31, 19 At December 31, 19
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..........................
Period of Delinquency
31 to 59 days......................
60 to 89 days......................
90 days or more (1)................
Foreclosures Pending........................
Total Delinquent Loans......................
Percent of Reduced Loan Documentation
Loan Portfolio
(1) Does not include foreclosures pending.
</TABLE>
The following tables set forth certain information concerning
foreclosed mortgage loans and loan loss experience of Residential Funding as of
December 31, 19__, December 31, 19__ and December 31, 19__ 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.
<TABLE>
Total Loan Portfolio Foreclosure Experience
<CAPTION>
At or for At or for At or for
the year ended the year ended the year ended
December 31, December 31, December 31,
19 19 19
------------------ ------------------ -----------------
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio.................................
Average Portfolio Balance............................
Foreclosed Loans (1).................................
Liquidated Foreclosed Loans (2)......................
Foreclosed Loans Ratio...............................
Gross Loss (3).......................................
Gross Loss Ratio.....................................
Covered Loss (4).....................................
Net Loss (5).........................................
Net Loss Ratio.......................................
Excess Recovery (6)..................................
</TABLE>
<PAGE>
<TABLE>
Total Reduced Loan Documentation Loan Portfolio Foreclosure Experience
<CAPTION>
At or for At or for At or for
the year ended the year ended the year ended
December 31, December 31, December 31,
19 19 19
------------------ ------------------ -------------------
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Reduced Loan Documentation
Loan Portfolio...................................
Average Portfolio Balance............................
Foreclosed Loans (1).................................
Liquidated Foreclosed Loans (2)......................
Foreclosed Loans Ratio...............................
Gross Loss (3).......................................
Gross Loss Ratio.....................................
Covered Loss (4).....................................
Net Loss (5).........................................
Net Loss Ratio.......................................
Excess Recovery (6)..................................
(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
have not been finally liquidated.
(2) Liquidated Foreclosed Loans is the sum of the principal balances of the
foreclosed loans liquidated during the period indicated.
(3) Gross Loss for any Mortgage Loan is equal to the difference between (a) the
principal balance plus accrued interest and 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 is equal to the aggregate of all proceeds received in
connection with foreclosed 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 Losses from Gross Losses. As
in 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
and 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.
</TABLE>
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 ___% and not more than _____% per annum of the outstanding
principal balance of each Mortgage Loan. 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 suc
<PAGE>
-53-
h 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 ____%
per annum of the outstanding principal balance of each Mortgage Loan. As
described more fully in the Prospectus, a Subservicer is entitled to servicing
compensation in a minimum amount equal to ____% 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 "Description of the
Certificates--Servicing and Other Compensation and Payment of Expenses; Spread"
in the Prospectus for information regarding other possible compensation to the
Master Servicer and Subservicers and for information regarding expenses payable
by the Master Servicer.
Voting Rights
Certain actions specified in the Prospectus that may be taken by holders of
Certificates evidencing a specified percentage of all undivided interests in the
Trust Fund may be taken by holders of Certificates entitled in the aggregate to
such percentage of the Voting Rights. __% of all Voting Rights will be allocated
among all holders of the Certificates (other than the Fixed Strip Certificates,
Variable Strip Certificates and Residual Certificates) in proportion to their
then outstanding Certificate Principal Balances, and _%, _%, _% and _% of all
Voting Rights will be allocated among holders of the Fixed Strip Certificates,
Variable Strip Certificates, Class R-I Certificates and Class R-II Certificates,
respectively, in proportion to the percentage interests evidenced by their
respective Certificates.
Termination
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the Senior Certificates are
described in "Description of the Certificates--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 principal balance of
the Mortgage Loans is less than 10% of the aggregate principal balance of the
Mortgage Loans as of the Cutoff Date either (i) to purchase all remaining
Mortgage Loans and other assets in the Trust Fund, thereby effecting early
retirement of the Senior Certificates or (ii) purchase in whole, but not in
part, the Certificates other than the Residual 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 underlying
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 Distribution Date on which the purchase proceeds are to be
distributed plus (b) accrued interest thereon at the Net Mortgage Rate to, but
not including, the first day of the month of repurchase.
Upon presentation and surrender of the Senior Certificates in connection
with the termination of the Trust Fund or a purchase of Certificates under the
circumstances described above, the holders of the Senior Certificates will
receive an amount equal to the Certificate Principal Balance of such class plus
one month's interest thereon (or with respect to the Variable Strip
Certificates, one month's interest on the Notional Amount) at the applicable
Pass-Through Rate plus any previously unpaid Accrued Certificate Interest.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
<PAGE>
-54-
Upon the issuance of the Offered Certificates, ______________________,
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 be the sole
classes of "residual interests" in the Trust Fund and the Offered Certificates
(other than the Residual Certificates), and Subordinate 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. See
"Certain Fed eral Income Tax Consequences--REMICs" in the Prospectus.
The Certificates will not be trea ted as having been issued with original
issue discount for federal income tax reporting purposes. The Certificates will,
be treated as having been issued with original issue discount for federal income
tax reporting purposes. The prepayment assumption that will be used in
determining 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 ___% 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--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus.
The OID Regulations suggest that original issue discount with respect to
securities such as the Stripped Interests Certificates that represent multiple
uncertificated REMIC regular interests, in which ownership interests will be
issued simultaneously to the same buyer and which are required under the Pooling
and Servicing Agreement to be transferred together, should be computed on an
aggregate method. In the absence of further guidance from the IRS, original
issue discount with respect to the uncertificated regular interests represented
by the Stripped Interests Certificates will be reported to the IRS and the
Certificateholders on an aggregate method based on a single overall constant
yield and the prepayment assumption stated above, treating all such
uncertificated regular interests as a single debt instrument as set forth in the
OID Regulations.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder (in particular, the Stripped Interests Certificateholders),
the amount of original issue discount allocable to such period would be zero and
such Certificateholder will be permitted to offset such negative amount only
against future original issue disc ount (if any) attributable to such
Certificates. Although the matter is not free from doubt, a Stripped Interests
Certificateholder may be permitted to deduct a loss to the extent that 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. Any such loss might be treated as a capital
loss.
Although they are unclear on the issue, in certain circumstances the OID
Regulations appear to per mit the holder of a debt instrument to recognize
original issue discount under a method that differs fro m 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 Service r 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
<PAGE>
-55-
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 own 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 "qualifying real property
loans" under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code generally to the extent that such Offered
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. Moreover, the Offered Certificates (other than the Residual
Certificates) will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. However, prospective investors in Offered Certificates
that will be generally treated as assets described in Section 860G(a)(3) of the
Code should note that, notwithstanding such treatment, any repurchase of such a
Certificate pursuant to the right of the Master Servicer or the Company to
repurchase such Offered Certificates may adversely affect any REMIC that holds
such Offered Certificates if such repurchase is made under circumstances giving
rise to a Prohibited Transaction Tax. See "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 the 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 regulations under the provisions of the Code related to
REMICs (the "REMIC Regulations") that significantly affect holders of Residual
Certificates. The REMIC Regulations impose restrictions on the transfer or
acquisition of certain residual interests, including the Residual Certificates.
In addition, the REMIC Regulations contain restrictions that apply to: (i)
thrift institutions holding residual interests lacking "significant value" and
(ii) the transfer of "noneconomic" residual interests to United States persons.
Pursuant to the Pooling and Servicing Agreement, the Residual Certificates may
not be transferred to non-United States persons.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating to
"excess inclusions" with respect to residual interest s. Based on the REMIC
Regulations, the Residual Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess inclusions
with respect to the Residual Certificates, which will be in an amount equal to
all or virtually all of the taxable income includible by holders of the Residual
Certificates. See "Certain Federal Income Tax Consequences--REMICs--Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transfer or 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
<PAGE>
-56-
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. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the Prospectus.
The Residual Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the Trust Fund's
term that significantly exceeds the amount of cash distributions received by
such Class Residual Certificateholders from the Trust Fund with respect to suc h
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 Trust Funds' term as a result of their ownership of the
Residual Certificates. In addition, the required inclusion of this amount of
taxable income during the Trust Fund'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.
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 own tax advisors as to the economic and tax consequences of investment in
such Residual Certificates.
For further information regarding the federal income tax consequences of
investing in the Residual Certificates, see "Certain Yield and Prepayment
Considerations--Additional Yield Considerations Applicable Solely to the
Residual Certificates" herein and "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
dated __________, 19_ _, the Underwriter has agreed to purchase and the Company
has agreed to sell to the Underwriter each class of Senior Certificates.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of the Senior Certificates is subject to, among
other things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Company's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending bef ore or threatened by the Securities and Exchange
Commission.
<PAGE>
-57-
The distribution of the Senior Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the Company
from the sale of the Senior Certificates, before deducting expenses payable by
the Company, will be _________% of the aggregate Certificate Principal Balance
of the Senior Certificates plus accrued interest thereon from the Cut-off Date.
The Underwriter may effect such transactions by selling the Senior Certificates
to or through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter for whom
they act as agent. In connection with the sale of the Senior Certificates, the
Underwriter may be deemed to have received compensation from the Company in the
form of underwriting compensation. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Senior Certificates
may be deemed to be underwriters and any profit on the resale of the Senior
Certificates positioned by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and under limited circumstances the Underwriter will indemnify the
Company, against certain civil liabilities under the Securities Act of 1933, or
contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Senior
Certificates will develop or, if it does develop, that it will continue. The
primary source of information available to investors concerning the Senior
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 Senior
Certificates and the status of the applicable form of credit enhancement. There
can be no assurance that any additional information regarding the Senior
Certificates will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Senior Certificates will be generally available on an ongoing basis. The limited
nature of suc h information regarding the Senior Certificates may adversely
affect the liquidity of the Senior Certifica tes, even if a secondary market for
the Senior Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon for
the Company by _________________________________, ________ and for the
Underwriter by -------------------------------.
RATINGS
It is a condition to the issuance of the Senior Certificates that they be
rated not lower than "___" by _________________ ___________
("_________________") and "___" by _________________ _______ ("_______").
The ratings of _______ on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of all distributions on the
underlying mortgage loans to which they are entitled. _______ ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by mortgagors or the degree to which such
prepayments might differ from that originally anticipated. The rating does not
address the possibility that Certificateholders might suffer a lower than
anticipated yield.
<PAGE>
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_________________ ratings on mortgage pass-through certificates also
address the likelihood of the receipt by Certificateholders of payments required
under the Pooling and Servicing Agreement. _________________ 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 mortga ge pool is adequate to make payments required under the
Certificates. _________________ 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 Company has not requested a rating on the Senior Certificates by any
rating agency other than _______ and ________ ________. However, there can be no
assurance as to whether any other rating agency will rate the Senior
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Senior
Certificates by _______ and _________________.
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 rating of the Fixed Strip Certificates or Variable
Strip Certificates does not address the possibility that the holders of such
Certificates may fail to fully recover their initial investment. In the event
that the rating initially assigned to the Senior Certificates is subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the Senior
Certificates.
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.
<PAGE>
-59-
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 U.S. Department of Labor ("DOL")
published proposed regulations ("401(c) Regulations") on December 22, 1997,
although final regulations have not yet been issued, providing guidance for
purposes of determining, in cases where insurance policies or annuity contracts
supported by an insurer's general account are issued to or for the benefit of a
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
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 or annuity contracts 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
<PAGE>
-60-
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 Plan Assets 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 in 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 conditions are satisfied: (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 Prohibited Transaction Class Exemption ("PTCE") 95-60), (ii) the
conditions set forth in PTCE 95-60 have been satisfied and (c) 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 ERISA and the Code to the proposed investment. See "ERISA
Considerations" in Prospectus.
<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
Page
Prospectus Supplement
Summary.............................................. S-
Description of the Mortgage Pool..................... S-
Description of the Certificates...................... S-
Certain Yield and Prepayment
Considerations.................................. S-
Pooling and Servicing Agreement...................... S-
Certain Federal Income Tax
Consequences.................................... S-
Method of Distribution............................... S-
Legal Opinions....................................... S-
Ratings.............................................. S-
Legal Investment..................................... S-
ERISA Considerations................................. S-
Prospectus
Summary of Prospectus................................
Special Considerations...............................
The Mortgage Pools...................................
Mortgage Loan Program................................
Description of the Certificates......................
Subordination........................................
Description of Credit Enhancement....................
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder....................
The Company..........................................
Residential Funding Corporation......................
The Pooling and Servicing Agreement..................
Yield Considerations.................................
Maturity and Prepayment
Considerations..................................
Certain Legal Aspects of Mortgage
Loans and Related Matters.......................
Certain Federal Income Tax
Consequences....................................
State and Other Tax Consequences.....................
ERISA Considerations.................................
Legal Investment Matters.............................
Use of Proceeds......................................
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Additional Information...............................
Index of Principal Definitions.......................
===============================================================================
RESIDENTIAL
FUNDING MORTGAGE
SECURITIES I, INC.
$_________________
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 199_-S__
$__________ ____% Class A-1 Certificates
$__________ ____% Class A-2 Certificates
$__________ ____% Class A-3 Certificates
$__________ ____% Class A-4 Certificates
$__________ ____% Class A-5 Certificates
$__________ ____% Class A-6 Certificates
$__________ Variable Rate Class A-7 Certificates
______________________________
PROSPECTUS SUPPLEMENT
_____________________________
_________________________________________________
______________,19__
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus supplement shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
VERSION 2
SUBJECT TO COMPLETION
.....................PRELIMINARY PROSPECTUS SUPPLEMENT DATED JUNE 19, 1998
PROSPECTUS SUPPLEMENT
(To Prospectus dated ______________, 19__)
$_______________ (APPROXIMATE)
RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
Company
RESIDENTIAL FUNDING CORPORATION
Master Servicer
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 19__-__
WEIGHTED AVERAGE ADJUSTABLE PASS-THROUGH RATE
The Series 19__-__ Mortgage Pass-Through Certificates (the "Certificates") will
evidence the entire beneficial ownership interest in a trust fund (the "Trust
Fund") consisting primarily of a pool of conventional adjustable rate one- to
four-family first mortgage loans (the "Mortgage Loans"), exclusive of the Spread
(as defined herein), to be deposited by Residential Funding Mortgage Securities
I, Inc. (the "Company") into the Trust Fund for the benefit of the
Certificateholders. Certain characteristics of the Mortgage Loans are described
herein under "Description of the Mortgage Pool."
A limited amount of losses on the Mortgage Loans will initially be covered by an
irrevocable letter of credit (the "Letter of Credit") to be issued by
________________ (the "Letter of Credit Bank"). The maximum amount available to
be drawn under the Letter of Credit will initially be equal to approximately
_____% of the aggregate principal balance of the Mortgage Loans as of
_______________, 19__ (the "Cut-off Date").
The interest rates on the Mortgage Loans (each, a "Mortgage Rate") will change
semi-annually based on the Index (as defined herein) and the respective Note
Margins described herein, subject to certain periodic and lifetime limitations
as described more fully herein.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY
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<PAGE>
STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
Distributions on the Certificates will be made on the 25th day of each month or,
if such day is not a business day, then on the next succeeding business day
commencing on ____________, 19__ (each, a "Distribution Date"). As more fully
described herein, interest distributions on the Certificates will be based on
the principal balance of the Mortgage Loans and the then applicable Weighted
Average Adjustable Pass-Through Rate, which will equal the weighted average of
the Mortgage Rates on the Mortgage Loans, net of the related servicing and
subservicing fees and Spread (as to each Mortgage Loan, the "Net Mortgage
Rate"), for the month preceding such Distribution Date, as described more fully
herein. The initial Weighted Average Adjustable Pass-Through Rate for the
Certificates will be _______% per annum. The Weighted Average Adjustable
Pass-Through Rate on the Certificates may increase or decrease from month to
month. Distributions in respect of principal of the Certificates will be made as
described herein under "Description of the Certificates--Distributions."
Certain Mortgage Loans provide that, at the option of the related Mortgagors,
the adjustable rate on such Mortgage Loans may be converted to a fixed rate (the
"Convertible Mortgage Loans"), provided that certain conditions have been
satisfied. Upon notification from a Mortgagor of such Mortgagor's intent to
convert from an adjustable rate to a fixed rate and prior to the conversion of
any such Mortgage Loan (a "Converting Mortgage Loan"), the related Subservicer
will be obligated to purchase the Converting Mortgage Loan at a net price of par
plus accrued interest thereon (the "Conversion Price"). In the event of a
failure by a Subservicer to purchase a Converting Mortgage Loan, the Master
Servicer shall use its best efforts to purchase any Converted Mortgage Loan (as
defined herein) from the Mortgage Pool at the Conversion Price during the one
month period following the date of conversion to a Converted Mortgage Loan. In
the event that neither the related Subservicer nor the Master Servicer purchases
a Converting or Converted Mortgage Loan, the Mortgage Pool will thereafter
include both fixed rate and adjustable rate Mortgage Loans. See "Certain Yield
and Prepayment Considerations" herein. Except as set forth herein, Residential
Funding Corporation's only obligations with respect to the Certificates are its
contractual obligations as Master Servicer under the terms of the Pooling and
Servicing Agreement (as defined herein).
The yield to maturity on the Certificates will depend on the rate of payment of
principal (including prepayments, defaults, liquidations and purchases of
Converting Mortgage Loans and Converted Mortgage Loans) on the Mortgage Loans.
The Mortgage Loans may be prepaid in full or in part at any time without
penalty. The yield to investors on the Certificates will be adversely affected
by any shortfalls in interest collected on the Mortgage Loans due to
prepayments, liquidations or otherwise. See "Certain Yield and Prepayment
Considerations" herein and "Yield Considerations" in the Prospectus.
-2-
<PAGE>
There is currently no secondary market for the Certificates.
_______________________________ (the "Underwriter") intends to make a secondary
market in the Certificates but is not obligated to do so. There can be no
assurance that a secondary market for the Certificates will develop or, if it
does develop, that it will continue. The Certificates will not be listed on any
securities exchange.
It is a condition of the issuance of the Certificates that they be rated "____"
by -----------------------------.
No election will be made to treat the Trust Fund underlying the Certificates as
a real estate mortgage investment conduit ("REMIC") for federal income tax
purposes.
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 GROUP, INC. OR ANY OF THEIR
AFFILIATES. NEITHER THE 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
Certificates, see "Risk Factors" in the Prospectus commencing on page __.
The Certificates will be purchased from the Company by the Underwriter and will
be offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Company from the sale of the Certificates will be
equal to _________% of the initial aggregate principal balance of the
Certificates, plus accrued interest thereon from __________ 1, 19__ (the
"Cut-off
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<PAGE>
Date"), net of any expenses payable by the Company. The Certificates are offered
by the Underwriter subject to prior sale, when, as and if delivered to and
accepted by the Underwriter and subject to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify such offer and to
reject any order in whole or in part. It is expected that delivery of the
Certificates will be made on or about ____________, 19____ at the office of
- -----------------------, ------------------------------, ----------------------
against payment therefor in immediately available funds.
The date of this Prospectus Supplement is _____________, 19__.
-4-
<PAGE>
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO ITS
PROSPECTUS DATED _____________, 19__, 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 CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL _____________, 19__, ALL DEALERS EFFECTING TRANSACTIONS IN THE
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.
-5-
<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.
Title of Securities..............
Mortgage Pass-Through Certificates, Weighted Average Adjustable
Pass-Through Rate, Series 19__-__.
Company..........................
Residential Funding Mortgage Securities I, Inc. (the "Company"), an
affiliate of Residential Funding Corporation, and an indirect
wholly-owned subsidiary of GMAC Mortgage Group, Inc. ("GMAC
Mortgage"). See "The Company" in the Prospectus.
Master Servicer..................
Residential Funding Corporation (the "Master Servicer" or "Residential
Funding"), an affiliate of the Company and an indirect wholly-owned
subsidiary of GMAC Mortgage. See "Pooling and Servicing Agreement--The
Master Servicer" herein and "Residential Funding Corporation" in the
Prospectus.
Trustee..........................
______________________, a national banking association (the
"Trustee").
Cut-off Date.....................
___________, 19__.
Delivery Date....................
On or about __________, 19__.
The Mortgage Pool................
The Mortgage Pool will consist of adjustable rate, fully-amortizing
mortgage loans (the "Mortgage Loans"), exclusive of the Spread (as
defined herein). The aggregate principal balance of the Mortgage Loans
as of the Cut-off Date will be approximately $--------------.
The Mortgage Loans are secured by first liens on one- to four-family
residential real properties (each, a "Mortgaged Property"). The
Mortgage Loans have terms to maturity of __ years from the date of
origination and a weighted average remaining term to stated maturity
of approximately ____ years and __ months as of the Cut-off Date. The
Mortgage Rate on each Mortgage Loan
-6-
<PAGE>
will adjust semi-annually on its Adjustment Date (as defined herein),
with corresponding adjustments in the amount of monthly payments, to
equal the sum (rounded as described herein) of the Index described
below and a fixed percentage set forth in the related Mortgage Note
(the "Note Margin"). However, (i) on any Adjustment Date such Mortgage
Rate may not increase or decrease by more than 1% (the "Periodic Rate
Cap"), and (ii) over the life of such Mortgage Loan, such Mortgage
Rate may not exceed the related maximum Mortgage Rate (such maximum
Mortgage Rate is equal to the Mortgage Rate at origination plus a
lifetime rate cap (the "Lifetime Rate Cap")); which maximum Mortgage
Rates will range from ______% to ______% and (iii) with respect to
approximately ____% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, over the life of such Mortgage Loan,
such Mortgage Rate may not be lower than the minimum Mortgage Rate.
The difference between the Mortgage Rate on each Mortgage Loan at
origination and the minimum Mortgage Rate on such Mortgage Loan will
equal the lifetime rate floor (the "Lifetime Rate Floor"). The minimum
Mortgage Rates will range from _____% to ______%.
Accordingly, changes in the Weighted Average Adjustable Pass-Through
Rate will not necessarily correspond to changes in the Index or other
prevailing interest rates. Additionally, the initial Mortgage Rates in
effect on the Mortgage Loans will likely be lower than the sum of the
Index and related Note Margin that would have been applicable at
origination. Because the maximum Mortgage Rate on any Mortgage Loan is
determined by adding the Lifetime Rate Cap to the Mortgage Rate at
origination, the maximum rate on a Mortgage Loan will likely be less
than the sum of the Index and the Note Margin that would have been
applicable at origination plus the Lifetime Rate Cap. No Mortgage Loan
provides for payment caps on any Adjustment Date which would result in
deferred interest or negative amortization. The Mortgage Loans will
bear interest at Mortgage Rates of at least _____% per annum but not
more than ______% per annum, as of the Cut-off Date. For a further
description of the Mortgage Loans, see "Description of the Mortgage
Pool" herein.
-7-
<PAGE>
The Index......................
As of any Adjustment Date with respect to any Mortgage Loan, the Index
applicable to the determination of the related Mortgage Rate will be a
rate equal to the monthly weighted average cost of funds for members
of the Federal Home Loan Bank of San Francisco as most recently
available 45 days prior to the Adjustment Date (the "Cost of Funds
Index" or "Index").
Conversion of Mortgage Loans...
Approximately _____% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, are Convertible Mortgage Loans. Upon
notification from a Mortgagor of such Mortgagor's intent to convert
from an adjustable rate to a fixed rate and prior to the conversion
thereof, the related Subservicer will be obligated to purchase the
Converting Mortgage Loan at a net price of par plus accrued interest
thereon (the "Conversion Price"). In the event of a failure by a
Subservicer to purchase a Converting Mortgage Loan, the Master
Servicer shall use its best efforts to purchase any Converted Mortgage
Loan (as defined herein) from the Mortgage Pool at the Conversion
Price during the one- month period following the date of conversion to
a Converted Mortgage Loan. In the event that neither the related
Subservicer nor the Master Servicer purchases a Converting or
Converted Mortgage Loan, the Mortgage Pool will thereafter include
both fixed-rate and adjustable-rate Mortgage Loans. See "Certain Yield
and Prepayment Considerations" herein.
The Certificates...............
The Certificates evidence the entire beneficial ownership interest in
a trust fund (the "Trust Fund") consisting primarily of the Mortgage
Pool, exclusive of the Spread. The Certificates will be issued
pursuant to a Pooling and Servicing Agreement, to be dated as of the
Cut-off Date, among the Company, the Master Servicer, and the Trustee
(the "Pooling and Servicing Agreement").
Weighted Average Adjustable Pass-
Through Rate on
the Certificates .............
The Weighted Average Adjustable Pass-Through Rate applicable to the
Certificates in respect of each Distribution Date will equal the
weighted average of the Net Mortgage Rates on the outstanding Mortgage
Loans for the month preceding such Distribution Date. The
-8-
<PAGE>
initial weighted Average Adjustable Pass-Through Rate will be ______%
per annum. 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 and primary servicing fees accrue (the "Servicing Fee Rate")
and the per annum rate at which the Spread referred to below under
"Pooling and Servicing Agreement--Servicing and Other Compensation and
Payment of Expenses; Spread" accrues.
Denominations..................
The Certificates will be offered in registered form, in minimum
denominations of $_________ and integral multiples of $________ in
excess thereof with one Certificate evidencing the authorized minimum
denomination plus the remainder of the aggregate initial principal
balance of all of the Certificates.
Interest Distributions.........
Holders of the Certificates will be entitled to receive distributions
allocable to interest in proportion to their respective Percentage
Interests (as defined herein) on each Distribution Date, to the extent
of available funds, in an aggregate amount equal to one month's
interest, at the then applicable Weighted Average Adjustable
Pass-Through Rate, on the principal balance of the Certificates
outstanding as of the close of business on the immediately preceding
Distribution Date, subject to reduction in the event of any full and
partial prepayments or any interest shortfalls not covered by the
Letter of Credit (as defined herein) as well as certain losses and
delinquencies on the Mortgage Loans as described herein. See
"Description of the Certificates--Distributions" herein and in the
Prospectus.
Principal Distributions........
Principal payments (including prepayments) received on the Mortgage
Loans will be passed through on each Distribution Date to holders of
the Certificates in proportion to their respective Percentage
Interests. See "Description of the Certificates-- Distributions"
herein and in the Prospectus.
-9-
<PAGE>
Advances.......................
The Master Servicer is required to make advances ("Advances") to
holders of the Certificates 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.
Credit Enhancement.............
Neither the Certificates nor the Mortgage Loans are insured or
guaranteed by any governmental agency or instrumentality or by the
Company, the Master Servicer, GMAC Mortgage or any affiliate thereof.
However, a limited amount of losses on the Mortgage Loans will be
covered initially by an irrevocable letter of credit (the "Letter of
Credit") to be issued by ________________ (the "Letter of Credit
Bank") in favor of the Trustee for the benefit of the holders of the
Certificates. The maximum amount available under the Letter of Credit
to cover losses with respect to the Mortgage Loans will initially
equal $_________ (the initial "Available Amount") which is equal to
approximately _____% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date. The Available Amount is subject
to periodic reduction as described herein.
The Letter of Credit will cover losses on the Mortgage Loans from
Defaulted Mortgage Losses, Special Hazard Losses, Fraud Losses and
Bankruptcy Losses (each as defined in the Prospectus). Amounts that
may be drawn under the Letter of Credit to cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses are initially limited to
$___________, $___________ and $______________, respectively. All of
the foregoing amounts are subject to periodic reduction as described
herein. Any draws under the Letter of Credit, including draws for
Special Hazard Losses, Fraud Losses and Bankruptcy Losses, will reduce
the Available Amount. The Letter of Credit will expire on
______________, 19__, unless earlier terminated or extended in
accordance with its terms or replaced in a manner as herein described.
In the event losses on Mortgage Loans occur which are not covered by
the Letter of Credit or any replacement credit enhancement, such
losses will be borne by the Certificateholders. See "Description of
Credit Enhancement" herein.
-10-
<PAGE>
Optional Termination...........
At its option, on any Distribution Date when the 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 other than the Residual Certificates. See
"Pooling and Servicing Agreement-- Termination" herein and "The
Pooling and Servicing Agreement--Termination" in the Prospectus.
Special
Prepayment
Considerations..............
The rate of principal payments on the Certificates collectively will
depend on the rate and timing of principal payments (including
prepayments, defaults and liquidations) on the Mortgage Loans. As is
the case with mortgage-backed securities generally, the Certificates
are subject to substantial inherent cash-flow uncertainties because
the Mortgage Loans may be prepaid at any time. Generally, when
prevailing interest rates are increasing, prepayment rates on mortgage
loans tend to decrease, resulting in a reduced return of principal to
investors at a time when reinvestment at such higher prevailing rates
would be desirable. Conversely, when prevailing interest rates are
declining, prepayment rates on mortgage loans tend to increase,
resulting in a greater return of principal to investors at a time when
reinvestment at comparable yields may not be possible.
See "Description of the Certificates - Distributions" and "Certain
Yield and Prepayment Considerations" herein, and "Maturity and
Prepayment Considerations" in the Prospectus.
Special Yield
Considerations..............
The yield to maturity on the Certificates will depend on the rate and
timing of principal payments (including prepayments, defaults,
liquidations [and purchases of Mortgage Loans converting to a fixed
rate]) on the
-11-
<PAGE>
Mortgage Loans, as well as other factors such as changes in the Index,
provisions of the Mortgage Loans limiting changes in the Mortgage
Rates and the purchase price for such Certificates, as described
herein. The Weighted Average Adjustable Pass-Through Rate will be
reduced to the extent that prepayments, liquidations and purchases
occur at a faster rate for Mortgage Loans having higher Net Mortgage
Rates than for Mortgage Loans having lower Net Mortgage Rates. The
yield to investors on the 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.
See "Certain Yield and Prepayment Considerations" herein, and "Yield
Considerations" in the Prospectus.
Certain Federal Income Tax
Consequences..................
No election will be made to treat the Trust Fund as a real estate
mortgage investment conduit for federal income tax purposes.
___________________ _____________ will deliver its opinion to the
effect that the Trust Fund will be classified as a grantor trust under
the Internal Revenue Code of 1986 (the "Code"), and not as a
partnership or an association taxable as a corporation. For federal
income tax purposes, the Certificateholders will be treated as owners
of stripped bonds, see "Certain Federal Income Tax Consequences--
Grantor Trust Fractional Interest Certificates" in the Prospectus. The
Certificateholders will therefore be required to include their yield
with respect to the Mortgage Loans in gross income as it accrues,
based on a constant yield method in accordance with the original issue
discount rules, which may be in advance of the receipt of cash
attributable to such income. In the absence of statutory or
administrative clarification, it is intended to base information
returns or reports to Certificateholders and the Internal Revenue
Service on the use of a prepayment assumption of __% CPR (as defined
herein) and a representative initial offering price for the
Certificates in computing such constant yield. However, no
representation is made that
-12-
<PAGE>
the Mortgage Loans will prepay at that rate or at any other rate.
Certificateholders should consult their tax advisors as to the proper
treatment of original issue discount on the Mortgage Loans and the
application of the stripped bond rules. For further information
regarding the federal income tax consequences of investing in the
Certificates, see "Certain Federal Income Tax Consequences" herein and
in the Prospectus.
ERISA Considerations...........
A fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should review carefully with
its legal advisors whether the purchase or holding of Certificates
could give rise to a transaction prohibited or not otherwise
permissible under ERISA or the Code. See "ERISA Considerations" in the
Prospectus.
Rating.........................
It is a condition of the issuance of the Certificates that they be
rated at least "___" by __________________. _________ RATING OF THE
CERTIFICATES WILL NOT REPRESENT ANY ASSESSMENT OF THE RELATED
SUBSERVICER'S ABILITY TO PURCHASE CONVERTING MORTGAGE LOANS, OR THE
REMARKETING AGENT'S ABILITY TO ARRANGE FOR THE PURCHASE OF CONVERTED
MORTGAGE LOANS. In the event that neither the related Subservicer nor
the Master Servicer purchases a Converting or Converted Mortgage Loan,
investors in the Certificates might suffer a lower than anticipated
yield. 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. See "Certain Yield and Prepayment
Considerations" and "Rating" herein and "Yield Considerations" in the
Prospectus.
Legal Investment...............
The Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") so long as they are rated in at least the second highest
rating category by a Rating Agency, and, as such, are legal
investments for certain entities to the extent provided in SMMEA.
SMMEA provides that states may override its provisions on legal
investment and restrict or condition investment in mortgage related
securities, by taking statutory action prior to October 3, 1991.
Certain states have enacted, and other states may enact, legislation
which overrides the preemption provisions of SMMEA. See "Legal
Investment Matters" in the Prospectus and "Rating" herein.
-14-
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
General
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date, after deducting payments
of principal due on such date, of approximately $___________. The Mortgage Pool
will consist of fully-amortizing Mortgage Loans with adjustable interest rates
which have terms to maturity of 30 years from the date of origination. All of
the Mortgage Loans were purchased by the Company through its affiliate
Residential Funding from Unaffiliated Sellers as more fully described herein and
in the Prospectus. Approximately ____% and ____% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, were being subserviced by
_____________________________. and _____________ ___________________ (which is
an affiliate of the Company), respectively.
Pursuant to the terms of the Pooling and Servicing Agreement, the Company
shall 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. However, to the
best of the Company's knowledge, approximately ____% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, were sold to Residential
Funding by ____ Unaffiliated Sellers that are currently institutions which are
either directly or indirectly under the control of the Resolution Trust
Corporation or in receivership or conservatorship. To the extent that such
institutions (or any other Sellers of the Mortgage Loans) are not able to
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. 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 Letter of Credit as
described herein under "Description of Credit Enhancement."
The Mortgage Rate on each Mortgage Loan will adjust semi-annually on a date
specified in the related Mortgage Note (the "Adjustment Date"). For
approximately ____% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, the first Adjustment Date occurred prior to the Cut-off Date.
On each Adjustment Date, the Mortgage Rate on a Mortgage Loan will be
adjusted to equal the sum (rounded to either the nearest or next highest
multiple of _____%) of (a) a rate per annum equal to the monthly weighted
average cost of funds for members of the Federal
-15-
<PAGE>
Home Loan Bank of San Francisco (the "FHLB of San Francisco") as published by
the FHLB of San Francisco (the "Cost of Funds Index" or "Index") and as most
recently available as of the day 45 days prior to such Adjustment Date or, in
the event that such Index is no longer available, an index selected by the
Master Servicer and reasonably acceptable to the Trustee that is based on
comparable information, and (b) the related Note Margin, subject to the
following limitations. The Mortgage Rate on the Mortgage Loan on any Adjustment
Date may not increase or decrease by more than the Periodic Rate Cap applicable
to such Mortgage Loan and, over the life of such Mortgage Loan, generally may
not exceed the Mortgage Rate at origination plus the Lifetime Rate Cap, or be
less than the Mortgage Rate at origination minus any Lifetime Rate Floor,
applicable to such Mortgage Loan. No Mortgage Loan provides for payment caps on
any Adjustment Date which would result in deferred interest or negative
amortization. Effective with the first payment due date on a Mortgage Loan after
an Adjustment Date therefor, the monthly principal and interest payment will be
adjusted to an amount that will fully amortize the then outstanding principal
balance of such Mortgage Loan at its stated maturity and pay interest at the
adjusted Mortgage Rate. Because the amortization schedule of each Mortgage Loan
will be recalculated semi-annually, any partial prepayments thereof will not
reduce the term to maturity of such Mortgage Loan. An increase in the Mortgage
Rate on a Mortgage Loan will result in a larger monthly payment and in a larger
percentage of such monthly payment being allocated to interest and a smaller
percentage being allocated to principal, and conversely, a decrease in the
Mortgage Rate on the Mortgage Loan will result in a lower monthly payment and in
a larger percentage of each monthly payment being allocated to principal and a
smaller percentage being allocated to interest.
The Cost of Funds Index reflects the monthly weighted average cost of funds
of savings and loan associations and savings banks, the home offices of which
are located in Arizona, California and Nevada, that are member institutions of
the FHLB of San Francisco, as computed from statistics tabulated and published
by the FHLB of San Francisco. The FHLB of San Francisco normally announces the
Cost of Funds Index on or near the last working day of the month following the
month in which the cost of funds was incurred. The Index is available through a
variety of sources, including, without limitation, Telerate, The Wall Street
Journal and USA Today.
Listed below are the historical values of the Cost of Funds Index since
1988. Such values may fluctuate significantly over time and may not increase or
decrease in a constant pattern from period to period. The following does not
purport to be representative of future values of the Index. No assurance can be
given as to the Index value to be applied on any future Adjustment Date.
COST OF FUNDS INDEX
Month 1988 1989 1990 1991 1992 1993
===== ====== ====== ====== ====== ====== =====
January.................
February................
March...................
-16-
<PAGE>
April...................
May.....................
June....................
July....................
August..................
September...............
October.................
November................
December................
The initial Mortgage Rate in effect on a Mortgage Loan generally will be
lower than the sum of the Index that would have been applicable at origination
and the Note Margin. Absent a decline in the Index subsequent to origination of
a Mortgage Loan, the related Mortgage Rate will generally increase on the first
Adjustment Date following origination of such Mortgage Loan. The repayment of
such Mortgage Loans will be dependent on the ability of the Mortgagor to make
larger Monthly Payments following adjustments of the Mortgage Rate. Moreover,
because the maximum Mortgage Rate on any Mortgage Loan is determined by adding
the Lifetime Rate Cap to the Mortgage Rate at origination, irrespective of the
Index that would have been applicable at origination, the maximum Mortgage Rate
on a Mortgage Loan will generally be less than the sum of the Index and the Note
Margin that would have been applicable at origination plus the Lifetime Rate
Cap. Mortgage Loans that have the same initial Mortgage Rate may not always bear
interest at the same Mortgage Rate because the Mortgage Loans may have different
Adjustment Dates (and the Mortgage Rate therefore may reflect different Index
values), different Note Margins, different Lifetime Rate Caps and different
Lifetime Rate Floors, if any.
Approximately ____% of the Mortgage Loans, by aggregate principal balance
as of the Cut-off Date, are Convertible Mortgage Loans. The first month in which
any of the Mortgage Loans could convert was _______, 19__ and the last month in
which any of the Mortgage Loans may convert is ________ 1, 19__. Upon
conversion, the monthly payments of principal and interest will be adjusted to
provide for full amortization at scheduled maturity. Upon notification from a
Mortgagor of such Mortgagor's intent to convert from an adjustable rate to a
fixed rate and prior to the conversion thereof, the related Subservicer will be
obligated to purchase the Converting Mortgage Loan at the Conversion Price. In
the event of a failure by a Subservicer to purchase a Converting Mortgage Loan,
the Master Servicer shall use its best efforts to purchase such Mortgage Loan
following its conversion (a "Converted Mortgage Loan") at the Conversion Price
during the one-month period following the date of conversion to a Converted
Mortgage Loan.
In the event that the related Subservicer fails to purchase a Converting
Mortgage Loan and the Master Servicer does not purchase a Converted Mortgage
Loan, neither the Company, GMAC Mortgage or any of their affiliates nor any
other entity is obligated to purchase or arrange for the purchase of any
Converted Mortgage Loan. Any such Converted Mortgage Loan will remain in the
Mortgage Pool as a fixed-rate Mortgage Loan and will result in the Mortgage
-17-
<PAGE>
Pool having both fixed rate and adjustable rate Mortgage Loans. See "Certain
Yield and Prepayment Considerations" herein.
Following the purchase of any Converted Mortgage Loan as described above,
the purchaser will be entitled to receive an assignment from the Trustee of such
Mortgage Loan and the purchaser will thereafter own such Mortgage Loan free of
any further obligation to the Trustee or the Certificateholders with respect
thereto.
The Principal Balance of any Mortgage Loan as of any time of determination
is the principal balance of such Mortgage Loan remaining to be paid by the
Mortgagor at the close of business on the Cut-off Date, after deduction of all
payments due on or before the Cut-off Date whether or not paid, reduced by all
amounts distributed to Certificateholders with respect to such Mortgage Loan and
reported to them as allocable to principal, including the principal components
of any Advances (as described below under "Description of the
Certificates--Advances").
The Mortgage Loans will have approximately the following characteristics as
of the Cut-off Date:
Number of Mortgage Loans.........................
Weighted Average Adjustable Pass-Through Rate(1).
Mortgage Rates:
Weighted Average.............................
Range........................................
Range of Net Mortgage Rates.......................
Note Margins:
Weighted Average.............................
Range........................................
Net Note Margin(2)................................
Maximum Mortgage Rates:
Weighted Average.............................
Range........................................
Maximum Net Mortgage Rates (3):
Weighted Average.............................
Range........................................
Weighted Average Months to Next Adjustment Date after ____________, 19__
(4)......
(1) The Weighted Average Adjustable Pass-Through Rate is equal to the
weighted average of the Net Mortgage Rates on the Mortgage Loans.
(2) The Net Note Margin is the Note Margin on each Mortgage Loan minus the
Servicing Fee Rate and the rate at which the Spread accrues.
-18-
<PAGE>
(3) The difference between the maximum Net Mortgage Rate and the Net
Mortgage Rate as of the Cut-off Date may be less than the Lifetime Rate
Cap.
(4) The Weighted Average Months to the next Adjustment Date is equal to the
weighted average of the number of months until the Adjustment Date next
following _____________, 19__.
The Mortgage Loans in the Mortgage Pool will have the following
characteristics as of the Cut-off Date (expressed as a percentage of the
aggregate principal balance of the Mortgage Loans having such characteristics
relative to the aggregate principal balance of all Mortgage Loans in the
Mortgage Pool):
The Mortgage Loans will have had individual principal balances at
origination of at least $__________ but not more than $__________.
None of the Mortgage Loans in the Mortgage Pool will have been
originated prior to _____________, 19__ or will have a scheduled maturity
later than ____________, ____. No Mortgage Loan in the Mortgage Pool will
have an unexpired term to stated maturity as of the Cut-off Date of less
than __ years and __ months. The weighted average remaining term to stated
maturity of the Mortgage Loans in the Mortgage Pool as of the Cut-off Date
will be approximately ____ years and __ months. The weighted average
Adjustment Date of the Mortgage Loans in the Mortgage Pool next following
the Cut-off Date is ____________, 19__.
Approximately _____% of such Mortgage Loans will have Loan-to-Value
Ratios at origination exceeding 80% and Mortgage Loans will have
Loan-to-Value Ratios exceeding 90%. The weighted average Loan-to-Value
Ratio at origination, as of the Cut-off Date, is approximately _____%.
At least _____% of such Mortgage Loans will be secured by fee simple
interests in detached one- to four-family dwelling units with the remaining
units being secured by fee simple interests in attached planned unit
developments, condominiums or townhouses.
Approximately _____% of the Mortgage Loans in the Mortgage Pool will
be secured by Mortgaged Properties located in California.
No more than _____% of the Mortgage Loans in the Mortgage Pool will be
secured by Mortgaged Properties located in any one zip code area in
California, and no more than ____% will be secured by Mortgaged Properties
located in any one zip code area outside California.
No more than _____% of the Mortgage Loans were equity refinance
mortgage loans made to mortgagors who used less than the entire amount of
the proceeds to refinance an existing mortgage loan. The weighted average
Loan-to-Value Ratio at origination of such Mortgage Loans, as of the
Cut-off Date, is approximately ______%.
-19-
<PAGE>
Approximately ____% of the Mortgage Loans were made to mortgagors who
used the entire proceeds to refinance an existing Mortgage Loan.
Approximately _____% of the Mortgage Loans in the Mortgage Pool will
have been purchased from one Unaffiliated Seller, and each of five other
Unaffiliated Sellers sold more than ____% but less than ____% of the
Mortgage Loans to Residential Funding. Except as indicated in the preceding
sentence, no Unaffiliated Seller sold more than ____% of the Mortgage Loans
to Residential Funding.
No Mortgage Loan provides for deferred interest or negative
amortization.
Approximately ____% of the Mortgage Loans in the Mortgage Pool will
have been underwritten under a reduced loan documentation program as
described in the Prospectus under "Mortgage Loan Program--Underwriting
Standards; Loss and Delinquency Experience. "The weighted average
Loan-to-Value Ratio at origination of the Mortgage Loans in the Mortgage
Pool which were underwritten under such reduced loan documentation program
will be approximately ____% and no more than approximately ____% of such
Mortgage Loans will be secured by Mortgaged Properties located in
California. See "Pooling and Servicing Agreement--The Master Servicer"
herein.
No more than ____% of the Mortgage Loans will be secured by vacation
or second homes. No more than ____% of the Mortgage Loans will be secured
by one- to four-story condominium units. No Mortgage Loans will be secured
by condominium units in buildings of five or more stories.
None of the Mortgage Loans in the Mortgage Pool will be Buydown
Mortgage Loans.
-20-
<PAGE>
Included below is a table showing the "Credit Scores" for certain
Mortgagors. Credit Scores are obtained by many mortgage lenders in connection
with mortgage loan applications to help assess a borrower's credit-worthiness.
Credit Scores are obtained from credit reports provided by various credit
reporting organizations, each of which may employ differing computer models and
methodologies. The Credit Score is designed to assess a borrower's credit
history at a single point in time, using objective information currently on file
for the borrower at a particular credit reporting organization. Information
utilized to create a Credit Score may include, among other things, payment
history, delinquencies on accounts, levels of outstanding indebtedness, length
of credit history, types of credit, and bankruptcy experience. Credit Scores
range from approximately 350 to approximately 840, with higher scores indicating
an individual with a more favorable credit history compared to an individual
with a lower score. However, a Credit Score purports only to be a measurement of
the relative degree of risk a borrower represents to a lender, i.e., a borrower
with a higher score is statistically expected to be less likely to default in
payment than a borrower with a lower score. In addition, it should be noted that
Credit Scores were developed to indicate a level of default probability over a
two-year period, which does not correspond to the life of a mortgage loan.
Furthermore, Credit Scores were not developed specifically for use in connection
with mortgage loans, but for consumer loans in general, and assess only the
borrower's past credit history. Therefore, a Credit Score does not take into
consideration the differences between mortgage loans and consumer loans
generally, or the specific characteristics of the related mortgage loan (for
example, the Loan-to-Value Ratio, the collateral for the mortgage loan, or the
debt to income ratio). There can be no assurance that the Credit Scores of the
Mortgagors will be an accurate predictor of the likelihood of repayment of the
related Mortgage Loans.
<TABLE>
Credit Score Distribution
<CAPTION>
Number of Percent of
Credit Score Range Mortgage Loans Principal Balance Mortgage Pool
<S> <C> <C> <C>
.................................................. $ %
..................................................
..................................................
..................................................
..................................................
..................................................
..................................................
..................................................
..................................................
..................................................
..................................................
..................................................
Not Available (1).................................
Subtotal with Credit Score........................
Total Pool........................................
-21-
<PAGE>
- ------------
(1) Mortgage loans indicated as having a Credit Score that is "not available"
include Mortgage Loans where the Credit Score was not provided by the
related Seller and Mortgage Loans where no credit history can be obtained
from the related Mortgagor.
</TABLE>
The following table sets forth the number and aggregate principal balance
as of the Cut-off Date of Mortgage Loans having their next Adjustment Dates in
the month described therein. The table also indicates the approximate percentage
of Mortgage Loans in the Mortgage Pool with an Adjustment Date in each such
month.
Aggregate
Month of Number of Principal Percentage of
Adjustment Date Mortgage Loans Balance Mortgage Pool
Total.........
-22-
<PAGE>
The following table sets forth the number and average original
principal balance of Mortgage Loans having original principal balances in
the ranges described therein, as of the Cut-off Date. The table also
indicates the approximate weighted average Mortgage Rate and the
approximate weighted average Loan-to-Value Ratio at origination of the
Mortgage Loans in each given range, as of the Cut-off Date. Such weighted
average Loan-to-Value Ratio of the Mortgage Loans is equal to the average
of the Loan-to-Value Ratios at origination.
<TABLE>
<CAPTION>
Weighted
Average
Number Average Weighted Original
of Original Average Loan-to-
Mortgage Principal Mortgage Value
Original Principal Balance Loans Balance Rate Ratio
<S> <C> <C> <C> <C>
Total, Average or Weighted Average................. _______ $____________ ________% _______%
</TABLE>
Primary Mortgage Insurance and Primary Hazard Insurance
Each Mortgage Loan is required to be covered by a standard hazard insurance
policy (a "Primary Hazard Insurance Policy"). In addition, to the best of the
Company's knowledge, each Mortgage Loan with a Loan-to-Value Ratio at
origination in excess of 80% will be insured by a primary mortgage insurance
policy covering the amount of such Mortgage Loan in excess of 75% of the value
of the related Mortgaged Property used in determining such Loan-to-Value Ratio
(a "Primary Insurance Policy"). Approximately _____% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, were required to be covered
by Primary Insurance Policies and, to the best of the Company's knowledge, such
Mortgage Loans are so covered. Substantially all of such Primary Insurance
Policies were issued by ________________________________________________
(together with the other primary mortgage guaranty insurers for the Mortgage
Loans, the "Primary Insurers"). The Master Servicer shall keep or cause to be
kept in full force and effect each such Primary Insurance Policy until the prin
cipal balance of the related Mortgage Loan secured by a Mortgaged Property is
reduced to 80% or less of the appraised value in the case of such a Mortgage
Loan having a Loan-to-Value Ratio at origination in excess of 80 %, 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 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. Each Primary
Insurer has been approved as a primary mortgage guaranty insurer by the Federal
Home Loan Mortgage Corporation ("FHLMC") and has a claims-paying ability
currently acceptable to the Rating Agency that will rate the Certificates;
however, there is no assurance as to the actual ability of any Primary Insurer
to pay claims.
-23-
<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 before such date. Prior to the issuance of the Certificates,
Mortgage Loans may be removed from the Mortgage Pool as a result of incomplete
documentation or otherwise, if the Company dee ms such removal necessary or
appropriate. A limited number of other mortgage loans may be included in the
Mortgage Pool prior to the issuance of the Certificates. The Company believes
that the information set forth herein will be substantially representative of
the characteristics of the Mortgage Pool as they will be constituted at the time
the 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 containing a detailed description of the
Mortgage Loans will be available to purchasers of the Certificates and will be
filed, together with the Pooling and Servicing Agreement, with the Securities
and Exchange Commission within fifteen days after initial issuance. The Current
Report on Form 8-K will specify the aggregate principal balance of the Mortgage
Loans in the Mortgage Pool outstanding as of the Cut-off Date and will set forth
the other approximate information presented in this Prospectus Supplement.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates evidence in the aggregate the entire beneficial ownership
of the Trust Fund. The Trust Fund will consist of (i) the Mortgage Loans,
exclusive of the Company's rights in and to the Spread with respect to each
Mortgage Loan; (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; (iv) any applicable
Primary Insurance Policies and all proceeds thereof; and (v) the Letter of
Credit (or any alternate form of credit support substituted therefor) and all
proceeds thereof, other than any amount drawn thereunder and deposited in a
reserve fund.
Distributions
Distributions to holders of Certificates will be made on each Distribution
Date based on their respective Percentage Interests. The undivided Percentage
Interest of a Certificate will be equal to the percenta ge obtained by dividing
the initial principal balance of such Certificate by the aggregate initial
principal balance of all Certificates, which will equal the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date.
Holders of Certificates will be entitled to receive distributions of
interest on each Distribution Date, to the extent of available funds, in an
aggregate amount equal to one month's interest, at the then applicable Weighted
Average Adjustable Pass-Through Rate on the principal balance of the Mortgage
Loans outstanding as of the close of business on the immediately preceding
Distribution Date (or, in the case of the first Distribution Date, outstanding
as of the Cut-off Date), subject to reduction in the event of any interest
shortfalls not covered by the Letter of Credit, including any Prepayment
Interest Shortfalls (as defined below) resulting from full and partial
prepayments, as well as certain losses and delinquencies on the Mortgage Loans
as described below. The Weighted Average Adjustable Pass-Through Rate for any
Distribution Date will equal the average of the Net Mortgage Rates (expressed as
a percentage rounded to four decimal places) on the Mortgage Loans (weighted by
the principal balances of such Mortgage Loans as of the Due Date occurring in
the preceding month). Subject to the followin g limitations, for each period
beginning on the related Adjustment Date therefor, the Net Mortgage Rate on a
Mortgage Loan will equal the sum of the Cost of Funds Index (rounded to the
nearest multiple of ______%) and
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<PAGE>
the Net Note Margin. The Net Note Margin for each Mortgage Loan will be ______%.
The Net Mortgage Rate on any Mortgage Loan on any Adjustment Date may not
increase or decrease by more than the Periodic Rate Cap, and the Net Mortgage
Rate on any Mortgage Loan will not exceed the maximum Net Mortgage Rate (the
"Maximum Net Mortgage Rate") applicable to such Mortgage Loan as specified in
the Pooling and Servicing Agreement. The difference between the Net Mortgage
Rate as of the Cut-off Date and the Maximum Net Mortgage Rate will not exceed,
and may be less than, the Lifetime Rate Cap. With respect to each Mortgage Loan,
the Net Mortgage Rate is the rate per annum equal to the Mortgage Rate for such
Mortgage Loan, net of the Servicing Fee Rate and the per annum rate at which the
Spread accrues. See "Description of the Mortgage Pool" and "Pooling and
Servicing Agreement--Servicing and Other Compensation and Payment of Expenses;
Spread" herein.
Holders of the Certificates will be entitled to receive on each
Distribution Date, to the extent of available funds after distributions of
interest as set forth above, an amount equal to the "Principal Distribution
Amount" for such Distribution Date, which will equal the sum of: (a) the
principal portion of any Advances for such Distribution Date; (b) any amount
required to be paid by the Master Servicer due to the operation of a deductible
clause in any blanket policy maintained by it to cover hazard losses on the
Mortgage Loans as described in the Prospectus under "Primary Mortgage Insurance,
Hazard Insurance; Claims Thereunder"; (c) all payments in respect of the
Mortgage Loans on account of principal (including, without limitation, Principal
Prepayments, the principal portion of any Liquidation Proceeds and Insurance
Proceeds, the principal portion of proceeds from repurchased Mortgage Loans and
the principal portion of proceeds from the purchase of Converting Mortgage Loans
and the sale of Converted Mortgage Loans) on deposit in the Custodial Account on
the Determination Date immediately preceding such Distribution Date, except (i)
Liquidation Proceeds, Insurance Proceeds (other than draws or payments under the
Letter of Credit) and Principal Prepayments received during the month in which
such Distribution Date occurs (unless such amounts are deemed to have been
received in the prior month pursuant to the Pooling and Servicing Agreement as
described below), (ii) scheduled payments of principal due on a date or dates
subsequent to the first day of the month in which such Distribution Date occurs,
(iii) late payments of principal which have been the subject of a previous
Advance or Advances that have not been reimbursed to the Master Servicer (on
behalf of itself or on behalf of the Subservicers) and (iv) an amount equal to
liquidation expenses incurred by the Master Servicer to the extent not
reimbursed from related Liquidation Proceeds; and (d) all amo unts required to
be deposited in the Certificate Account on the Business Day immediately
preceding such Distribution Date, with respect to draws or payments under the
Letter of Credit which are allocable to payments on account of principal of the
Mortgage Loans, except for payments of principal which have been the subject of
a previous Advance or Advances and which are eligible for withdrawal in
reimbursement to the Master Servicer or the Subservicers.
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 no interest is distributed on prepayments in part, as such prepayments are
applied to reduce the outstanding principal balance of the related Mortgage Loan
as of the Due Date in the month of prepayment. The Prepayment Interest Shortfall
and other interest shortfalls (such as those resulting from the application of
the Relief Act (as defined herein)) not covered by the Letter of Credit on any
Distribution Date will be allocated to the holders of the Certificates pro rata
based on distributions of interest to be made on such Distribution Date, before
taking into account any such reduction. Prepayment Interest Shortfalls and other
interest shortfalls will not be offset by a reduction of the servicing
compensation of the Master Servicer or otherwise.
Distributions for any Distribution Date will also be reduced if net
Liquidation Proceeds or net Insurance Proceeds (including receipt of any amounts
payable as described below under "Description of Credit Enhancement") received
on a defaulted Mortgage Loan during the month preceding the month in which such
Distribution Date occurs are less than the outstanding principal balance of such
Mortgage Loan, plus interest thereon at the related Net Mortgage Rate. If an
Advance by the Master Servicer was previously made in respect thereof,
-25-
<PAGE>
late payments of principal and interest, if any, remitted to the Master Servicer
for deposit into the Custodial Account will not be passed through to
Certificateholders but rather will be subject to withdrawal by the Master
Servicer from the Custodial Account in reimbursement to itself for such Advance.
To the extent that an Advance is not made, the distributions for such
Distribution Date will be reduced accordingly. Reimbursement of the Master
Servicer or the Company for any other advances or expenses reimbursable to
either as described in the Prospectus, out of amounts otherwise distributable to
the Certificateholders, will also reduce the distributions for the related
Distribution Date. Distributions for any Distribution Date will be reduced to
the extent that losses on any Mortgage Loans in the Mortgage Pool are not
covered by the Letter of Credit or any substitute form of credit enhancement.
With respect to Insurance Proceeds, Liquidation Proceeds and other
unscheduled collections (not including prepayments by the mortgagors) received
in any calendar month, the Master Servicer may elect to treat such amounts as
part of the distribution to be made on 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 loss which
requires a draw on the Letter of Credit shall be deemed to have occurred) on the
last day of the month prior to the receipt thereof.
Advances
Prior to each Distribution Date, the Master Servicer is required to make
Advances for the benefit of the Certificateholders (out of its own funds,
advances made by a Subservicer, or funds held in the Custodial Acc ount (as
described in the Prospectus) for future distribution or withdrawal) with respect
to any payments of prin cipal and interest (net of the related Servicing Fees
and the Spread) 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 (including draws on the Letter of Credit) or Liquidation Proceeds. 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
bankruptcy proceedings or the application of the Relief Act or similar
legislation. Subject to the provisions of the Pooling and Servicing Agreement,
General Motors Acceptance Corporation has agreed to support Residential
Funding's obligation to make Advances as described herein.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from late collections, Insurance Proceeds (including draws on the
Letter of Credit) and Liquidation Proceeds from the Mortgage Loan as to which
such unreimbursed Advance was made. In addition, any Advances previously made
which are deemed by the Master Servicer to be nonrecoverable from related late
collections, Insurance Proceeds (including draws on the Letter of Credit) and
Liquidation Proceeds may be reimbursed to the Master Servicer out of any funds
in the Custodial Account or Certificate Account prior to distributions on the
Certificates.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The effective yield to the holders of Certificates will be lower than the
yield otherwise produced by the applicable Weighted Average Adjustable
Pass-Through Rate and purchase price because monthly distributions will not be
made to such holders until the 25th day (or if such day is not a business day,
then on the next succeeding business day) of the month following the month in
which interest accrues on the Mortgage Loans (without any additional
distributions of interest or earnings thereon in respect of such delay). See
"Yield Considerations" in the Prospectus.
-26-
<PAGE>
The yield to maturity and the aggregate amount of distributions on the
Certificates will be directly related to the rate of payment of principal on the
Mortgage Loans. Such yield may be adversely affected by a higher or lower than
anticipated rate of payment of principal on the Mortgage Loans in the Trust
Fund. The rate of payment of principal on such Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans (which will change
periodically as described above), the rate of principal prepayments thereon by
the Mortgagors, liquidations of defaulted Mortgage Loans and purchases of
Mortgage Loans due to certain brea ches of representations or the conversion of
Convertible Mortgage Loans. The principal component of the monthly payments on
the Mortgage Loans may change on each related Adjustment Date. In addition, the
amortization schedule of a Mortgage Loan may be changed in connection with the
receipt of a partial prepayment thereon, provided however that such changes will
not include a change in the maturity date of the related Mortgage Loan. See
"Description of the Mortgage Pool--General" herein.
Other factors affecting prepayment of mortgage loans include changes in
mortgagors' housing needs, job transfers, mortgage market interest rates,
unemployment, mortgagors' net equity in the mortgaged properties, changes in the
value of the mortgaged properties and servicing decisions. If prevailing
mortgage rates fell significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayment (and refinancing) would be expected to increase.
Conversely, if prevailing mortgage rates rose significantly above the Mortgage
Rates on the Mortgage Loans, the rate of prepayment on the Mortgage Loans would
be expected to decrease. There can be no certainty as to the rate of prepayments
on, or conversions of, the Mortgage Loans during any period or over the life of
the Certificates. However, in the event that substantial numbers of Mortgagors
exercise their conversion rights, and the related Subservicers and the Master
Servicer purchase the Converting and Converted Mortgage Loans, the Mortgage Pool
will experience substantial prepayment of principal.
The Mortgage Loans may be prepaid by the Mortgagors at any time without
payment of any prepayment fee or penalty. In addition, certain of the Mortgage
Loans provide that the Mortgagors may, during a specified period of time,
convert the adjustable rate of such Mortgage Loans to a fixed rate. The Company
is not aware of any publicly available statistics that set forth principal
prepayment or conversion experience or prepayment or conversion forecasts of
adjustable rate mortgage loans over an extended period of time, and its
experience with respect to adjustable rate mortgages is insufficient to draw any
conclusions with respect to the expected prepayment or conversion rates on the
adjustable rate Mortgage Loans included in the Mortgage Pool. The rate of
payments (including prepayments) on pools of mortgage loans is influenced by a
variety of economic, geographic, social and other factors. As is the case with
conventional fixed rate mortgage loans, adjustable rate mortgage loans may be
subject to a greater rate of principal prepayments or purchases due to their
conversion to fixed interest rate loans in a low interest rate environment. For
example, if prevailing interest rates fall significantly, adjustable rate
mortgage loans could be subject to higher prepayment and conversion rates than
if prevailing interest rates remain constant because the availability of fixed
rate or other adjustable rate mortgage loans at competitive interest rates may
encourage Mortgagors to refinance their adjustable rate mortgages to "lock in" a
lower fixed interest rate or take advantage of the availability of such other
adjustable rate mortgage loans, or, in the case of convertible adjustable rate
mortgage loans, to exercise their option to convert the adjustable interest
rates to fixed interest rates. The conversion feature may also be exercised in a
rising interest rate environment as Mortgagors attempt to limit their risk of
higher rates. Such a rising interest rate environment may also result in an
increase in the rate of defaults on the Mortgage Loans. In the event that the
Subservicers or the Master Servicer purchases Converting or Converted Mortgage
Loans, a Mortgagor's exercise of the conversion option will result in a pro rata
distribution of the principal portion thereof to the Certificateholders, as
described herein. Alternatively, to the extent Subservicers fail in their
obligation to purchase Converting Mortgage Loans and the Master Servicer does
not purchase Converted Mortgage Loans, as described herein, the Mortgage Pool
will include fixed rate Mortgage Loans, which will have the effect of limiting
the extent to which the Weighted Average Adjustable Pass-Through Rate can
increase or decrease in accordance with changes in the Index and accordingly may
affect the yield to Certificateholders.
-27-
<PAGE>
The existence of Periodic Rate Caps, Lifetime Rate Caps and any Lifetime
Rate Floors also will affect the likelihood of prepayments resulting from
refinancing and the exercise of the conversion option. Although the Mortgage
Rates on the Mortgage Loans will adjust periodically, such increases and
decreases will be limited by the Periodic Rate Caps, Lifetime Rate Caps and any
Lifetime Rate Floors on each Mortgage Loan and will be based on the Index (which
may not rise and fall consistently with mortgage interest rates) plus the
related Note Margins (which may be different from the prevailing margins on
other mortgage loans). As a result, the Mortgage Rates on the Mortgage Loans at
any time may not equal the prevailing rates for other adjustable rate loans and
accordingly, the rate of prepayment may be lower or higher than would otherwise
be anticipated.
With respect to those Mortgage Loans having Lifetime Rate Floors, if
prevailing mortgage rates were to fall below the minimum Mortgage Rates, the
rate of prepayment on such Mortgage Loans may be expected to increase and such
Mortgage Loans may prepay at a rate higher than would otherwise be anticipated
for adjustable rate mortgage loans.
All of the Mortgage Loans are assumable under certain circumstances if, in
the sole judgment of the Master Servicer or Subservicer, the prospective
purchaser of a Mortgaged Property is creditworthy and the secu rity for such
Mortgage Loan is not impaired by the assumption. The extent to which the
Mortgage Loans are assumed by purchasers of the Mortgaged Properties rather than
prepaid by the related mortgagors in connection with the sales of the Mortgaged
Properties will affect the weighted average life of the Certificates and may
result in a prepayment experience on the Mortgage Loans that differs from that
on other conventional mortgage loans.
The yield to maturity of the Certificates will depend on the rate of
payment of principal (including principal prepayments, purchases of Mortgage
Loans in the Mortgage Pool which are Converting Mortgage Loa ns or Converted
Mortgage Loans or in respect of which a breach of a representation or warranty
has occurred, and liquidation of defaulted Mortgage Loans) on the Mortgage
Loans, the price paid by the holders of Certificates and the Weighted Average
Adjustable Pass-Through Rate in effect from time to time. Such yield may be
adversely affected by a higher or lower than anticipated rate of prepayments on
the Mortgage Loans. Because the Weighte d Average Adjustable Pass-Through Rate
at any time is the weighted average of the Net Mortgage Rates on the Mortgage
Loans, the Weighted Average Adjustable Pass Through Rate (and the yield on the
Certificates) will be reduced as a result of prepayments, liquidations and
purchases at a faster rate for Mortgage Loans having higher Net Mortgage Rates
as opposed to Mortgage Loans having lower Net Mortgage Rates. Because Mortgage
Loans having higher Net Mortgage Rates generally have higher Mortgage Rates,
such Mortgage Loans are generally more likely to be prepaid at a faster rate
under most circumstances than are Mortgage Loans having lower Net Mortgage
Rates.
The rate of default on the Mortgage Loans will also affect the rate of
payment of principal on the Mortgage Loans. In general, defaults on mortgage
loans are expected to occur with greater frequency in their early years,
although little data is available with respect to the rate of default on
adjustable rate mortgage loans. Increases in the monthly payments to an amount
in excess of the preceding monthly payment required at the time of origination
may result in a default rate higher than that on level payment mortgage loans.
Furthermore, the Mortgagor under each Mortgage Loan was qualified on the basis
of the Mortgage Rate in effect at origination. The repayment of such Mortgage
Loans will be dependent on the ability of the Mortgagor to make larger monthly
payments following adjustments of the Mortgage Rate. The rate of default on
Mortgage Loans which are equity refinance or limited documentation mortgage
loans may be higher than for other types of Mortgage Loans.
Prepayments, liquidations and purchases of the Mortgage Loans will result
in distributions to Certificateholders of principal amounts which would
otherwise be distributed over the remaining terms of the Mortgage Loans.
Furthermore, the rate of prepayments, defaults and liquidations on, or
conversions of, the Mortgage Loans will be affected by the general economic
condition of the region of the country where 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 increasing unemployment or falling
-28-
<PAGE>
property values. See "Maturity and Prepayment Considerations" in the Prospectus.
Since the rates of payment of principal on the Mortgage Loans will depend on
future events and a variety of factors (as described more fully herein and in
the Prospectus under "Yield Considerations" and "Maturity and Prepayment
Considerations"), no assurance can be given as to such rate or the rate of
principal prepayments on the Certificates.
The amount of interest passed through to holders of the Certificates will
be reduced by shortfalls in collections of interest resulting from full or
partial principal prepayments or otherwise, which will not be offset by a
reduction in the Servicing Fees payable to the Master Servicer or otherwise. See
"Yield Considerations" in the Prospectus and "Description of the
Certificates--Distributions" herein for a discussion of the effect of principal
prepayments on the Mortgage Loans on the yield to maturity of the Certificates.
See also "Additional Considerations" herein.
The timing of changes in the rate of prepayments, liquidations and
purchases of the Mortgage Loa ns 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 addition, the yield to maturity of the Certificates will depend on the
price paid by holders of the Certificates. If any Certificate is purchased at
initial issuance at a discount and the rate of prepayments on the Mortgage Loans
is lower than that originally anticipated, the purchaser's yield to maturity
will be lower than that assumed at the time of purchase. Conversely, if any
Certificate is purchased at initial issuance at a premium and the rate of
prepayments on the Mortgage Loans is higher than that originally anticipated,
the purchaser's yield to maturity will be lower than that assumed at the time of
purchase.
The first distribution on the Certificates reflecting an adjustment to the
scheduled monthly payments on a related Mortgage Loan will be passed through to
holders of Certificates on the second Distribution Date following the date on
which the adjustment to such Mortgage Rate was made. Furthermore, adjustments in
the Net Mortgage Rates are based on the Index as reported 45 days prior to the
Adjustment Date. Accordingly, the yield to Certificateholders will be adjusted
on a delayed basis relative to movements in the Index. Although the Net Mortgage
Rate of each Mortgage Loan will be adjusted pursuant to the Index, such rate is
subject to the Periodic Rate Cap and is also limited by the Lifetime Rate Cap
and any Lifetime Rate Floor applicable to such Mortgage Loan. With respect to
certain Mortgage Loans the difference between the Net Mortgage Rate as of the
Cut-off Date and the maximum Net Mortgage Rate will be less than the Lifetime
Rate Cap. Therefore, if the Index changes substantially between Adjustment
Dates, the Net Mortgage Rate may be lower than if the Net Mortgage Rate could be
adjusted based on the Index without such caps.
A number of factors affect the performance of the Index and may cause the
Index to move in a manner different from other indices. To the extent that the
Index may reflect changes in the general level of interest rates less quickly
than other indices, in a period of rising interest rates, increases in the yield
to Certificateholders due to such rising interest rates may occur later than
that which would be produced by other indices, and in a period of declining
rates, the Index may remain higher than other market interest rates which may
result in a higher level of prepayments of Mortgage Loans which adjust in
accordance with the Index than mortgage loans which adjust in accordance with
other indices.
For additional considerations relating to the yield on the Certificates,
see "Yield Considerations" and "Maturity and Prepayment Considerations" in the
Prospectus.
POOLING AND SERVICING AGREEMENT
General
<PAGE>
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") dated as of __________, 19__,
among the Company, the Master Servicer, and
__________________________________________________, as Trustee. Reference is
made to the Prospectus for important information additional to that set forth
herein regarding the terms and conditions of the Pooling and Servicing Agreement
and the Certificates. The Trustee will appoint ___________________
________________________ to serve as Custodian in connection with the
Certificates. The 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.
The Master Servicer
Residential Funding, an indirect, wholly-owned subsidiary of GMAC Mortgage,
and an affiliate of the Company, will act as master servicer for the
Certificates pursuant to the Pooling and Servicing Agreement. For a general
description of Residential Funding and its activities, see "Residential Funding
Corporation" in the Prospectus.
The following tables set forth certain information concerning the
delinquency experience (including pending foreclosures) on one- to four-family
residential mortgage loans that generally complied with Residential Funding's
published loan purchase criteria at the time of purchase by Residential Funding
and were being master serviced by Residential Funding on December 31, 19__ and
December 31, 19__. The tables set forth informati on for the total mortgage loan
portfolio, the adjustable rate loan portfolio and mortgage loans underwritten
under a reduced loan documentation program described under "Mortgage Loan
Program--Underwriting Standards; Loss and Delinquency Experience" 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 gen eral, it is 31 days past due on a contractual
basis.
-30-
<PAGE>
<TABLE>
<CAPTION>
Total Loan Portfolio
At December 31, 19 At December 31, 19
By No. By Dollar By No. By Dollar
of Amount of of Amount of
Loans Loans Loans Loans
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C>
Total Loan Portfolio........................
Period of Delinquency
31 to 59 days......................
60 to 89 days......................
90 days or more (1)................
Foreclosures Pending........................
Total Delinquent Loans......................
Percent of Loan Portfolio...................
(1) Does not include foreclosures pending.
</TABLE>
<TABLE>
Total Adjustable Rate Loan Portfolio
<CAPTION>
At December 31, 19 At December 31, 19
By No. By Dollar By No. By Dollar
of Amount of of Amount of
Loans Loans Loans Loans
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C>
Total Adjustable Loan Rate
Portfolio...............................
Period of Delinquency
31 to 59 days......................
60 to 89 days......................
90 days or more (1)................
Foreclosures Pending........................
Total Delinquent Loans......................
Percent of Adjustable Rate
Loan Portfolio..........................
(1) Does not include foreclosures pending.
</TABLE>
<TABLE>
Total Reduced Loan Documentation Loan Portfolio
<CAPTION>
At December 31, 19 At December 31, 19
By No. By Dollar By No. By Dollar
of Amount of of Amount of
Loans Loans Loans Loans
(Dollar Amounts in Thousands)
-31-
<PAGE>
<S> <C> <C> <C> <C>
Total Reduced Loan
Documentation Loan Portfolio............
Period of Delinquency
31 to 59 days......................
60 to 89 days......................
90 days or more (1)................
Foreclosures Pending........................
Total Delinquent Loans......................
Percent of Reduced Loan
Documentation Loan Portfolio.............
(1) Does not include foreclosures pending.
</TABLE>
The following tables set forth certain information concerning
foreclosed mortgage loans and loan loss experience of Residential Funding as of
December 31, 19__ and December 31, 19__ with respect to the mortgage loans
referred to above.
<TABLE>
Total Loan Portfolio
<CAPTION>
At At
December 31, December 31,
19 19
------------------ -----------------
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C>
Total Loan Portfolio.................................
Foreclosed Loans (1).................................
Foreclosed Loans Ratio...............................
Gross Loss (2).......................................
Gross Loss Ratio.....................................
Covered Loss (3).....................................
Net Loss (4).........................................
Net Loss Ratio.......................................
Excess Recovery (5)..................................
</TABLE>
-32-
<PAGE>
<TABLE>
Total Adjustable Rate Loan Portfolio
<CAPTION>
At At
December 31, December 31,
19 19
------------------ -----------------
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C>
Total Adjustable Rate
Loan Portfolio...................................
Foreclosed Loans (1).................................
Foreclosed Loans Ratio...............................
Gross Loss (2).......................................
Gross Loss Ratio.....................................
Covered Loss (3).....................................
Net Loss (4).........................................
Net Loss Ratio.......................................
Excess Recovery (5)..................................
</TABLE>
<TABLE>
Total Reduced Loan Documentation Loan Portfolio
<CAPTION>
At At
December 31, December 31,
19 19
------------------ -----------------
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C>
Total Loan Portfolio.................................
Foreclosed Loans (1).................................
Foreclosed Loans Ratio...............................
Gross Loss (2).......................................
Gross Loss Ratio.....................................
Covered Loss (3).....................................
Net Loss (4).........................................
Net Loss Ratio.......................................
Excess Recovery (5)..................................
(1) For purposes of these tables, Foreclosed Loans include 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 have not been finally liquidated.
(2) Gross Loss for any Mortgage Loan is equal to the difference between (a)
the principal balance plus accrued interest and 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 (3) below. Losses are cumulative for the portfolio for the
period beginning February 1, 1986 through the date indicated.
(3) Covered Loss is equal to the aggregate of all proceeds received in
connection with foreclosed Mortgage Loans from mortgage pool insurance,
special hazard insurance (but not including primary mortgage
-33-
<PAGE>
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. Losses are cumulative for the portfolio for
the period beginning February 1, 1986 through the date indicated.
(4) Net Loss is determined by subtracting Covered Losses from Gross Losses.
(5) Excess Recoveries are 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
all or a portion of the accrued interest thereon and all Liquidation
Expenses related to such Mortgage Loan. Excess Recoveries are not
applied to offset Gross Losses or 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.
</TABLE>
Servicing And Other Compensation And Payment Of Expenses; Spread
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 ____% and not more than ____% per annum of the outstanding
principal balance of each Mortgage Loan. 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 ____% per annum of the
outstanding principal balance of each Mortgage Loan. As described more fully in
the Prospectus, a Subservicer is entitled to servicing compensation in a minimum
amount equal to ____% 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, including the expenses of the Letter of Credit and any substitute
credit support. See "The Pooling and Servicing Agreement--Servicing and Other
Compensation and Payment of Expenses; Spread" in the Prospectus for information
regarding other possible compensation to the Master Servicer and Subservicers
and for information regarding expenses payable by the Master Servicer.
Pursuant to the terms of the Pooling and Servicing Agreement, the Master
Servicer will be obligated to remit to the Company or its designee, a portion of
the interest collected on each Mortgage Loan (the "Spread"). The rate at which
the Spread on each Mortgage Loan accrues will be equal to ____% per annum.
Termination
The circumstances under which the obligations created by the Pooling and
Servicing Agreement will terminate in respect of the Certificates are described
in "Description of the Certificates-- Termination; Retireme nt of Certificates"
in the Prospectus. The Master Servicer or the Company will have the option (i)
to purchase all remaining Mortgage Loans and other assets in the Trust Fund,
thereby effecting early retirement of the Certifica tes or (ii) to purchase in
whole, but not in part, the Certificates other than the Residual Certificates,
but either such option will not be exercisable until such time as the aggregate
principal balance of the Mortgage Loans as of the Distribution Date on which the
purchase proceeds are to be distributed to the Certificateholders is less than
10% of the aggregate principal balance of the Mortgage Loans as of the Cut-off
Date. Any such purchase of Mortgage Loans and other assets of the Trust Fund
shall be made at a price equal to the aggregate principal balance of all the
Mortgage Loans (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
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than such unpaid principal balance) (net of any unreimbursed Advance
attributable to principal), together with one month's interest on such aggregate
amount at the then applicable Weighted Average Adjustable Pass-Through Rate.
Upon presentation and surrender of the Certificates in connection with the
termination of the Trust Fund or a purchase of Certificates under the
circumstances described above, the holders of the Certificates will receive, in
proportion to their respective Percentage Interests, an amount equal to the sum
of the principal balances of the Mortgage Loans plus one month's accrued
interest thereon at the then applicable Weighted Average Adjustable Pass-Through
Rate.
DESCRIPTION OF CREDIT ENHANCEMENT
General
All of the Mortgage Loans are the subject of credit support coverage
provided by the Letter of Credit. In addition, each Mortgage Loan is covered by
a Primary Hazard Insurance Policy as described under "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder" in the Prospectus. See also
"Description of the Mortgage Pool--Primary Mortgage Insurance" herein.
Letter Of Credit
The Letter of Credit Bank will issue the Letter of Credit to the Trustee
for the benefit of the holders of the Certificates. Subject to the limitations
described below, the Letter of Credit will be available to cover Defaulted
Mortgage Losses, Special Hazard Losses, Fraud Losses and Bankruptcy Losses. The
maximum amount available to be drawn under the Letter of Credit with respect to
all losses will initially be equal to $_________ (the initial "Available
Amount") which is equal to approximately ____% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date. The Available Amount at
any time will be reduced by any amounts previously drawn under the Letter of
Credit (net of any amounts received or collected by the Master Servicer
following each respective draw as subsequent recoveries on the Mortgage Loans
with respect to which such draws were made and, if appropriate, such draws were
reimbursed to the Letter of Credit Bank). The Available Amount will be
reinstated with respect to the subsequent recoveries described in the preceding
sentence, however in no event will the Avai lable Amount be reinstated to an
amount in excess of the initial Available Amount. The Available Amount under the
Letter of Credit (if the Letter of Credit is extended in accordance with its
terms) is also subject to reduction pursuant to the terms of the Pooling and
Servicing Agreement annually beginning on the tenth anniversary of the Cut-off
Date and each anniversary thereafter, such that, beginning with the fourteenth
anniversary of the Cut-off Date and on each anniversary thereafter, the
Available Amount will not exceed ____% of the aggregate outstand ing principal
balance of the Mortgage Loans, provided that such scheduled reductions will not
reduce the Available Amount below three times the principal balance of the
largest single Mortgage Loan outstanding on such anniversary, and further
provided that the Available Amount will not be reduced in accordance with the
preceding sentence if delinquency rates and losses on the Mortgage Loans exceed
certain levels as specified by the Rating Agency as set forth in the Pooling and
Servicing Agreement. The Amount Available may be further reduced from time to
time by such amounts as the Master Servicer may determine and direct the
Trustee, provided the then current rating of the Certificates is not adversely
affected.
Notwithstanding the foregoing, the maximum amount available under the
Letter of Credit in connection with Fraud Losses (the "Fraud Loss Amount") shall
initially be equal to $___________. 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 ____% of the aggregate
principal balance of all of the Mortgage Loans as of the Cut-off Date minus the
aggregate amount of draws made under the Letter of Credit with respect to Fraud
Losses up to such date of determination, and (Y) from the first through 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)
____% of the aggregate
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principal balance of all of the Mortgage Loans as of the most recent anniversary
of the Cut-off Date minus (2) the aggregate amount of draws made under the
Letter of Credit with respect to Fraud Losses since the most recent anniversary
of the Cut-off Date up to such date of determination. After the fifth
anniversary of the Cut-off Date the Fraud Loss Amount shall be zero and no draws
shall be made under the Letter of Credit with respect to Fraud Losses.
The maximum amount available under the Letter of Credit in respect of
Special Hazard Losses (the "Sp ecial Hazard Amount") will equal $__________ less
the sum of (A) any amounts drawn under the Letter of Cre dit in respect of
Special Hazard Losses (to the extent that such amounts do not exceed the lesser
of the cost of repair or replacement of the related Mortgaged Properties) and
(B) the Adjustment Amount. The Adjustment Amount on each anniversary of the
Cut-off Date will be equal to the amount, if any, by which the Special Hazard
Amount, without giving effect to the deduction of the Adjustment Amount for such
anniversary, exceeds the greater of (i) 1% (or, if greater than 1%, the highest
percentage of Mortgage Loans by principal balance in any California zip code
area) times the aggregate principal balance of all of the Mortgage Loans in the
Mortgage Pool on such anniversary and (ii) twice the principal balance of the
single Mortgage Loan in the Mortgage Pool having the largest principal balance.
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 Letter of Credit will not cover losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
As of any date of determination prior to the first anniversary of the
Cut-off Date, the maximum amount available under the Letter of Credit in respect
of Bankruptcy Losses (the "Bankruptcy Amount") will equal $__________ less the
sum of any amounts drawn under the Letter of Credit for such losses up to such
date of determination. As of any day of determination on or after the first
anniversary of the Cut-off Date, the Bankrup tcy 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 (the "Relevant
Anniversary") 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, provided that delinquency rates and losses on all of
the Mortgage Loans do not exceed certain levels as set forth in the Pooling and
Servicing Agreement, over (2) the aggregate amount of draws made under the
Letter of Credit since the Relevant Anniversary in connection with Bankruptcy
Losses. The Bankruptcy Amount and the related automatic reductions described
above may be reduced or modified upon writ ten confirmation from the Rating
Agency that such reduction or modification will not adversely affect the then
current rating assigned to the Certificates by such Rating Agency. Such a
reduction or modification may adversely affect the coverage provided by the
Letter of Credit with respect to Bankruptcy Losses.
Payments under the Letter of Credit will be made in the same manner as
described in the Prospectus. See "Description of Credit Enhancement--Letter of
Credit" in the Prospectus. However, the Trustee shall not make such draws under
the Letter of Credit 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 Mortgag e 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.
Any Mortgage Loan the unpaid principal balance of which is paid pursuant to
a draw under the Letter of Credit will be assigned to the Company and will no
longer be subject to the Pooling and Servicing Agreement. Any subsequent
recoveries with respect to such Mortgage Loans will be paid to the Company and,
following notice and, if appropriate, reimbursement of such draw to the Letter
of Credit Bank, the Available Amount under the Letter of Credit (and the Special
Hazard Amount, Fraud Loss Amount or Bankruptcy Amount, if applicable) will be
reinstated to the extent of such recovery.
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The Master Servicer, in lieu of maintaining the Letter of Credit, may
reduce the coverage thereunder (including accelerating the manner in which such
coverage is reduced pursuant to the related automatic reductions), terminate
such coverage or obtain and maintain alternate forms of credit support
(including, but not limited to, other letters of credit, insurance policies,
surety bonds, reserve funds, and secured or unsecured corporate guaranties),
with respect to Defaulted Mortgage Losses, Special Hazard Losses, Fraud Losses
and Bankruptcy Losses, provided that prior to any such reduction, termination or
substitution the Master Servicer shall have obtained written confirmation from
the Rating Agency that such reduction, termination or substitution will not
adversely affect the then current rating assigned to the Certificates by such
Rating Agency and shall provide a copy of each confirmation to the Trustee. In
the event that the long-term debt obligations of the Letter of Credit Bank are
at any time downgraded by the Rating Agency, the Company may request the Master
Servicer to obtain alternate forms of credit support, in accordance with the
preceding sentence, but the Master Servicer is under no obligation to do so. In
lieu of making a draw under the Letter of Credit for Defaulted Mortgage Losses,
Special Hazard Losses, Fraud Losses or Bankruptcy Losses as provided above, the
Master Servicer, at its sole option, may pay the amount otherwise required to be
drawn, in which case the amount so paid will reduce the related coverage under
the Letter of Credit.
As to any Mortgage Loan which is delinquent in payment by 90 days or more,
the Master Servicer may , at its sole option, purchase such Mortgage Loan at a
price equal to 100% of the unpaid principal balance thereof plus all accrued and
unpaid interest thereon through the last day of the month in which such purchase
occurs. To the extent that the Master Servicer subsequently experiences losses
with respect to such purchased Mortgage Loans which would have been covered by
the Letter of Credit had such Mortgage Loans remained in the Trust Fund, the
Available Amount (and the Special Hazard Amount, Fraud Loss Amount or Bankruptcy
Amount, to the extent that such losses constitute Special Hazard Losses, Fraud
Losses or Bankruptcy Losses) will be reduced by an amount equal to the entire
amount of such losses.
The Letter of Credit will expire on ___________, 19__ unless earlier
terminated or extended in accorda nce with its terms. The Letter of Credit
contains provisions to the effect that on or before the first day of the sixth
month immediately preceding the expiration date a request may be made to extend
the expiration date. It is within the Letter of Credit Bank's sole discretion
whether to agree to such an extension. If, as of the date 30 days prior to the
expiration date, or the expiration date thereof as so extended, a replacement
Letter of Credit or alternate form of credit support has not been delivered to
the Trustee, then, pursuant to the terms of the Pooling and Servicing Agreement,
the entire remaining amount of the Letter of Credit will be drawn by the Trustee
prior to such expiration date. In that event, the amount so paid will be held by
the Trustee in the form of a reserve fund held outside of the Trust Fund (but
pledged to the Trustee and held by it in trust for the benefit of the
Certificateholders), pending the substitution of any other form of credit
support therefor, and will be applied in the same manner as described herein
regarding draws under the Letter of Credit.
Letter Of Credit Bank
The Letter of Credit will be issued by the Letter of Credit Bank, which
will be the_____________________ , a______________ .____________ principal
executive offices are located at _____________.
____________________ is engaged in a broad range of banking and financial
services activities, including deposit-taking, lending and leasing, securities
brokerage services, investment management, investment banking, capital markets
activities and foreign exchange transactions.
The information set forth in the preceding paragraphs concerning the Letter
of Credit Bank has been provided by the Letter of Credit Bank as of the date
hereof. The Company makes no representation as to the accuracy or completeness
of such information.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
No election will be made to treat the Trust Fund as a real estate mortgage
investment conduit for federal income tax purposes. _______________________,
counsel to the Company, will deliver its opinion to the effect that the Trust
Fund will be classified as a grantor trust under Subpart E, Part I of Subchapter
J of the Code, and not as a partnership or an association taxable as a
corporation.
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 is (i) 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 dire ctly relevant to the
determination of any entry on a tax return. Accordingly, taxpayers should
consult their own tax advisors and tax return preparers regarding the
preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed herein.
Each Certificateholder will generally be treated as an owner of an interest
in the Mortgage Loans, which will be treated as an interest in "stripped bonds".
Accordingly, the Certificateholders will be required to include their yield with
respect to the Mortgage Loans in gross income as it accrues, based on a constant
yield method in accordance with the original issue discount rules, which may
result in income being recognized for tax purposes in advance of the receipt of
cash attributable to such income. See "Certain Federal Income Tax
Consequences--Grantor Trust Funds--Taxation of Owners of Grantor Trust
Fractional Interest Certificates--If Stripped Bond Rules Apply" in the
Prospectus.
In the absence of statutory or administrative clarification, it is intended
that information returns or reports to Certificateholders and the Internal
Revenue Service (the "IRS") will be based on the use of a prepayment assumption
of ___% of the Constant Prepayment Rate ("CPR") and on a representative initial
offering price for the Certificates in computing the constant yield. The
Constant Prepayment Rate or CPR represents a constant assu med rate of
prepayment each month relative to the outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans. However, no representation
is made that the Mortgage Loans will in fact prepay at that rate or at any other
rate and Certificateholders should bear in mind that the use of a representative
initial offering price will mean that such information returns or reports, even
if otherwise accepted as accurate by the IRS, will in any event be accurate only
as to the initial Certificateholders. The Certificateholders should consult
their own tax advisors as to the proper treatment of their investment in the
Mortgage Loans under the stripped bond rules.
_______________________ will deliver its opinion that the Certificates
represent interests in "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code, "loans . . . secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code and as "qualifying
real property loans" within the meaning of Section 593(d) of the Code, and the
interest thereon will be treated as "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code. In addition, the Certificates will be "qualified mortgages" within the
meaning of Section 860G(a)(3)(A) of the Code. See "Certain Federal Income Tax
Consequences--Grantor Trust Funds-Characterization of Investments in Grantor
Trust Certificates--Grantor Trust Fractional Interest Certificates" in the
Prospectus.
For further information regarding the federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax
Consequences-Grantor Trust Funds" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
dated ______________, 19__ the Underwriter has agreed to purchase and the
Company has agreed to sell to the Underwriter the Certificates.
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The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept deliv ery of the 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 Certificates by the Underwriter may be effected
from time to time in one or mor e negotiated transactions, or otherwise, at
varying prices to be determined at the time of sale. Proceeds to the Company
from the sale of the Certificates, before deducting expenses payable by the
Company, will be _____% of the aggregate Certificate Principal Balance of the
Certificates plus accrued interest thereon from the Cut-off Date. The
Underwriter may effect such transactions by selling the 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 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 Certificates may be
deemed to be underwriters and any profit on the resale of the Certificates
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and under limited circumstances the Underwriter will indemnify the
Company, against certain civil liabilities under the Securities Act of 1933, or
contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Certificates will
develop or, if it does develop, that it will continue. The primary source of
information available to investors concerning the 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 Certificates and the status of the
applicable form of credit enhancement. There can be no assurance that any
additional informati on regarding the Certificates will be available through any
other source. In addition, the Company is not aware of any source through which
price information about the Certificates will be generally available on an
ongoing basis. The limited nature of such information regarding the Certificates
may adversely affect the liquidity of the Certificates, even if a secondary
market for the Certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon for
the Company by _____________________ and for the Underwriter by
_________________________.
RATING
It is a condition to the issuance of the Certificates that they be rated
not lower than "___" by _____________________________________.
The ratings of _______ on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions on the
underlying mortgage loans to which they are entitled. _______ ratin gs on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by mortgagors or the degree to which such
prepayments might differ from that originally anticipated. _______ ratings on
pass-through certificates do not represent any assessment of the related
Subservicer's ability to purchase Converting Mortgage Loans, or the Master
Servicer's ability to purchase Converted Mortgage Loans. In the event that
neither the related Subservicer nor the Master Servicer purchases a Converting
or Converted Mortgage Loan,
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investors might suffer a lower than anticipated yield. The rating does not
address the possibility that Certificateholders might suffer a lower than
anticipated yield.
The Company has not requested a rating on the Certificates by any rating
agency other than _______. However, there can be no assurance as to whether any
other rating agency will rate the Certificates, or, if it doe s, what rating
would be assigned by any such other rating agency. A rating on the Certificates
by another ratin g agency, if assigned at all, may be lower than the rating
assigned to the Certificates by _______.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the rating initially assigned to the
Certificates is subsequently lowered for any reason, no person or entity is
obligated to provide any additional support or credit enhancement with respect
to the 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
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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 U.S. Department of Labor ("DOL")
published proposed regulations ("401(c) Regulations") on December 22, 1997,
although final regulations have not yet been issued, providing guidance for
purposes of determining, in cases where insurance policies or annuity contracts
supported by an insurer's general account are issued to or for the benefit of a
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
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 or annuity contracts 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 Plan Assets 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
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<PAGE>
constitute or result in 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 conditions are satisfied: (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 Prohibited Transaction Class Exemption ("PTCE") 95-60), (ii) the
conditions set forth in PTCE 95-60 have been satisfied and (c) 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 ERISA and the Code to the proposed investment. See "ERISA
Considerations" in Prospectus.
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No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement and the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or by the 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
Page
Prospectus Supplement
Summary.............................................. S-
Description of the Mortgage Pool..................... S-
Description of the Certificates...................... S-
Certain Yield and Prepayment
Considerations.................................. S-
Pooling and Servicing Agreement...................... S-
Certain Federal Income Tax
Consequences.................................... S-
Method of Distribution............................... S-
Legal Opinions....................................... S-
Ratings.............................................. S-
Legal Investment..................................... S-
ERISA Considerations................................. S-
Prospectus
Summary of Prospectus................................
Special Considerations...............................
The Mortgage Pools...................................
Mortgage Loan Program................................
Description of the Certificates......................
Subordination........................................
Description of Credit Enhancement....................
Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder....................
The Company..........................................
Residential Funding Corporation......................
The Pooling and Servicing Agreement..................
Yield Considerations.................................
Maturity and Prepayment
Considerations..................................
Certain Legal Aspects of Mortgage
Loans and Related Matters.......................
Certain Federal Income Tax
Consequences....................................
State and Other Tax Consequences.....................
ERISA Considerations.................................
Legal Investment Matters.............................
Use of Proceeds......................................
Methods of Distribution..............................
Legal Matters........................................
Financial Information................................
Additional Information...............................
Index of Principal Definitions.......................
<PAGE>
===============================================================================
RESIDENTIAL
FUNDING MORTGAGE
SECURITIES I, INC.
$_________________
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 199_-S__
$__________ ____% Class A-1 Certificates
$__________ ____% Class A-2 Certificates
$__________ ____% Class A-3 Certificates
$__________ ____% Class A-4 Certificates
$__________ ____% Class A-5 Certificates
$__________ ____% Class A-6 Certificates
$__________ Variable Rate Class A-7 Certificates
______________________________
PROSPECTUS SUPPLEMENT
_____________________________
_________________________________________________
______________,19__
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement..................$ 4,425,000
Legal Fees and Expenses................................ 1,000,000
Accounting Fees and Expenses........................... 450,000
Trustee's Fees and Expenses
(including counsel fees)........................ 575,000
Printing and Engraving Fees............................ 400,000
Rating Agency Fees..................................... 2,500,000
Miscellaneous.......................................... 675,000
-----------
Total ................................................ $10,025,000
----------
Indemnification of Directors and Officers (Item 15 of Form S-3).
Any underwriters who execute an Underwriting Agreement in the form filed as
Exhibit 1.1 to this Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Securities Act of 1933
from certain information furnished to the Registrant by or on behalf of such
indemnifying party.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the
<PAGE>
-2-
fact that such person acted in any of the capacities set forth above, against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that despite the adjudication of liability such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of the State of Delaware, the Registrant (i) shall
indemnify and hold harmless each person who was or is a party or is threatened
to be made a party to any action, suit or proceeding described in subsections
(a) and (b) by reason of the fact that he is or was a director or officer, or
his testator or intestate is or was a director or officer of the Registrant,
against expenses, judgments, fines and amounts paid in settlement, and (ii)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any such action, suit or proceeding if such
person is or was serving at the request of the Registrant as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
In addition, the Pooling and Servicing Agreements will provide that no
director, officer, employee or agent of the Registrant is liable to the Trust
Fund or the Certificateholders, except for such person's own willful
misfeasance, bad faith, gross negligence in the performance of duties or
reckless disregard of obligations and duties. The Pooling and Servicing
Agreements will further provide that, with the exceptions stated above, a
director, officer, employee or agent of the Registrant is entitled to be
indemnified against any loss, liability or expense incurred in connection with
legal action relating to such Pooling and Servicing Agreements and related
Certificates other than such expenses related to particular Mortgage Loans.
Certain controlling persons of the Registrant may also be entitled to
indemnification from General Motors Acceptance Corporation, an indirect parent
of the Registrant. Under sections
<PAGE>
-3-
7015 and 7018-7023 of the New York Banking Law, General Motors Acceptance
Corporation may or shall, subject to various exceptions and limitation,
indemnify its directors or officers and
may purchase and maintain insurance as follows:
(a) If the director is made or threatened to be made a party to
an action by or in the right of General Motors Acceptance Corporation
to procure a judgment in its favor, by reason of the fact that such
person is or was a director or officer of General Motors Acceptance
Corporation or is or was servicing at the request of General Motors
Acceptance Corporation as a director or officer of some other
enterprise, General Motors Acceptance Corporation may indemnify such
person against amounts paid in settlement of such action or an appeal
therein, if such director or officer acted, in good faith, for a
purpose which such person reasonably believed to be in (or, in the case
of service for any other enterprise, not opposed to) the best interests
of general Motors Acceptance Corporation, except that no
indemnification is available under such statutory provisions in respect
of a threatened action or a pending action which is settled or
otherwise disposed of, or any claim or issue or matter as to which such
person is found liable to General Motors Acceptance Corporation, unless
in each such case a court determined that such person is fairly and
reasonably entitled to indemnity for such amount as the court deems
proper.
(b) With respect to any action or proceeding other than one by
or in the right of General Motors Acceptance Corporation to procure a
judgment in its favor, if a director or officer is made or threatened
to be made a party by reason of the fact that such person was a
director or officer of General Motors Acceptance Corporation, or served
some other enterprise at the request of General Motors Acceptance
Corporation, General Motors Acceptance Corporation may indemnify such
person against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees, incurred as a result of
such action or proceeding or an appeal therein, if such person acted in
good faith for a purpose which such person reasonably believed to be in
(or, in the case of service for any other enterprise, not opposed to)
the best interests of General Motors Acceptance Corporation and, in
criminal actions or proceedings, in addition, had no reasonable cause
to believe that such person's conduct was unlawful.
(c) A director or officer who has been wholly successful, on the
merits or otherwise, in the defense of a civil or criminal action or
proceeding of the character described in paragraphs (a) or (b) above,
shall be entitled to indemnification as authorized in such paragraphs.
(d) General Motors Acceptance Corporation may purchase and
maintain insurance to indemnify directors and officers in instances in
which they may not otherwise be indemnified by General Motors
Acceptance Corporation under the provisions of the New York Banking
Law, provided hat the contract of insurance provides for a retention
amount and for co-insurance, except that no such insurance may provide
for any
<PAGE>
-4-
payment, other than cost of defense, to or on behalf of any director or
officer if a judgment or other final adjudication adverse to such
director or officer establishes that such person's acts of active and
deliberate dishonesty were material to the cause of action so
adjudicated or that such person personally gained in fact a financial
profit or other advantage to which such person was not legally
entitled.
The foregoing statement is subject to the detailed provisions of sections
7015 and 7018- 7023 of the New York Banking Law.
As a subsidiary of General Motors Corporation, General Motors Acceptance
Corporation is insured against liabilities which it may incur by reason of the
foregoing provisions of the New York Banking Law and directors and officers of
General Motors Acceptance Corporation are insured against some liabilities which
might arise out of their employment and not be subject to indemnification under
said Banking Law.
Pursuant to resolutions adopted by the Board of Directors of General Motors
Corporation, that company to the fullest extent permissible under law will
indemnify, and has purchased insurance on behalf of, directors or officers of
the company, or any of them, who incur or are threatened with personal
liability, including expenses, under Employee Retirement Income Security Act of
1974 or any amendatory or comparable legislation or regulation thereunder.
<PAGE>
-5-
Exhibits (Item 16 of Form S-3).
Exhibits--
1.1* --Form of Underwriting Agreement
3.1* --Certificate of Incorporation of Residential Funding Mortgage Securities
I, Inc. ("RFMSI") (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement (File No. 33-9518)).
3.2* --By-Laws of RFMSI (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement (File No. 2-99554)).
4.1* --Form of Pooling and Servicing Agreement for an offering of Mortgage
Pass-Through Certificates consisting of senior and subordinate
certificate classes (incorporated by reference to Exhibit 4.1 to
Post-Effective Amendment No. 1 to the Registrant's Registration
Statement (File No. 33-20826)).
4.2* --Form of Pooling and Servicing Agreement for alternate forms of credit
support (single class) (incorporated by reference to Exhibit 4.1 to
the Registrant's Registration Statement (File No. 33-26683)).
4.3* --Form of Pooling and Servicing Agreement for alternate forms of credit
support (multi-class) (incorporated by reference to Exhibit 4.2 to the
Registrant's Registration Statement (File No. 33-9518)).
4.4* --Form of Pooling and Servicing Agreement for an offering of Mortgage
Pass-Through Certificates backed by Mortgage Securities (incorporated
by reference to Exhibit 4.4 to the Registrant's Registration Statement
(File No. 33-49689)).
5.1 -- Opinion of Thacher Proffitt & Wood with respect to legality.
5.2 -- Opinion of Orrick, Herrington & Sutcliffe with respect to
legality.
8.1 -- Opinion of Thacher Proffitt & Wood with respect to certain tax matters
(included with Exhibit 5.1).
8.2 -- Opinion of Orrick, Herrington & Sutcliffe with respect to certain tax
matters.
23.1 -- Consent of Thacher Proffitt & Wood (included as part of Exhibit 5.1 and
Exhibit 8.1).
23.2 -- Consent of Orrick, Herrington & Sutcliffe (included as part of Exhibit
5.2 and Exhibit 8.2).
24.1* --Power of Attorney
_______________________________
* Not filed herewith.
<PAGE>
-6-
Undertakings (Item 17 of Form S-3).
A. Undertakings Pursuant to Rule 415.
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
<PAGE>
-7-
B. Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
Residential Funding Mortgage Securities I, Inc. certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form S-3,
reasonably believes that the security rating requirement contained in
Transaction Requirement B.5 of Form S-3 will be met by the time of the sale of
the securities registered hereunder, and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on the 23rd day of
June, 1998.
RESIDENTIAL FUNDING MORTGAGE
SECURITIES I, INC.
By: /s/Bruce J. Paradis
Bruce J. Paradis
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
SIGNATURE TITLE DATE
* Director and President June 23, 1998
- -----------------------
Bruce J. Paradis (Principal Executive
Officer)
* Director, Executive Vice June 23, 1998
- -----------------------
Davee L. Olson President and Chief Financial
Officer (Principal Financial
Officer)
* Director and June 23, 1998
- -----------------------
Dennis W. Sheehan Assistant Treasurer
* Controller (Principal June 23, 1998
- -----------------------
Jack R. Katzmark Accounting Officer)
* By: /s/Bruce J. Paradis
Bruce J. Paradis
Attorney-in-fact pursuant to a power of attorney filed with Registration
Statement 333-39665.
<PAGE>
<TABLE>
EXHIBIT INDEX
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Number Description Location of Exhibit
in Sequential
Numbering System
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1.1* Form of Underwriting Agreement
- ---------------------------------------------------------------------------------------------------------------------------------
3.1* Certificate of Incorporation of RFMSI (incorporated by reference to
Exhibit 3.1 to the Registrant's Registration Statement (File No. 33-
9518))
- ---------------------------------------------------------------------------------------------------------------------------------
3.2* By-Laws of RFMSI (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement (File No. 2-99554))
- ---------------------------------------------------------------------------------------------------------------------------------
4.1* Form of Pooling and Servicing Agreement for an offering of
Mortgage Pass-Through Certificates consisting of senior and
subordinate certificate classes (incorporated by reference to Exhibit
4.1 to Post-Effective Amendment No. 1 to the Registrant's
Registration Statement (File No. 33-20826))
- ---------------------------------------------------------------------------------------------------------------------------------
4.2* Form of Pooling and Servicing Agreement for alternate forms of
credit support (single class) (incorporated by reference to Exhibit 4.1
to the Registrant's Registration Statement (File No. 33-26683))
- ---------------------------------------------------------------------------------------------------------------------------------
4.3* Form of Pooling and Servicing Agreement for alternate forms of
credit support (multi-class) (incorporated by reference to Exhibit 4.2
to the Registrant's Registration Statement (File No. 33-9518))
- ---------------------------------------------------------------------------------------------------------------------------------
4.4* Form of Pooling and Servicing Agreement for an offering of
Mortgage Pass-Through Certificates backed by Mortgage Securities
(incorporated by reference to Exhibit 4.4 to the Registrant's
Registration Statement (File No. 33-49689))
- ---------------------------------------------------------------------------------------------------------------------------------
5.1 Opinion of Thacher Proffitt & Wood with respect to legality.
- ---------------------------------------------------------------------------------------------------------------------------------
5.2 Opinion of Orrick, Herrington & Sutcliffe with respect to legality.
- ---------------------------------------------------------------------------------------------------------------------------------
8.1 Opinon of Thacher Proffitt & Wood with respect to certain tax
matters (included in Exhibit 5.1).
- ---------------------------------------------------------------------------------------------------------------------------------
8.2 Opinion of Orrick, Herrington & Sutcliffe with respect to certain tax
matters.
- ---------------------------------------------------------------------------------------------------------------------------------
23.1 Consent of Thacher Proffitt & Wood (included as part of Exhibit 5.1
and Exhibit 8.1).
- ---------------------------------------------------------------------------------------------------------------------------------
23.2 Consent of Orrick, Herrington & Sutcliffe (included as part of
Exhibit 5.2 and Exhibit 8.2).
- ---------------------------------------------------------------------------------------------------------------------------------
24.1* Power of Attorney
- ---------------------------------------------------------------------------------------------------------------------------------
* Not filed herewith.
</TABLE>
<PAGE>
EXHIBIT 5.1
June 23, 1998
Residential Funding Mortgage
Securities I, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Re: Residential Funding Mortgage Securities I, Inc. Mortgage Pass-Through
Certificates; Registration Statement on Form S-3
Dear Sirs:
We are counsel to Residential Funding Mortgage Securities I, Inc., a
Delaware corporation (the "Registrant") in connection with the registration
under the Securities Act of 1933, as amended (the "Act"), of Mortgage
Pass-Through Certificates (the "Certificates"), and the related preparation and
filing of a Registration Statement on Form S-3 (the "Registration Statement").
The Certificates are issuable in series under separate pooling and servicing
agreements (each such agreement, a "Pooling and Servicing Agreement"), among the
Registrant, a master servicer to be identified in the prospectus supplement for
such series of Certificates and a trustee to be identified in the prospectus
supplement for such series of Certificates. Each Pooling and Servicing Agreement
will be substantially in the form filed as an Exhibit to the Registration
Statement.
<PAGE>
In connection with rendering this opinion letter, we have examined the
forms of the Pooling and Servicing Agreement contained as Exhibits in the
Registration Statement, the Registration Statement and such other documents as
we have deemed necessary. As to matters of fact, we have examined and relied
upon representations or certifications of officers of the Registrant or public
officials. In rendering this opinion letter, except for the matters that are
specifically addressed in the opinions expressed below, we have assumed (i) the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies, (ii) the necessary
entity formation and continuing existence in the jurisdiction of formation, and
the necessary licensing and qualification in all jurisdictions, of all parties
to all documents, (iii) the necessary authorization, execution, delivery and
enforceability of all documents, and the necessary entity power with respect
thereto, and (iv) that there is not and will not be any other agreement that
modifies or supplements the agreements expressed in the documents to which this
opinion letter relates and that renders any of the opinions expressed herein
inconsistent with such documents as so modified or supplemented.
Our opinions set forth below are subject to the qualification that
enforceability of each of the respective obligations of the parties under any
agreement is subject to (i) general principles of equity, regardless of whether
such enforceability is considered in a proceeding in equity or at law, (ii) the
effect of certain laws, regulations and judicial or other decisions upon the
availability and enforceability of certain covenants, remedies and other
provisions, including the remedies of specific performance and self-help and
provisions imposing penalties and forfeitures, (iii) bankruptcy, insolvency,
liquidation, receivership, moratorium, reorganization or other similar laws
affecting the rights of creditors and (iv) public policy considerations
underlying the securities laws, to the extent that such public policy
considerations limit the enforceability of the provisions of any agreement,
which purport or are construed to provide indemnification with respect to
securities law violations.
In rendering this opinion letter, we to not express any opinion concerning
any law other than the law of the State of New York and the corporate law of the
State of Delaware. We do not express any opinion with respect to the securities
laws of any jurisdiction or any other matter not specifically addressed in the
opinions expressed below.
Based on the foregoing, we are of the opinion that:
1. Upon the authorization, execution and delivery thereof by the
parties thereto, each Pooling and Servicing Agreement will be the legal and
valid obligation of the Registrant, enforceable against the Registrant in
accordance with its terms.
<PAGE>
2. Upon the authorization, execution and delivery of a Pooling and
Servicing Agreement for a series of Certificates by the parties thereto,
the execution and authentication of the Certificates of such series in
accordance with that Pooling and Servicing Agreement and the sale and
delivery of such Certificates as contemplated in the Registration Statement
and the prospectus and prospectus supplement delivered in connection
therewith, such Certificates will be legally and validly issued and
outstanding, fully paid and non-assessable and entitled to the benefits of
that Pooling and Servicing Agreement.
3. The description of federal income tax consequences appearing under
the heading "Certain Federal Income Tax Consequences" in the prospectus
contained in the Registration Statement, while not purporting to discuss
all possible federal income tax consequences of an investment in
Certificates, is accurate with respect to those tax consequences which are
discussed.
We hereby consent to the filing of this opinion letter as an Exhibit to the
Registration Statement, and to the use of our name in the prospectus and
prospectus supplement included in the Registration Statement under the heading
"Legal Matters", and in the prospectus included in the Registration Statement
under the heading "Certain Federal Income Tax Consequences", without admitting
that we are "experts" within the meaning of the Act, and the rules and
regulations thereunder, with respect to any part of the Registration Statement,
including this Exhibit.
Very truly yours,
THACHER PROFFITT & WOOD
By /s/ Thacher Proffitt & Wood
Exhibit 5.2
June 23, 1998
Residential Funding Mortgage Securities I, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-3, to be filed by Residential Funding Mortgage Securities I, Inc., a Delaware
corporation (the "Registrant"), with the Securities and Exchange Commission on
June 19, 1998 (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act") of
Mortgage Pass-Through Certificates (the "Certificates"). The Certificates are
issuable in series (each, a "Series") under a separate Pooling and Servicing
Agreement (each such agreement, a "Pooling and Servicing Agreement") by and
among the Registrant, the Master Servicer or Servicer named therein and the
Trustee named therein. The Certificates of each Series are to be sold as set
forth in the Registration Statement, any amendment thereto, and the prospectus
and prospectus supplement relating to such Series.
We have examined such instruments, documents and records as we deemed
relevant and necessary as a basis of our opinion hereinafter expressed. In such
examination, we have assumed the following: (a) the authenticity of original
documents and the genuineness of all signatures; (b) the conformity to the
originals of all documents submitted to us as copies; and (c) the truth,
accuracy and completeness of the information, representations and warranties
contained in the records, documents, instruments and certificates we have
reviewed.
Based on such examination, we are of the opinion that when the issuance
of each Series of Certificates has been duly authorized by appropriate corporate
action and the Certificates of such Series have been duly executed,
authenticated and delivered in accordance with the Pooling and Servicing
Agreement relating to such Series and sold, the Certificates will be legally
issued, fully paid, binding obligations of the trust created by the Pooling and
Servicing Agreement, and the holders of the Certificates will be entitled to the
benefits of the Pooling and Servicing
<PAGE>
Residential Funding Mortgage Securities I, Inc.
June 23, 1998
Page 2
Agreement, except as enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance,
moratorium, or other laws relating to or affecting the rights of creditors
generally and general principles of equity, including without limitation,
concepts of materiality, reasonableness, good faith and fair dealing, and the
possible unavailability of specific performance or injunctive relief, regardless
of whether such enforceability is considered in a proceeding in equity or at
law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and the prospectus contained therein. In giving such
consent, we do not consider that we are "experts," within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this opinion as an exhibit or otherwise.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
Exhibit 8.2
June 23, 1998
Residential Funding Mortgage Securities I, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Ladies and Gentlemen:
We have advised Residential Funding Mortgage Securities I, Inc. (the
"Registrant") with respect to certain federal income tax aspects of the issuance
by the Registrant of its Mortgage Pass-Through Certificates, issuable in series
(the "Certificates"). Such advice conforms to the description of selected
federal income tax consequences to holders of the Certificates that appears
under the heading "Certain Federal Income Tax Consequences" in the prospectus
(the "Prospectus") forming a part of the Registration Statement on Form S-3 as
prepared for filing by the Registrant with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), on June 19,
1998 (the "Registration Statement"). Such description does not purport to
discuss all possible income tax ramifications of the proposed issuance, but with
respect to those tax consequences which are discussed, in our opinion the
description is accurate in all material respects.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and the Prospectus contained therein. In giving such
consent, we do not consider that we are "experts," within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this opinion as an exhibit or otherwise.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
