REGISTRATION NO. 333-72493
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3/A
AMENDMENT NO. 3 TO
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)
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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
Robert C. Wipperman, Esq.
Stroock & Stroock & Lavan
180 Maiden Lane
New York, New York 10038
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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. [ ]
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<CAPTION>
CALCULATION OF REGISTRATION FEE
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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)
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<S> <C> <C> <C> <C>
Mortgage Pass-Through $12,001,000,000 100% $12,000,000,000 $3,336,000.00
Certificates (Issuable in Series)
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(1) $712,340,541.56 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the Registrant under Registration Statement No.
333-57481 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 $12,713,340,541.56. In addition,
the registration fee in connection with the $1,000,000.00 aggregate principal
amount of Mortgage Pass-Through Certificates to be registered by the Registrant
under this Registration Statement has been previously paid by the Registrant in
connection with the original filing on February 17, 1999.
(2) Estimated solely for the purpose of calculating the registration fee.
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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. 333-57481 previously filed by the
Registrant. This Registration Statement which relates to $12,713,340,541.56
aggregate principal amount of Mortgage Pass-Through Certificates, constitutes
Post-Effective Amendment No. 4 to Registration Statement 333-57481.
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EXPLANATORY NOTE
This Registration Statement includes (i) a basic prospectus and (ii) an
illustrative form of prospectus supplement for use in an offering of Mortgage
Pass-Through Certificates consisting of senior and subordinate certificate
classes.
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION JUNE 30, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
MORTGAGE PASS-THROUGH CERTIFICATES
RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
Depositor
The depositor may periodically form separate trusts to issue certificates in
series, backed by mortgage collateral.
OFFERED CERTIFICATES The certificates in a series will represent interests
in a trust and will be paid ONLY from the assets of
that trust. Each series may include multiple classes of
certificates with differing payment terms and
priorities. Credit enhancement will be provided for all
offered certificates.
MORTGAGE COLLATERAL Each trust will consist primarily of:
o mortgage loans secured by first liens on one-
to four-family residential properties;
o mortgage securities and whole or partial
participations in mortgage loans; and
o mortgage loans secured by additional
collateral.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE CERTIFICATES OR DETERMINED THAT
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
______________, 1999
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
We provide information to you about the certificates in two separate documents
that provide progressively more detail:
o this prospectus, which provides general information, some of
which may not apply to your series of certificates; and
o the accompanying prospectus supplement, which describes the
specific terms of your series of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THE ACCOMPANYING PROSPECTUS
SUPPLEMENT DIFFERS FROM THE RELATED DESCRIPTION IN THIS PROSPECTUS, YOU SHOULD
RELY ON THE INFORMATION IN THAT PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and the
accompanying prospectus supplement, including the information incorporated by
reference. See "Additional Information", "Reports to certificateholders" and
"Incorporation of Certain Information by Reference" in this Prospectus. You can
request information incorporated by reference from Residential Funding Mortgage
Securities I, Inc. by calling us at (612) 832-7000 or writing to us at 8400
Normandale Lake Boulevard, Suite 600, Minneapolis, Minnesota 55437. We have not
authorized anyone to provide you with different information. We are not offering
the certificates in any state where the offer is not permitted.
Some capitalized terms used in this prospectus are defined in the Glossary
attached hereto.
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TABLE OF CONTENTS
Page
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INTRODUCTION...................................................................4
THE TRUSTS.....................................................................4
General...................................................................4
The Mortgage Loans........................................................7
MORTGAGE LOAN PROGRAM.........................................................14
Underwriting Standards...................................................14
Qualifications of Sellers................................................19
Representations by Sellers...............................................20
Subservicing.............................................................25
DESCRIPTION OF THE CERTIFICATES...............................................28
General..................................................................28
Form of Certificates.....................................................29
Assignment of Trust Assets...............................................32
Review of Mortgage Loans.................................................33
Spread...................................................................35
Payments on Mortgage Loans; Deposits to Certificate Account..............35
Withdrawals from the Custodial Account...................................39
Distributions............................................................40
Example of Distributions.................................................42
Advances.................................................................43
Prepayment Interest Shortfalls...........................................45
Reports to Certificateholders............................................45
Collection and Other Servicing Procedures................................46
Special Servicing and Special Servicing Agreements.......................48
Realization Upon Defaulted Mortgage Loans................................49
SUBORDINATION.................................................................51
General..................................................................51
Overcollateralization....................................................53
DESCRIPTION OF CREDIT ENHANCEMENT.............................................53
General..................................................................53
Letters of Credit........................................................55
Mortgage Pool Insurance Policies.........................................55
Special Hazard Insurance Policies........................................58
Bankruptcy Policies......................................................59
Reserve Funds............................................................59
Certificate Insurance Policies; Surety Bonds.............................60
Maintenance of Credit Enhancement........................................60
Reduction or Substitution of Credit Enhancement..........................61
OTHER FINANCIAL OBLIGATIONS RELATED TO THE
CERTIFICATES.............................................................62
Swaps and Yield Supplement Agreements....................................62
Purchase Obligations.....................................................63
INSURANCE POLICIES ON MORTGAGE LOANS..........................................63
Primary Insurance Policies...............................................63
Standard Hazard Insurance on Mortgaged Properties........................65
THE DEPOSITOR.................................................................66
RESIDENTIAL FUNDING CORPORATION...............................................67
THE POOLING AND SERVICING AGREEMENT...........................................67
Servicing and Other Compensation and Payment of Expenses.................68
Evidence as to Compliance................................................69
Certain Matters Regarding the Master Servicer and the Depositor..........70
Events of Default........................................................71
Rights Upon Event of Default.............................................71
Amendment................................................................72
Termination; Retirement of Certificates..................................74
The Trustee..............................................................75
YIELD CONSIDERATIONS..........................................................75
MATURITY AND PREPAYMENT CONSIDERATIONS........................................79
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.......................................82
The Mortgage Loans.......................................................82
Environmental Legislation................................................93
Soldiers' and Sailors' Civil Relief Act of 1940..........................95
Default Interest and Limitations on Prepayments..........................95
Forfeitures in Drug and RICO Proceedings.................................96
Negative Amortization Loans..............................................96
MATERIAL FEDERAL INCOME TAX CONSEQUENCES......................................97
General..................................................................97
REMICs...................................................................98
STATE AND OTHER TAX CONSEQUENCES.............................................120
ERISA CONSIDERATIONS.........................................................120
ERISA Plan Asset Regulations............................................121
Prohibited Transaction Exemption........................................122
Insurance Company General Accounts......................................125
Representations from Investing Plans....................................126
Tax-Exempt Investors....................................................127
Consultation with Counsel...............................................127
LEGAL INVESTMENT MATTERS.....................................................127
USE OF PROCEEDS..............................................................129
METHODS OF DISTRIBUTION......................................................129
LEGAL MATTERS................................................................131
FINANCIAL INFORMATION........................................................131
ADDITIONAL INFORMATION.......................................................131
REPORTS TO CERTIFICATEHOLDERS................................................131
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE...............................................................132
GLOSSARY.......................................................................1
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INTRODUCTION
The mortgage pass-through certificates offered may be sold from time to
time in series. 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 depositor or any other
entity specified in the related prospectus supplement, in a trust consisting
primarily of a segregated pool of one- to four-family, residential first
mortgage loans, acquired by the depositor from one or more affiliated or
unaffiliated institutions. Each series of certificates will be issued under a
pooling and servicing agreement among the depositor, the trustee and master
servicer specified in the related prospectus supplement.
THE TRUSTS
GENERAL
The mortgage loans and other assets described in this prospectus under
"The Trusts--The Mortgage Loans" and in the related prospectus supplement will
be held in a trust for the benefit of the holders of the related series of
certificates and the Excess Spread, if any, under a pooling and servicing
agreement as described in this section and in the related prospectus supplement.
As specified in the related prospectus supplement, each series of certificates
will represent in the aggregate the entire beneficial ownership interest in the
mortgage pool consisting primarily of conventional mortgage loans, excluding any
interest retained by the depositor 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 the mortgage loans which may include mortgage securities evidencing
interests in mortgage loans.
As specified in the related prospectus supplement, 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
modular pre-cut/panelized housing, 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 Loans evidenced by Cooperative Notes. In addition, if specified in
the related prospectus supplement relating to a series of certificates, a
mortgage pool may contain Additional Collateral Loans or Pledged Asset Mortgage
Loans that are secured, in addition to the related mortgaged property, by
Additional Collateral or Pledged Assets.
As used herein, unless the context indicates otherwise, mortgage loans
includes Cooperative Loans, Additional Collateral Loans and Pledged Asset
Mortgage 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.
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The prospectus supplement with respect to a series will describe the
specific manner in which certificates of that series issued under a particular
pooling and servicing agreement will evidence specified beneficial ownership
interests in a separate trust created under that pooling and servicing
agreement. A trust will consist of, to the extent provided in the related
pooling and servicing agreement:
o 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 depositor or
any of its affiliates with respect to each Mortgage Loan
o assets including, without limitation, all payments and
collections derived from the mortgage loans or mortgage
securities due after the related cut-off date, as from time to
time are identified as deposited in the Custodial Account and
in the related Certificate Account
o property acquired by foreclosure of the mortgage loans or deed
in lieu of foreclosure and portions of the related proceeds
from the disposition of any related Additional Collateral or
Pledged Assets
o hazard insurance policies and primary insurance policies, if
any, and portions of the related proceeds; and
o 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 policy, certificate insurance
policy, surety bond or other type of credit enhancement as
described under "Description of Credit Enhancement."
The related prospectus supplement will describe the material terms and
conditions of certificates of interest or participations in mortgage loans to
the extent they are included in the related trust.
Each mortgage loan will be selected by the depositor for inclusion in a
mortgage pool from among those purchased by the depositor, either directly or
through its affiliates, including Residential Funding Corporation, from sellers
who are affiliates of the depositor including HomeComings Financial Network,
Inc. and GMAC Mortgage Corporation, or from banks, savings and loan
associations, mortgage bankers, investment banking firms, the Federal Deposit
Insurance Corporation, or FDIC, and other mortgage loan originators or sellers
not affiliated with the depositor, all as described in this prospectus under
"Mortgage Loan Program." If a mortgage pool is composed of mortgage loans
acquired by the depositor directly from sellers other than Residential Funding
Corporation, 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. No more than five percent (5%)
of the mortgage loans (as they are constituted as of the cut-off date) by
aggregate principal balance as of the cut-off date will have characteristics
that deviate from those characteristics described in the related prospectus
supplement. Other mortgage loans available for
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purchase by the depositor may have characteristics which would make them
eligible for inclusion in a mortgage pool but were not selected for inclusion in
a mortgage pool at that time.
The mortgage loans may also be delivered to the depositor in a
Designated Seller Transaction. Those certificates may be sold in whole or in
part to any seller identified in the related prospectus supplement in exchange
for the related mortgage loans, or may be offered under any of the other methods
described in this prospectus under "Methods of Distribution." The related
prospectus supplement for a Designated Seller Transaction will 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 depositor, Residential Funding Corporation, GMAC Mortgage Group, Inc. or any
of their affiliates will make any representation or warranty with respect to the
mortgage loans, or any representation as to the accuracy or completeness of the
information provided by the seller.
If specified in the related prospectus supplement, the trust underlying
a series of certificates may include mortgage securities. The mortgage
securities may have been issued previously by the depositor or an affiliate
thereof, a financial institution or other entity engaged in the business of
mortgage lending or a limited purpose corporation organized for the purpose of,
among other things, acquiring and depositing mortgage loans into trusts, and
selling beneficial interests in such trusts. As specified in the related
prospectus supplement, the mortgage securities will primarily be similar to
certificates offered hereunder. As to any series of certificates, the related
prospectus supplement will include a description of the mortgage securities and
any related credit enhancement, and the mortgage loans underlying those mortgage
securities will be described together with any other mortgage loans included in
the mortgage pool relating to that series. As to any series of certificates, as
used in this prospectus a mortgage pool includes the related mortgage loans
underlying any mortgage securities.
Any mortgage securities underlying any certificates will (i) either (a)
have been previously registered under the Securities Act, or (b) will be
eligible for sale under Rule 144(k) under the Securities Act, and (ii) will be
acquired in secondary market transactions from persons other than the issuer or
its affiliates. Alternatively, if the mortgage securities were acquired from
their issuer or its affiliates, or were issued by the depositor or any of its
affiliates, then the mortgage securities will be registered under the Securities
Act at the same time as the certificates.
For any series of certificates backed by mortgage securities, the
entity that administers the mortgage securities may be referred to as the
manager, if so specified in the related prospectus supplement. References in
this prospectus to Advances to be made and other actions to be taken by the
master servicer in connection with the mortgage loans may include Advances made
and other actions taken under the terms of the mortgage securities.
As 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
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interest in only the related mortgage pool and corresponding trust, and not in
any other mortgage pool or trust.
THE MORTGAGE LOANS
As specified in the related prospectus supplement, all of the mortgage
loans in a mortgage pool will:
o have monthly payments due or deemed to be due on the first of
each month
o be secured by mortgaged properties located in any of the 50
states, the District of Columbia or the Puerto Rico mortgage
loans and
o be of one or more types 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, or ARM
loans, having an original or modified term to maturity of not more than
30 years with a related interest rate which usually 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 Note Margin and an index. The related
prospectus supplement will describe 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 the ARM Loan, which in most
cases will occur 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 in most cases 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
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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 limited 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 the mortgage loan, the resulting
amount of deferred interest will be added to the principal balance of
that 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 that mortgage loan. The 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 these 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. The 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 the
mortgage loan;
(7) Balloon Loans. The amount of the monthly payment will
remain constant until the maturity date, upon which date Balloon Amount
will be due and payable; or
(8) Additional Collateral Loans, Buy-Down Mortgage Loans,
Convertible Mortgage Loans, Cooperative Loans, modified loans or
Pledged Asset Mortgage Loans.
If so specified in the related prospectus supplement, a mortgage pool
may contain mortgage loans that provide for payment of a prepayment charge.
If so specified in the related prospectus supplement, a mortgage pool
will contain Additional Collateral Loans. The Additional Collateral Requirement
will generally terminate when the Loan-to-Value Ratio of the mortgage loan is
reduced to a predetermined level, which generally shall not be more than 75%, as
a result of a reduction in the loan amount caused by principal payments by the
mortgagor under the mortgage loan or an increase in the appraised value of the
related mortgaged property.
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The seller of the Additional Collateral Loan or the related
subservicer, as applicable, will be required, in accordance with the master
servicer's servicing guidelines or its normal servicing procedures, to attempt
to realize on any Additional Collateral if the related Additional Collateral
Loan is liquidated upon default. The right to receive proceeds from the
realization of Additional Collateral upon any liquidation will be assigned to
the related trustee. No assurance can be given as to the amount of proceeds, if
any, that might be realized from such Additional Collateral and thereafter
remitted to the trustee.
Unless otherwise specified in the related prospectus supplement, an
insurance company whose claims-paying ability is rated in the highest long-term
rating category by each rating agency rating the applicable series of
certificates will have issued a limited purpose surety bond insuring any
deficiency in the amounts realized by the Additional Collateral Loan Seller from
the liquidation of Additional Collateral, up to the amount of the Additional
Collateral Requirement. For additional considerations concerning the Additional
Collateral Loans, see "Certain Legal Aspects of Mortgage Loans--The Mortgage
Loans--Anti-Deficiency Legislation and Other Limitations on Lenders" in this
prospectus.
If so specified in the related prospectus supplement, a mortgage pool
may include Pledged Asset Mortgage Loans. Each Pledged Asset will be held by a
custodian for the benefit of the trustee for the trust in which the related
Pledged Asset Mortgage Loan is held, and will be invested in investment
obligations permitted by the Rating Agencies rating the related series of
certificates. The amount of the Pledged Assets will be determined by the seller
in accordance with its underwriting standards, but generally will not be more
than an amount that, if applied to reduce the original principal balance of the
mortgage loan, would reduce that principal balance to less than 70% of the
appraised value of the mortgaged property.
If, following a default by the mortgagor and the liquidation of the
related mortgaged property, there remains a loss on the related mortgage loan,
the limited liability company will be required to pay to the master servicer or
the subservicer on behalf of the trustee the amount of that loss, up to the
pledged amount for such mortgage loan. If the mortgagor becomes a debtor in a
bankruptcy proceeding, there is a significant risk that the Pledged Assets will
not be available to be paid to the certificateholders. At the mortgagor's
request, and in accordance with some conditions, the Pledged Assets may be
applied as a partial prepayment of the mortgage loan. The Pledged Assets will be
released to the limited liability company if the outstanding principal balance
of the mortgage loan has been reduced by the amount of the Pledged Assets.
If so specified in the related prospectus supplement, a mortgage pool
may include mortgage loans that have been modified. The modifications may
include conversions from an adjustable to a fixed mortgage rate (discussed
below) or other changes in the related mortgage note. If a mortgage loan is a
modified mortgage loan, references to origination generally shall be deemed to
be references to the date of modification.
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The mortgaged properties may consist of detached individual dwellings,
cooperative dwellings, individual condominiums, townhouses, duplexes, row
houses, modular pre-cut/panelized housing, individual units or two- to four-
unit dwellings in planned unit developments, two- to four-family dwellings and
other attached dwelling units. Each mortgaged property, other than a Cooperative
dwelling, will be located on land owned in fee simple by the mortgagor or, if
specified in the related prospectus supplement, land leased by the mortgagor.
Attached dwellings may include structures where each mortgagor owns the land
upon which the unit is built with the remaining adjacent land owned in common,
or dwelling units subject to a proprietary lease or occupancy agreement in an
apartment building owned by a Cooperative. The proprietary lease or occupancy
agreement securing a Cooperative Loan is subordinate, in most cases, to any
blanket mortgage on the related cooperative apartment building or on the
underlying land. Additionally, in the case of a Cooperative Loan, the
proprietary lease or occupancy agreement may be terminated and the cooperative
shares may be cancelled by the Cooperative if the tenant-stockholder fails to
pay maintenance or other obligations or charges owed by the tenant-stockholder.
See "Certain Legal Aspects of Mortgage Loans."
The mortgaged properties may be owner occupied or non-owner occupied
and may include vacation homes, second homes and investment properties. The
percentage of mortgage loans that are owner-occupied will be disclosed in the
related prospectus supplement. The basis for any statement that a given
percentage of the mortgage loans are secured by mortgage properties that are
owner-occupied will be one or more of the following:
O the making of a representation by the mortgagor at origination
of a mortgage loan that the mortgagor intends to use the
mortgaged property as a primary residence,
O a representation by the originator of the mortgage loan (which
representation may be based solely on the above clause, or
O the fact that the mailing address for the mortgagor is the
same as the address of the mortgaged property; and any
representation and warranty in the related pooling and
servicing agreement regarding owner-occupancy may be based
solely on that
information.
Mortgage loans secured by investment properties, including two- to four-unit
dwellings, may also be secured by an assignment of leases and rents and
operating or other cash flow guarantees relating
to the mortgage loans.
In the case of purchase mortgage loans, the Loan-to-Value Ratio, or LTV
ratio, is 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 the mortgage loan and (2) the sales
price for the related mortgaged property, except that in the case of some
employee or preferred customer loans, the denominator of the ratio may be the
sales price.
In the case of some non-purchase mortgage loans including refinance,
modified or converted mortgage loans, the LTV ratio at origination is defined in
most cases as the ratio, expressed as a percentage, of the principal amount of
the mortgage loan to either the appraised value determined in an appraisal
obtained at the time of refinancing, modification or conversion or, if no
appraisal has
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been obtained, the value of the related mortgaged property which value generally
will be supported by either:
o a representation by the related seller as to the value
o a broker's price opinion, automated appraisal, drive by
appraisal or other certification of value
o an appraisal obtained within twelve months prior to the
refinancing, modification or conversion or, under the
streamlined refinancing program described herein, an appraisal
obtained within approximately 24 months prior to the
refinancing, or
o the sales price, if the mortgaged property was purchased
within the previous twelve months.
In the case of some mortgage loans seasoned for over twelve months, the
LTV ratio may be determined at the time of purchase from the related seller
based on the ratio of the current loan amount to the current value of the
related mortgaged property which value may be supported by
either:
o a statistical analysis
o a broker's price opinion or
o an appraisal obtained within 120 days of the purchase date, in
which case the LTV ratio may be significantly lower than the
ratio determined at origination.
The denominator of the applicable ratio described in the preceding
three paragraphs is the appraised value. In connection with a representation by
the related seller as to the value of the mortgaged property, the seller in most
cases 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 the related property at the
time of the origination of the original mortgage loan or (ii) the current LTV
ratio of the mortgage loan generally meets the depositor's underwriting
guidelines. There can be no assurance that the substance of that representation
and warranty will be true.
Some of the mortgage loans which are subject to negative amortization
will have LTV ratios that will increase after origination as a result of their
negative amortization. In the case of some seasoned mortgage loans, the values
used in calculating LTV ratios may no longer be accurate valuations of the
mortgaged properties, particularly where the LTV ratio was not determined at the
time of purchase as described in the four preceding paragraphs. Certain
mortgaged properties may be located in regions where property values have
declined significantly since the time of origination. In addition, the LTV ratio
does not take into account any secondary financing. Under the depositor's
underwriting standards, a seller is usually permitted to provide secondary
financing to a mortgagor contemporaneously with the origination of a mortgage
loan, provided that the combined LTV 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
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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 of the existing mortgage loan.
The mortgage loans may be loans that have been consolidated and/or have
had various terms changed, 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 some costs of construction of or improvements to the related
mortgaged property. The appraised value of this type of mortgaged property will
be based on the assumption that the construction has been completed; no
inspections of the 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 LTV 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 the mortgage loan to be faster than that assumed.
A mortgage pool may contain Convertible Mortgage Loans. If specified in
the related prospectus supplement, upon any conversion, the depositor will
repurchase or Residential Funding Corporation, the applicable subservicer or a
third party will purchase the converted mortgage loan as and to the extent
described in the related prospectus supplement. Alternatively, if specified in
the related prospectus supplement, the depositor, Residential Funding
Corporation or another party specified in the related prospectus supplement may
agree to act as remarketing agent with respect to the 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 converted mortgage loan, the inability of any
remarketing agent to arrange for the sale of the converted mortgage loan and the
unwillingness of the 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, some of the mortgage
loans may be Buy- Down Mortgage Loans under which the monthly payments made by
the mortgagor during the Buy- Down Period will be less than the scheduled
monthly payments on the mortgage loan, the resulting difference to be made up
from:
o Buy-Down Funds contributed by the seller of the mortgaged
property or another source and placed in the Buy-Down Account;
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o if the Buy-Down Funds are contributed on a present value
basis, investment earnings on the Buy-Down Funds; or
o additional buydown funds to be contributed over time by the
mortgagor's employer or another source.
See "Description of the Certificates--Payments on mortgage loans;
Deposits to Certificate Account." Under Residential Funding Corporation's
underwriting standards, the mortgagor under each Buy-Down Mortgage Loan will be
qualified based on the initial reduced monthly payment amount. See "Mortgage
Loan Program--Underwriting Standards" for a discussion of loss and delinquency
considerations relating to Buy-Down Mortgage Loans.
The related prospectus supplement will provide material information
concerning the types and characteristics of the mortgage loans included in the
related mortgage pool. A Current Report on Form 8-K will be available upon
request to holders of the related series of certificates and will be filed,
together with the related pooling and servicing agreement with the Securities
and Exchange Commission within fifteen days after the initial issuance of the
certificates. In the event that mortgage loans are added to or deleted from the
trust after the date of the related prospectus supplement, that addition or
deletion will be noted in the Form 8-K. Additions or deletions of this type, if
any, will be made prior to the closing date.
The depositor 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, usually through
subservicers which are other mortgage servicing institutions, under 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 those 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 for the trust. All
references in this prospectus 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 depositor will make a series of limited representations and
warranties regarding the mortgage loans except as otherwise specified in this
prospectus, 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
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its obligation to enforce some purchase and other obligations of subservicers
and sellers, as described in this prospectus under "Mortgage Loan
Program--Representations by Sellers," "Subservicing by Sellers" and "Description
of the Certificates--Assignment of mortgage loans," and its obligation to make
cash advances in the event of delinquencies in payments on or with respect to
the mortgage loans in amounts described in this prospectus under "Description of
the Certificates--Advances", or under the terms of any mortgage securities. The
obligation of the master servicer to make Advances will be limited to amounts
which the master servicer believes ultimately would be reimbursable out of the
proceeds of liquidation of the mortgage loans or any applicable form of credit
support. See "Description of the Certificates--Advances."
MORTGAGE LOAN PROGRAM
The mortgage loans will have been purchased by the depositor, either
directly or indirectly through Residential Funding Corporation, from sellers.
The mortgage loans will have been originated in accordance with the depositor's
underwriting standards or alternative underwriting criteria as described in this
prospectus under "Underwriting Standards" or as described in the related
prospectus supplement.
UNDERWRITING STANDARDS
GENERAL STANDARDS
The depositor's underwriting standards with respect to the mortgage
loans will conform to those published in Residential Funding Corporation's
Client Guide, as application to the "Jumbo A" program. The underwriting
standards contained in the Client Guide are continuously revised based on
opportunities and prevailing conditions in the residential mortgage market and
the market for the depositor's mortgage pass-through certificates. The mortgage
loans may be underwritten by Residential Funding Corporation or by a designated
third party. In some circumstances, however, the mortgage loans may be
underwritten only by the seller. See "--Client Guide Standards--Qualifications
of Sellers." Residential Funding Corporation 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 depositor's underwriting standards, as well as any
other underwriting standards that may be applicable to any mortgage loans, the
underwriting standards include a set of specific criteria under which the
underwriting evaluation is made. However, the application of 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 the
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
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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 depositor purchases mortgage loans which do not
conform to the underwriting standards contained in the Client Guide. A portion
of the mortgage loans will be purchased in negotiated transactions, which may be
governed by master commitment agreements relating to ongoing purchases of
mortgage loans by Residential Funding Corporation, from sellers who will
represent that the mortgage loans have been originated in accordance with
underwriting standards agreed to by Residential Funding Corporation. Residential
Funding Corporation, on behalf of the depositor, will review only a limited
portion of the mortgage loans in any delivery from the related seller for
conformity with the applicable underwriting standards. A portion of the 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 Corporation. The depositor, or Residential Funding Corporation on behalf
of the depositor, may accept a certification from an insurance company or a
confirmation by a 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 Corporation or the depositor.
The level of review by Residential Funding Corporation or the
depositor, 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:
O factors relating to the experience and status of the seller
O characteristics of the specific mortgage loan, including the
principal balance, the LTV ratio, the loan type or loan
program, and
O 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
depositor.
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 various loan features, including maximum loan amount,
maximum LTV 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 contained in the Client Guide. Those 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
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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 depositor or Residential Funding Corporation. 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
underwriting standards will be equivalent under all circumstances. In the case
of a Designated Seller Transaction, the applicable underwriting standards will
be those of the seller or of the originator of the mortgage loans, and will be
described in the related prospectus supplement.
The depositor, either directly or indirectly through Residential
Funding Corporation, will also purchase mortgage loans from its affiliates,
including GMAC Mortgage Corporation and HomeComings Financial Network, Inc.,
with underwriting standards in accordance with the Client Guide or as otherwise
agreed to by the depositor. However, in some limited circumstances, the mortgage
loans may be employee or preferred customer loans with respect to which, in
accordance with the related 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 Corporation, or its affiliates, in limited circumstances
preferential interest rates may be allowed, and primary insurance policies may
not be required in connection with a LTV ratio over 80%. As to any series of
certificates representing interests in such mortgage loans, credit enhancement
may be provided covering losses on the mortgage loans to the extent that these
losses would be covered by primary insurance policies if obtained, in the form
of a corporate guaranty or in other forms described in this prospectus under
"Description of Credit Enhancement." Neither the depositor nor Residential
Funding Corporation will review any affiliate's mortgage loans for conformity
with the underwriting standards contained in the Client Guide.
CLIENT GUIDE STANDARDS
The following is a brief description of the underwriting standards set
forth in the Client 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 that 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.
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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 in this prospectus under "The Mortgage Pools--The Mortgage Loans."
Credit Scores are obtained by many mortgage lenders in connection with
mortgage loan applications to help assess a borrower's credit-worthiness. In
addition, Credit Scores may be obtained by Residential Funding Corporation after
the origination of a mortgage loan if the seller does not provide to Residential
Funding Corporation a Credit Score. Credit Scores are obtained from credit
reports provided by various credit reporting organizations, each of which may
employ differing computer models and methodologies.
The Credit Score is designed to assess a borrower's credit history at a
single point in time, using objective information currently on file for the
borrower at a particular credit reporting organization. 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, in most cases, a Credit Score does
not take into consideration the differences between mortgage loans and consumer
loans, or the specific characteristics of the related mortgage loan, including
the LTV 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 or that any mortgagor's Credit Score would not be lower if obtained as of
the date of the related prospectus supplement.
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, including
property taxes and hazard insurance, and other financial obligations and monthly
living expenses. The depositor will underwrite ARM loans, Buy-Down Mortgage
Loans, graduated payment mortgage loans and any 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
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of the increase even though the borrowers may not be able to make the higher
payments at the time of origination. The mortgage rate in effect from the
origination date of an ARM loan or other types of loans to the first adjustment
date are likely to be lower, and may be significantly lower, than the sum of the
then applicable index and Note Margin. Similarly, the amount of the monthly
payment on Buy-Down 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 those 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 depend on the borrower's ability to obtain
refinancing or to sell the mortgaged property prior to the maturity of the
Balloon Loan, and there can be no assurance that refinancing will be available
to the borrower or that a sale will be possible.
If so specified in the related prospectus supplement, a mortgage pool
may include mortgage loans that have been underwritten pursuant to a streamlined
documentation refinancing program, contained in the Client Guide. This program
permits mortgage loans to be refinanced with only limited verification or
updating of the underwriting information that was obtained at the time that the
original mortgage loan was originated. For example, a new appraisal of the
mortgaged property may not be required if the refinanced mortgage loan was
originated up to approximately 24 months prior to the refinancing. In addition,
the mortgagor's income may not be verified, although continued employment is
required to be verified. In some cases, the mortgagor may be permitted to borrow
up to 105% of the outstanding principal amount of the original mortgage loan.
Each mortgage loan underwritten pursuant to this program will be treated as
having been underwritten pursuant to the same underwriting documentation program
as the mortgage loan that it refinanced, including for purposes of the
disclosure in the related prospectus supplement.
The underwriting standards set forth in the Client Guide will be varied
in appropriate cases, including "limited" or "reduced loan documentation"
mortgage loan programs. Some reduced loan documentation programs, for example,
do not require income, employment or asset verifications. In most cases, in
order to be eligible for a reduced loan documentation program, the LTV ratio
must meet applicable guidelines, the borrower must have a good credit history
and the borrower's eligibility for this type of 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 a representation and warranty, neither the depositor,
Residential Funding Corporation 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 LTV ratio with respect to such mortgage loan
will be higher than the LTV ratio set forth with respect thereto in the related
prospectus supplement.
In its evaluation of mortgage loans that have more than twelve months
of payment experience, Residential Funding Corporation tends to place greater
weight on payment history and
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may take into account market and other economic trends while placing less weight
on underwriting factors traditionally applied to newly originated mortgage
loans. Some mortgage loans seasoned for over twelve months may be underwritten
for purchase by Residential Funding Corporation based on the borrower's credit
score and payment history, with no current income verification, and under
alternative property valuation methods described in this prospectus 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 depositor'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 the value will support the loan balance in the future.
QUALIFICATIONS OF SELLERS
Except with respect to Designated Seller Transactions, each seller,
other than the FDIC and investment banking firms, will have been approved by
Residential Funding Corporation for participation in Residential Funding
Corporation's loan purchase program. In determining whether to approve a seller
for participation in the loan purchase program, Residential Funding Corporation
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 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,
that institution may continue to be treated as a seller. Any event of this type
may adversely affect the ability of any seller to repurchase mortgage loans in
the event of a breach of a representation or warranty which has not been cured.
Residential Funding Corporation monitors sellers that it knows to be
under control of the FDIC or are insolvent, otherwise in receivership or
conservatorship or financially distressed. Any seller that is under control of
the FDIC or insolvent 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.
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As specified in the related prospectus supplement, the qualifications
required of sellers for approval by Residential Funding Corporation 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 depositor, Residential
Funding Corporation 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
Except as described in the two preceding paragraphs, each seller will
make representations and warranties with respect to the mortgage loans sold by
it directly or indirectly to the depositor. The representations and warranties
generally include, among other things, that at the time of the sale by the
seller to Residential Funding Corporation of each mortgage loan:
o 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 depositor or Residential Funding Corporation
o the seller has good title to each mortgage loan and each
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
o 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
o each mortgaged property is free from damage and in good repair
o there are no delinquent tax or, to the best of the seller's
knowledge, assessment liens against the mortgaged property
o each mortgage loan is current as to all required payments
o if a primary insurance policy is required with respect to a
mortgage loan, the mortgage loan is the subject of a primary
insurance policy; and
o each mortgage loan was made in compliance with, and is
enforceable under, all applicable local, state and federal
laws in all material respects.
In the event of a breach of a seller's representation or warranty that
materially adversely affects the interests of the certificateholders in a
mortgage loan, the related seller will be obligated to repurchase that mortgage
loan as described in this prospectus under "Mortgage Loan
Program--Representations by Sellers". However, there can be no assurance that a
seller will honor its obligation to repurchase any mortgage loan as to which
that type of breach of a representation or
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warranty arises. Any costs associated with enforcing the seller's obligation to
repurchase that mortgage loan will be borne by the related trust.
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. In most cases,
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 relating to a
mortgage loan will have been made as of the date on which that seller sold the
mortgage loan to the depositor or Residential Funding Corporation; the date as
of which the 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 depositor or Residential Funding Corporation,
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 depositor from sellers through Residential Funding Corporation,
Residential Funding Corporation, except in the case of a Designated Seller
Transaction or as to mortgage loans underlying any mortgage securities, will
also have made limited representations and warranties regarding the mortgage
loans to the depositor at the time, just prior to the initial issuance of the
related series of certificates, that they are sold to the depositor. These
representations and warranties will include, among other things, that:
o 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;
o except in the case of Cooperative Loans, either a policy of
title insurance in the form and amount required by the Client
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 depositor;
o to the best of Residential Funding Corporation's knowledge, if
required, the mortgage loans are the subject of a primary
insurance policy;
o Residential Funding Corporation 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;
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o each mortgaged property is free of damage and is in good
repair;
o each mortgage loan complied in all material respects with all
applicable local, state and federal laws at the time of
origination;
o except as otherwise indicated in the related prospectus
supplement, no mortgage loan is 30 or more days 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
o there is no delinquent tax or, to the best of Residential
Funding Corporation's knowledge, assessment lien against any
mortgaged property.
In the event of a breach of a representation or warranty made by
Residential Funding Corporation that materially adversely affects the interests
of the certificateholders in a mortgage loan, Residential Funding Corporation
will be obligated to repurchase or substitute for that mortgage loan as
described below. In addition, Residential Funding Corporation 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 the Mortgage and 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
depositor delivers to the trustee or the custodian an affidavit certifying that
the original mortgage note has been lost or destroyed, if the mortgage loan
subsequently is in default and the enforcement of the mortgage loan or of the
related mortgage is materially adversely affected by the absence of the original
mortgage note, Residential Funding Corporation will be obligated to repurchase
or substitute for that mortgage loan in the manner described in this prospectus
under "Mortgage Loan Program--Representations by Sellers". However, Residential
Funding Corporation will not be required to repurchase or substitute for any
mortgage loan if the circumstances giving rise to that 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
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 Corporation nor any seller will be required to purchase or
substitute for any mortgage loan as a result of this type of prepayment or
modification.
The depositor 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
Corporation insofar as the agreement relates to the representations and
warranties made by a seller or Residential Funding Corporation, as the case may
be, relating to the mortgage loan and any remedies provided for with respect to
any breach of the representations and
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warranties. If a seller or Residential Funding Corporation, 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 that mortgage loan within 90 days after notice from the
master servicer, the seller or Residential Funding Corporation, as the case may
be, will be obligated to purchase the mortgage loan at the purchase price set
forth in the related pooling and servicing agreement which purchase price will
in most cases 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 as master servicing compensation or
subservicing compensation, as applicable, and, if applicable, the Excluded
Spread.
As to any mortgage loan required to be purchased by Residential Funding
Corporation as provided above, rather than repurchase the mortgage loan,
Residential Funding Corporation may, at its sole option, remove the deleted
mortgage loan from the trust and cause the depositor to substitute in its place
a qualified substitute mortgage loan; however, this substitution must be
effected within 120 days of the date of the initial issuance of the certificates
with respect to a trust for which no REMIC election is to be made. With respect
to a trust for which a REMIC election is to be made, except as otherwise
provided in the prospectus supplement relating to a series of certificates, any
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 the
substitution would cause the trust to not qualify as a REMIC or result in a
prohibited transaction tax under the Internal Revenue Code.
Any qualified substitute mortgage loan generally will, on the date of
substitution:
o have an outstanding principal balance, after deduction of the
principal portion of the monthly payment due in the month of
substitution, not in excess of the outstanding principal
balance of the deleted mortgage loan, with the amount of any
shortfall to be deposited in a Custodial Account in the month
of substitution for distribution to the certificateholders;
o 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;
o have an LTV ratio at the time of substitution no higher than
that of the deleted mortgage loan at the time of substitution;
o have a remaining term to maturity not greater than, and not
more than one year less than, that of the deleted mortgage
loan; and
o 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,
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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 Corporation, as the case may be, fails to honor that
obligation. The master servicer will be entitled to reimbursement for any costs
and expenses incurred in pursuing any 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 described
in the preceding sentence, may negotiate and enter into one or more settlement
agreements with that seller that could provide for, among other things, the
purchase of only a portion of the affected mortgage loans or coverage of some
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 remedies if it determines that one remedy is more likely to result in a
greater recovery. In accordance with the above described practices, the master
servicer 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 the 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 depositor's or Residential Funding
Corporation's representations has occurred, the seller's purchase obligation
will not become an obligation of the depositor or Residential Funding
Corporation. In the case of a Designated Seller Transaction where the seller
fails to repurchase a mortgage loan and neither the depositor, Residential
Funding Corporation nor any other entity has assumed the representations and
warranties, the repurchase obligation of the seller will not become an
obligation of the depositor or Residential Funding Corporation. 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 Corporation in its capacity as a seller of mortgage loans to the
depositor, or for any other event giving rise to the obligations.
Neither the depositor 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 those obligations with
respect to mortgage loans. This type of default by a seller is not a default by
the depositor 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, or by the depositor or the master
servicer, as described in this prospectus under "Description of the
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Certificates--Assignment of mortgage loans," Residential Funding Corporation,
the depositor or the master servicer may have a purchase or substitution
obligation. Any mortgage loan not so purchased or substituted for shall remain
in the related trust 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 Corporation's consent to the transfer of subservicing rights
relating to any mortgage loans to a successor servicer, Residential Funding
Corporation may release that seller from liability under its representations and
warranties described above, upon the assumption of the successor servicer of the
seller's liability for the representations and warranties as of the date they
were made. In that event, Residential Funding Corporation's rights under the
instrument by which the successor servicer assumes the seller's liability will
be assigned to the trustee, and the successor servicer shall be deemed to be the
"SELLER" for purposes of the foregoing provisions.
SUBSERVICING
The seller of a mortgage loan will usually act as the subservicer for
that mortgage loan under a subservicing agreement between Residential Funding
Corporation and the subservicer unless servicing is released to the master
servicer or has been transferred to a servicer approved by Residential Funding
Corporation. The master servicer may, but is not obligated to, assign the
related 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
some mortgage loans sold in negotiated transactions will usually vary from the
form filed herewith to accommodate the different features of the mortgage loans
included in a Designated Seller Transaction and to vary the parameters
constituting an event of default. The following description describes all
material terms and provisions relating to the subservicing agreements. The
description does not purport to be complete and is subject to, 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 any subservicing agreement
will be a contract solely between the master servicer and the subservicer, the
pooling and servicing agreement under which a series of certificates is issued
will provide that, if for any reason the master servicer for that 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 that subservicing agreement.
With the approval of the master servicer, a subservicer may delegate
its servicing obligations to third-party servicers, but that subservicer will
remain obligated under the related subservicing agreement. Each subservicer will
be required to perform the customary functions of a servicer,
including:
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o collection of payments from mortgagors and remittance of those
collections to the master servicer;
o maintenance of hazard insurance and filing and settlement of
claims thereunder, subject in some cases to the right of the
master servicer to approve in advance any such settlement;
o maintenance of escrow or impoundment accounts of mortgagors
for payment of taxes, insurance and other items required to be
paid by the mortgagor under the mortgage loan;
o 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; o attempting to
cure delinquencies; and o maintaining accounting records
relating to the mortgage loans.
A subservicer may also be required to supervise foreclosures and
inspect and manage mortgaged properties. A subservicer will also be obligated to
make Advances to the master servicer for 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 some 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 that 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. A subservicer may, as
limited by the terms of the related prospectus supplement, transfer its
servicing obligations to another entity that has been approved for participation
in Residential Funding Corporation'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 some
expenditures which it makes, in most cases 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
depositor or Residential Funding Corporation, 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."
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Each subservicer will be required to agree to indemnify the master
servicer for any liability or obligation sustained by the master servicer in
connection with any act or failure to act by the subservicer in its servicing
capacity. Each subservicer is required to maintain a fidelity bond and an errors
and omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the master servicer.
Each subservicer will be required to service each mortgage loan under
the terms of the subservicing agreement for the entire term of that mortgage
loan, unless the subservicing agreement is earlier terminated by the master
servicer or unless servicing is released to the master servicer. In accordance
with applicable law, the master servicer may terminate a subservicing agreement
immediately upon the giving of notice upon stated events, including the
violation of the subservicing agreement by the subservicer, or upon sixty days'
notice to the subservicer without cause upon payment of an amount equal to
approximately 2% of the aggregate outstanding principal balance of all mortgage
loans, including the mortgage loans, serviced by such subservicer under 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 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 Corporation the liability for such representations and
warranties will not be assumed by the new subservicer. In the event of this type
of assumption, the master servicer may in the exercise of its business judgment
release the terminated subservicer from liability in respect of the
representations and warranties. Any amendments to a subservicing agreement or to
a new subservicing agreement may contain provisions different from those
described in this prospectus which are in effect in the original subservicing
agreements. However, the pooling and servicing agreement for each trust will
provide that any amendment or new agreement may not be inconsistent with or
violate the related 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 some instances, two or more series of certificates, will be issued under
a pooling and servicing agreement, similar to one of the forms filed as an
exhibit to the registration statement under the Securities Act of 1933, as
amended, with respect to the certificates of which this prospectus is a part.
Each pooling and servicing agreement will be filed with the Securities and
Exchange Commission as an exhibit to a Form 8-K. The following summaries
(together with additional summaries under "The Pooling and Servicing Agreement"
below) describe all material terms and 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
and the related prospectus supplement.
Each series of certificates may consist of any one or a combination of
the following:
o a single class of certificates;
o two or more classes of senior certificates, of which one or
more classes of certificates may be senior in right of payment
to any other class or classes of certificates subordinated
thereto, and as to which some classes of senior or subordinate
certificates may be senior to other classes of senior or
subordinate certificates, as described in the respective
prospectus supplement;
o one or more classes of mezzanine certificates which are
subordinate certificates but which are senior to other classes
of subordinate certificates in respect of such distributions
or losses;
o 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;
o 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 some accrued interest will
not be distributed but rather will be added to their principal
balance on the distribution date, which is the 25th day, or,
if the 25th day is not a business day, the next business day,
of each month, commencing in the month following the month in
which the related cut-off date occurs; or o other types of
classes of certificates, as described in the related
prospectus supplement.
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Credit support for each series of certificates will be provided by a
mortgage pool insurance policy, special hazard insurance policy, bankruptcy
policy, 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 certificate registrar appointed under the related pooling and
servicing agreement to register the certificates. 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 refers to the entity whose name
appears on the records of the certificate registrar or, if applicable, a
transfer agent, as the registered holder of the certificate, except as otherwise
indicated in the related prospectus supplement.
If issued in book-entry form, the classes of a series of certificates
will be initially issued through the book-entry facilities of The Depository
Trust Company, or DTC, or CEDEL Bank, SA or the Euroclear System (in Europe) if
they are participants of those systems, or indirectly through organizations
which are participants in those systems, or through any other depository or
facility as may be specified in the related prospectus supplement. As to any
class of book-entry certificates so issued, the record holder of those
certificates will be DTC's nominee. CEDEL Bank, SA and Euroclear System will
hold omnibus positions on behalf of their participants through customers'
securities accounts in CEDEL Bank, SA's and Euroclear System's names on the
books of their respective depositaries, which in turn will hold those positions
in customers' securities accounts in the depositaries' names on the books of
DTC. DTC is a limited-purpose trust company organized under the laws of the
State of New York, which holds securities for its DTC participants, which
include securities brokers and dealers, banks, trust companies and clearing
corporations. DTC together with the CEDEL Bank, SA and Euroclear System
participating organizations facilitates the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in the accounts of participants. Other institutions that are not
participants but indirect participants which clear through or maintain a
custodial relationship with participants have indirect access to DTC's clearance
system.
Unless otherwise specified in the related prospectus supplement, no
beneficial owner in an interest in any book-entry certificate will be entitled
to receive a certificate representing that interest in registered, certificated
form, unless either (i) DTC ceases to act as depository for that certificate and
a successor depository is not obtained, or (ii) the depositor elects in its sole
discretion to
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discontinue the registration of the 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 their 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 the 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 the
certificates, may be limited because of the lack of physical certificates
evidencing the certificates and because DTC may act only on behalf of
participants.
Because of time zone differences, the securities account of a CEDEL
Bank, SA or Euroclear System participant as a result of a transaction with a DTC
participant, other than a depositary holding on behalf of CEDEL Bank, SA or
Euroclear System, will be credited during a subsequent securities settlement
processing day, which must be a business day for CEDEL Bank, SA or Euroclear
System, as the case may be, immediately following the DTC settlement date.
Credits or any transactions in those securities settled during this processing
will be reported to the relevant Euroclear System participant or CEDEL Bank, SA
participants on that business day. Cash received in CEDEL Bank, SA or Euroclear
System as a result of sales of securities by or through a CEDEL Bank, SA
participant or Euroclear System participant to a DTC participant, other than the
depositary for CEDEL Bank, SA or Euroclear System, will be received with value
on the DTC settlement date, but will be available in the relevant CEDEL Bank, SA
or Euroclear System 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 Bank, SA participants and Euroclear System participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL Bank, SA
participants or Euroclear System participants, on the other, will be effected in
DTC in accordance with DTC rules on behalf of the relevant European
international clearing system by the relevant depositaries; however, the cross
market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in that system in
accordance with its rules and procedures and within its established deadlines
(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
Bank, SA participants and Euroclear System participants may not deliver
instructions directly to the depositaries.
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CEDEL Bank, SA, as a professional depository, holds securities for its
participating organizations and facilitates the clearance and settlement of
securities transactions between CEDEL Bank, SA participants through electronic
book-entry changes in accounts of CEDEL Bank, SA participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL Bank, SA is subject to regulation by the Luxembourg Monetary
Institute.
Euroclear System was created to hold securities for participants of
Euroclear System and to clear and settle transactions between Euroclear System
participants through simultaneous electronic book-entry delivery against
payment, thereby eliminating the need for physical movement of certificates and
any risk from lack of simultaneous transfers of securities and cash. Euroclear
System operator is the Brussels, Belgium office of Morgan Guaranty Trust Company
of New York, under contract with the clearance cooperative, Euroclear System
Clearance Systems S.C., a Belgian cooperative corporation. All operations are
conducted by the Euroclear System operator, and all Euroclear System securities
clearance accounts and Euroclear System cash accounts are accounts with the
Euroclear System operator, not the clearance cooperative.
The clearance cooperative establishes policy for Euroclear System on
behalf of Euroclear System participants. The Euroclear System operator is the
Belgian branch of a New York banking corporation which is a member bank of the
Federal Reserve System. As a result, it is regulated and examined by the Board
of Governors of the Federal Reserve System and the New York State Banking
Department, as well as the Belgian Banking Commission. Securities clearance
accounts and cash accounts with the Euroclear System operator are governed by
the terms and conditions Governing Use of Euroclear System and the related
operating procedures of the Euroclear System and applicable Belgian law. The
terms and conditions govern transfers of securities and cash within Euroclear
System, withdrawals of securities and cash from Euroclear System, and receipts
of payments with respect to securities in Euroclear System. All securities in
Euroclear System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts.
Distributions on the book-entry certificates will be forwarded by the
trustee to DTC, and DTC will be responsible for forwarding those payments to
participants, each of which will be responsible for disbursing the payments to
the beneficial owners it represents or, if applicable, to indirect participants.
Accordingly, beneficial owners may experience delays in the receipt of payments
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 those actions. None of the master servicer, the
depositor, the trustee or any of their respective affiliates will have any
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the book-entry certificates, or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
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ASSIGNMENT OF TRUST ASSETS
At the time of issuance of a series of certificates, the depositor will
cause the mortgage loans or mortgage securities and any other assets being
included in the related trust 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
the 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 that assignment, deliver a series of
certificates to the depositor 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. The 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 LTV ratio at origination or
modification, without regard to any secondary financing.
If so specified in the related prospectus supplement, and in accordance
with the rules of membership of Merscorp, Inc. and/or Mortgage Electronic
Registration Systems, Inc. or, MERS, assignments of the mortgages for the
mortgage loans in the related trust will be registered electronically through
Mortgage Electronic Registration Systems, Inc., or MERS(R) System. With respect
to mortgage loans registered through the MERS(R) System, MERS shall serve as
mortgagee of record solely as a nominee in an administrative capacity on behalf
of the trustee and shall not have any interest in any of those mortgage loans.
In addition, the depositor will, as to each mortgage loan other than
mortgage loans underlying any mortgage securities, deliver to the trustee, or to
the custodian, a set of legal documents relating to each mortgage loan that are
in possession of the depositor, including:
o 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;
o the mortgage, except for any mortgage not returned from the
public recording office, with evidence of recording indicated
thereon or, in the case of a Cooperative Loan, on the related
financing statement;
o an assignment in recordable form of the mortgage, or evidence
that the mortgage is held for the trustee through the MERS(R)
System or, with respect to a Cooperative Loan, an assignment
of the related proprietary lease or occupancy agreement; and
o if applicable, any riders or modifications to the mortgage
note and mortgage, together with any other documents at such
times as described in the related pooling and servicing
agreement.
The 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 may include mortgage loans where the
original mortgage note is not delivered to the trustee if the depositor delivers
to the trustee or the custodian a copy or a duplicate original of the mortgage
note,
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together with an affidavit certifying that the original mortgage note has been
lost or destroyed. With respect to those mortgage loans, the trustee or its
nominee may not be able to enforce the mortgage note against the related
borrower. Residential Funding Corporation will agree to repurchase or substitute
for that type of mortgage loan in some circumstances (see "Mortgage Loan
Program--Representations by Sellers").
In the event that, with respect to any mortgage loan, the depositor
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 depositor will deliver or cause to be delivered to the trustee or the
custodian a true and correct photocopy of the mortgage or assignment. The
depositor will deliver or cause to be delivered to the trustee or the custodian
such Mortgage or assignment with evidence of recording indicated thereon after
receipt thereof from the public recording office or from the related
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, 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 depositor or the originator of the 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 those mortgage loans either a Direct Puerto Rico Mortgage or an
Endorsable Puerto Rico Mortgage. Endorsable Puerto Rico Mortgages do not require
an assignment to transfer the related lien. Rather, transfer of those mortgages
follows an effective endorsement of the related mortgage note and, therefore,
delivery of the assignment referred to in the third clause listed in the third
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 the assignment would be delivered to the trustee, or the
custodian.
Assignments of the mortgage loans to the trustee will be recorded in
the appropriate public recording office, except for mortgages held under the
MERS(R) System or in states where, in the opinion of counsel acceptable to the
trustee, the recording is not required to protect the trustee's interests in the
mortgage loan against the claim of any subsequent transferee or any successor to
or creditor of the depositor or the originator of the mortgage loan, or except
as otherwise specified in the related prospectus supplement.
REVIEW OF MORTGAGE LOANS
The trustee or the custodian will hold documents in trust for the
benefit of the certificateholders, and within 45 days after receipt thereof,
will review such documents. 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 depositor, the former of which shall notify the related
subservicer
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or seller, as the case may be. If the subservicer or seller does not cure the
omission or defect within 60 days after notice is given to the master servicer,
the subservicer or seller, as the case may be, will be obligated to purchase
within 90 days of such notice the related mortgage loan from the trustee at its
purchase price or, 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 in this prospectus under "Mortgage Loan Program--Representations by
Sellers" but in accordance with the provisions described in this prospectus
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. Neither the master servicer nor the depositor will
be obligated to purchase or substitute for a mortgage loan if the subservicer or
seller, as the case may be, defaults on its obligation to do so. 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.
The trustee will be authorized at any time to appoint one or more
custodians under a custodial agreement to maintain possession of and review
documents relating to the mortgage loans as the agent of the trustee. The
identity of any custodian 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 depositor will make limited representations and warranties as to
the types and geographical concentrations of the mortgage loans and as to the
accuracy, in all material respects, of some identifying information in respect
of each such mortgage loan, for example, original LTV ratio, principal balance
as of the cut-off date, mortgage rate and maturity. Upon a breach of any of this
type of representation which materially adversely affects the interests of the
certificateholders in a mortgage loan, the depositor will be obligated to cure
the breach in all material respects, to purchase the mortgage loan at its
purchase price or to substitute for the mortgage loan a qualified substitute
mortgage loan in accordance with the provisions for substitution by Residential
Funding Corporation as described in this prospectus under "Mortgage Loan
Program--Representations by Sellers." However, the depositor 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 that breach also
constitutes fraud in the origination of the related mortgage loan. This purchase
or substitution obligation constitutes the sole remedy available to
certificateholders or the trustee for a breach of this type of representation by
the depositor. Any mortgage loan not so purchased or substituted for shall
remain in the related trust.
The master servicer will make 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 of this type of
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
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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 the mortgage loan, or to substitute for the mortgage loan a qualified
substitute mortgage loan in accordance with the provisions for substitution
described in this prospectus under "Mortgage Loan Program--Representations by
Sellers." This purchase or substitution obligation will constitute the sole
remedy available to certificateholders or the trustee for a breach of this type
of representation by the master servicer. Any mortgage loan not so purchased or
substituted for shall remain in the related trust.
In accordance with the terms of each pooling and servicing agreement,
the master servicer, either directly or through subservicers, will service and
administer the mortgage loans assigned to the trustee.
SPREAD
The depositor, the master servicer or any of their affiliates, or any
other entity 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 portion of interest in this manner will
be disclosed in the related prospectus supplement. This payment may be in
addition to any other payment, including a servicing fee, that the specified
entity is otherwise entitled to receive with respect to the mortgage loans or
mortgage securities. Any payment of this sort 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 Excess Spread or Excluded Spread. The interest portion of a Realized
Loss or Extraordinary Loss and any partial recovery of interest in respect of
the mortgage loans or mortgage securities will be allocated between the owners
of any Excess Spread or Excluded Spread and the certificateholders entitled to
payments of interest as provided in the applicable pooling and servicing
agreement.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO CERTIFICATE ACCOUNT
Each subservicer servicing a mortgage loan under a subservicing
agreement will establish and maintain an Subservicing Account. Except as
otherwise permitted by the applicable nationally recognized statistical rating
agency or agencies maintaining a rating on the certificates of that series, a
Subservicing Account 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 Corporation may be held
therein.
A subservicer is required to deposit into its Subservicing Account on a
daily basis all amounts described in this prospectus 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
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day prior to the determination date referred to below and is currently the 18th
day of each month or, if that 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, some
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 by deed in lieu of foreclosure. The certificateholders are
not entitled to any of these 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 the subservicer
prior to the first day of the following month, from the date of application of
the payment to the first day of the following month.
The master servicer will deposit or will cause to be deposited into the
Custodial Account payments and collections received by it subsequent to the
cut-off date, other than payments due on or before the cut-off date, as
specifically described in the related pooling and servicing agreement, which,
except as otherwise provided therein, generally will include the following:
o all payments on account of principal of the mortgage loans
comprising a trust;
o all payments on account of interest on the mortgage loans
comprising that trust, net of the portion of each payment
thereof retained by the subservicer, if any, as its servicing
or other compensation;
o liquidation proceeds;
o all amounts, net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed Servicing Advances
made, by the related subservicer, received and retained,
including Insurance Proceeds or proceeds from any alternative
arrangements established in lieu of any such insurance and
described in the applicable prospectus supplement, other than
proceeds to be applied to the restoration of the related
property or released to the mortgagor in accordance with the
master servicer's normal servicing procedures;
o any Buy-Down Funds and, if applicable, investment earnings
thereon, required to be paid to certificateholders, as
described in this prospectus under "Description of the
Certificates--Payments on Mortgage Loans; Deposits to
Certificate Account";
o all proceeds of any mortgage loan in the trust purchased or,
in the case of a substitution, amounts representing a
principal adjustment, by the master servicer, the depositor,
Residential Funding Corporation, any subservicer or seller or
any other person under the terms of the pooling and servicing
agreement;
o 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 in this
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prospectus under "Description of the Certificates--Payments on
Mortgage Loans; Deposits to Certificate Account"; and
o any amounts required to be transferred from the Certificate
Account to the Custodial Account.
See "Mortgage Loan Program--Representations by Sellers," "--Assignment
of mortgage loans" above and "Purchase Obligations."
In addition to the Custodial Account, the master servicer will
establish and maintain the Certificate Account). Both the Custodial Account and
the Certificate Account must be either:
o maintained with a depository institution whose debt
obligations at the time of any deposit therein are rated by
any rating agency that rated any certificates of the related
series not less than a specified level comparable to the
rating category of the certificates;
o an account or accounts the deposits in which are fully insured
to the limits established by the FDIC, provided that any
deposits not so insured shall be otherwise maintained so that,
as evidenced by an opinion of counsel, the certificateholders
have a claim with respect to the funds in such accounts or a
perfected first priority security interest in any collateral
securing those funds that is superior to the claims of any
other depositors or creditors of the depository institution
with which the accounts are maintained;
o in the case of the Custodial Account, a trust account or
accounts maintained in either the corporate trust department
or the corporate asset services department of a financial
institution which has debt obligations that meet specified
rating criteria;
o in the case of the Certificate Account, a trust account or
accounts maintained with the trustee; or
o any 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 some 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 in this prospectus
under "Description of the Certificates--Payments on Mortgage Loans; Deposits to
Certificate Account". The Custodial Account may contain funds relating to more
than one series of 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 described 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 that distribution date. The
master servicer or the trustee will also deposit or cause to be deposited into
the Certificate Account:
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o the amount of any Advances made by the master servicer as
described herein under "--Advances;"
o 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;
o 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;
o any distributions received on any mortgage securities included
in the trust; and
o any other amounts as described 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 typically 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 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 the 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 described in this prospectus 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 those funds under the related buydown plan or
(ii) if the Buy-Down Funds are to be deposited on a discounted basis, that
amount of Buy-Down Funds which, together with investment earnings thereon at a
rate as set forth in the Client 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 depositor will be obligated to add
to any discounted Buy- Down Funds any of its own funds should investment
earnings prove insufficient to maintain the scheduled level of payments. To the
extent that any insufficiency is not recoverable from the 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
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subservicing agreement described in this prospectus under "Description of the
Certificates--Payments on Mortgage Loans; Deposits to Certificate Account" 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 the 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.
If the mortgagor on a Buy-Down Mortgage Loan prepays the mortgage loan
in its entirety during the Buy-Down Period, the subservicer will withdraw from
the Buy-Down Account and remit to the mortgagor or any other designated party in
accordance with the related buydown plan any Buy- Down Funds remaining in the
Buy-Down Account. If a prepayment by a 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, in most cases, 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 some mortgage loan programs. Any Buy-Down
Funds so remitted to the master servicer in connection with a prepayment
described in the preceding sentence will be deemed to reduce the amount that
would be required to be paid by the mortgagor to repay fully the related
mortgage loan if the mortgage loan were not subject to the buydown plan.
Any investment earnings remaining in the Buy-Down Account after
prepayment or after termination of the Buy-Down Period will be remitted to the
related mortgagor or any other designated party under 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 that Buy-Down mortgage loan is sold in
liquidation either by the master servicer, the primary insurer, the pool insurer
under the mortgage pool insurance policy or any other insurer, the subservicer
will be required to withdraw from the Buy-Down Account the Buy-Down Funds and
all investment earnings thereon, if any, and remit the same to the master
servicer or, if instructed by the master servicer, pay the same to the primary
insurer or the pool insurer, as the case may be, if the mortgaged property is
transferred to that insurer and the insurer pays all of the loss incurred 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 described in the related
pooling and servicing agreement, which (except as otherwise provided therein)
will include the following:
o to make deposits to the Certificate Account in the amounts and
in the manner provided in the pooling and servicing agreement
and described in this prospectus under "Payments on Mortgage
Loans; Deposits to Certificate Account;"
o to reimburse itself or any subservicer for Advances, or for
Servicing Advances, out of late payments or collections on the
mortgage loan with respect to which those Advances or
Servicing Advances were made;
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o to pay to itself or any subservicer unpaid Servicing Fees and
Subservicing Fees, out of payments or collections of interest
on each mortgage loan;
o to pay to itself as additional servicing compensation any
investment income on funds deposited in the Custodial Account,
any amounts remitted by subservicers as interest on partial
prepayments on the 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;
o to pay to itself, a subservicer, Residential Funding
Corporation, the depositor or the seller all amounts received
with respect to each mortgage loan purchased, repurchased or
removed under 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;
o to pay the depositor 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;
o to reimburse itself or any subservicer for any Nonrecoverable
Advance, limited by the terms of the pooling and servicing
agreement as described in the related prospectus supplement;
o to reimburse itself or the depositor for other expenses
incurred for which it or the depositor is entitled to
reimbursement, including reimbursement in connection with
enforcing any repurchase, substitution or indemnification
obligation of any seller, or against which it or the depositor
is indemnified under the pooling and servicing agreement;
o to withdraw any amount deposited in the Custodial Account that
was not required to be deposited therein; and
o to clear the Custodial Account of amounts relating to the
corresponding mortgage loans in connection with the
termination of the trust under the pooling and servicing
agreement, as described in "The Pooling and Servicing
Agreement--Termination; Retirement of Certificates."
DISTRIBUTIONS
Beginning on the distribution date in the month next succeeding the
month in which the cut-off date occurs, or any other date as may be set forth in
the 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 distributions will be made to the persons who are
registered as the holders of the certificates at the close of business on the
last business day of the preceding month.
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Distributions will be made in immediately available funds, by wire
transfer or otherwise, to the account of a certificateholder at a bank or other
entity having appropriate facilities therefor, if the 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 that 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 the
certificates at the office or agency of the trustee specified in the notice to
the certificateholders. Distributions will be made to each certificateholder in
accordance with that holder's percentage interest in a particular 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 classes of strip certificates, may have a different
specified interest rate, or pass-through rate, which may be a fixed, variable or
adjustable pass-through rate, or any combination of two or more pass-through
rates. The 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 that 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 last
day of the preceding month of a class of certificates, an amount equal to the
percentage interest represented by the certificate held by that holder
multiplied by that class's Distribution Amount.
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 of principal, and any schedule or formula or other
provisions applicable to that determination, including distributions among
multiple classes of senior certificates or subordinate certificates, shall be
described in the related prospectus supplement. Distributions of principal on
any class of certificates will be made on a pro rata basis among all of the
certificates of that class unless otherwise set forth in the related prospectus
supplement.
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Except as otherwise provided in the related pooling and servicing
agreement, on or prior to the 20th day, or, if the 20th day is not a business
day, the next business day, of the month of distribution, 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
with information 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 1999:
DATE NOTE DESCRIPTION
- ---- ---- -----------
June 1 (A) Cut-off date.
Subservicers receive any Principal
June 2-30 (B) Prepayments and applicable interest thereon.
June 30 (C) record date.
The due dates for payments on a
June 2-July 1 (D) mortgage loan.
Subservicers remit to the Master
Servicer scheduled payments of principal and
interest due during the related Due Period and
July 16 (E) received or advanced by them.
July 20 (F) Determination date.
July 26 (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 that month. A series
of certificates may have different prepayment periods, cut-off dates, record
dates, remittance dates, determination dates and/or distribution dates
than those set forth above.
- -------------
(A) The initial principal balance of the mortgage pool will be the aggregate
principal balance of the mortgage loans at the close of business on June 1
after deducting principal payments due on or before that 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.
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(B) Any 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 from
such prepaid amounts for the month in which the partial Principal
Prepayments were received.
(C) Distributions on July 26--because July 25, 1999 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 those payments. Funds
required to be remitted from the Subservicing Accounts to the master
servicer will be remitted on July 16-- because July 18, 1999 is not a
business day--together with any required Advances by the subservicers,
except that Principal Prepayments in full and 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 26 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 16, 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 in clause (B) above. Distributions to the holders of senior
certificates, if any, on July 26 may include 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 26, 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 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 the
mortgage securities.
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ADVANCES
As to each series of certificates, the master servicer will make
Advances on or before each distribution date, but only to the extent that the
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 in this prospectus under "--Collection and Other Servicing
Practices," and no Advance will be required in connection with any reduction in
amounts payable under the Soldiers and Sailors Relief Act of 1940, or 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 includes mortgage securities, the master servicer's
advancing obligations will be pursuant to the terms of the 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 in
this prospectus.
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to related certificateholders. 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, those funds will be required to be replaced
on or before any future distribution date to the extent that funds in the
Certificate Account on that 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
those amounts were advanced, including 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 depositor, Residential Funding Corporation, a subservicer or a
seller.
Advances may also be reimbursable from cash otherwise distributable to
certificateholders to the extent that the master servicer shall determine that
any Advances previously made are not ultimately recoverable as described in the
third preceding paragraph. With respect to any senior/subordinate series, so
long as the related subordinate certificates remain outstanding and limited with
respect to Special Hazard Losses, Fraud Losses, Bankruptcy Losses and
Extraordinary Losses, the Advances may also be reimbursable out of amounts
otherwise distributable to holders of the subordinate 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 some 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
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.
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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 the support are downgraded by a rating
agency rating the related certificates or if any collateral supporting such
obligation is not performing or is removed under 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 the mortgage loan, the mortgagor pays interest on the amount prepaid
only to but not including the date on which the 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.
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 Compensating
Interest for that mortgage loan from the date of the prepayment to the related
due date. Compensating Interest will be limited to the aggregate amount
specified in the related prospectus supplement and 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 setting forth the information described in the
related pooling and servicing agreement. Except as otherwise provided in the
related pooling and servicing agreement, the information will include the
following (as applicable):
o the amount, if any, of the distribution allocable to
principal;
o the amount, if any, of the distribution allocable to interest
and the amount, if any, of any shortfall in the amount of
interest and principal;
o the aggregate unpaid principal balance of the mortgage loans
after giving effect to the distribution of principal on that
distribution date;
o the outstanding principal balance or notional amount of each
class of certificates after giving effect to the distribution
of principal on that distribution date;
o based on the most recent reports furnished by subservicers,
the number and aggregate principal balances of 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;
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o the book value of any property acquired by the trust through
foreclosure or grant of a deed in lieu of foreclosure;
o the balance of the reserve fund, if any, at the close of
business on that distribution date;
o the percentage of the outstanding principal balances of the
senior certificates, if applicable, after giving effect to the
distributions on that distribution date;
o 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;
o if applicable, the Special Hazard Amount, Fraud Loss Amount
and Bankruptcy Amount as of the close of business on the
applicable distribution date and a description of any change
in the calculation of those amounts;
o in the case of certificates benefitting from alternative
credit enhancement arrangements described in a prospectus
supplement, the amount of coverage under the alternative
arrangements as of the close of business on the applicable
determination date;
o the servicing fee payable to the master servicer and the
subservicer; and
o with respect to any series of certificates as to which the
trust includes mortgage securities, any additional information
as required under the related pooling and servicing agreement.
In addition to the information described above, reports to
certificateholders will contain any other information as is described 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.
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 that calendar
year. The report will include information as to the aggregate of amounts
reported pursuant to the first two items in the list above for that calendar
year or, in the event the person was a holder of record of a class of
certificates during a portion of that calendar year, for the applicable portion
of that 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 the 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
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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 the 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 the waiver or modification is not materially
adverse to any certificateholders, taking into account any estimated loss that
may result absent that action. With respect to any series of certificates as to
which the trust includes mortgage securities, the master servicer's servicing
and administration obligations will be pursuant to the terms of those mortgage
securities.
Under its subservicing agreement, a subservicer is granted discretion
to extend relief to mortgagors whose payments become delinquent. A subservicer
may grant a period of temporary indulgence, in most cases 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. Most
other types of forbearance 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 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
modifications of the mortgage loan rather than proceeding with foreclosure. In
making this determination, the estimated Realized Loss that might result if the
mortgage loan were liquidated would be taken into account. These modifications
may have the effect of reducing the mortgage rate or extending the final
maturity date of the mortgage loan. Any modified mortgage loan may remain in the
related trust, and the reduction in collections resulting from the modification
may result in reduced distributions of interest, or other amounts, on, or may
extend the final maturity of, one or more classes of the related 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 so that the monthly payment is recalculated as an amount that will
fully amortize its remaining principal amount by the original maturity date
based on the original mortgage rate, provided that the 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 the conveyance, to exercise its rights to
accelerate the maturity of the mortgage loan under any due-on-sale clause
applicable thereto, but only if the exercise of those rights is permitted by
applicable law and only to the extent it would not adversely affect or
jeopardize coverage under any primary insurance policy or applicable credit
enhancement arrangements. If the master servicer or subservicer is prevented
from enforcing the due-
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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 the due-on-sale clause, the
master servicer or subservicer will enter into an assumption and modification
agreement with the person to whom the related property has been or is about to
be conveyed, under which that person becomes liable under the mortgage note
subject to 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 the release will not adversely affect the
collectability of the mortgage loan.
An ARM loan may be assumed if the 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 that ARM loan would not be
impaired by the assumption. If a mortgagor transfers the mortgaged property
subject to an ARM loan without consent, the 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" in this
prospectus. 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 this
type of 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 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 this type of 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.
SPECIAL SERVICING AND SPECIAL SERVICING AGREEMENTS
The pooling and servicing agreement for a series of certificates may
name a Special Servicer. The Special Servicer may have discretion to extend
relief to certain mortgagors whose payments become delinquent. The Special
Servicer may be permitted to grant a period of temporary indulgence to a
mortgagor or may enter into a repayment plan providing for repayment of
arrearages by the mortgagor, in each case without the prior approval of the
master servicer or the subservicer. Other types of forbearance may require the
approval of the master servicer or subservicer, as applicable.
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In addition, the master servicer may enter into various agreements with
holders of one or more classes of subordinate certificates or of a class of
securities representing interests in one or more classes of subordinate
certificates. Under the terms of those agreements, the holder may, with
respect to some delinquent mortgage loans:
o instruct the master servicer to commence or delay foreclosure
proceedings, provided that the holder deposits a specified
amount of cash with the master servicer which will be
available for distribution to certificateholders in the event
that Liquidation Proceeds are less than they otherwise may
have been had the master servicer acted under its normal
servicing procedures;
o instruct the master servicer to purchase the mortgage loans
from the trust prior to the commencement of foreclosure
proceedings at the purchase price and to resell the mortgage
loans to the holder, in which case any subsequent loss with
respect to the mortgage loans will not be allocated to the
certificateholders;
o become, or designate a third party to become, a subservicer
with respect to the mortgage loans so long as (i) the master
servicer has the right to transfer the subservicing rights and
obligations of the mortgage loans to another subservicer at
any time or (ii) the holder or its servicing designee is
required to service the mortgage loans according to the master
servicer's servicing guidelines; or
o the related prospectus supplement may provide for the other
types of special servicing arrangements.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
In the event that title to any acquisition of title and cancellation of
any REO Mortgage Loan will be considered for most purposes to be an outstanding
mortgage loan held in the trust until it is converted into 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 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, the amortization schedule will be deemed to have
adjusted in accordance with any interest rate changes occurring on any
adjustment date therefor, so long as the REO Mortgage Loan is considered to
remain in the trust. If a REMIC election has been made, any mortgaged property
so acquired by the trust must be disposed of in accordance with applicable
federal income tax regulations and consistent with the status of the trust as a
REMIC. To the extent provided in the related pooling and servicing agreement,
any income, net of expenses and other than gains described in the second
succeeding paragraph, received by the subservicer or the master servicer on the
mortgaged property prior to its disposition will be deposited in the Custodial
Account upon receipt and will be available at that time to the extent provided
in the related pooling and servicing agreement, for making payments to
certificateholders.
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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 remedies if it determines that one remedy is
more likely to result in a greater recovery. If the mortgage loan is an
Additional Collateral Loan, 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 the 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, the mortgage
loan will be removed from the related trust. 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 the 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 the
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 the defaulted
mortgage loan.
With respect to some series of certificates, the applicable form of
credit enhancement may provide, to the extent of coverage, that a defaulted
mortgage loan or REO Mortgage Loan will be removed from the trust prior to its
final liquidation. 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 that 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 the Realized Loss was allocated, with the
amounts to be distributed allocated among such classes in the same proportions
as such Realized Loss was allocated, provided that no such distributions of
subsequent recoveries, together with any other reimbursement amounts, exceed the
total amount of the Realized Loss that was allocated to that class. In the event
that any class of certificates to which such Realized Loss was allocated is no
longer outstanding, any subsequent recovery shall be distributed to the persons
who were the holders of that 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 in accordance with specified
conditions in the event that, following the final liquidation of a mortgage loan
and a draw under the related credit enhancement, subsequent recoveries are
received. If a defaulted mortgage loan or REO Mortgage Loan is not so removed
from the trust, then, upon its final liquidation, if a loss is realized which is
not covered by any applicable form of credit enhancement or other insurance, the
certificateholders will bear the loss. However, if a gain results from the final
liquidation of an REO Mortgage Loan
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which is not required by law to be remitted to the related mortgagor, the master
servicer will be entitled to retain that gain as additional servicing
compensation unless the related prospectus supplement provides otherwise. For a
description of the master servicer's obligations to maintain and make claims
under applicable forms of credit enhancement and insurance relating to the
mortgage loans, see "Description of Credit Enhancement" and "Insurance Policies
on Mortgage Loans."
For a discussion of legal rights and limitations associated with the
foreclosure of a mortgage loan, see "Certain Legal Aspects of Mortgage Loans."
SUBORDINATION
GENERAL
A senior/subordinate series of certificates will consist of one or more
classes of senior certificates and one or more classes of subordinate
certificates, as specified in the related prospectus supplement. Subordination
of the subordinate certificates of any senior/subordinate series will be
effected by the following method, unless an alternative method is specified in
the related prospectus supplement. In addition, some 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 that amount among the various classes of certificates included in the
series, will be described in the related prospectus supplement. Generally, with
respect to any series, the amount available for distribution will be allocated
first to interest on the senior certificates of that 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.
If so provided in the pooling and servicing agreement, the master
servicer may be permitted, under certain circumstances, to purchase any mortgage
loan that is three or more months delinquent in payments of principal and
interest, at the purchase price. Any Realized Loss subsequently incurred in
connection with any such mortgage loan will be borne by the then-current
certificateholders of the class or classes that would have borne that Realized
Loss if the mortgage loan had not been so purchased, unless that purchase was
made upon the request of the holder of the most junior class of certificates of
the related Series.
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.
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Except as noted below, Realized Losses will be allocated to the
subordinate certificates of the related series until their outstanding principal
balances have been reduced to zero. Additional Realized Losses, if any, will be
allocated to the senior certificates. If the series includes more than one class
of senior certificates, the 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.
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 the Fraud Loss Amount and with respect to the
Bankruptcy Amount, and the subordinate certificates may provide no coverage with
respect to other specified types of losses, as described in the related
prospectus supplement, in which case those 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 described in the related prospectus supplement,
that the then-current rating of the related series of certificates will not be
adversely affected.
In most cases, any allocation of a Realized Loss, including a Special
Hazard Loss, to a certificate in a senior/subordinate series will be made by
reducing its outstanding principal balance as of the distribution date following
the calendar month in which the Realized Loss was incurred.
The rights of holders of the various classes of certificates of any
series to receive distributions of principal and interest is determined by the
aggregate outstanding principal balance of each class or, if applicable, the
related notional amount. The outstanding principal balance of any certificate
will be reduced by all amounts previously distributed on that certificate
representing 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 described in
the related prospectus supplement, holders of senior certificates may be
entitled to receive a disproportionately larger amount of prepayments received
during specified periods, which will have the effect, absent offsetting losses,
of accelerating the amortization of the senior certificates and increasing the
respective percentage ownership interest evidenced by the subordinate
certificates in the related trust, 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, some Realized Losses will be allocated
first to subordinate certificates by reduction of their outstanding principal
balance, which will have the effect of increasing the respective ownership
interest evidenced by the senior certificates in the related trust.
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If so provided in the related prospectus supplement, some 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 the Subordinate Amount will be limited to the extent described in the
related prospectus supplement. As specified in the related prospectus
supplement, the Subordinate Amount may be reduced based upon the amount of
losses borne by the holders of the subordinate certificates as a result of the
subordination, a specified schedule or other method of reduction as the
prospectus supplement may specify.
With respect to any senior/subordinate series, the terms and provisions
of the subordination may vary from those described in this prospectus. Any
variation and any additional credit enhancement will be described in the related
prospectus supplement.
OVERCOLLATERALIZATION
If so specified in the related prospectus supplement, interest
collections on the mortgage loans may exceed interest payments on the
certificates for the related distribution date. To the extent such excess
interest is applied as principal payments on the certificates, the effect will
be to reduce the principal balance of the certificates relative to the
outstanding balance of the mortgage loans, thereby creating
overcollateralization and additional protection to the certificateholders, as
specified in the related prospectus supplement.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Credit support with respect to each series of certificates may be
comprised of one or more of the following components. Each component will have a
dollar limit and will provide coverage with respect to Realized Losses that are:
o Defaulted Mortgage Losses;
o Special Hazard Losses;
o Bankruptcy Losses; and
o Fraud Losses.
Most forms of credit support will not provide protection against all
risks of loss and will not guarantee repayment of the entire outstanding
principal balance of the certificates and interest thereon. If losses occur that
exceed the amount covered by credit support or are of a type that is not
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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 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 described in this prospectus and in the related prospectus
supplement,
o coverage with respect to Defaulted Mortgage Losses may be
provided by a mortgage pool insurance policy,
o coverage with respect to Special Hazard Losses may be provided
by a special hazard insurance policy,
o coverage with respect to Bankruptcy Losses may be provided by
a bankruptcy policy and
o coverage with respect to Fraud Losses
may be provided by a mortgage pool insurance policy or mortgage repurchase bond.
In addition, if so specified in the applicable prospectus supplement, in lieu of
or in addition to any or all of the foregoing arrangements, credit enhancement
may be in the form of a reserve fund to cover those 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, other secured or unsecured corporate guarantees or in any
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 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. Coverage may also be
provided by representations made by Residential Funding Corporation or the
depositor. 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 LTV ratios at origination of over 80% which are not insured
by a primary insurance policy, to the extent that those 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 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, as
limited by such insurance policy. As described in the pooling and servicing
agreement, credit support may apply to all of the mortgage loans or to some
mortgage loans contained in a mortgage pool.
Each prospectus supplement will include a description of:
o the amount payable under the credit enhancement arrangement,
if any, provided with respect to a series;
o any conditions to payment thereunder not otherwise described
in this prospectus;
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o the conditions under which the amount payable under the credit
support may be reduced and under which the credit support may
be terminated or replaced; and
o the material provisions of any agreement relating to the
credit support.
Additionally, each prospectus supplement will contain information with
respect to the issuer of any third-party credit enhancement, 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 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 the policies, copies of which generally will be
exhibits to the Form 8-K to be filed with the Securities and Exchange Commission
in connection with the issuance of the related series of 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, a bank will deliver to the trustee an
irrevocable letter of credit. The letter of credit may provide direct coverage
with respect to the mortgage loans. The letter of credit bank, the amount
available under the letter of credit with respect to each component of credit
enhancement, the expiration date of the letter of credit, and a more detailed
description of the letter of credit will be specified in the related prospectus
supplement. On or before each distribution date, the letter of credit bank will
be required to make 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
obtained by the depositor for a trust will be issued by the pool insurer. Each
mortgage pool insurance policy, in accordance with the limitations described in
this prospectus and in the prospectus supplement, if any, will cover Defaulted
Mortgage Losses in an amount 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 described under "--Maintenance of Credit Enhancement,"
the master servicer will use its best reasonable
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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
specified conditions precedent described in the succeeding paragraph. 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:
o any required primary insurance policy is in effect for the
defaulted mortgage loan and a claim thereunder has been
submitted and settled;
o hazard insurance on the property securing the mortgage loan
has been kept in force and real estate taxes and other
protection and preservation expenses have been paid by the
master servicer;
o if there has been physical loss or damage to the mortgaged
property, it has been restored to its condition, reasonable
wear and tear excepted, at the cut-off date; and
o the insured has acquired good and merchantable title to the
mortgaged property free and clear of liens except permitted
encumbrances.
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 its outstanding principal balance plus accrued and unpaid
interest at the applicable mortgage rate to the date of purchase and some
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 some 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 the 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 the 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 those policies), from the related hazard insurance policy or
applicable special hazard insurance policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery
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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) 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) the expenses will be recoverable by
it through Liquidation Proceeds or Insurance Proceeds.
A mortgage pool insurance policy and some primary insurance policies
will likely not insure against loss sustained by reason of a default arising
from, among other things, fraud or negligence in the origination or servicing of
a mortgage loan, including misrepresentation by the mortgagor, the seller or
other persons involved in the origination thereof, failure to construct a
mortgaged property in accordance with plans and specifications or bankruptcy,
except if specified in the related prospectus supplement an endorsement to the
mortgage pool insurance policy provides for insurance against that type of loss.
Depending upon the nature of the event, a breach of representation made by a
seller may also have occurred. That breach, if it materially and adversely
affects the interests of 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 depositor or Residential Funding Corporation.
The original amount of coverage under each mortgage pool insurance
policy will be reduced over the life of the related series of 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 some expenses incurred by the master servicer or
subservicer as well as accrued interest on delinquent mortgage loans to the date
of payment of the claim. See "Certain Legal Aspects of mortgage loans and
Related Matters--Foreclosure." Accordingly, if aggregate net claims paid under
any mortgage pool insurance policy reach the original policy limit, coverage
under that mortgage pool insurance policy will be exhausted and any further
losses will be borne by the related certificateholders. In addition, unless the
master servicer determines that an Advance relating to a delinquent mortgage
loan would be recoverable to it from the proceeds of the liquidation of the
mortgage loan or otherwise, the master servicer would not be obligated to make
an Advance respecting any delinquency since the Advance would not be ultimately
recoverable to it from either the mortgage pool insurance policy or from any
other related source. See "Description of the 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, the policy will not
provide coverage against hazard losses. As described 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 those losses. Additionally, no coverage for Special Hazard
Losses, Fraud Losses or Bankruptcy Losses will cover all risks, and the amount
of any such
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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 obtained for a
trust will be issued by the insurer named in the related prospectus supplement.
Each special hazard insurance policy subject to limitations described in this
paragraph and in the related prospectus supplement, if any, will protect the
related certificateholders from Special Hazard Losses. 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
described in the 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.
In accordance with 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 the 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 the related property or (ii) upon transfer of
the property to the insurer, the unpaid principal balance of the mortgage loan
at the time of acquisition of the related 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 the related property.
If the property is transferred to a third party in a sale approved by
the special hazard insurer, the amount that the special hazard insurer will pay
will be the amount under (ii) above reduced by the net proceeds of the sale of
the property. If the unpaid principal balance plus accrued interest and some
expenses is paid by the special hazard insurer, the amount of further coverage
under the related special hazard insurance policy will be reduced by that amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair of the property will further reduce coverage by that amount.
Restoration of the property with the proceeds described under (i) above will
satisfy the condition under each mortgage pool insurance policy that the
property be restored before a claim under the policy may be validly presented
with respect to the defaulted mortgage loan secured by the related property. The
payment described under (ii) above will render presentation of a claim relating
to a 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 some 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.
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To the extent described in the related prospectus supplement, coverage
for Special Hazard Losses for a series of certificates may be provided, in whole
or in part, by a type of special hazard coverage other than a special hazard
insurance policy or by means of a representation of the depositor or Residential
Funding Corporation.
BANKRUPTCY POLICIES
In the event of a personal bankruptcy of a mortgagor, a bankruptcy
court may establish the value of the mortgaged property of the mortgagor, and,
if specified in the related prospectus supplement, any related Additional
Collateral, at a Deficient Valuation. The amount of the secured debt could then
be reduced to that value, and, thus, the holder of the mortgage loan would
become an unsecured creditor to the extent the outstanding principal balance of
the mortgage loan exceeds the value assigned to the mortgaged property, and any
related Additional Collateral, by the bankruptcy court.
In addition, other modifications of the terms of a mortgage loan can
result from a bankruptcy proceeding, including a Debt Service Reduction. See
"Certain Legal Aspects of mortgage loans--Anti-Deficiency Legislation and Other
Limitations on Lenders." Any bankruptcy policy to provide coverage for
Bankruptcy Losses resulting from proceedings under the federal Bankruptcy Code
obtained for a trust will be issued by an insurer named in the related
prospectus supplement. The level of coverage under each bankruptcy policy will
be set forth in the related prospectus supplement.
RESERVE FUNDS
If so specified in the related prospectus supplement, the depositor
will deposit or cause to be deposited in a reserve fund, any combination of cash
or Permitted Investments in specified amounts, or any other instrument
satisfactory to the rating agency or Agencies, which will be applied and
maintained in the manner and under the conditions specified in the related
pooling and servicing agreement. In the alternative or in addition to that
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 the 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 specified circumstances the remaining amount of the
letter of credit may be drawn by the trustee and deposited in a reserve
fund.
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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 reserve fund will not be deemed to be part of
the related trust. A reserve fund may provide coverage to more than one series
of certificates, if set forth 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, unless the assets are
owned by the related trust. However, to the extent that the depositor, any
affiliate of the depositor or any other entity has an interest in any reserve
fund, in the event of the bankruptcy, receivership or insolvency of that entity,
there could be delays in withdrawals from the reserve fund and the corresponding
payments to the certificateholders. These 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 depositor may
obtain one or more certificate insurance policies or guaranties or one or more
surety bonds, or one or more guarantees issued by insurers or other parties
acceptable to the rating agency or Agencies rating the 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 that class or those classes of certificates. Any certificate insurance
policy, surety bond or guaranty will have the characteristics described in, and
will be in accordance with any limitations and exceptions described in, the
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 the 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.
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The master servicer, the Servicer or the Certificate Administrator will
agree to pay the premiums for each mortgage pool insurance policy, special
hazard insurance policy, bankruptcy policy, certificate insurance policy or
surety bond, as applicable, on a timely basis, unless the premiums are paid
directly by the trust. As to mortgage pool insurance policies generally, in the
event the related insurer ceases to be a Qualified Insurer, 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 the policy. If the cost of the replacement policy is
greater than the cost of the existing policy, the coverage of the replacement
policy will, unless otherwise agreed to by the depositor, be reduced to a level
so that its premium rate does not exceed the premium rate on the original
insurance policy. 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, or Freddie Mac, the Federal National Mortgage Association
or Fannie Mae or any successor entity, the master servicer will review, not less
often than monthly, the financial condition of the pool insurer with a view
toward determining whether recoveries under the mortgage pool insurance policy
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, at the same cost
limit. Any losses in market value of the certificates associated with any
reduction or withdrawal in rating by an applicable rating agency shall be borne
by the certificateholders.
If any property securing a defaulted mortgage loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
special hazard insurance policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any letter of credit,
mortgage pool insurance policy or any related primary insurance policy, the
master servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that 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 the
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 the determinations incorrectly or recovery is not
available for any other reason, the master servicer is nevertheless obligated to
follow whatever normal practices and procedures, in accordance with the
preceding sentence, that it deems necessary or advisable to realize upon the
defaulted mortgage loan and in the event this determination has been incorrectly
made, is entitled to reimbursement of its expenses in connection with the
restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
The amount of credit support provided with respect to any series of
certificates and relating to various types of losses incurred may be reduced
under specified circumstances. In most cases, the amount available as credit
support will be subject to periodic reduction on a non-discretionary basis
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in accordance with a schedule or formula set forth in the related pooling and
servicing agreement. Additionally, in most cases, the 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 depositor 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 any credit support with other credit
enhancement instruments issued by obligors whose credit ratings are equivalent
to the downgraded level and in lower amounts which would satisfy the downgraded
level, provided that the then-current rating of each class of the related series
of 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
depositor, the master servicer or any 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, and other yield supplement agreements or
similar yield maintenance arrangements that do not involve swap agreements or
other notional principal contracts.
An interest rate swap is an agreement between two parties to exchange a
stream of interest payments on an agreed hypothetical or "notional" principal
amount. No principal amount is exchanged between the counterparties to an
interest rate swap. In the typical swap, one party agrees to pay a fixed rate on
a notional principal amount, while the counterparty pays a floating rate based
on one or more reference interest rates including the London Interbank Offered
Rate or, LIBOR, a specified bank's prime rate or U.S. Treasury Bill rates.
Interest rate swaps also permit counterparties to exchange a floating rate
obligation based 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
principals and as agents utilizing standardized Swap
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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 some circumstances, there can be no assurance that the trust will be able
to terminate a swap or yield supplement agreement when it would be economically
advantageous to the trust to do so.
PURCHASE OBLIGATIONS
Some types of mortgage loans and classes of certificates of any series,
as specified in the related prospectus supplement, may be subject to a purchase
obligation. The terms and conditions of each purchase obligation, including the
purchase price, timing and payment procedure, will be described in the 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 its provider, which may
include a bank or other financial institution or an insurance company. Each
purchase obligation will be evidenced by an instrument delivered to the trustee
for the benefit of the applicable 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 the 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, at times, a primary insurance policy or an
alternative form of coverage, as described below. The descriptions of any
insurance policies contained in this prospectus or any prospectus supplement and
the coverage thereunder do not purport to be complete and are qualified in their
entirety by reference to the forms of policies.
PRIMARY INSURANCE POLICIES
Unless otherwise specified in the related prospectus supplement, (i)
each mortgage loan having a LTV ratio at origination of over 80% will be covered
by a primary mortgage guaranty
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insurance policy insuring against default on the 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 LTV
ratio equal to or less than 80%, and (ii) the depositor will represent and
warrant that, to the best of the depositor's knowledge, the mortgage loans are
so covered. Alternatively, coverage of the type that would be provided by a
primary insurance policy if obtained may be provided by another form of credit
enhancement as described 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 LTV ratio level as of the
applicable cut-off date. In most cases, the depositor will have the ability to
cancel any primary insurance policy if the LTV ratio of the mortgage loan is
reduced to 80% or less (or a lesser specified percentage) based on an appraisal
of the mortgaged property after the related closing date or as a result of
principal payments that reduce the principal balance of the mortgage loan after
the closing date.
Mortgage loans which are subject to negative amortization will only be
covered by a primary insurance policy if that coverage was required upon their
origination, notwithstanding that subsequent negative amortization may cause
that mortgage loan's LTV ratio, based on the then-current balance, to
subsequently exceed the limits which would have required coverage 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 will usually differ from those in
Primary Insurance Policies issued by other primary insurers, each primary
insurance policy generally will pay either:
o the insured percentage of the loss on the related mortgaged
property;
o the entire amount of the loss, after receipt by the primary
insurer of good and merchantable title to, and possession of,
the mortgaged property; or
o at the option of the primary insurer under certain Primary
Insurance Policies, the sum of the delinquent monthly payments
plus any Advances made by the insured, both to the date of the
claim payment and, thereafter, monthly payments in the amount
that would have become due under the mortgage loan if it had
not been discharged plus any Advances made by the insured
until the earlier of (a) the date the mortgage loan would have
been discharged in full if the default had not occurred or (b)
an approved sale.
The amount of the loss as calculated under a primary insurance policy
covering a mortgage loan will in most cases consist of the unpaid principal
amount of such mortgage loan and accrued and unpaid interest thereon and
reimbursement of some expenses, less:
o rents or other payments received by the insured (other than
the proceeds of hazard insurance) that are derived from the
related mortgaged property;
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o hazard insurance proceeds received by the insured in excess of
the amount required to restore the mortgaged property and
which have not been applied to the payment of the mortgage
loan;
o amounts expended but not approved by the primary insurer;
o claim payments previously made on the mortgage loan; and
o unpaid premiums and other amounts.
As conditions precedent to the filing or payment of a claim under a
primary insurance policy, in the event of default by the mortgagor, the insured
will typically be required, among other things, to:
o advance or discharge (a) hazard insurance premiums and (b) as
necessary and approved in advance by the primary insurer, real
estate taxes, protection and preservation expenses and
foreclosure and related costs;
o in the event of any physical loss or damage to the mortgaged
property, have the mortgaged property restored to at least its
condition at the effective date of the primary insurance
policy (ordinary wear and tear excepted); and
o tender to the primary insurer good and merchantable title to,
and possession of, the mortgaged property.
For any certificates offered under this prospectus, 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 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 the primary insurance policy was in place as of the
cut-off date and the depositor had knowledge of such primary insurance policy.
If the depositor gains knowledge that as of the closing date, a mortgage loan
had a LTV 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 the standard
or covered by alternate credit enhancement as described in the related
prospectus supplement) and that the mortgage loan has a then current LTV 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 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. Most coverage will be in an amount equal
to the lesser of the principal balance of the 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 the hazard policies to be maintained or shall obtain a
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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.
The standard form of fire and extended coverage policy covers physical
damage to or destruction of the improvements on the property by fire, lightning,
explosion, smoke, windstorm, hail, riot, strike and civil commotion, in
accordance with the conditions and exclusions specified in each policy. The
policies relating to the mortgage loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms and therefore will not contain identical terms and conditions, the
basic terms thereof are dictated by respective state laws. These policies
typically do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement, including earthquakes, landslides and mudflows, nuclear reactions, wet
or dry rot, vermin, rodents, insects or domestic animals, theft and, in some
cases, vandalism. The foregoing list is merely indicative of some kinds of
uninsured risks and is not intended to be all-inclusive. Where the improvements
securing a mortgage loan are located in a federally designated flood area at the
time of origination of that mortgage loan, the pooling and servicing agreement
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 to the lesser of the amount required to compensate for any loss or damage
on a replacement cost basis or the maximum insurance available under the federal
flood insurance program.
The hazard insurance policies covering the mortgaged properties
typically contain a co-insurance clause that in effect requires the related
mortgagor at all times to carry insurance of a specified percentage, typically
80% to 90%, of the full replacement value of the improvements on the property in
order to recover the full amount of any partial loss. If the related mortgagor's
coverage falls below this specified percentage, this clause usually provides
that the insurer's liability in the event of partial loss does not exceed the
greater of (i) the replacement cost of the improvements damaged or destroyed
less physical depreciation or (ii) the proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of the improvements.
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 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.
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THE DEPOSITOR
The depositor is an indirect wholly-owned subsidiary of GMAC Mortgage
Group, Inc., which is a wholly-owned subsidiary of General Motors Acceptance
Corporation. The depositor was incorporated in the State of Delaware on January
25, 1985. The depositor was organized for the purpose of serving as a private
secondary mortgage market conduit. The depositor anticipates that it will in
many cases have acquired mortgage loans indirectly through Residential Funding
Corporation, which is also an indirect wholly-owned subsidiary of GMAC Mortgage
Group, Inc.. The depositor does not have, nor is it expected in the future to
have, any significant assets.
The certificates do not represent an interest in or an obligation of
the depositor. The depositor's only obligations with respect to a series of
certificates will be pursuant to limited representations and warranties made by
the depositor or as otherwise provided in the related prospectus supplement.
The depositor 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 Corporation, an affiliate of the depositor, will act as the
master servicer or manager for a series of certificates.
Residential Funding Corporation 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 Corporation'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 Corporation conducts
operations from its headquarters in Minneapolis and from offices located in
California, New York, Florida, Georgia and Maryland. At December 31, 1998,
Residential Funding Corporation was master servicing a first lien loan portfolio
of approximately $55.0 billion and a second lien loan portfolio of approximately
$2.9 billion.
Residential Funding Corporation's delinquency, foreclosure and loan
loss experience as of the end of the most recent calendar quarter for which that
information is available on the portfolio of loans for which it acts as master
servicer and that were originated under its modified loan purchase criteria will
be summarized in each prospectus supplement relating to a mortgage pool for
which Residential Funding Corporation will act as master servicer. There can be
no assurance that this experience will be representative of the results that may
be experienced with respect to any particular series of certificates.
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THE POOLING AND SERVICING AGREEMENT
As described in this prospectus under "Description of the
Certificates--General," each series of certificates will be issued under a
pooling and servicing agreement as described in that section. The following
summaries describe 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
for 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 some circumstances, of the outstanding
principal balance of each mortgage loan, and that compensation will be retained
by it from collections of interest on the mortgage loan in the related trust,
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 the collections are deposited into the applicable Custodial Account.
Notwithstanding the foregoing, with respect to a series of certificates as to
which the trust includes mortgage securities, the compensation payable to the
master servicer or manager for servicing and administering the mortgage
securities on behalf of the holders of the certificates may be based on a
percentage per annum described in the related prospectus supplement of the
outstanding balance of those mortgage securities and may be retained from
distributions of interest thereon, if so 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. Some
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 depositor or
Residential Funding Corporation, 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. The master servicer will retain these
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 from the investment of funds in the Custodial Account
or the applicable Certificate Account, to the extent not applied as Compensating
Interest, or in a Subservicing Account, as the case may be. In addition, some
reasonable duties of the master servicer may be performed by an affiliate of the
master servicer who will be entitled to compensation therefor.
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The master servicer will pay or cause to be paid some of the ongoing
expenses associated with each trust and incurred by it in connection with its
responsibilities under the pooling and servicing agreement, including, without
limitation, payment of any fee or other amount payable for 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 limited circumstances. In addition, as indicated in the
preceding section, the master servicer will be entitled to reimbursements for
some of the expenses incurred by it in connection with Liquidated Mortgage Loans
and in connection with the restoration of mortgaged properties, such right of
reimbursement being prior to the rights of certificateholders to receive any
related Liquidation Proceeds, including Insurance Proceeds.
EVIDENCE AS TO COMPLIANCE
Each pooling and servicing agreement will provide that the master
servicer will, with respect to each series of certificates, deliver to the
trustee, on or before the date in each year specified in the related pooling and
servicing agreement, an officer's certificate stating that:
o 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 that pooling and servicing agreement has
been made under the supervision of that officer;
o to the best of the officer's knowledge, based on the 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 the pooling and servicing
agreement throughout that year, or, if there has been material
noncompliance with the servicing standards or a material
default in the fulfillment of any such obligation, the
statement shall include a description of the noncompliance or
specify each default known to the officer and the nature and
status thereof; and
o to the best of the 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 that year, or, if there has been material
noncompliance with the servicing standards or a material
default in the fulfillment of such obligations, the statement
shall include a description of the noncompliance or specify
each default, as the case may be, known to the 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
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examination conducted by that 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
any exceptions and other qualifications that, in the opinion of the firm, the
accounting standards require it to report. In rendering its statement, the 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 DEPOSITOR
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 its duties is
no longer permissible under applicable law or except in connection with a
permitted transfer of servicing. No 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
described below, neither the master servicer, the depositor, nor any director,
officer, employee or agent of the master servicer or the depositor will be under
any liability to the trust or the certificateholders for any action taken or for
refraining from the taking of any action in good faith under the pooling and
servicing agreement, or for errors in judgment; provided, however, that neither
the master servicer, the depositor, 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
depositor, and any director, officer, employee or agent of the master servicer
or the depositor is entitled to indemnification by the trust 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 under 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 depositor 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 depositor may, however, in its discretion undertake any action
which it may deem necessary or desirable with respect to the pooling and
servicing agreement and the rights and duties of the
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parties thereto and the interests of the certificateholders thereunder. In that
event, the legal expenses and costs of that action and any liability resulting
therefrom will be expenses, costs and liabilities of the trust and the master
servicer or the depositor, as the case may be, will be entitled to be reimbursed
for the legal expenses and costs 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) that person is qualified to service
mortgage loans on behalf of Fannie Mae or Freddie Mac and (ii) the 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 that person is reasonably satisfactory to the depositor and the trustee. In
the case of any assignment of this type, the master servicer will be released
from its obligations under the pooling and servicing agreement, exclusive of
liabilities and obligations incurred by it prior to the time of assignment.
EVENTS OF DEFAULT
Events of default under the pooling and servicing agreement for a
series of certificates will include: o 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
that series any required payment which continues unremedied for five days after
the giving of written notice of the failure to the master servicer by the
trustee or the depositor, or to the master servicer, the depositor and the
trustee by the holders of certificates of such class evidencing not less than
25% of the aggregate percentage interests constituting that class; o 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 that series of certificates which continues unremedied for 30 days,
or 15 days in the case of a failure to pay the premium for any insurance policy
which is required to be maintained under the pooling and servicing agreement,
after the giving of written notice of the failure to the master servicer by the
trustee or the depositor, or to the master servicer, the depositor and the
trustee by the holders of any class of certificates of that series evidencing
not less than 25% of the aggregate percentage interests constituting that class;
and o some 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.
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A default under the terms of any mortgage securities included in any
trust 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 depositor
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, 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 depositor 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 the trust and in and to the mortgage
loans and the proceeds thereof, whereupon the trustee or, upon notice to the
depositor and with the depositor's consent, its designee will succeed to all
responsibilities, duties and liabilities of the master servicer under the
pooling and servicing agreement, other than the obligation to purchase mortgage
loans under some 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 appointment, the trustee
is obligated to act in that 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 the pooling and servicing
agreement (except as otherwise provided for in the related pooling and servicing
agreement with respect to the credit enhancer) unless the holder previously has
given to the trustee written notice of default and the continuance thereof and
unless the holders of certificates of any class evidencing not less than 25% of
the aggregate percentage interests constituting that class have made written
request upon the trustee to institute the proceeding in its own name as trustee
thereunder and have offered to the trustee reasonable indemnity and the trustee
for 60 days after receipt of the request and indemnity has neglected or refused
to institute any proceeding. However, the trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the pooling and servicing
agreement or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the holders of
certificates covered by the pooling and servicing agreement, unless the
certificateholders have offered to the trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
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AMENDMENT
Each pooling and servicing agreement may be amended by the depositor,
the master servicer and the trustee, without the consent of the related
certificateholders:
o to cure any ambiguity;
o to correct or supplement any provision therein which may be
inconsistent with any other provision therein or to correct
any error;
o to change the timing and/or nature of deposits in the
Custodial Account or the 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) the change may not
adversely affect in any material respect the interests of any
certificateholder, as evidenced by an opinion of counsel, and
(c) the 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;
o if an election to treat the related trust as a "real estate
mortgage investment conduit" or, REMIC has been made, to
modify, eliminate or add to any of its provisions (a) to the
extent necessary to maintain the qualification of the trust as
a REMIC or to avoid or minimize the risk of imposition of any
tax on the related trust, provided that the trustee has
received an opinion of counsel to the effect that (1) that
action is necessary or desirable to maintain qualification or
to avoid or minimize that risk, and (2) the action will not
adversely affect in any material respect the interests of any
related certificateholder, or (b) to modify the provisions
regarding the transferability of the REMIC residual
certificates, provided that the depositor has determined that
the change would not adversely affect the applicable ratings
of any classes of the certificates, as evidenced by a letter
from each applicable rating agency 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; o to
make any other provisions with respect to matters or questions
arising under the pooling and servicing agreement which are
not materially inconsistent with its provisions, so long as
the action will not adversely affect in any material respect
the interests of any certificateholder; or o to amend any
provision that is not material to holders of any class of
related certificates.
The pooling and servicing agreement may also be amended by the
depositor, 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 that class for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the pooling and
servicing agreement or of modifying in any manner the rights of the related
certificateholders, except that no such amendment may
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(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 the 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 that
class have consented to the change in the percentage.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related trust, the trustee will not be entitled to consent to any
amendment to a pooling and servicing agreement without having first received an
opinion of counsel to the effect that the amendment or the exercise of any power
granted to the master servicer, the depositor or the trustee in accordance with
the amendment will not result in the imposition of a tax on the related trust or
cause the trust to fail to qualify as a REMIC.
TERMINATION; RETIREMENT OF CERTIFICATES
The primary obligations created by the pooling and servicing agreement
for each series of certificates 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 the certificateholders following the
earlier of
o 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
o the purchase by the master servicer or the depositor or, if
specified in the related prospectus supplement, by the holder
of the REMIC residual certificates (see "Material Federal
Income Tax Consequences" below) from the trust for such series
of all remaining mortgage loans and all property acquired in
respect of the mortgage loans.
Any option to purchase described in the second item above will be
limited to cases in which the aggregate Stated Principal Balance of the
remaining mortgage loans is less than or equal to ten percent (10%) of the
initial aggregate Stated Principal Balance of the mortgage loans. In addition to
the foregoing, the master servicer or the depositor may have the option to
purchase, in whole but not in part, the certificates specified in the related
prospectus supplement in the manner described 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 depositor, the mortgage loans may be
sold, thereby effecting a retirement of the certificates and the termination of
the trust, or the certificates so purchased may be held or resold by the master
servicer or the depositor. 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
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agreement, a penalty may be imposed upon the certificateholders based upon the
fee that would be foregone by the master servicer because of the related
termination.
Any purchase described in the preceding paragraph of mortgage loans and
property acquired relating to the mortgage loans evidenced by a series of
certificates shall be made at the option of the master servicer, the depositor
or, if applicable, the holder of the REMIC residual certificates at the price
specified in the related prospectus supplement. The exercise of that right will
effect early retirement of the certificates of that series, but the right of any
entity to purchase the mortgage loans and related property will be in accordance
with the criteria, and will be at the price, set forth in the related prospectus
supplement. Early termination in this manner may adversely affect the yield to
holders of some classes of the certificates. If a REMIC election has been made,
the termination of the related trust will be effected in a manner consistent
with applicable federal income tax regulations and its status as a REMIC.
In addition to the optional repurchase of the property in the related
trust, if so specified in the related prospectus supplement, a holder of the
Call Class will have the right, solely at its discretion, to terminate the
related trust and thereby effect early retirement of the certificates of the
series, on any distribution date after the 12th distribution date following the
date of initial issuance of the related series of certificates and until the
date when the optional termination rights of the master servicer and the
depositor become exercisable. The Call Class will not be offered under the
prospectus supplement. Any such call will be of the entire trust at one time;
multiple calls with respect to any series of certificates will not be permitted.
In the case of a call, the holders of the certificates will be paid a price
equal to the Call Price. To exercise the call, the Call Certificateholder must
remit to the related trustee for distribution to the certificateholders, funds
equal to the Call Price. If those funds are not deposited with the related
trustee, the certificates of that series will remain outstanding. In addition,
in the case of a trust for which a REMIC election or elections have been made,
this termination will be effected in a manner consistent with applicable Federal
income tax regulations and its status as a REMIC. In connection with a call by
the Call certificateholder, the final payment to the certificateholders will be
made upon surrender of the related certificates to the trustee. Once the
certificates have been surrendered and paid in full, there will not be any
further liability to certificateholders.
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 depositor and/or its
affiliates, including Residential Funding
Corporation.
The trustee may resign at any time, in which event the depositor will
be obligated to appoint a successor trustee. The depositor may also remove the
trustee if the trustee ceases to be eligible to continue as trustee under the
pooling and servicing agreement or if the trustee becomes
insolvent.
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Upon becoming aware of those circumstances, the depositor will be obligated to
appoint a successor trustee. The trustee may also be removed at any time by the
holders of certificates evidencing not less than 51% of the aggregate voting
rights in the related trust. Any resignation or removal of the trustee and
appointment of a successor trustee will not become effective until acceptance of
the appointment by the successor trustee.
YIELD CONSIDERATIONS
The yield to maturity of a certificate will depend on the price paid by
the holder for the certificate, the pass-through rate on any 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 the certificate or its notional amount, 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 the mortgage loan outstanding as of the first day of the related due date for
the mortgage loan, subject to any deferred interest. The amount of 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 that class's specified
percentage of each 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 the certificate, or any combination of pass-through rates, calculated
as described in this prospectus 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 the certificate because, while interest
will accrue on each mortgage loan from the first day of each month, the
distribution of interest will be made on the 25th day or, if the 25th day is not
a business day, the next succeeding business day, of the month following the
month of accrual.
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 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 Net Mortgage Rates, net of servicing fees and any
Excess Spread or Excluded Spread, of the related mortgage loans for the month
preceding the
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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 for the mortgage loans by the
depositor, 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. This type of
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 its holders. In some circumstances, rapid prepayments may result in the
failure of the holders to recoup their original investment. In addition, the
yield to maturity on other types of classes of certificates, including accrual
certificates, certificates with a pass-through rate that fluctuates inversely
with or at a multiple of an index or other classes in a series including more
than one class of 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 of
the mortgage loans, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal payments
and repurchases occurring at a rate higher or lower than the rate anticipated by
the investor during the period immediately following the issuance of a series
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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. Prepayments in
full generally will reduce the amount of interest distributed in the following
month to holders of certificates entitled to distributions of interest if the
resulting Prepayment Interest Shortfall is not covered by Compensating Interest.
See "Description of the Certificates--Prepayment Interest Shortfalls." 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
the partial prepayment is received. As a result, 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 the
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 LTV 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 LTV ratios
greater than 80% and with no primary insurance policies. The yield on any class
of certificates and the timing of principal payments on that class may also be
affected by modifications or actions that may be approved by the master servicer
as described in this prospectus 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 some 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
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usually 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 Corporation's underwriting guidelines, and may accordingly
increase the risk of default with respect to the related mortgage loan.
The mortgage rates on ARM loans that are subject to negative
amortization typically 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 typically 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 those 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 their principal balance and will bear interest
at the applicable mortgage rate.
The addition of any deferred interest to the principal balance of any
related class of certificates will lengthen the weighted average life of that
class of certificates and may adversely affect yield to holders of those
certificates. In addition, with respect to ARM loans that are subject to
negative amortization, during a period of declining interest rates, it might be
expected that each scheduled monthly payment on such a mortgage loan would
exceed the amount of scheduled principal and accrued interest on its principal
balance, and since the excess will be applied to reduce the principal balance of
the related class or classes of certificates, the weighted average life of those
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 that class's
principal balance or notional balance, as adjusted downward to reflect any
decrease in interest caused by any Principal Prepayments and the addition of any
deferred interest to the principal balance of any mortgage loan. See
"Description of the Certificates--Principal and Interest on the Certificates."
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the mortgage loans in a given mortgage pool will vary depending upon
the type of mortgage loans included in the 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
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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 those mortgage loans, is expected to be a
substantial amount, will typically depend on the mortgagor's ability to obtain
refinancing of the 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. Neither the depositor, 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 prepayment standard or model 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
that series that would be outstanding on specified payment dates for the series
based on the assumptions stated in the related 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.
The following is a list of factors that may affect prepayment
experience: o homeowner mobility; o economic conditions; o changes in
mortgagors' housing needs; o job transfers; o unemployment; o
mortgagors' equity in the properties securing the mortgages; o
servicing decisions; o enforceability of due-on-sale clauses; o
mortgage market interest rates; o mortgage recording taxes; o
solicitations and the availability of mortgage funds; and o the
obtaining of secondary financing by the mortgagor.
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 some transfers by the mortgagor of the underlying mortgaged property.
Unless the related prospectus supplement indicates otherwise, the master
servicer will enforce any due-on-sale clause to the extent it has knowledge of
the conveyance or
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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, in some circumstances, 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 provisions of the pooling and servicing
agreement and legal developments that may affect the prepayment experience on
the mortgage loans.
In addition, some 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 some extent, depend on the interest rates on
the underlying mortgage loans.
A subservicer may allow the refinancing of a mortgage loan in any trust
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 a refinancing, the new loan would not be
included in the related trust and, therefore, the 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. These programs may include, without limitation,
modifications of existing loans, general or targeted solicitations, the offering
of pre-approved applications, reduced origination fees or closing costs, or
other financial incentives. Targeted solicitations may be based on a variety of
factors, including the credit of the borrower or the location of the mortgaged
property. In addition, subservicers or the master servicer may encourage
assumptions of mortgage loans, including defaulted mortgage loans, under which
creditworthy borrowers assume the outstanding indebtedness of the mortgage loans
which may be removed from the related mortgage pool. As a result of these
programs, with respect to the mortgage pool underlying any trust (i) the rate of
Principal Prepayments of the mortgage loans in the 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.
All statistics known to the depositor 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.
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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 those 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 depositor is not aware
of any historical prepayment experience with respect to mortgage loans secured
by properties located in Puerto Rico and, accordingly, prepayments on those
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, the adjustments generally will:
o not increase or decrease the mortgage rates by more than a
fixed percentage amount on each adjustment date;
o not increase the mortgage rates over a fixed percentage amount
during the life of any ARM Loan; and
o 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 some 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 some circumstances, the master servicer, the depositor 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. See "The Pooling and Servicing Agreement--termination; Retirement of
Certificates."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of some legal aspects of
mortgage loans that are general in nature. Because these legal aspects are
governed in part by state law, which laws may differ substantially from state to
state, the summaries do not purport to be complete, to reflect the laws of any
particular state or to encompass the laws of all states in which the mortgaged
properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the mortgage loans.
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THE MORTGAGE LOANS
GENERAL
The mortgage loans, other than Cooperative Loans, will be secured by
deeds of trust, mortgages or deeds to secure debt depending upon the prevailing
practice in the state in which the related mortgaged property is located. In
some states, a mortgage, deed of trust or deed to secure debt creates a lien
upon the related real property. In other states, the mortgage, deed of trust or
deed to secure debt conveys legal title to the property to the mortgagee subject
to a condition subsequent, for example, the payment of the indebtedness secured
thereby. These instruments are not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers. Priority
with respect to these instruments depends on their terms and in some cases on
the terms of separate subordination or inter-creditor agreements, and generally
on the order of recordation of the mortgage deed of trust or deed to secure debt
in the appropriate recording office.
There are two parties to a mortgage, the mortgagor, who is the borrower
and homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In some states, three parties may be involved in a mortgage financing
when title to the property is held by a land trustee under a land trust
agreement of which the borrower is the beneficiary; at origination of a mortgage
loan, the land trustee, as fee owner of the property, executes the mortgage and
the borrower executes (1) a separate undertaking to make payments on the
mortgage note and (2) an assignment of leases and rents. 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, the grantee's
authority under a deed to secure debt generally with a power of sale, to the
trustee to secure payment of the obligation. A deed to secure debt typically has
two parties, under which the borrower, or grantor, conveys title to the real
property to the grantee, or lender, typically with a power of sale, until the
time when the debt is repaid. The trustee's authority under a deed of trust and
the mortgagee's 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 some 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 Cooperative
Note evidencing a Cooperative Loan will be secured by a security interest in
shares issued by the Cooperative that owns the related apartment building, which
is a corporation entitled to be treated as a housing cooperative under federal
tax law, and in the related proprietary lease or occupancy agreement granting
exclusive rights to occupy a specific dwelling unit in the Cooperative's
building. The security agreement will create a lien upon,
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or grant a security interest in, the Cooperative shares and proprietary leases
or occupancy agreements, the priority of which will depend on, among other
things, the terms of the particular security agreement as well as the order of
recordation of the agreement, or the filing of the financing statements related
thereto, in the appropriate recording office or the taking of possession of the
Cooperative shares, depending on the law of the state in which the Cooperative
is located. This type of lien or security interest is not, in general, prior to
liens in favor of the cooperative corporation for unpaid assessments or common
charges.
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
typically the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as mortgagor or lessee, as the case may be, is also
responsible for fulfilling the mortgage or rental obligations.
An underlying mortgage loan is ordinarily obtained by the Cooperative
in connection with either the construction or purchase of the Cooperative's
building or the obtaining of capital by the Cooperative. The interest of the
occupant under proprietary leases or occupancy agreements as to which that
Cooperative is the landlord is 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 the final payment could lead to foreclosure
by the mortgagee.
Similarly,
a land lease has an expiration date and the inability of the Cooperative to
extend its term or, in the alternative, to purchase the land, could lead to
termination of the Cooperative's interest in the property and termination of all
proprietary leases and occupancy agreements. In either event, a foreclosure by
the holder of an underlying mortgage or the termination of the underlying lease
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
shares of the Cooperative, or in the case of the 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 under the
proprietary lease, which rental payment represents the tenant-stockholder's pro
rata share of the Cooperative's payments for its underlying mortgage, real
property taxes, maintenance expenses and other capital
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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. In accordance with
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 Internal Revenue Code of 1986, or Internal Revenue Code, of a corporation
that qualifies as a "cooperative housing corporation" within the meaning of
Section 216(b)(1) of the Internal Revenue Code is allowed a deduction for
amounts paid or accrued within his or her taxable year to the corporation
representing his or her proportionate share of certain interest expenses and
real estate taxes allowable as a deduction under Section 216(a) of the Internal
Revenue Code to the corporation under Sections 163 and 164 of the Internal
Revenue Code. In order for a corporation to qualify under Section 216(b)(1) of
the Internal Revenue Code for its taxable year in which those items are
allowable as a deduction to the corporation, the section requires, among other
things, that at least 80% of the gross income of the corporation be derived from
its tenant-stockholders. By virtue of this requirement, the status of a
corporation for purposes of Section 216(b)(1) of the Internal Revenue Code must
be determined on a year-to-year basis. Consequently, there can be no assurance
that Cooperatives relating to the Cooperative Loans will qualify under this
section for any particular year. In the event that a Cooperative fails to
qualify for one or more years, the value of the collateral securing any related
Cooperative Loans could be significantly impaired because no deduction would be
allowable to tenant-stockholders under Section 216(a) of the Internal Revenue
Code with respect to those years. In view of the significance of the tax
benefits accorded tenant-stockholders of a corporation that qualifies under
Section 216(b)(1) of the Internal Revenue Code, the likelihood that this type of
failure would be permitted to continue over a period of years appears remote.
FORECLOSURE ON MORTGAGE LOANS
Although a deed of trust or a deed to secure debt may also be
foreclosed by judicial action, foreclosure of a deed of trust or a deed to
secure debt is typically accomplished by a non-judicial trustee's or grantee's,
as applicable, sale under a specific provision in the deed of trust or deed to
secure debt which authorizes the trustee or grantee, as applicable, to sell the
property upon any
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default by the borrower under the terms of the note or deed of trust or deed to
secure debt. In addition to any notice requirements contained in a deed of trust
or deed to secure debt, in some states, the trustee or grantee, as applicable,
must record a notice of default and send a copy to the borrower/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 grantee, as applicable,
must provide notice to any other individual having an interest of record in the
real property, including any junior lienholders. If the deed of trust or deed to
secure debt is not reinstated within a specified period, a notice of sale must
be posted in a public place and, in most states, published for a specific period
of time in one or more newspapers. In addition, some states' laws require that a
copy of the notice of sale be posted on the property and sent to all parties
having an interest of record in the real property.
Foreclosure of a mortgage generally is accomplished by judicial action.
In most cases, 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 those states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
In the case of foreclosure under a mortgage, a deed of trust or deed to
secure debt, the sale by the referee or other designated officer or by the
trustee or grantee, as applicable, is a public
sale.
However, because of the difficulty a potential buyer at the sale may have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
grantee, as applicable, or referee for a credit bid less than or equal to the
unpaid principal amount of the mortgage or deed of trust or deed to secure debt,
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 the 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 repairs at its own expense that 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
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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 those actions. The process may be expedited if the mortgagee can obtain the
consent of the defendant to the execution of a deed in lieu of foreclosure.
Under Commonwealth of Puerto Rico law, in the case of the public sale
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 the property and (b) is occupied by
the mortgagor as his principal residence, the mortgagor of the property has a
right to be paid the first $1,500 from the proceeds obtained on the public sale
of the property. The mortgagor can claim this sum of money from the mortgagee at
any time prior to the public sale or up to one year after the sale. This payment
would reduce the amount of sales proceeds available to satisfy the mortgage loan
and may increase the amount of the loss.
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with
the rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, in accordance
with restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the
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Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by the tenant-stockholder, including mechanics'
liens against the Cooperative's building incurred by the tenant-stockholder.
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 the 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 the lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under the proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender 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. This
approval or consent is usually based on the prospective purchaser's income and
net worth, among other factors, and may significantly reduce the number of
potential purchasers, which could limit the ability of the lender to sell and
realize upon the value of the collateral. 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
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adversely affect the marketability of the shares allocated to the dwelling unit
in the event of foreclosure.
A foreclosure on the Cooperative shares is accomplished by public sale
in accordance with the provisions of Article 9 of the Uniform Commercial Code,
or UCC, and the security agreement relating to those shares. Article 9 of the
UCC requires that a sale be conducted in a "commercially reasonable" manner.
Whether a sale has been conducted in a "commercially reasonable" manner will
depend on the facts in each case. In determining commercial reasonableness, a
court will look to the notice given the debtor and the method, manner, time,
place and terms of the sale and the sale price. 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, or a deed to
secure debt or foreclosure of a mortgage, the borrower and foreclosed junior
lienors or other parties are given a statutory period, typically ranging from
six months to two years, in which to redeem the property from the foreclosure
sale. In some states, redemption may occur only 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.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Some states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust, a mortgagee under a mortgage or
a grantee under a deed to secure debt. In
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some states, including California, statutes limit the right of the beneficiary,
mortgagee or grantee to obtain a deficiency judgment against the borrower
following foreclosure. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. In the case of a mortgage loan secured by a property owned by a trust
where the Mortgage Note is executed on behalf of the trust, a deficiency
judgment against the trust following foreclosure or sale under a deed of trust
or deed to secure debt, even if obtainable under applicable law, may be of
little value to the beneficiary, grantee or mortgagee if there are no trust
assets against which the deficiency judgment may be executed. Some state
statutes require the beneficiary, grantee or mortgagee to exhaust the security
afforded under a deed of trust, deed to secure debt or mortgage by foreclosure
in an attempt to satisfy the full debt before bringing a personal action against
the borrower.
In other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting the security;
however, in some of these states, the lender, following judgment on the personal
action, may be deemed to have elected a remedy and may be precluded from
exercising remedies with respect to the security. Consequently, the practical
effect of the election requirement, in those states permitting this election, is
that lenders will usually proceed against the security first rather than
bringing a personal action against the borrower. Finally, in 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, grantee 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 some
circumstances, including circumstances where the disposition of the collateral,
which, in the case of a Cooperative Loan, would be the shares of the Cooperative
and the related proprietary lease or occupancy agreement, was not conducted in a
commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon its
collateral and/or enforce a deficiency judgment. For example, under the federal
bankruptcy law, all actions against the debtor, the debtor's property and any
co-debtor are automatically stayed upon the filing of a bankruptcy petition.
Moreover, a court having federal bankruptcy jurisdiction may permit a debtor
through its Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary
default relating to a mortgage loan on the 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
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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 under a
plan confirmed under 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 Internal Revenue Code may, in some
circumstances, have priority over the lien of a mortgage, deed to secure debt or
deed of trust. This may have the effect of delaying or interfering with the
enforcement of rights 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.
Some of the mortgage loans may be High Cost Loans. Purchasers or
assignees of any High Cost Loan, including any trust, could be liable for all
claims and subject to all defenses arising under any applicable law that the
borrower could assert against the originator of the High Cost Loan. Remedies
available to the borrower include monetary penalties, as well as recission
rights if the appropriate disclosures were not given as required.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the prospectus supplement indicates otherwise, the mortgage
loans contain due-on-sale clauses. These clauses permit the lender to accelerate
the maturity of the loan if the borrower sells, transfers or conveys the
property. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses has been limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982, or Garn-St Germain Act, preempts state
constitutional, statutory and case law that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms,
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subject to limited exceptions. The Garn-St Germain Act does "encourage" lenders
to permit assumption of loans at the original rate of interest or at some other
rate less than the average of the original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, 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 under 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 designed to relieve the borrower from the legal
effect of its defaults under the loan documents. Examples of judicial remedies
that have been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, including the borrower failing to adequately maintain the property.
Finally, some courts have been faced with the issue of whether or not federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under deeds of trust, deeds to secure debt or
mortgages receive notices in addition to the statutorily prescribed minimum. For
the most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust, or under a deed
to secure a debt or a mortgagee having a power of sale, does not involve
sufficient state action to afford constitutional protections to the borrower.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act of
1980, or Title V, provides that state usury limitations shall not apply to some
types of residential first mortgage loans, including Cooperative Loans,
originated by some lenders 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, or OTS 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,
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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 described in the related prospectus supplement, each
seller of a mortgage loan, 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. These restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act, or Title VIII.
Title VIII provides that, notwithstanding any state law to the contrary;
o state-chartered banks may originate alternative mortgage
instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to the origination of
alternative mortgage instruments by national banks,
o state-chartered credit unions may originate alternative
mortgage instruments in accordance with regulations
promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by
federal credit unions and
o all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered
savings banks and mutual savings banks and mortgage banking
companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal
Home Loan Bank Board, predecessor to the OTS, 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 these
provisions. Some states have taken this action.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended, or CERCLA, and under state law in some
states, a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a
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mortgaged property may become liable in some circumstances for the costs of
cleaning up hazardous substances regardless of whether they have contaminated
the property. CERCLA imposes strict, as well as joint and several, liability on
several classes of potentially responsible parties, including current owners and
operators of the property who did not cause or contribute to the contamination.
Furthermore, liability under CERCLA is not limited to the original or
unamortized principal balance of a loan or to the value of the property securing
a loan. Lenders may be held liable under CERCLA as owners or operators unless
they qualify for the secured creditor exemption to CERCLA. This exemption
exempts from the definition of owners and operators those who, without
participating in the management of a facility, hold indicia of ownership
primarily to protect a security interest in the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of
1996, or Conservation Act amended, among other things, the provisions of CERCLA
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 some circumstances may impose liability
on a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property on
which contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and lead-
based paint. These cleanup costs may be substantial. It is possible that the
cleanup costs could become a liability of a trust and reduce the amounts
otherwise distributable to the holders of the related series of certificates.
Moreover, some federal statutes and some states by statute impose an
Environmental Lien. All subsequent liens on that property are usually
subordinated to an Environmental Lien and, in some states, even prior recorded
liens are subordinated to Environmental Liens. In the latter states, the
security interest of the trustee in a related parcel of real property that is
subject to an Environmental Lien could be adversely affected.
Traditionally, many residential mortgage lenders have not taken steps
to evaluate whether contaminants are present 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
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depositor nor any master servicer will be required by any Agreement to undertake
any of these evaluations prior to foreclosure or accepting a deed-in-lieu of
foreclosure. The depositor does not make any representations or warranties or
assume any liability with respect to the absence or effect of contaminants on
any mortgaged property or any casualty resulting from the presence or effect of
contaminants. However, the master servicer will not be obligated to foreclose on
any mortgaged property or accept a deed-in-lieu of foreclosure if it knows or
reasonably believes that there are material contaminated conditions on the
property. A failure so to foreclose may reduce the amounts otherwise available
to 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 Soldiers' and Sailors' Civil Relief Act of 1940,
as amended, or Relief Act, a borrower who enters military service after the
origination of the 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 the borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Air Force, Army, Marines, Navy, National Guard,
Reserves or Coast Guard, and officers of the U.S. Public Health Service assigned
to duty with the military.
Because the Relief Act applies to borrowers who enter military
service, including reservists who are called to active duty, after origination
of the related mortgage loan, no information can be provided as to the number of
mortgage loans that may be affected by the Relief Act. With respect to mortgage
loans included in a trust, 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 those 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 some
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.
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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 some states, there are or may be specific limitations
upon the late charges which a lender may collect from a borrower for delinquent
payments. Some states also limit the amounts that a lender may collect from a
borrower as an additional charge if the loan is prepaid. In addition, the
enforceability of provisions that provide for prepayment fees or penalties 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, or RICO statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984, the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime 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, or DIDMC, and as a result, a
mortgage loan that provided for negative amortization violated New Hampshire's
requirement that first mortgage loans provide for computation of interest on a
simple
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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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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a discussion of the material federal income tax
consequences of the purchase, ownership and disposition of the certificates.
This discussion is directed solely to certificateholders that hold the
certificates as capital assets within the meaning of Section 1221 of the
Internal Revenue Code and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which, including banks, insurance companies and foreign investors) may be
subject to special rules. In addition, the authorities on which this discussion,
and the opinion referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. 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 in this prospectus or in a
prospectus supplement. In addition to the federal income tax consequences
described in this prospectus, potential investors should consider the state and
local tax consequences, if any, of the purchase, ownership and disposition of
the 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, or a portion thereof, which the master servicer will
covenant to elect to have treated as a REMIC under Sections 860A through 860G or
REMIC Provisions of the Internal Revenue Code. The prospectus supplement for
each series of certificates will indicate whether a REMIC election or elections
will be made for the related trust and, if that election is to be made, will
identify all "regular interests" and "residual interests" in the REMIC. If a
REMIC election will not be made for a trust, the federal income consequences of
the purchase, ownership and disposition of the related certificates will be
described 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.
In the event that a REMIC election is not made upon the issuance of a
particular Series because, for example, a grantor trust structure is being used,
an opinion of counsel relating to the tax consequences of that structure will be
filed prior to the initial sale of the related certificates. Furthermore, the
tax discussion relating to that structure will be provided in the prospectus
supplement for that series.
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The following discussion is based in part upon the OID regulations and
in part upon 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 some issues relevant to, and in some instances provide that
they are not applicable to, securities similar to the certificates.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC certificates, Thacher
Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP or Stroock & Stroock & Lavan
LLP, counsel to the depositor, will deliver their opinion to the effect that,
assuming compliance with all provisions of the related pooling and servicing
agreement, the related trust, or each applicable portion of the trust, will
qualify as a REMIC and the REMIC certificates offered with respect thereto will
be considered to evidence ownership of "regular interests,"or REMIC regular
certificates or "residual interests," or 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 Internal Revenue Code for that status
during any taxable year, the Internal Revenue Code provides that the entity will
not be treated as a REMIC for that year and thereafter. In that event, the
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 in this prospectus under "Material Federal Income Tax
Consequences". Although the Internal Revenue Code authorizes the Treasury
Department to issue regulations providing relief in the event of an inadvertent
termination of REMIC status, no regulations have been issued. Any relief,
moreover, may be accompanied by sanctions, including the imposition of a
corporate tax on all or a portion of the trust's income for the period in which
the requirements for that status are not satisfied. The pooling and servicing
agreement with respect to each REMIC will include provisions designed to
maintain the trust's status as a REMIC under the REMIC Provisions. It is not
anticipated that the status of any trust 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 Internal Revenue Code and assets
described in Section 7701(a)(19)(C) of the Internal Revenue Code in the same
proportion that the assets of the REMIC underlying the certificates would be so
treated. Moreover, if 95% or more of the assets of the REMIC qualify for any of
the foregoing treatments at all times during a calendar year, the REMIC
certificates will qualify for the corresponding status in their entirety for
that calendar year. Interest, including original issue discount, on the REMIC
regular certificates and income allocated to the class of REMIC residual
certificates will be interest described in Section 856(c)(3)(B) of the Internal
Revenue Code
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to the extent that those certificates are treated as "real estate assets" within
the meaning of Section 856(c)(4)(A) of the Internal Revenue Code. In addition,
the REMIC regular certificates will be "qualified mortgages" within the meaning
of Section 860G(a)(3)(C) of the Internal Revenue Code if transferred to another
REMIC on its startup day in exchange for regular or residual interests in that
REMIC. The determination as to the percentage of the REMIC's assets that
constitute assets described in the foregoing sections of the Internal Revenue
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 that
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 those 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 or Pledged Asset Mortgage Loans, may not be treated entirely as assets
described in the foregoing sections. If the assets of a REMIC include Additional
Collateral Loans or Pledged Asset Mortgage 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 those characterizations. If so, the
related prospectus supplement will describe the mortgage loans, including
Additional Collateral Loans or Pledged Asset Mortgage Loans, that may not be so
treated. The REMIC regulations do provide, however, that payments on mortgage
loans held pending distribution are considered part of the mortgage loans for
purposes of Section 856(c)(4)(A) of the Internal Revenue Code.
TIERED REMIC STRUCTURES
For some series of REMIC certificates, two or more separate elections
may be made to treat designated portions of the related trust as REMICs for
federal income tax purposes. Upon the issuance of this type of series of REMIC
certificates, Thacher Proffitt & Wood, Orrick, Herrington & Sutcliffe LLP or
Stroock & Stroock & Lavan LLP, counsel to the depositor, will deliver their
opinion 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
Internal Revenue Code, and "loans secured by an interest in real property" under
Section 7701(a)(19)(C) of the Internal Revenue Code, and
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whether the income on the certificates is interest described in Section
856(c)(3)(B) of the Internal Revenue 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
Some REMIC regular certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Internal Revenue Code.
Any holders of REMIC regular certificates issued with original issue discount
typically will be required to include original issue discount in income as it
accrues, in accordance with the method described below, in advance of the
receipt of the cash attributable to that income. In addition, Section 1272(a)(6)
of the Internal Revenue Code provides special rules applicable to REMIC regular
certificates and certain other debt instruments issued with original issue
discount. Regulations have not been issued under that section.
The Internal Revenue Code requires that a prepayment assumption be used
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 the discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The conference committee report accompanying the Tax Reform Act of 1986
indicates that the regulations will provide that the prepayment assumption used
with respect to a REMIC regular certificate must be the same as that used in
pricing the initial offering of the REMIC regular certificate. The prepayment
assumption used by the master servicer in reporting original issue discount for
each series of REMIC regular certificates will be consistent with this standard
and will be disclosed in the related prospectus supplement. However, neither the
depositor nor the master servicer will make any representation that the mortgage
loans will in fact prepay at a rate conforming to the prepayment assumption or
at any other rate.
The original issue discount, if any, on a REMIC regular certificate
will be the excess of its stated redemption price at maturity over its issue
price. The issue price of a particular class of
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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, or the closing date, the issue price for
that class will be treated as the fair market value of the class on the closing
date. Under the OID regulations, the stated redemption price of a REMIC regular
certificate is equal to the total of all payments to be made on that certificate
other than "qualified stated interest." Qualified stated interest includes
interest that is unconditionally payable at least annually at a single fixed
rate, or in the case of a variable rate debt instrument, at a "qualified
floating rate," an "objective rate," a combination of a single fixed rate and
one or more "qualified floating rates" or one "qualified inverse floating rate,"
or a combination of "qualified floating rates" that generally does not operate
in a manner that accelerates or defers interest payments on a 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 of the original issue discount will vary according to
the characteristics of the REMIC regular certificates. If the original issue
discount rules apply to the certificates, the related prospectus supplement will
describe the manner in which the 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, or IRS.
Some classes of the REMIC regular certificates may provide for the
first interest payment with respect to their certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" (as defined below) for original issue discount is each monthly period
that 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 the accrued interest. In these cases, information
returns to the certificateholders and the IRS will be based on the position that
the portion of the purchase price paid for the interest accrued with respect to
periods prior to the closing date is treated as part of the overall cost of the
REMIC regular certificate, and not as a separate asset the cost of which is
recovered entirely out of interest received on the next distribution ate, and
that portion of the interest paid on the first distribution date in excess of
interest accrued for a number of days corresponding to the number of days from
the closing date to the first distribution date should be included in the stated
redemption price of the REMIC regular certificate. However, the OID regulations
state that all or some portion of the accrued interest may be treated as a
separate asset the cost of which is
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recovered entirely out of interest paid on the first distribution date. It is
unclear how an election to do so would be made under the OID regulations and
whether that election could be made unilaterally by a certificateholder.
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 the REMIC regular certificate, by multiplying (i)
the number of complete years, rounding down for partial years, from the issue
date until the payment is expected to be made, presumably taking into account
the prepayment assumption, by (ii) a fraction, the numerator of which is the
amount of the payment, and the denominator of which is the stated redemption
price at maturity of the 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 the DE MINIMIS
original issue discount and a fraction, the numerator of which is the amount of
the principal payment and the denominator of which is the outstanding stated
principal amount of the 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 that 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 the certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held the 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 accrual period, begins on
the closing date, a calculation will be made of the portion of the original
issue discount that accrued during that accrual period. The portion of original
issue discount that accrues in any accrual period will equal the excess, if any,
of (i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC regular certificate,
if any, in future periods and (B) the distributions made on the REMIC regular
certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of the 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
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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 the certificate, increased by the aggregate amount of original issue
discount that accrued with respect to that certificate in prior accrual periods,
and reduced by the amount of any distributions made on that 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 that 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 uncertificated regular
interests as a single debt instrument as set forth in the OID regulations, so
long as the pooling and servicing agreement requires that the uncertificated
regular interests be transferred together.
A subsequent purchaser of a REMIC regular certificate that purchases
the certificate at a cost, excluding any portion of that cost attributable to
accrued qualified stated interest, less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to that certificate. However, each daily
portion will be reduced, if the cost is in excess of its "adjusted issue price,"
in proportion to the ratio that excess bears to the aggregate original issue
discount remaining to be accrued on the 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 the certificate at the beginning of the accrual period which includes
that day, plus (ii) the daily portions of original issue discount for all days
during the accrual period prior to that day minus (iii) any principal payments
made during the accrual period prior to that day with respect to the
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
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Section 1276 of the Internal Revenue Code such a certificateholder generally
will be required to allocate the portion of each distribution representing
stated redemption price first to accrued market discount not previously included
in income, and to recognize ordinary income to that extent.
A certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, the election will apply to all market
discount bonds acquired by the certificateholder on or after the first day of
the first taxable year to which the election applies. In addition, the OID
regulations permit a certificateholder to elect to accrue all interest,
discount, including DE MINIMIS market or original issue discount, and premium in
income as interest, based on a constant yield method. If the election were made
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 the certificateholder acquires during the taxable year of
the election or thereafter. Similarly, a certificateholder that made this
election for a certificate that is acquired at a premium would be deemed to have
made an election to amortize bond premium with respect to all debt instruments
having amortizable bond premium that the certificateholder owns or acquires. See
"--Premium." Each of these elections to accrue interest, discount and premium
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 Internal
Revenue Code if the market discount is less than 0.25% of the remaining stated
redemption price of the 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." This treatment may result in discount being included in income at a
slower rate than discount would be required to be included in income using the
method described above.
Section 1276(b)(3) of the Internal Revenue Code specifically authorizes
the Treasury Department to issue regulations providing for the method for
accruing market discount on debt instruments, the principal of which is payable
in more than one installment. Until regulations are issued by the Treasury
Department, certain rules described in the Committee Report apply. The Committee
Report indicates that in each accrual period market discount on REMIC regular
certificates should accrue, at the certificateholder's option:
o on the basis of a constant yield method,
o 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
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remaining to be paid on the REMIC regular certificate as of
the beginning of the accrual period, or
o 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 those 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 the 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 that Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
In addition, under Section 1277 of the Internal Revenue Code, a holder
of a 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 deferred interest expense would not exceed the market discount that
accrues during that taxable year and is, in general, allowed as a deduction not
later than the year in which the market discount is includible in income. If the
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by that holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
PREMIUM
A REMIC regular certificate purchased at a cost, excluding any portion
of that cost attributable to accrued qualified stated interest, greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of a REMIC regular certificate may elect under Section 171
of the Internal Revenue Code to amortize that premium under the constant yield
method over the life of the certificate. If made, this election will apply to
all debt instruments having amortizable bond premium that the holder 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,
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further treating the certificateholder as having made the election to amortize
premium generally. See "--Market Discount." The conference committee report
states that the same rules that apply to accrual of market discount, which rules
will require use of a prepayment assumption in accruing market discount with
respect to REMIC regular certificates without regard to whether those
certificates have original issue discount, will also apply in amortizing bond
premium under Section 171 of the Internal Revenue Code.
REALIZED LOSSES
Under Section 166 of the Internal Revenue Code, both corporate holders
of the REMIC regular certificates and noncorporate holders of the REMIC regular
certificates that acquire those certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their certificates become wholly or partially
worthless as the result of one or more Realized Losses on the 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 Internal Revenue Code until the
holder's certificate becomes wholly worthless--until its outstanding principal
balance has been reduced to zero--and that the loss will be characterized as a
short-term capital loss.
Each holder of a REMIC regular certificate will be required to accrue
interest and original issue discount with respect to that 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 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 that 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 the loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL
As residual interests, the REMIC residual certificates will be subject
to tax rules that differ significantly from those that would apply if the REMIC
residual certificates were treated for federal income tax purposes as direct
ownership interests in the mortgage loans or as debt instruments issued by the
REMIC.
A holder of a REMIC residual certificate generally will be required to
report its daily portion
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of the taxable income or, in accordance with the limitations noted in this
discussion, the net loss of the REMIC for each day during a calendar quarter
that the holder owned the REMIC residual certificate. For this purpose, the
taxable income or net loss of the REMIC will be allocated to each day in the
calendar quarter ratably using a "30 days per month/90 days per quarter/360 days
per year" convention unless otherwise disclosed in the related prospectus
supplement. The daily amounts will then be allocated among the REMIC residual
certificateholders in proportion to their respective ownership interests on that
day. Any amount included in the gross income or allowed as a loss of any REMIC
residual certificateholder by virtue of this allocation will be treated as
ordinary income or loss. The taxable income of the REMIC will be determined
under the rules described in this prospectus in "--Taxable Income of the REMIC"
and will be taxable to the REMIC residual certificateholders without regard to
the timing or amount of cash distributions by the REMIC. Ordinary income derived
from REMIC residual certificates will be "portfolio income" for purposes of the
taxation of taxpayers in accordance with limitations under Section 469 of the
Internal Revenue Code on the deductibility of "passive losses."
A holder of a REMIC residual certificate that purchased the certificate
from a prior holder of that certificate also will be required to report on its
federal income tax return amounts representing its daily portion of the taxable
income or net loss of the REMIC for each day that it holds the REMIC residual
certificate. These daily portions generally will equal the amounts of taxable
income or net loss determined as described above. The committee report indicates
that modifications of the general rules may be made, by regulations, legislation
or otherwise, to reduce, or increase, the income or loss of a REMIC residual
certificateholder that purchased the REMIC residual certificate from a prior
holder of such certificate at a price greater than, or less than, the adjusted
basis (as defined below) that REMIC residual certificate would have had in the
hands of an original holder of that Certificate. The REMIC regulations, however,
do not provide for any such modifications.
Any payments received by a REMIC residual certificateholder in
connection with the acquisition of that REMIC residual certificate will be taken
into account in determining the income of the holder for federal income tax
purposes. Although it appears likely that any payment would be includible in
income immediately upon its receipt, the IRS might assert that the payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of these payments, holders of REMIC residual certificates should
consult their tax advisors concerning the treatment of these payments for income
tax purposes.
The amount of income REMIC residual certificateholders will be required
to report, or the tax liability associated with that income, may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC residual certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC residual certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess inclusions"
and "noneconomic" residual interests discussed below. The fact that the tax
liability associated with the income allocated to REMIC residual
certificateholders may exceed the cash distributions received by the REMIC
residual
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certificateholders for the corresponding period may significantly adversely
affect the REMIC residual certificateholders after-tax rate of return.
TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the 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. The 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
those interests in order to determine the basis of the REMIC in the mortgage
loans and other property held by the REMIC.
Subject to the possible application of the DE MINIMIS rules, the method
of accrual by the REMIC of original issue discount income and market discount
income with respect to mortgage loans that it holds will be equivalent to the
method of accruing original issue discount income for REMIC regular
certificateholders--under the constant yield method taking into account the
prepayment assumption. However, a REMIC that acquires loans at a market discount
must include the discount in income currently, as it accrues, on a constant
interest basis. See "-- Taxation of Owners of REMIC 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 discount will be includible in the income of the REMIC as it accrues,
in advance of receipt of the cash attributable to that income, under a method
similar to the method described above for accruing original issue discount on
the REMIC regular certificates. It is anticipated that each REMIC will elect
under Section 171 of the Internal Revenue
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Code to amortize any premium on the mortgage loans. Premium on any mortgage loan
to which the election applies may be amortized under a constant yield method,
presumably taking into account a prepayment assumption.
A REMIC will be allowed deductions for interest, including original
issue discount, on the 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 an 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 that class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC 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 Internal Revenue Code, which allows
those deductions only to the extent they exceed in the aggregate two percent of
the taxpayer's adjusted gross income, will not be applied at the REMIC level so
that the REMIC will be allowed deductions for servicing, administrative and
other non-interest expenses in determining its taxable income. All of these
expenses will be allocated as a separate item to the holders of REMIC residual
certificates, subject to the limitation of Section 67 of the Internal Revenue
Code. See "--Possible Pass-Through of Miscellaneous Itemized Deductions." If the
deductions allowed to the REMIC exceed its gross income for a calendar quarter,
the excess will be the net loss for the REMIC for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS
The adjusted basis of a REMIC residual certificate will be equal to the
amount paid for that REMIC residual certificate, increased by amounts included
in the income of the related
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certificateholder and decreased, but not below zero, by distributions made, and
by net losses allocated, to the related certificateholder.
A REMIC residual certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent the net loss exceeds the
REMIC residual certificateholder's adjusted basis in its REMIC residual
certificate as of the close of that calendar quarter, determined without regard
to the net loss. Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
in accordance with the same limitation, may be used only to offset income from
the REMIC residual certificate. The ability of REMIC residual certificateholders
to deduct net losses in accordance with additional limitations under the
Internal Revenue Code, as to which the certificateholders should consult their
tax advisors.
Any distribution on a REMIC residual certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC residual certificate. To the extent a distribution
on a REMIC residual certificate exceeds the adjusted basis, it will be treated
as gain from the sale of the REMIC residual certificate. holders of REMIC
residual certificates may be entitled to distributions early in the term of the
related REMIC under circumstances in which their bases in the REMIC residual
certificates will not be sufficiently large that distributions will be treated
as nontaxable returns of capital. Their bases in the REMIC residual certificates
will initially equal the amount paid for such REMIC residual certificates and
will be increased by their allocable shares of taxable income of the trust.
However, their basis increases may not occur until the end of the calendar
quarter, or perhaps the end of the calendar year, with respect to which the
REMIC taxable income is allocated to the REMIC residual certificateholders. To
the extent the REMIC residual certificateholders initial bases are less than the
distributions to the REMIC residual certificateholders, and increases in the
initial bases either occur after distributions or, together with their initial
bases, are less than the amount of the distributions, gain will be recognized to
the REMIC residual certificateholders on those distributions and will be treated
as gain from the sale of their REMIC residual certificates.
The effect of these rules is that a certificateholder may not amortize
its basis in a REMIC residual certificate, but may only recover its basis
through distributions, through the deduction of its share of any net losses of
the REMIC or 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 the REMIC residual certificate to its holder and the
adjusted basis the REMIC residual certificate would have had in the hands of the
original holder, see "--General."
EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC residual certificate
will be subject to federal income tax in all events.
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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 the REMIC residual
certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during that quarter that the REMIC residual certificate was held by the
REMIC residual certificateholder. The daily accruals of a REMIC residual
certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC residual certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the closing date. For this purpose,
the adjusted issue price of a REMIC residual certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC residual
certificate, increased by the sum of the daily accruals for all prior quarters
and decreased, but not below zero, by any distributions made with respect to the
REMIC residual certificate before the beginning of that quarter. The issue price
of a REMIC residual certificate is the initial offering price to the public,
excluding bond houses, brokers and underwriters, at which a substantial amount
of the REMIC residual certificates were sold. If less than a substantial amount
of a particular class of REMIC residual certificates is sold for cash on or
prior to the closing date, the issue price of that class will be treated as the
fair market value of that class on the closing date. The "long-term Federal
rate" is an average of current yields on Treasury securities with a remaining
term of greater than nine years, computed and published monthly by the IRS.
For REMIC residual certificateholders, an excess inclusion:
o will not be permitted to be offset by deductions, losses or
loss carryovers from other activities,
o will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and
o 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 the REMIC
residual certificates, reduced, but not below zero, by the real estate
investment trust taxable income, within the meaning of Section 857(b)(2) of the
Internal Revenue Code, excluding any net capital gain, will be allocated among
the shareholders of the trust in proportion to the dividends received by the
shareholders from the trust, and any
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amount so allocated will be treated as an excess inclusion with respect to a
REMIC residual certificate as if held directly by the shareholder. Treasury
regulations yet to be issued could apply a similar rule to regulated investment
companies, common trust funds and some cooperatives; the REMIC regulations
currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC regulations, transfers of "noneconomic" REMIC residual
certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If the transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on the "noneconomic" REMIC residual certificate. The REMIC regulations
provide that a REMIC residual certificate is noneconomic unless, based on the
prepayment assumption and on any required or permitted clean up calls, or
required qualified liquidation provided for in the REMIC's organizational
documents, (1) the present value of the expected future distributions
(discounted using the "applicable Federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue 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 restrictions under the terms of the related pooling and servicing
agreement that are intended to reduce the possibility of any transfer being
disregarded. The restrictions will require each party to a transfer to provide
an affidavit that no purpose of the transfer is to impede the assessment or
collection of tax, including representations as to the financial condition of
the prospective transferee, as to which the transferor also is required to make
a reasonable investigation to determine the transferee's historic payment of its
debts and ability to continue to pay its debts as they come due in the future.
Prior to purchasing a REMIC residual certificate, prospective purchasers should
consider the possibility that a purported transfer of the REMIC residual
certificate by such a purchaser to another purchaser at some future date may be
disregarded in accordance with the above-described rules which would result in
the retention of tax liability by that purchaser.
The related prospectus supplement will disclose whether offered REMIC
residual certificates may be considered "noneconomic" residual interests under
the REMIC regulations. Any disclosure that a REMIC residual certificate will not
be considered "noneconomic" will be based upon some assumptions, and the
depositor will make no representation that a REMIC residual certificate will not
be considered "noneconomic" for purposes of the above-described rules. See
"--Foreign Investors in REMIC certificates" for additional restrictions
applicable to transfers of certain REMIC residual certificates to foreign
persons.
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MARK-TO-MARKET RULES
The 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 those fees and expenses should be allocated
to the holders of the related REMIC regular certificates. Unless otherwise
stated in the related prospectus supplement, fees and expenses will be allocated
to holders of the related REMIC residual certificates in their entirety and not
to the holders of the related 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 the
individual's, estate's or trust's share of fees and expenses will be added to
the gross income of that holder and (ii) the individual's, estate's or trust's
share of fees and expenses will be treated as a miscellaneous itemized deduction
allowable in accordance with the limitation of Section 67 of the Internal
Revenue Code, which permits those deductions only to the extent they exceed in
the aggregate two percent of a taxpayer's adjusted gross income. In addition,
Section 68 of the Internal Revenue Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over that amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC certificateholders that
are in accordance with the limitations of either Section 67 or Section 68 of the
Internal Revenue Code may be substantial. Furthermore, in determining the
alternative minimum taxable income of such a holder of a REMIC Certificate that
is an individual, estate or trust, or a "Pass-Through Entity" beneficially owned
by one or more individuals, estates or trusts, no deduction will be allowed for
such holder's allocable portion of servicing fees and other miscellaneous
itemized deductions of the REMIC, even though an amount equal to the amount of
such fees and other deductions will be included in the holder's gross income.
Accordingly, the REMIC certificates may not be appropriate investments for
individuals, estates, or trusts, or pass-through entities
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beneficially owned by one or more individuals, estates or trusts. Any
prospective investors should consult with their tax advisors prior to making an
investment in these certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO
CERTAIN ORGANIZATIONS
If a REMIC residual certificate is transferred to a Disqualified
Organization, a tax would be imposed in an amount, determined under the REMIC
regulations, equal to: THE PRODUCT OF
(1) the present value, discounted using the "applicable Federal
rate" for obligations whose term ends on the close of the last
quarter in which excess inclusions are expected to accrue with
respect to the certificate, which rate is computed and
published monthly by the IRS, of the total anticipated excess
inclusions with respect to the REMIC residual certificate for
periods after the transfer; and
(2) the highest marginal federal income tax rate applicable to
corporations.
The anticipated excess inclusions must be determined as of the date
that the REMIC residual certificate is transferred and must be based on events
that have occurred up to the time of transfer, the prepayment assumption and any
required or permitted clean up calls or required liquidation provided for in the
REMIC's organizational documents. This tax generally would be imposed on the
transferor of the REMIC residual certificate, except that where the transfer is
through an agent for a Disqualified Organization, the tax would instead be
imposed on that agent. However, a transferor of a REMIC residual certificate
would in no event be liable for the 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 the affidavit is false. Moreover, an entity
will not qualify as a REMIC unless there are reasonable arrangements designed to
ensure that:
o residual interests in the entity are not held by Disqualified
Organizations; and
o information necessary for the application of the tax described
herein will be made available.
Restrictions on the transfer of REMIC residual certificates and other
provisions that are intended to meet this requirement will be included in the
pooling and servicing agreement, including
provisions:
(1) requiring any transferee of a REMIC residual certificate to
provide an affidavit representing that it is not a
Disqualified Organization and is not acquiring the REMIC
residual certificate on behalf of a Disqualified Organization,
undertaking to maintain that status and agreeing to obtain a
similar affidavit from any person to whom it shall transfer
the REMIC residual certificate;
(2) providing that any transfer of a REMIC residual certificate to
a Disqualified Organization shall be null and void; and
(3) granting to the master servicer the right, without notice to
the holder or any prior holder, to sell to a purchaser of its
choice any REMIC residual certificate that shall become owned
by a Disqualified Organization despite (1) and (2) above.
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In addition, if a Pass-Through Entity includes in income excess
inclusions with respect to a REMIC residual certificate, and a Disqualified
Organization is the record holder of an interest in that entity, then a tax will
be imposed on the entity equal to the product of (i) the amount of excess
inclusions on the REMIC residual certificate that are allocable to the interest
in the Pass-Through Entity held by the Disqualified Organization and (ii) the
highest marginal federal income tax rate imposed on corporations. A Pass-Through
Entity will not be subject to this tax for any period, however, if each record
holder of an interest in the Pass-Through Entity furnishes to that Pass- Through
Entity (i) the holder's social security number and a statement under penalties
of perjury that the social security number is that of the record holder or (ii)
a statement under penalties of perjury that the record holder is not a
Disqualified Organization. For taxable years beginning after December 31, 1997,
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 the tax paid by the partners.
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 that REMIC regular
certificate to that certificateholder, increased by income reported by the
certificateholder with respect to that REMIC regular certificate, including
original issue discount and market discount income, and reduced, but not below
zero, by distributions on the REMIC regular certificate received by the
certificateholder and by any amortized premium. The adjusted basis of a REMIC
residual certificate will be determined as described under "--Taxation of Owners
of REMIC Residual Certificates--Basis Rules, Net Losses and Distributions."
Except as described below, any gain or loss generally will be capital gain or
loss.
Gain from the sale of a REMIC regular certificate that might otherwise
be capital gain will be treated as ordinary income to the extent the gain does
not exceed the excess, if any, of (i) the amount that would have been includible
in the seller's income with respect to the REMIC regular certificate had income
accrued thereon at a rate equal to 110% of the "applicable federal rate", which
is typically a rate based on an average of current yields on Treasury securities
having a maturity comparable to that of the certificate, which rate is computed
and published monthly by the IRS, determined as of the date of purchase of the
REMIC regular certificate, over (ii) the amount of ordinary income actually
includible in the seller's income prior to the sale. In addition, gain
recognized on the sale of a REMIC regular certificate by a seller who purchased
the REMIC regular certificate at a market discount will be taxable as ordinary
income to the extent of any accrued and
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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 Internal Revenue Code, so that gain or loss
recognized from the sale of a REMIC certificate by a bank or thrift institution
to which that section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC regular certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that the certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Internal Revenue Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in
certificates or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value of
the taxpayer's net investment in the transaction. The amount of gain so realized
in a conversion transaction that is recharacterized as ordinary income generally
will not exceed the amount of interest that would have accrued on the taxpayer's
net investment at 120% of the appropriate "applicable Federal rate", which rate
is computed and published monthly by the IRS, at the time the taxpayer enters
into the conversion transaction, subject to appropriate reduction for prior
inclusion of interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include any
net capital gain in total net investment income for the taxable year, for
purposes of the limitation on the deduction of interest on indebtedness incurred
to purchase or carry property held for investment to a taxpayer's net investment
income.
If the seller of a REMIC residual certificate reacquires the
certificate, any other residual interest in a REMIC or any similar interest in a
"taxable mortgage pool" (as defined in Section 7701(i) of the Internal Revenue
Code) within six months of the date of the sale, the sale will be subject to the
"wash sale" rules of Section 1091 of the Internal Revenue Code. In that event,
any loss realized by the REMIC residual certificateholders on the sale will not
be deductible, but instead will be added to the REMIC residual
certificateholders adjusted basis in the newly-acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Internal Revenue Code imposes a prohibited transactions tax, which
is a tax on REMICs equal to 100% of the net income derived from prohibited
transactions. In general, subject to specified exceptions a prohibited
transaction means the disposition of a mortgage loan, the receipt of income from
a source other than a mortgage loan or other permitted investments, the receipt
of compensation for services, or gain from the disposition of an asset purchased
with the payments on the 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, some contributions to a REMIC made
after the day on which the
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REMIC issues all of its interests could result in the imposition of a
contributions tax, which is a tax on the REMIC equal to 100% of the value of the
contributed property. Each pooling and servicing agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to the tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the 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 the 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 relating to compliance
with applicable laws and regulations. Any tax not borne by the master servicer
or the trustee will be payable out of the related trust resulting in a reduction
in amounts payable to holders of the related REMIC certificates.
TERMINATION
A REMIC will terminate immediately after the distribution date
following receipt by the REMIC of the final payment from 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 the REMIC residual
certificate is less than the certificateholder's adjusted basis in the
certificate, the certificateholder should be treated as realizing a loss equal
to the amount of the difference, and the loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Internal
Revenue Code, the REMIC will be treated as a partnership and REMIC residual
certificateholders will be treated as
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partners. Unless otherwise stated in the related prospectus supplement, the
trustee will file REMIC federal income tax returns on behalf of the related
REMIC and the entity identified as the REMIC Administrator in the related
pooling and servicing agreement or REMIC Administrator will prepare the 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 will have the
authority to act on behalf of the REMIC and the REMIC residual
certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC residual certificateholders will be required to report the
REMIC items consistently with their treatment on the related REMIC's tax return
and may in some circumstances be bound by a settlement agreement between the
REMIC Administrator, as tax matters person, and the IRS concerning any REMIC
item.
Adjustments made to the REMIC tax return may require a REMIC residual
certificateholders to make corresponding adjustments on its return, and an audit
of the REMIC's tax return, or the adjustments resulting from an audit, could
result in an audit of the certificateholder's return. No REMIC will be
registered as a tax shelter under Section 6111 of the Internal Revenue Code
because it is not anticipated that any REMIC will have a net loss for any of the
first five taxable years of its existence. Any person that holds a REMIC
residual certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of that person and other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC regular certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
are required to be sent to individual holders of REMIC regular Interests and the
IRS; holders of REMIC regular certificates that are corporations, trusts,
securities dealers and other non-individuals will be provided interest and
original issue discount income information and the information in the following
paragraph 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 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,
typically 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
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constant yield method requires information relating to the holder's purchase
price that the REMIC Administrator will not have, the regulations only require
that information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "--Taxation of Owners of REMIC 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. Any 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 Internal Revenue Code at a rate of 31% if
recipients of payments fail to furnish to the payor certain information,
including their taxpayer identification numbers, or otherwise fail to establish
an exemption from the tax. Any amounts deducted and withheld from a distribution
to a recipient would be allowed as a credit against the recipient's federal
income tax. Furthermore, penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC regular certificateholder that is not a United States person
and is not subject to federal income tax as a result of any direct or indirect
connection to the United States in addition to its ownership of a REMIC regular
certificate will not be subject to United States federal income or withholding
tax on 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 the certificateholder is not a United
States person and providing the name and address of the certificateholder. For
these purposes, United States person means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in, or
under the laws of, the United States, any state thereof or the District of
Columbia, except, in the case of a partnership, to the extent provided in
regulations, or an estate whose income is subject to United States federal
income tax regardless of its source, or a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States persons have the authority to control all
substantial decisions of the trust. To the extent prescribed in regulations by
the Secretary of the Treasury, which regulations have not yet been issued, a
trust which was in existence on August 20, 1996 (other than a trust treated as
owned by the grantor under subpart E of part I of subchapter J of chapter 1 of
the Internal Revenue Code), and which was treated as a United States person on
August
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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 of accrued original issue discount, to the
holder may be subject to a tax rate of 30%, subject to reduction under any
applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on the
United States shareholder's allocable portion of
the interest income received by the controlled foreign corporation.
Further, it appears that a 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
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
"Material Federal Income Tax Consequences," potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the certificates offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax advisors
with respect to the various tax consequences of investments in the certificates
offered hereby.
ERISA CONSIDERATIONS
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Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, or ERISA, impose fiduciary and prohibited transaction restrictions on
employee pension and welfare benefit plans subject to ERISA 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 those ERISA plans are invested. Section
4975 of the Internal Revenue Code imposes essentially the same prohibited
transaction restrictions on Tax- Favored Plans.
Some employee benefit plans, including governmental plans (as defined
in Section 3(32) of ERISA) and if no election has been under Section 410(d) of
the Internal Revenue Code, church plans (as defined in Section 3(33) of ERISA),
are not subject to the ERISA requirements discussed in this prospectus.
Accordingly, assets of these plans may be invested in certificates without
regard to the ERISA considerations described below, subject to the provisions of
applicable federal and state law. Any plan that is a tax-qualified plan and
exempt from taxation under Sections 401(a) and 501(a) of the Internal Revenue
Code, however, is subject to the prohibited transaction rules in Section 503 of
the Internal Revenue 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 Internal Revenue Code prohibit a
broad range of transactions involving "plan assets" of ERISA plans and
Tax-Favored Plans, or ERISA plans, and Parties in Interest, 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 under Section 502(i) of ERISA or Section 4975 of the
Internal Revenue Code, unless a statutory or administrative exemption is
available with respect to any transaction of this sort.
ERISA PLAN ASSET REGULATIONS
An investment of ERISA plan assets in certificates may cause the
underlying mortgage loans, mortgage securities or any other assets included in a
trust to be deemed "plan assets" of the Plan. The U.S. Department of Labor, or
DOL has promulgated regulations at 29 C.F.R. Section 2510.3-101 or, DOL
Regulations concerning whether or not a Plan's assets would be deemed to include
an interest in the underlying assets of an entity, including a trust, for
purposes of applying the general fiduciary responsibility provisions of ERISA
and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code, when a ERISA plan assets acquires an "equity interest",
such as a certificate, in that entity.
Because of the factual nature of some of the rules in the DOL
Regulations, ERISA plan assets either may be deemed to include an interest in
the assets of an entity, including a trust, 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
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reliance upon the availability of any exception under the DOL Regulations. For
purposes of this section, the term ERISA plan or "assets of an ERISA plan" has
the meaning specified in the DOL Regulations and includes an undivided interest
in the underlying assets of some entities in which a ERISA plan invests.
The prohibited transaction provisions of Section 406 of ERISA and
Section 4975 of the Internal Revenue Code may apply to a trust and cause the
depositor, the master servicer, any subservicer, the trustee, the obligor under
any credit enhancement mechanism or certain affiliates of those entities to be
considered or become Parties in Interest with respect to an investing ERISA plan
or of a ERISA plan holding an interest in such an entity. If so, the acquisition
or holding of certificates by or on behalf of the investing ERISA plan assets
could also give rise to a prohibited transaction under ERISA and/or Section 4975
of the Internal Revenue Code, unless some statutory or administrative exemption
is available. Certificates acquired by a ERISA plan would be assets of that
Plan. Under the DOL Regulations, a trust, including the mortgage loans, mortgage
securities or any other assets held in the trust, may also be deemed to be
assets of each ERISA plan that acquires certificates. Special caution should be
exercised before ERISA plan assets are used to acquire a certificate in those
circumstances, especially if, with respect to the ERISA plan assets, the
depositor, 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 the ERISA plan assets;
or (ii) has authority or responsibility to give, or regularly gives, investment
advice with respect to ERISA plan assets for a fee under an agreement or
understanding that any advice will serve as a primary basis for investment
decisions with respect to the ERISA plan assets.
Any person who has discretionary authority or control respecting the
management or disposition of ERISA plan assets, and any person who provides
investment advice with respect to the ERISA plan assets for a fee (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 were to constitute ERISA
plan assets, then any party exercising management or discretionary control with
respect to those ERISA plan assets may be deemed to be a ERISA plan assets
"fiduciary," and thus subject to the fiduciary requirements of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code with respect to any investing Plan. In addition, if the mortgage
loans, mortgage securities or any other assets held in a trust were to
constitute ERISA plan assets, then the acquisition or holding of certificates
by, on behalf of a ERISA plan assets or with ERISA plan assets, as well as the
operation of such trust, may constitute or result in a prohibited transaction
under ERISA and the Internal Revenue Code.
PROHIBITED TRANSACTION EXEMPTION
The DOL has issued an individual exemption, Prohibited Transaction
exemption, or PTE 94- 29, 59 Fed. Reg. 14674 (March 29, 1994) as amended by PTE
97-34, 62 Fed. Reg. 39021 (July 21, 1997), to Residential Funding Corporation
and certain of its affiliates, which generally exempts from the application of
the prohibited transaction provisions of Section 406 of ERISA, and the excise
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taxes imposed on the prohibited transactions pursuant to Section 4975(a) and (b)
of the Internal Revenue Code, certain transactions, among others, relating to
the servicing and operation of mortgage pools of certain secured obligations
including mortgage loans, which are held in a trust and the purchase, sale and
holding of pass-through certificates issued by that trust as to which (i) the
depositor 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 depositor
or an affiliate is the underwriter or placement agent, provided that conditions
in the exemption are satisfied. For purposes of this section, the term
Underwriter shall include (a) the depositor 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 depositor 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 ERISA plan or with ERISA plan assets must be on terms that are at least as
favorable to the ERISA plan as they would be in an arm's-length transaction with
an unrelated party. 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 ERISA plan or with ERISA plan
assets must be rated in one of the three highest generic rating categories by
Standard & Poor's, a division of McGraw Hill Companies, Inc., Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc., or 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
depositor, the master servicer, any subservicer, the trustee and any mortgagor
with respect to assets of a trust constituting more than 5% of the aggregate
unamortized principal balance of the assets in the related trust as of the date
of initial issuance of the certificates. Fifth, the sum of all payments made to
and retained by the Underwriters must represent not more than reasonable
compensation for underwriting the certificates; the sum of all payments made to
and retained by the depositor pursuant to the assignment of the assets to the
related trust must represent not more than the fair market value of those
obligations; and the sum of all payments made to and retained by the master
servicer and any subservicer must represent not more than reasonable
compensation for that person's services under the related pooling and servicing
agreement and reimbursement of that person's reasonable expenses in connection
therewith. Sixth, the exemption states that the investing ERISA plan or ERISA
plan assets investor must be an accredited investor as defined in Rule 501(a)(1)
of Regulation D of the Securities and Exchange Commission under the Securities
Act of 1933, as amended. In addition, except as otherwise specified in the
related prospectus supplement, the exemptive relief afforded by the exemption
may not apply to any certificates where the related trust contains a swap.
The exemption also requires that each trust meet the following
requirements:
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o the trust must consist solely of assets of the type that have
been included in other investment pools
o certificates evidencing interests in those other investment
pools must have been rated in one of the three highest
categories of one of the exemption rating agencies for at
least one year prior to the acquisition of certificates by or
on behalf of a ERISA plan or with ERISA plan assets; and
o certificates in the 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 ERISA plan or with ERISA plan assets.
A fiduciary of or other investor of ERISA plan assets contemplating
purchasing a certificate must make its own determination that the general
conditions described above will be satisfied with respect to that certificate.
If the general conditions of the 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
Internal Revenue Code by reason of Sections 4975(c)(1)(A) through (D) of the
Internal Revenue Code, in connection with the direct or indirect sale, exchange,
transfer, holding or the direct or indirect acquisition or disposition in the
secondary market of certificates by or with ERISA plan assets. However, no
exemption is provided from the restrictions of Sections 406(a)(1)(E) and
406(a)(2) of ERISA for the acquisition or holding of a certificate by or with
ERISA plan assets of an excluded plan by any person who has discretionary
authority or renders investment advice with respect to ERISA plan assets of the
excluded plan. For purposes of the certificates, an Excluded Plan is a ERISA
plan sponsored by any member of the restricted group.
If 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 Internal Revenue Code by reason of Section 4975(c)(1)(E) of the
Internal Revenue Code, in connection with the following:
(1) the direct or indirect sale, exchange or transfer of
certificates in the initial issuance of certificates between
the depositor or an underwriter and a ERISA plan when the
person who has discretionary authority or renders investment
advice with respect to the investment of the relevant ERISA
plan assets in the certificates is:
(a) a mortgagor with respect to 5% or less of the fair
market value of the assets of a trust; or
(b) an affiliate of such a person.
(2) the direct or indirect acquisition or disposition in the
secondary market of certificates by a ERISA plan or with ERISA
plan assets; and
(3) the holding of certificates by a ERISA plan or with ERISA plan
assets.
Additionally, if 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
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the excise taxes imposed by Sections 4975(a) and (b) of the Internal Revenue
Code by reason of Section 4975(c) of the Internal Revenue Code, for transactions
in connection with the servicing, management and operation of the mortgage
pools. The depositor 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 Internal Revenue Code by reason of Section 4975(c) of the
Internal Revenue Code, for transactions in connection with the servicing,
management and operation of the mortgage pools, provided that the general
conditions of the 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 Internal Revenue Code by reason of Sections
4975(c)(1)(A) through (D) of the Internal Revenue Code, if those restrictions
are deemed to otherwise apply merely because a person is deemed to be a Party in
Interest with respect to an investing ERISA plan, or a ERISA plan holding
interests in the investing entity holding ERISA plan assets, by virtue of
providing services to the ERISA plan or the ERISA plan assets, or by virtue of
having specified relationships to such a person, solely as a result of the ERISA
plan's ownership of certificates.
Before purchasing a certificate, a fiduciary or other investor of ERISA
plan assets should itself confirm that (a) the certificates constitute
"certificates" for purposes of the exemption and (b) the specific and general
conditions described in the exemption and the other requirements 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 ERISA plan assets investor should consider its general
fiduciary obligations under ERISA in determining whether to purchase any
certificates with ERISA plan assets.
Any fiduciary or other ERISA plan assets investor that proposes to
purchase certificates on behalf of a ERISA plan assets or with ERISA plan should
consult with its counsel with respect to the potential applicability of ERISA
and the Internal Revenue Code to that 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, the fiduciary or other ERISA
plan assets investor should consider the availability of the exemption or
Prohibited Transaction Class exemption, or PTCE 83-1, or PTCE 83-1 for some
transactions involving mortgage pool investment trusts. However, PTCE 83-1 does
not provide exemptive relief with respect to certificates evidencing interests
in trusts which include Cooperative Loans or some types of mortgage securities,
or which contain a Swap. In addition, the fiduciary or other ERISA plan assets
investor should consider the availability of other class exemptions granted by
the DOL, which provide relief from certain of the prohibited transaction
provisions of ERISA and the related excise tax provisions of Section 4975 of the
Internal Revenue Code, including Sections I and III of PTCE 95-60, regarding
transactions by insurance company general accounts. The related prospectus
supplement may contain additional information regarding the application of the
exemption, PTCE
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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 ERISA plan's or other ERISA plan assets
investor's investment in the certificates or, even if an exemption were deemed
to apply, that any exemption would apply to all prohibited transactions that
may occur in connection with this form of investment.
INSURANCE COMPANY GENERAL ACCOUNTS
In addition to any exemptive relief that may be available under PTCE
95-60 for the purchase and holding of the certificates by an insurance company
general account, the Small Business Job Protection Act of 1996 added a new
Section 401(c) to ERISA, which provides exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Internal Revenue Code,
including the prohibited transaction restrictions imposed by ERISA and the
related excise taxes imposed by Section 4975 of the Internal Revenue Code, for
transactions involving an insurance company general account.
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 ERISA plan on
or before December 31, 1998, which general account assets constitute ERISA plan
assets. Section 401(c) of ERISA generally provides that, until 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 Internal
Revenue Code on the basis of a claim that the assets of an insurance company
general account constitute ERISA 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 ERISA plan after
December 31, 1998 or issued to ERISA plans on or before December 31, 1998 for
which the insurance company does not comply with the 401(C) Regulations may be
treated as ERISA plan assets. In addition, because Section 401(c) does not
relate to insurance company separate accounts, separate account assets are still
treated as ERISA plan assets of any ERISA plan invested in a 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
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certificates are subordinate certificates or the related trust contains a swap,
except as otherwise specified in the related prospectus supplement, transfers of
those certificates to a ERISA plan, to a trustee or other person acting on
behalf of any ERISA plan, or to any other person using ERISA plan assets to
effect the acquisition will not be registered by the trustee unless the
transferee provides the depositor, the trustee and the master servicer with an
opinion of counsel satisfactory to the depositor, the trustee and the master
servicer, which opinion will not be at the expense of the depositor, the trustee
or the master servicer, that the purchase of the certificates by or on behalf of
the ERISA plan or with ERISA plan assets is permissible under applicable law,
will not constitute or result in any non-exempt prohibited transaction under
ERISA or Section 4975 of the Internal Revenue Code and will not subject the
depositor, the trustee or the master servicer to any obligation in addition to
those undertaken in the pooling and servicing agreement.
In lieu of an opinion of counsel, except as otherwise specified in the
related prospectus supplement, the transferee may provide a certification of
facts substantially to the effect that the purchase of the certificates by or on
behalf of the ERISA plan or with ERISA 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 Internal Revenue Code, will not
subject the depositor, the trustee or the master servicer to any obligation in
addition to those undertaken in the pooling and servicing agreement, and the
following conditions are met: (a) the source of funds used to purchase the
certificates is an "insurance company general account" (as that term is defined
in PTCE 95-60), and (b) the conditions in Sections I and III of PTCE 95-60 have
been satisfied as of the date of the acquisition of the certificates.
TAX-EXEMPT INVESTORS
A Tax-Exempt Investor nonetheless will be subject to federal income
taxation to the extent that its income is "unrelated business taxable
income,"or, UBTI within the meaning of Section 512 of the Internal Revenue Code.
All "excess inclusions" of a REMIC allocated to a REMIC residual certificate
held by a Tax-Exempt Investor will be considered UBTI and thus will be subject
to federal income tax. See "Material Federal Income Tax Consequences-- Taxation
of Owners of REMIC Residual Certificates--Excess Inclusions."
CONSULTATION WITH COUNSEL
There can be no assurance that the exemption or any other DOL exemption
will apply with respect to any particular ERISA 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.
Prospective ERISA plan investors should consult with their legal counsel
concerning the impact of ERISA and the Internal Revenue Code and the potential
consequences to their specific circumstances prior to making an investment in
the certificates.
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Any fiduciary or other investor of ERISA plan assets that proposes to
acquire or hold certificates on behalf of a ERISA plan or with ERISA 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 Internal Revenue 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, classes that are, and continue to be, rated in one of the
two highest rating categories by at least one nationally recognized statistical
rating organization will constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984, as amended, or SMMEA,
and, as such, will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
depository institutions, life insurance companies and pension funds) created
under or existing under the laws of the United States or of any State whose
authorized investments are subject to state regulation to the same extent that,
under applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for those entities. Under SMMEA, if a State enacted
legislation on or prior to October 3, 1991 specifically limiting the legal
investment authority of any of these entities with respect to "mortgage related
securities," these securities will constitute legal investments for entities
subject to the legislation only to the extent provided therein. Certain States
enacted legislation which overrides the preemption provisions of SMMEA. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest in
"mortgage related securities," or require the sale or other disposition of the
securities, so long as the contractual commitment was made or the securities
acquired prior to the enactment of the legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with "mortgage related securities" without limitation as to the percentage of
their assets represented thereby, federal credit unions may invest in these
securities, and national banks may purchase these securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. SS24 (Seventh), subject in each case to any
regulations that the applicable federal regulatory authority may prescribe.
The 1998 Policy Statement was adopted by the Federal Reserve Board, the
Office of the Comptroller of the Currency, the FDIC, the National Credit Union
Administration, or NCUA and the OTS with an effective date of May 26, 1998. The
1998 Policy Statement rescinded a 1992 policy statement that had required, prior
to purchase, a depository institution to determine whether a
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mortgage derivative product that it was considering acquiring was high-risk,
and, if so, required that the proposed acquisition would reduce the
institution's overall interest rate risk. The 1998 Policy Statement eliminates
constraints on investing in certain "high-risk" mortgage derivative products and
substitutes broader guidelines for evaluating and monitoring investment risk.
The OTS has issued Thrift Bulletin 13a, entitled "Management of
Interest Rate Risk, Investment Securities, and Derivatives Activities,"or TB
13a, which is effective as of December 1, 1998 and applies to thrift
institutions regulated by the OTS. One of the primary purposes of TB 13a is to
require thrift institutions, prior to taking any investment position to conduct
(i) a pre-purchase portfolio sensitivity analysis for any "significant
transaction" involving securities or financial derivatives, and (ii) a
pre-purchase price sensitivity analysis of any "complex security" or financial
derivative. For the purposes of TB 13a, "complex security" includes, among other
things, any collateralized mortgage obligation or REMIC security, other than any
"plain vanilla" mortgage pass-through security (that is, securities that are
part of a single class of securities in the related pool that are non-callable
and do not have any special features). One or more classes of certificates
offered hereby and by the related prospectus supplement may be viewed as
"complex securities". The OTS recommends that while a thrift institution should
conduct its own in-house pre-acquisition analysis, it may rely on an analysis
conducted by an independent third-party as long as management understands the
analysis and its key assumptions. Further, TB 13a recommends that the use of
"complex securities with high price sensitivity" be limited to transactions and
strategies that lower a thrift institution's portfolio interest rate risk. TB
13a warns that investment in complex securities by thrift institutions that do
not have adequate risk measurement, monitoring and control systems may be viewed
by OTS examiners as an unsafe and unsound practice.
Prospective investors in the 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 some investors either
to purchase some classes of certificates or to purchase any class of
certificates representing more than a specified percentage of the investors'
assets. The depositor will make no representations as to the proper
characterization of any class of 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 the investor.
USE OF PROCEEDS
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Substantially all of the net proceeds to be received from the sale of
certificates will be applied by the depositor 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 depositor for general
corporate purposes. The depositor expects that it will make additional sales of
securities similar to the certificates from time to time, but the timing and
amount of any additional offerings will be dependent upon a number of factors,
including the volume of mortgage loans purchased by the depositor, 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 depositor from that sale.
The depositor 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 the following methods:
o by negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters
o by placements by the depositor with institutional investors
through dealers; and
o by direct placements by the depositor with institutional
investors.
In addition, if specified in the 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 securing the
certificates.
If underwriters are used in a sale of any certificates, other than in
connection with an underwriting on a best efforts basis, the 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. These underwriters may be
broker-dealers affiliated with the depositor whose identities and relationships
to the depositor will be as described 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 that series and the members of the
underwriting syndicate, if any, will be named in the related prospectus
supplement.
In connection with the sale of the certificates, underwriters may
receive compensation from the depositor 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
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deemed to be underwriters in connection with the certificates, and any discounts
or commissions received by them from the depositor 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 of the certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the depositor will indemnify the
several underwriters and the underwriters will indemnify the depositor against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The prospectus supplement with respect to any series offered by
placements through dealers will contain information regarding the nature of the
offering and any agreements to be entered into between the depositor and
purchasers of certificates of that series.
The depositor 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 the purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection with
reoffers and sales by them of certificates. Holders of certificates should
consult with their legal advisors in this regard prior to any reoffer or sale.
LEGAL MATTERS
Certain legal matters, including certain federal income tax matters,
will be passed upon for the Company by Thacher Proffitt & Wood, New York, New
York, Orrick, Herrington & Sutcliffe LLP, New York, New York or by Stroock &
Stroock & Lavan LLP, as specified in the prospectus supplement.
FINANCIAL INFORMATION
The depositor has determined that its financial statements are not
material to the offering made hereby. The certificates do not represent an
interest in or an obligation of the depositor. The depositor's only obligations
with respect to a series of certificates will be to repurchase the mortgage
loans upon any breach of limited representations and warranties made by the
depositor, or as otherwise provided in the applicable prospectus supplement.
ADDITIONAL INFORMATION
132
<PAGE>
The depositor has filed the registration statement with the Securities
and Exchange Commission. The depositor is also subject to some of the
information requirements of the Securities Exchange Act of 1934, as amended, or
Exchange Act, and, accordingly, will file reports thereunder with the Securities
and Exchange Commission. The registration statement and the exhibits thereto,
and reports and other information filed by the depositor pursuant to the
Exchange Act can be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at certain of its Regional Offices located as
follows: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048 and electronically through
the Securities and Exchange Commission's Electronic Data Gathering, Analysis and
Retrieval System at the Securities and Exchange Commission's Web Site
(http://www.sec.gov).
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
depositor will file with the Securities and Exchange Commission those periodic
reports relating to the trust for a series of certificates as are required under
the Exchange Act.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the depositor to "incorporate by reference" the
information filed with the SEC by the depositor, under Section 13(a), 13(c), 14
or 15(d) of the Exchange Act, that relates to the trust fund for the
certificates. This means that the depositor can disclose important information
to any investor by referring the investor to these documents. The information
incorporated by reference is an important part of this prospectus, and
information filed by the depositor with the SEC that relates to the trust fund
for the certificates will automatically update and supersede this information.
Documents that may be incorporated by reference with respect to a particular
series of certificates include an insurer's financials, a certificate policy,
mortgage pool policy, computational materials, collateral term sheets, the
related pooling and servicing agreement and amendments thereto, other documents
on Form 8-K and Section 13(a), 13(c), 14 or 15(d) of Exchange Act as may be
required in connection with the related trust fund.
The depositor 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 the related
series of certificates, upon written or oral request of that person, a copy of
any or all reports incorporated herein by reference, in each case to the extent
the reports relate to
133
<PAGE>
one or more of the classes of the related series of certificates, other than the
exhibits to those documents, unless the exhibits are specifically incorporated
by reference in the documents. Requests should be directed in writing to
Residential Funding Mortgage Securities I, Inc., 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437, or by telephone at (612) 832-7000.
134
<PAGE>
GLOSSARY
1998 POLICY STATEMENT-- The revised supervisory statement listing the
guidelines for investments in "high risk mortgage securities", and adopted by
the Federal Reserve Board, the Office of the Comptroller of the Currency, the
FDIC, the National Credit Union Administration, or NCUA and the OTS with an
effective date of May 26, 1998.
401(C) REGULATIONS--The proposed regulations of the DOL published on
December 22, 1997, under Section 401(c) of ERISA.
ADDITIONAL COLLATERAL--With respect to an Additional Collateral Loan,
(1) financial assets owned by the mortgagor, which will consist of securities,
insurance policies, annuities, certificates of deposit, cash, accounts or
similar assets and/or (2) a third party guarantee, usually by a relative of the
mortgagor, which in turn is secured by a security interest in financial assets.
ADDITIONAL COLLATERAL LOANS--A mortgage loan with an LTV ratio at
origination in excess of 80%, but not greater than 100% and is secured by
Additional Collateral, in addition to the related Mortgaged Property and in lieu
of any primary mortgage insurance by Additional Collateral.
ADDITIONAL COLLATERAL REQUIREMENT--The amount of Additional Collateral
required for any Additional Collateral Loan, which in most cases will not exceed
30% of the principal amount of such
mortgage loan.
ADVANCE--As to any mortgage loan and any distribution date, an amount
equal to the scheduled payments of principal (other than any Balloon Amount in
the case of a Balloon Loan) and interest at the applicable pass-through rate
which were delinquent as of the close of business on the business day preceding
the determination date on the mortgage loans.
BALLOON AMOUNT--The full outstanding principal balance on a Balloon
Loan due and payable on the maturity date.
BALLOON LOANS--Fixed rate mortgage loans having original or modified
terms to maturity of 5 or 7 years in most cases, with level monthly payments of
principal and interest based on a 30 year amortization schedule.
BANKRUPTCY AMOUNT--The amount of Bankruptcy Losses that may be borne
solely by the subordinate certificates of the related series.
BANKRUPTCY LOSSES--A Realized Loss attributable to certain actions
which may be taken by a bankruptcy court in connection with a mortgage loan,
including a reduction by a bankruptcy court of the principal balance of or the
mortgage rate on a mortgage loan or an extension of its maturity.
<PAGE>
BUY-DOWN ACCOUNT--As to a Buydown Mortgage Loan, the custodial account
where Buydown Funds are deposited.
BUY-DOWN FUNDS--As to a Buydown Mortgage Loan, the amount contributed
by the seller of the Mortgaged Property or another source and placed in the
Buydown Account.
BUY-DOWN MORTGAGE LOAN--A mortgage loan subject to a temporary buydown
plan.
BUY-DOWN PERIOD--The early years of the term of or Buy-Down Mortgage
Loan when payments will be less than the scheduled monthly payments on the
Mortgage Loan, the resulting difference to be made up from the Buy-Down Funds.
CALL CERTIFICATE--Any Certificate evidencing an interest in a Call
Class.
CALL CLASS--A class of certificates under which the holder will have
the right, at its sole discretion, to terminate the related trust resulting in
early retirement of the Certificates of the series.
CALL PRICE--In the case of a call with respect to a Call Class, a price
equal to 100% of the principal balance of the related certificates as of the day
of that purchase plus accrued interest at the
applicable pass-through rate.
CERTIFICATE ACCOUNT--An account established and maintained by the
master servicer in the name of the trustee for the benefit of the holders of
each series of certificates, for the disbursement of payments on the mortgage
loans evidenced by each series of certificates.
CERTIFICATE ADMINISTRATOR--In addition to or in lieu of the master
servicer for a series of certificates, the related prospectus supplement may
identify a certificate administrator for the trust. The certificate
administrator may be an affiliate of the depositor or the master servicer.
COMPENSATING INTEREST--With respect to any mortgage loan that prepaid
in full during the related prepayment period an additional payment made by the
master servicer, to the extent funds are available from the servicing fee, equal
to the amount of interest at the mortgage rate (less the servicing fee and
Excluded Spread, if any) for that mortgage loan from the date of the prepayment
to the related Due Date.
CONVERTIBLE MORTGAGE LOAN--ARM loans which allow the mortgagors to
convert the adjustable rates on those mortgage loans to a fixed rate at one or
more specified periods during the life of the mortgage loans, in most cases not
later than ten years subsequent to the date of
origination.
COOPERATIVE--With respect to a Cooperative Mortgage Loan, the
corporation that owns the related apartment building.
2
<PAGE>
COOPERATIVE LOANS--Cooperative apartment loans evidenced by Cooperative
Notes secured by security interests in shares issued by Cooperatives and in the
related proprietary leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in the related buildings.
COOPERATIVE NOTES--A promissory note with respect to a Cooperative
Loan.
CREDIT SCORES--A measurement of the relative degree of risk a borrower
represents to a Lender obtained from credit reports utilizing, among other
things, payment history, delinquencies on accounts, levels of outstanding
indebtedness, length of credit history, types of credit, and bankruptcy
experience.
CUSTODIAL ACCOUNT--The custodial account or accounts created and
maintained pursuant to the pooling and servicing agreement in the name of a
depository institution, as custodian for the holders of the certificates, for
the holders of certain other interests in mortgage loans serviced or sold by the
master servicer and for the master servicer, into which the amounts shall be
deposited directly. Any such account or accounts shall be an Eligible Account.
DEBT SERVICE REDUCTION--Modifications of the terms of a mortgage loan
resulting from a bankruptcy proceeding, including a reduction in the amount of
the monthly payment on the related mortgage loan, but not any permanent
forgiveness of principal.
DEFAULTED MORTGAGE LOSSES--A Realized Loss 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.
DEFICIENT VALUATION--In connection with the personal bankruptcy of a
mortgagor, the difference between the outstanding principal balance of a
mortgage loan and a lower value established by the bankruptcy court.
DESIGNATED SELLER TRANSACTION--A transaction in which the mortgage
loans are provided by an unaffiliated seller described in the prospectus
supplement.
DIRECT PUERTO RICO MORTGAGE--With respect to any Puerto Rico Mortgage
Loan, a Mortgage to secure a specific obligation for the benefit of a specified
person.
DISQUALIFIED ORGANIZATION--For these purposes means:
o the United States, any State or political subdivision thereof,
any foreign government, any international organization, or any
agency or instrumentality of the foregoing (but would not
include instrumentalities described in Section 168(h)(2)(D) of
the Code or Freddie Mac)
3
<PAGE>
o 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,
o any organization described in Section 1381(a)(2)(C) of the
Code
o an "electing large partnership" (as described in Section 775
of the Code) or
o 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 that person may cause the related
trust 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 that person.
DISTRIBUTION AMOUNT--As to a class of certificates for any distribution
date will be the portion, if any, of the amount to be distributed to that class
for that distribution date of principal, plus, if the class is entitled to
payments of interest on that distribution date, interest accrued during the
related interest accrual period at the applicable pass-through rate on the
principal balance or notional amount of that class specified in the applicable
prospectus supplement, less certain interest shortfalls, which will include:
o any deferred interest added to the principal balance of the
mortgage loans and/or the outstanding balance of one or more
classes of certificates on the related due date;
o any other interest shortfalls, including, without limitation,
shortfalls resulting from application of the Relief Act or
similar legislation or regulations as in effect from time to
time, allocable to certificateholders which are not covered by
advances or the applicable credit enhancement; and
o Prepayment Interest Shortfalls not covered by Compensating
Interest, in each case in an amount that is allocated to that
class on the basis set forth in the prospectus supplement.
DUE --As to any distribution date, the period starting on the second
day of the month prior to such distribution date, and ending on the first day of
the month of such distribution date.
ELIGIBLE ACCOUNT--An account acceptable to the applicable rating
agency.
ENDORSABLE PUERTO RICO MORTGAGE--As to any Puerto Rico Mortgage Loan, a
mortgage to secure an instrument transferable by endorsement.
ENVIRONMENTAL LIEN--A lien imposed by federal or state statute, for any
cleanup costs incurred by a state on the property that is the subject of the
cleanup costs.
EXCESS SPREAD--A portion of interest due with respect to the mortgage
loans or mortgage securities transferred as part of the assets of the related
trust.
4
<PAGE>
EXCLUDED SPREAD--A portion of interest due with respect to the mortgage
loans or mortgage securities, excluded from the assets transferred to the
related trust.
EXTRAORDINARY LOSSES--Realized Losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks.
FRAUD LOSS AMOUNT--The amount of Fraud Losses that may be borne solely
by the subordinate certificates of the related series.
FRAUD LOSSES--A Realized Loss incurred on defaulted mortgage loans as
to which there was fraud in the origination of the mortgage loans.
HIGH COST LOANS--Mortgage loans that are subject to the special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994,
which were originated on or after October 1, 1995, are not mortgage loans made
to finance the purchase of the mortgaged property and have interest rates or
origination costs in excess of prescribed levels.
INSURANCE PROCEEDS--Proceeds of any special hazard insurance policy,
bankruptcy policy, mortgage pool insurance policy, primary insurance policy and
any title, hazard or other insurance policy or guaranty covering any mortgage
loan in the mortgage pool together with any payments under any letter of credit.
ISSUE PREMIUM--As to a class of REMIC Regular Certificates, the issue
price in excess of the stated redemption price of that class.
LIQUIDATED MORTGAGE LOAN--A defaulted mortgage loan for which the
related mortgaged property has been sold by the related trust and all
recoverable Liquidation Proceeds and Insurance
Proceeds have been received.
LIQUIDATION PROCEEDS--Amounts collected by the subservicer in
connection with the liquidation of a mortgage loan, by foreclosure or otherwise.
MARK-TO-MARKET REGULATIONS--The final regulations of the IRS, released
on December 24, 1996, relating to the requirement that a securities dealer mark
to market securities held for sale to customers.
NET MORTGAGE RATE--As to a mortgage loan, the mortgage rate net of
servicing fees, other administrative fees and any Excess Spread or Excluded
Spread.
NONRECOVERABLE ADVANCE--Any Advance previously made which the Master
Servicer has determined to not be ultimately recoverable from Liquidation
Proceeds, Insurance Proceeds or otherwise.
5
<PAGE>
NOTE MARGIN--Amounts advanced by the master servicer or related
subservicer to cover taxes, insurance premiums or similar expenses as to any
mortgaged property. With respect to an ARM loan, the fixed percentage set forth
in the related mortgage note, which when added to the related index, provides
the mortgage rate for the ARM loan.
PARTIES IN INTEREST--With respect to an ERISA plan, persons who have
specified relationships to the ERISA plan, either "parties in interest" within
the meaning of ERISA or "disqualified persons" within the meaning of the Code.
PASS-THROUGH ENTITY--Any regulated investment company, real estate
investment trust, trust, partnership or 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 that
interest, be treated as a pass-through entity.
PERMITTED INVESTMENTS--United States government securities and other
investment grade obligations specified in the related pooling and servicing
agreement.
PLEDGED ASSET MORTGAGE LOANS--Mortgage loans that have LTV ratios at
origination of up to 100% and are secured, in addition to the related mortgaged
property, by Pledged Assets.
PLEDGED ASSETS--As to a Pledged Asset Mortgage Loan, (1) financial
assets owned by the mortgagor, which will consist of securities, insurance
policies, annuities, certificates of deposit, cash, accounts or similar assets
and/or (2) a third party guarantee, usually by a relative of the mortgagor,
which in turn is secured by a security interest in financial assets or
residential property owned by the guarantor.
PREPAYMENT INTEREST SHORTFALL--With respect to a mortgage loan that is
subject to a mortgagor prepayment or liquidation, the amount that equals the
difference between a full month's interest due with respect to that mortgage
loan and the amount of interest paid or recovered with
respect thereto.
PRINCIPAL PREPAYMENTS--Any principal payments received with respect to
a mortgage loan, in advance of the scheduled due date and not accompanied by a
payment of interest for any period
following the date of payment.
QUALIFIED INSURER--As to a mortgage pool insurance policy, special
hazard insurance policy, bankruptcy policy, certificate insurance policy or
surety bond, an insurer qualified under applicable law to transact the insurance
business or coverage as applicable.
REALIZED LOSS--As to any defaulted mortgage loan that is finally
liquidated, the amount of loss realized, if any (as described in the related
pooling and servicing agreement), 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
6
<PAGE>
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 the reduction will be treated as a Realized Loss.
REO MORTGAGE LOAN--A mortgage loan where title to the related mortgaged
property has been obtained by the trustee or its nominee on behalf of
certificateholders of the related series.
SERVICING ADVANCES--Amounts advanced on any mortgage loan to cover
taxes, insurance premiums or similar expenses.
SPECIAL HAZARD AMOUNT--The amount of Special Hazard Losses that may be
allocated to the subordinate certificates of the related series.
SPECIAL HAZARD LOSSES--A Realized Loss incurred, to the extent that the
loss was attributable to (i) direct physical damage to a mortgaged property
other than any loss of a type covered by a hazard insurance policy or a flood
insurance policy, if applicable, and (ii) any shortfall in insurance proceeds
for partial damage due to the application of the co-insurance clauses contained
in hazard insurance policies. The amount of the Special Hazard Loss is limited
to he lesser of the cost of repair or replacement of the mortgaged property; any
loss above that amount would be a Defaulted Mortgage Loss or other applicable
type of loss. Special Hazard Losses does not include losses occasioned by war,
civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
chemical contamination or waste by the mortgagor.
SPECIAL SERVICER--A special servicer named pursuant to the pooling and
servicing agreement for a series of certificates, which will be responsible for
the servicing of delinquent loans.
STATED PRINCIPAL BALANCE--As to any mortgage loan as of any date of
determination, its principal balance as of the cut-off date, after application
of all scheduled principal payments due on or before the cut-off date, whether
received or not, reduced by all amounts allocable to principal that are
distributed to certificateholders on or before the date of determination, and as
further reduced to the extent that any Realized Loss has been allocated to any
certificates on or before that date.
SUBORDINATE AMOUNT--A specified portion of subordinated distributions
with respect to the mortgage loans, allocated to the holders of the subordinate
certificates as set forth in the related prospectus supplement.
SUBSERVICING ACCOUNT--An account established and maintained by a
subservicer which meets the requirements described in the Client Guide and is
otherwise acceptable to the master servicer.
TAX-EXEMPT INVESTOR--Tax-qualified retirement plans described in
Section 401(a) of the Code and on individual retirement accounts described in
Section 408 of the Code.
7
<PAGE>
TAX-FAVORED PLANS--An ERISA plan that is exempt from federal income
taxation under Section 501 of the Code.
8
<PAGE>
The information in this prospectus supplement is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This prospectus
supplement is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED JUNE 30, 1999
Prospectus supplement dated ____________, ____
(to prospectus dated ____________, ____)
$ -----------------
RFMSI SERIES ____-S__ TRUST
ISSUER
RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
DEPOSITOR
RESIDENTIAL FUNDING CORPORATION
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-S__
The trust will hold a pool of one- to four-family residential first
mortgage loans.
The trust will issue these classes of certificates that are offered
under this prospectus supplement:
o [13] classes of senior certificates
o 3 classes of subordinated certificates
Credit enhancement for all of these certificates will be provided by
additional subordination.
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S- IN THIS
PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. 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.
_______________________will offer all but two of these classes of certificates
to the public at varying prices to be determined at the time of sale. The
proceeds to the depositor from the sale of the underwritten certificates will be
approximately _____% of the principal balance of the underwritten certificates
plus accrued interest, before deducting expenses. There is no underwriting
arrangement for those two classes of certificates.
[NAME OF UNDERWRITER]
UNDERWRITER
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
We provide information to you about the offered certificates in two separate
documents that provide progressively more detail:
o the prospectus, which provides general information, some of which may
not apply to your series of certificates; and
o this prospectus supplement, which describes the specific terms of your
series of certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES IN THIS PROSPECTUS SUPPLEMENT DIFFERS
FROM THE RELATED DESCRIPTION IN THE PROSPECTUS, YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
The depositor's principal offices are located at 8400 Normandale Lake Boulevard,
Suite 600, Minneapolis, Minnesota 55437 and its telephone number is (612)
832-7000.
TABLE OF CONTENTS
Page
----
Summary....................................................................S-__
Risk Factors...............................................................S-__
Risk of Loss..........................................................S-__
Limited Obligations...................................................S-__
Liquidity Risks.......................................................S-__
Special Yield and Prepayment Consideration............................S-__
Introduction...............................................................S-__
Description of the Mortgage Pool...........................................S-__
General...............................................................S-__
Mortgage Pool Characteristics.........................................S-__
Primary Mortgage Insurance and Primary
Hazard Insurance..................................................S-__
Additional Information................................................S-__
Description of the Certificates............................................S-__
General...............................................................S-__
Book-Entry Registration of Certain of the
Offered Certificates..............................................S-__
Glossary of Terms.....................................................S-__
Interest Distributions................................................S-__
[Determination of LIBOR..............................................S-__]
Principal Distributions on the Senior
Certificates......................................................S-__
Principal Distributions on the Class M
Certificates......................................................S-__
Allocation of Losses; Subordination...................................S-__
Advances..............................................................S-__
Certain Yield and Prepayment Considerations................................S-__
General...............................................................S-__
[Adjustable Rate Certificate Yield
Considerations...................................................S-__]
Principal Only Certificate [and][,] Variable Strip
Certificate [and Super Senior Certificate] Yield
Considerations........................................................S-__
Class M-2 and Class M-3 Certificate Yield
Considerations....................................................S-__
Additional Yield Considerations Applicable
Solely to the Residual Certificates...............................S-__
Pooling and Servicing Agreement............................................S-__
General...............................................................S-__
The Master Servicer...................................................S-__
Servicing and Other Compensation and
Payment of Expenses...............................................S-__
Voting Rights.........................................................S-__
Termination...........................................................S-__
Year 2000 Considerations...................................................S-__
Overview of the Year 2000 Issue.......................................S-__
Overview of Residential Funding's Y2K Project.........................S-__
Y2K Project Status....................................................S-__
Risks Related to Y2K..................................................S-__
Material Federal Income Tax Consequences..................................S-__
Special Tax Considerations Applicable to
Residual Certificates.............................................S-__
Method of Distribution.....................................................S-__
Legal Opinions........................................................S-__
Ratings...............................................................S-__
Legal Investment......................................................S-__
ERISA Considerations..................................................S-__
Annex I....................................................................S-__
<PAGE>
SUMMARY
The following summary is a very general overview of the offered
certificates and does not contain all of the information that you should
consider in making your investment decision. To understand all of the terms of
the offered certificates, you should read carefully this entire document and the
prospectus.
Issuer......................................RFMSI Series ____-S__ Trust
Title of securities...............Mortgage Pass-Through Certificates, Series
____-S__.
Depositor.........................Residential Funding Mortgage Securities I,
Inc., an affiliate of Residential Funding
Corporation.
Master servicer...................Residential Funding Corporation.
Trustee...........................____________________________.
Mortgage pool....................._____fixed rate
mortgage loans with an aggregate principal
balance of approximately $______________ as of
the cut-off date, secured by first liens on
one- to four-family residential properties.
Cut-off date......................___________1, ____.
Closing date......................On or about _____________, ____.
Distribution dates................Beginning on __________ 25, ____ and
thereafter on the 25th of each month or, if
the 25th is not a business day, on the next
business day.
Scheduled final distribution
date............................__________25, 20__. The actual final
distribution date could be substantially
earlier.
Form of certificates..............Book-entry: [Class A-1] through [Class A-9]
and Class M Certificates. Physical: Class A-P,
Class A-V and Class R Certificates.
SEE "DESCRIPTION OF THE
CERTIFICATES--BOOK-ENTRY REGISTRATION" IN THIS
PROSPECTUS SUPPLEMENT.
Minimum denominations.............[Class A-1] through [A-9], Class A-P and Class
M-1 Certificates:
$25,000. Class M-2 and Class M-3 Certificates:
$250,000. Class A-V and Class R Certificates:
20% percentage interests.
Legal investment..................When issued, the
Class A, Class R and Class M-1 Certificates
will, and the Class M-2 and Class M-3
Certificates will not, be "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of
1984.
SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
S-3
<PAGE>
<TABLE>
<CAPTION>
OFFERED CERTIFICATES
- ------------------------------------------------------------------------------------------------------------
INITIAL
PASS-THROUGH CERTIFICATE INITIAL RATING
CLASS RATE PRINCIPAL BALANCE (_____ /_____) DESIGNATIONS
============================================================================================================
<S> <C> <C> <C> <C>
CLASS A CERTIFICATES:
- ------------------------------------------------------------------------------------------------------------
[A-1 ____% $__________ AAA/AAA Senior/PAC/Fixed Rate]
- ------------------------------------------------------------------------------------------------------------
[A-2 ____% $__________ AAA/AAA Senior/TAC/Fixed Rate]
- ------------------------------------------------------------------------------------------------------------
[A-3 ____% $__________ AAA/AAA Senior/Accretion Directed/Fixed Rate]
- ------------------------------------------------------------------------------------------------------------
[A-4 ____% $__________ AAA/AAA Senior/Accrual/Fixed Rate]
- ------------------------------------------------------------------------------------------------------------
[A-5 Adjustable Rate $___________ AAA/AAA Senior/Floater/Companion/Adjustable
Rate]
- ------------------------------------------------------------------------------------------------------------
[A-6 Adjustable Rate $___________ AAA/AAA Senior/Inverse
Floater/Companion/Adjustable Rate]
- ------------------------------------------------------------------------------------------------------------
[A-7 ____% $___________ AAA/AAA Senior/Lockout/Fixed Rate]
- ------------------------------------------------------------------------------------------------------------
[A-8 ____% $___________ AAA/AAA Super Senior/Fixed Rate]
- ------------------------------------------------------------------------------------------------------------
[A-9 ____% $___________ AAA/AAA Senior Support/Fixed Rate]
- ------------------------------------------------------------------------------------------------------------
A-P 0.00% $___________ AAA/AAAr Senior/Fixed Rate/Principal Only
- ------------------------------------------------------------------------------------------------------------
A-V Variable Rate $___________ AAA/AAAr Senior/Interest Only/Variable Rate
- ------------------------------------------------------------------------------------------------------------
Total Class A Certificates: $___________
============================================================================================================
CLASS R CERTIFICATES:
============================================================================================================
R[-I] ____% $ 100 AAA/AAA Senior/Residual
- ------------------------------------------------------------------------------------------------------------
[R-II ____% $ 100 AAA/AAA Senior/Residual]
- ------------------------------------------------------------------------------------------------------------
Total senior certificates: $___________
============================================================================================================
CLASS M CERTIFICATES:
============================================================================================================
M-1 ____% $____________ AA/NA Mezzanine/Fixed Rate
- ------------------------------------------------------------------------------------------------------------
M-2 ____% $____________ A/NA Mezzanine/Fixed Rate
- ------------------------------------------------------------------------------------------------------------
M-3 ____% $____________ BBB/NA Mezzanine/Fixed Rate
============================================================================================================
Total Class M Certificates: $__________
============================================================================================================
Total offered certificates: $__________
- ------------------------------------------------------------------------------------------------------------
NON-OFFERED CERTIFICATES
- ------------------------------------------------------------------------------------------------------------
CLASS B CERTIFICATES:
============================================================================================================
B-1 ____% $__________ BB/NA Subordinate/Fixed Rate
- ------------------------------------------------------------------------------------------------------------
B-2 ____% $_________ B/NA Subordinate/Fixed Rate
- ------------------------------------------------------------------------------------------------------------
B-3 ____% $_________ NA/NA Subordinate/Fixed Rate
============================================================================================================
Total Class B Certificates: $__________
============================================================================================================
Total offered and
non-offered certificates: $___________
- ------------------------------------------------------------------------------------------------------------
</TABLE>
OTHER INFORMATION:
CLASS A-5 AND CLASS A-6:
--------- ---------
<TABLE>
<CAPTION>
ADJUSTABLE RATES: INITIAL FORMULA MAXIMUM MINIMUM
<S> <C> <C> <C> <C>
Class A-5: _______% LIBOR + _____% _____% ____%
Class A-6: _______% ________% - (_________ x LIBOR)_____ 0.00%
</TABLE>
CLASS A-V:
----------
Variable Rate: Varies according to the excess interest available on the
mortgage loans. The Class A-V Certificates do not have a principal balance.
For the purpose of calculating interest payments, interest will accrue on a
notional amount equal to $_____________.
S-4
<PAGE>
THE TRUST
The depositor will establish a trust with respect to the Series _____-S__
Certificates under a pooling and servicing agreement. On the closing date, the
depositor will deposit the pool of mortgage loans described in this prospectus
supplement into the trust. Each certificate will represent a partial ownership
interest in the trust.
THE MORTGAGE POOL
The mortgage loans to be deposited into the trust have the following
characteristics as of the cut-off date:
WEIGHTED
RANGE AVERAGE
Principal balance $______ to $_______ $_______*
Mortgage rate _____% to _____% ______%
Remaining term to ___ to ___ ___
maturity (months)
*Indicates average principal balance
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE POOL SEE "DESCRIPTION OF THE
MORTGAGE POOL" IN THIS PROSPECTUS SUPPLEMENT.
DISTRIBUTIONS ON THE OFFERED CERTIFICATES
AMOUNT AVAILABLE FOR MONTHLY DISTRIBUTION. On each monthly distribution date,
the trustee will make distributions to investors. The amount available for
distribution will include:
o collections of monthly payments on the mortgage loans, including
prepayments and other unscheduled collections PLUS
o advances for delinquent payments MINUS
o the fees and expenses of the subservicers and the master servicer,
including reimbursement for advances.
SEE "DESCRIPTION OF THE CERTIFICATES--GLOSSARY OF TERMS--AVAILABLE DISTRIBUTION
AMOUNT" IN THIS PROSPECTUS SUPPLEMENT.
PRIORITY OF DISTRIBUTIONS. Distributions on the offered certificates will be
made from available amounts as follows:
o Distribution of interest to the interest-bearing Senior Certificates o
Distribution of principal to the Class A-P Certificates o Distribution of
principal to the remaining Senior Certificates entitled
to principal
o Payment to master servicer for certain unreimbursed advances o
Distribution to the Class M Certificates in the following order:
o Interest to the Class M-1 Certificates o Principal to the Class M-1
Certificates o Interest to the Class M-2 Certificates o Principal to
the Class M-2 Certificates o Interest to the Class M-3 Certificates o
Principal to the Class M-3 Certificates
INTEREST DISTRIBUTIONS. The amount of interest owed to each class of
interest-bearing certificates on each distribution date will equal:
S-5
<PAGE>
o the pass-through rate for that class of certificates MULTIPLIED BY o
the principal balance or notional amount of that class of
certificates as of the day immediately prior to the related
distribution date MULTIPLIED BY
o 1/12th MINUS
o the share of some types of interest shortfalls allocated to that
class.
SEE "DESCRIPTION OF THE CERTIFICATES--INTEREST DISTRIBUTIONS" IN THIS PROSPECTUS
SUPPLEMENT.
ALLOCATIONS OF PRINCIPAL. Principal distributions on the certificates will be
allocated among the various classes of offered certificates as described in this
prospectus supplement. Until the distribution date in _____________, ALL
principal prepayments on the mortgage loans will be distributed among the senior
certificates, unless the interest-bearing senior certificates are no longer
outstanding. Not all outstanding senior certificates will receive principal on
each distribution date. The Class A-P Certificates receive only a portion of the
principal received from each mortgage loan that has a net mortgage rate of less
than ____%. The Class A-V Certificates are not entitled to receive any principal
distributions.
SEE "DESCRIPTION OF THE CERTIFICATES--PRINCIPAL DISTRIBUTIONS ON THE SENIOR
CERTIFICATES" AND "--PRINCIPAL DISTRIBUTIONS ON THE CLASS M CERTIFICATES" IN
THIS PROSPECTUS SUPPLEMENT.
CREDIT ENHANCEMENT
ALLOCATION OF LOSSES. Most losses on the mortgage loans will be allocated in
full to the first class listed below with a principal balance greater than zero:
o Class B-3 o Class B-2 o Class B-1 o Class M-3 o Class M-2 o Class M-1
When this occurs, the principal balance of the class to which the loss is
allocated is reduced, without a corresponding payment of principal.
If none of the Class M Certificates or Class B Certificates are outstanding,
losses on the mortgage loans will be allocated proportionately among the senior
certificates, in accordance with the special rules mentioned below.
Not all losses will be allocated in the priority described in the third
preceding paragraph. Losses due to natural disasters such as floods and
earthquakes, fraud by a mortgagor, or bankruptcy of a mortgagor will be
allocated as described in the third preceding paragraph only up to specified
amounts. Losses of these types in excess of the specified amount and losses due
to other extraordinary events will be allocated proportionately among all
outstanding classes of certificates except as stated in the following paragraph.
Therefore, the Class M Certificates and Class B Certificates do not act as
credit enhancement for the senior certificates for such losses.
SPECIAL LOSS ALLOCATION FOR CLASS A-P CERTIFICATES. Whenever losses are
allocated
S-6
<PAGE>
to the senior certificates, the Class A-P Certificates will share in the loss
only if the mortgage loan had a net mortgage rate less than ____%. In that case,
the Class A-P Certificates will bear a share of the loss equal to their
percentage interest in the principal of that mortgage loan.
[SPECIAL LOSS ALLOCATION FOR CLASS A-8 AND CLASS A-9. Whenever losses are
allocated to the senior certificates, the share of the loss allocable to the
Class A-8 Certificates will instead be allocated to the Class A-9 Certificates
until the Class A-9 Certificates are no longer outstanding.]
SEE "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF LOSSES; SUBORDINATION" IN
THIS PROSPECTUS SUPPLEMENT.
PRIORITY OF DISTRIBUTIONS. All or a disproportionately large portion of
principal prepayments and other unscheduled payments of principal will be
allocated to the senior certificates during the first nine years after the
closing date. This provides additional credit enhancement for the senior
certificates by reserving a greater portion of the principal balances of the
Class M Certificates and Class B Certificates for absorption of losses.
ADVANCES
For any month, if the master servicer does not receive the full scheduled
payment on a mortgage loan, the master servicer will advance funds to cover the
amount of the scheduled payment that was not made. However, the master servicer
will advance funds only if it determines that the advance will be recoverable
from future payments or collections on that mortgage loan. SEE "DESCRIPTION OF
THE CERTIFICATES--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT.
OPTIONAL TERMINATION
On any distribution date on which the principal balances of the mortgage loans
is less than 10% of their principal balances as of the cut-off date, the master
servicer or the depositor will have the option to:
o purchase from the trust all remaining mortgage loans, causing an
early retirement of the certificates; OR
o purchase all the certificates.
Under either type of optional purchase, holders of the outstanding certificates
will receive the outstanding principal balance of the certificates in full with
accrued interest. However, any optional purchase of the remaining mortgage loans
may result in a shortfall to the holders of the most subordinate classes of
certificates outstanding, if the trust then holds properties acquired from
foreclosing upon defaulted loans. In either case, there will be no reimbursement
of principal reductions or related interest that resulted from losses allocated
to the certificates.
SEE "POOLING AND SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT
AND "THE POOLING AND SERVICING AGREEMENT--TERMINATION; RETIREMENT OF
CERTIFICATES" IN THE PROSPECTUS.
RATINGS
S-7
<PAGE>
When issued, the offered certificates will receive ratings which are not lower
than those listed in the table on page S-__ of this prospectus supplement. The
ratings on the offered certificates address the likelihood that holders of the
offered certificates will receive all distributions on the underlying mortgage
loans to which they are entitled. A security rating is not a recommendation to
buy, sell or hold a security and may be changed or withdrawn at any time by the
assigning rating agency. The ratings also do not address the rate of principal
prepayments on the mortgage loans. For example, the rate of prepayments, if
different than originally anticipated, could adversely affect the yield realized
by holders of the offered certificates or cause holders of the Class A-V
Certificates to fail to fully recover their initial investments.
SEE "RATINGS" IN THIS PROSPECTUS SUPPLEMENT.
LEGAL INVESTMENT
When issued, the Class A, Class R and Class M-1 Certificates will, and the Class
M-2 and Class M-3 Certificates will not, be "mortgage related securities" for
purposes of SMMEA. You should consult your legal advisors in determining whether
and to what extent the offered certificates constitute legal investments for
you.
SEE "LEGAL INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT FOR IMPORTANT INFORMATION
CONCERNING POSSIBLE RESTRICTIONS ON OWNERSHIP OF THE OFFERED CERTIFICATES BY
REGULATED INSTITUTIONS.
ERISA CONSIDERATIONS
The Class A Certificates may be considered eligible for purchase by persons
investing assets of employee benefit plans or individual retirement accounts.
Sales of the Class M Certificates and the Class R Certificates to such plans or
retirement accounts are prohibited, except as permitted under "ERISA
Considerations" in this prospectus supplement. If you invest in a Class M
Certificate, you will be deemed to represent that you comply with these
restrictions.
SEE "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
TAX STATUS
For federal income tax purposes, the depositor will elect to treat the trust as
two real estate mortgage investment conduits. The certificates, other than the
Class R Certificates, will represent ownership of regular interests in the trust
and will be treated as representing ownership of debt for federal income tax
purposes. You will be required to include in income all interest and original
issue discount, if any, on such certificates in accordance with the accrual
method of accounting regardless of your usual methods of accounting. For federal
income tax purposes, each of the Class R Certificates will be the sole residual
interest in one of the two real estate mortgage investment conduits.
FOR FURTHER INFORMATION REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
INVESTING IN THE OFFERED CERTIFICATES, INCLUDING IMPORTANT INFORMATION REGARDING
THE TAX TREATMENT OF THE CLASS R CERTIFICATES, SEE "MATERIAL FEDERAL INCOME TAX
S-8
<PAGE>
CONSEQUENCES" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
S-9
<PAGE>
RISK FACTORS
The offered certificates are not suitable investments for all
investors. In particular, you should not purchase any class of offered
certificates unless you understand the prepayment, credit, liquidity and market
risks associated with that class.
The offered certificates are complex securities. You should possess,
either alone or together with an investment advisor, the expertise necessary to
evaluate the information contained in this prospectus supplement and the
prospectus in the context of your financial situation and tolerance for risk.
You should carefully consider, among other things, the following
factors in connection with the purchase of the offered certificates:
RISK OF LOSS
THE RETURN ON YOUR CERTIFICATES MAY BE AFFECTED BY LOSSES ON THE MORTGAGE LOANS,
WHICH COULD OCCUR DUE TO A VARIETY OF CAUSES.
Losses on the mortgage loans may occur due to a wide variety of causes,
including a decline in real estate values, and adverse changes in the borrower's
financial condition. A decline in real estate values or economic conditions
nationally or in the regions where the mortgaged properties are located may
increase the risk of losses on the mortgage loans. [Special risks for specific
loan types, such as negative amortization or escalating payments, will be
disclosed if material to an individual offering.]
THE RETURN ON YOUR CERTIFICATES MAY BE PARTICULARLY SENSITIVE TO CHANGES IN REAL
ESTATE MARKETS IN SPECIFIC AREAS.
One risk of investing in mortgage-backed securities is created by any
concentration of the related properties in one or more geographic regions.
Approximately ____% of the cut-off date principal balance of the mortgage loans
are located in California. If the regional economy or housing market weakens in
California, or in any other region having a significant concentration of
properties underlying the mortgage loans, the mortgage loans in that region may
experience high rates of loss and delinquency, resulting in losses to
certificateholders. A region's economic condition and housing market may be
adversely affected by a variety of events, including natural disasters such as
earthquakes, hurricanes, floods and eruptions, and civil disturbances such as
riots. [Concentrations material to an individual offering will be disclosed.]
S-10
<PAGE>
THE RETURN ON YOUR CERTIFICATES WILL BE REDUCED IF LOSSES EXCEED THE CREDIT
ENHANCEMENT AVAILABLE TO YOUR CERTIFICATES.
The only credit enhancement for the senior certificates will be the
subordination provided by the Class M Certificates and Class B Certificates
[,plus, in the case of the Class A-8 Certificates, the subordination provided by
the Class A-9 Certificates]. The only credit enhancement for the Class M
Certificates will be the subordination provided by the Class B Certificates and
by any Class M Certificates with a lower payment priority. You should also be
aware that the credit enhancement provided for some types of losses is limited.
THE VALUE OF YOUR CERTIFICATES MAY BE REDUCED IF LOSSES ARE HIGHER THAN
EXPECTED.
If the performance of the mortgage loans is substantially worse than assumed by
the rating agencies, the ratings of any class of the certificates may be lowered
in the future. This would probably reduce the value of those certificates.
Neither the depositor, the master servicer nor any other entity will have any
obligation to supplement any credit enhancement, or to take any other action to
maintain any rating of the certificates.
SEE "SUMMARY-- CREDIT ENHANCEMENT" AND "DESCRIPTION OF THE CERTIFICATES--
ALLOCATION OF LOSSES; SUBORDINATION"IN THIS PROSPECTUS SUPPLEMENT.
LIMITED OBLIGATIONS
PAYMENTS ON THE MORTGAGE LOANS ARE THE PRIMARY SOURCE OF PAYMENTS ON YOUR
CERTIFICATES.
The certificates represent interests only in the RFMSI Series ____-S__ Trust.
The certificates do not represent an interest in or obligation of the depositor,
the master servicer or any of their affiliates. If proceeds from the assets of
the RFMSI Series ____-S__ Trust are not sufficient to make all payments provided
for under the pooling and servicing agreement, investors will have no recourse
to the depositor, the master servicer or any other entity, and will incur
losses.
LIQUIDITY RISKS
S-11
<PAGE>
YOU MAY HAVE TO HOLD YOUR CERTIFICATES TO MATURITY IF THEIR MARKETABILITY IS
LIMITED.
A secondary market for your certificates may not develop. Even if a secondary
market does develop, it may not continue or it may be illiquid. Neither the
underwriter nor any other person will have any obligation to make a secondary
market in your certificates. Illiquidity means you may not be able to find a
buyer to buy your securities readily or at prices that will enable you to
realize a desired yield. Illiquidity can have a severe adverse effect on the
market value of your certificates.
Any class of offered certificates may experience illiquidity, although generally
illiquidity is more likely for classes that are especially sensitive to
prepayment, credit or interest rate risk, or that have been structured to meet
the investment requirements of limited categories of investors.
SPECIAL YIELD AND PREPAYMENT CONSIDERATIONS
THE YIELD ON YOUR CERTIFICATES WILL VARY DEPENDING ON THE RATE OF PREPAYMENTS.
The yield to maturity on each class of offered certificates will depend on a
variety of factors, including:
o the rate and timing of principal payments on the mortgage loans,
including prepayments, defaults and liquidations, and repurchases due
to breaches of representations or warranties;
o the pass-through rate for that class;
o interest shortfalls due to mortgagor prepayments; and
o the purchase price of that class.
The rate of prepayments is one of the most important and least predictable of
these factors.
In general, if you purchase a certificate at a price higher than its outstanding
principal balance and principal distributions on your certificate occur faster
than you assumed at the time of purchase, your yield will be lower than you
anticipated. Conversely, if you purchase a certificate at a price lower than its
outstanding principal balance and principal distributions on that class occur
more slowly than you assumed at the time of purchase, your yield will be lower
than you anticipated.
S-12
<PAGE>
THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS WILL VARY DEPENDING ON FUTURE
MARKET CONDITIONS, AND OTHER FACTORS.
Since mortgagors can generally prepay their mortgage loans at any time, the rate
and timing of principal distributions on the offered certificates are highly
uncertain. Generally, when market interest rates increase, borrowers are less
likely to prepay their mortgage loans. This could result in a slower return of
principal to you at a time when you might have been able to reinvest your funds
at a higher rate of interest than the pass-through rate on your class of
certificates. On the other hand, when market interest rates decrease, borrowers
are generally more likely to prepay their mortgage loans. This could result in a
faster return of principal to you at a time when you might not be able to
reinvest your funds at an interest rate as high as the pass-through rate on your
class of certificates. Refinancing programs, which may involve soliciting all or
some of the mortgagors to refinance their mortgage loans, may increase the rate
of prepayments on the mortgage loans. These refinancing programs may be offered
by the master servicer, any subservicer or their affiliates, and may include
streamlined documentation programs as well as programs under which a mortgage
loan is modified to reduce the interest rate.
SEE "MATURITY AND PREPAYMENT CONSIDERATIONS" IN THE PROSPECTUS.
THE YIELD ON YOUR CERTIFICATES WILL BE AFFECTED BY THE SPECIFIC FORMS THAT APPLY
TO THAT CLASS, DISCUSSED BELOW.
The offered certificates of each class have different yield considerations and
different sensitivities to the rate and timing of principal distributions. The
following is a general discussion of yield considerations and prepayment
sensitivities of each class.
SEE "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
CLASS A CERTIFICATES
The Class A Certificates are subject to various priorities for payment of
principal. Distributions of principal on the Class A Certificates with an
earlier priority of payment will be affected by the rates of prepayment of the
mortgage loans early in the life of the mortgage pool. Those classes of Class A
Certificates with a later priority of payment will be affected by the rates of
prepayment of the mortgage loans experienced both before and after the
commencement of principal distributions on those classes, and will be more
likely to be affected by losses on the mortgage loans not covered by the credit
enhancement.
SEE "DESCRIPTION OF THE CERTIFICATES--PRINCIPAL DISTRIBUTIONS ON THE SENIOR
CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
S-13
<PAGE>
[CLASS A-1 CERTIFICATES
Based on the structuring assumptions, the Class A-1 Certificates are structured
so that principal payments will be made in accordance with the table in this
prospectus supplement, but only if the mortgage loans prepay at a constant rate
within a range. If prepayments occur at a rate below that range, the weighted
average life of the Class A-1 Certificates will be extended. On the other hand,
if prepayments occur at a rate above that range, the weighted average life of
the Class A-1 Certificates will be reduced.]
[CLASS A-2 CERTIFICATES
Based on the structuring assumptions, the Class A-2 Certificates are structured
so that principal payments will be made in accordance with the table in this
prospectus supplement, but only if the mortgage loans prepay at a specific
constant rate. If prepayments occur at a rate slower than that rate, the
weighted average life of the Class A-2 Certificates will be extended. On the
other hand, if prepayments occur at a rate faster than that rate, the weighted
average life of the Class A-2 Certificates will be reduced.]
[CLASS A-4 CERTIFICATES
Because the Class A-4 Certificates are not entitled to receive any distributions
of interest for some period of time, these certificates will likely experience
significant price and yield volatility. Investors should consider whether this
volatility is suitable to their investment needs.]
[CLASS A-5 CERTIFICATES AND CLASS A-6 CERTIFICATES
The interest rate on the Class A-5 Certificates will vary with LIBOR. THE
INTEREST RATE ON THE CLASS A-6 CERTIFICATES WILL VARY INVERSELY WITH A MULTIPLE
OF LIBOR. Therefore, the yield to investors on the Class A-5 Certificates will
be sensitive, and the Class A-6 Certificates will be extremely sensitive, to
fluctuations of LIBOR.
The Class A-5 Certificates and Class A-6 Certificates may receive small or large
distributions of principal on each distribution date to the extent necessary to
stabilize principal distributions on the Class A-1 Certificates and Class A-2
Certificates. Due to the companion nature of the Class A-5 and Class A-6
Certificates, these certificates will likely experience price and yield
volatility. Investors should consider whether this volatility is suitable to
their investment needs.]
[CLASS A-7 CERTIFICATES
It is not expected that the Class A-7 Certificates will receive any
distributions of principal until the distribution date in ____________. Until
the distribution date in ____________, the Class A-7 Certificates may receive a
portion of principal prepayments that is smaller than its PRO RATA share of
principal prepayments.]
S-14
<PAGE>
[CLASS A-9 CERTIFICATES
After the principal balance of the Class M Certificates and Class B Certificates
have been reduced to zero, losses on the mortgage loans otherwise allocable to
the Class A-8 Certificates will be allocated to the Class A-9 Certificates.
Therefore the yield to maturity on the Class A-9 Certificates will be extremely
sensitive to losses otherwise allocable to the Class A-8 Certificates.]
CLASS A-P CERTIFICATES
The Class A-P Certificates will receive a portion of the principal payments ONLY
on the mortgage loans that have net mortgage rates lower than ____%. Therefore,
the yield on the Class A-P Certificates is extremely sensitive to the rate and
timing of principal prepayments and defaults on the mortgage loans that have net
mortgage rates lower than ____%. Mortgage loans with lower mortgage rates are
less likely to be prepaid than mortgage loans with higher mortgage rates. If
prepayments of principal on the mortgage loans that have net mortgage rates
lower than ____% occur at a rate slower than an investor assumed at the time of
purchase, the investor's yield will be adversely affected.
CLASS A-V CERTIFICATES
The Class A-V Certificates will receive a portion of the interest payments ONLY
from mortgage loans that have net mortgage rates higher than ____%. Therefore,
the yield on the Class A-V Certificates will be extremely sensitive to the rate
and timing of principal prepayments and defaults on the mortgage loans that have
net mortgage rates higher than ____%. Mortgage loans with higher mortgage rates
are more likely to be prepaid than mortgage loans with lower mortgage rates. If
the mortgage loans that have net mortgage rates higher than ____% are prepaid at
a rate faster than an investor assumed at the time of purchase, the yield to
investors in the Class A-V Certificates will be adversely affected. Investors in
the Class A-V Certificates should fully consider the risk that a rapid rate of
prepayments on the mortgage loans that have net mortgage rates higher than ____%
could result in the failure of such investors to fully recover their
investments.
CLASS M CERTIFICATES
The yield to investors in each class of the Class M Certificates will be
sensitive to the rate and timing of losses on the mortgage loans, if those
losses are not covered by a more subordinate class of Class M Certificates or
the Class B Certificates.
SEE "SUMMARY--CREDIT ENHANCEMENT--ALLOCATION OF LOSSES" AND "DESCRIPTION OF THE
CERTIFICATES--ALLOCATION OF LOSSES; SUBORDINATION" IN THIS PROSPECTUS
SUPPLEMENT.
S-15
<PAGE>
It is not expected that the Class M Certificates will receive any distributions
of principal prepayments until the distribution date in _______________. After
that date, all or a disproportionately large portion of principal prepayments on
the mortgage loans may be allocated to the senior certificates, and none or a
disproportionately small portion of principal prepayments may be paid to the
holders of the Class M Certificates and Class B Certificates. As a result, the
weighted average lives of the Class M Certificates may be longer than would
otherwise be the case.
S-16
<PAGE>
INTRODUCTION
The Depositor will establish a trust with respect to Series ____-S__ on
the closing date, under a pooling and servicing agreement among the depositor,
the master servicer and the trustee, dated as of the cut-off date. On the
closing date, the depositor will deposit into the trust a pool of mortgage
loans, that in the aggregate will constitute a mortgage pool, secured by one- to
four-family residential properties with terms to maturity of not more than
thirty years.
Some capitalized terms used in this prospectus supplement have the
meanings given below under "Description of the Certificates--Glossary of Terms"
or in the prospectus under "Glossary."
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 the cut-off date, of $____________. The mortgage
loans are secured by first liens on fee simple interests in one- to four-family
residential real properties and, in the case of four mortgage loans, an interest
in shares issued by a cooperative apartment corporation and the related
proprietary lease. In each case, the property securing the mortgage loan is
referred to as the mortgaged property. The mortgage pool will consist of
conventional, fixed-rate, fully-amortizing, level monthly payment first mortgage
loans with terms to maturity of not more than 30 years from the date of
origination or modification. With respect to mortgage loans which have been
modified, references in this prospectus supplement to the date of origination
shall be deemed to be the date of the most recent modification. All percentages
of the mortgage loans described in this prospectus supplement are approximate
percentages by aggregate principal balance as of the cut-off date unless
otherwise indicated.
All of the mortgage loans were purchased by the depositor through its
affiliate, Residential Funding, from unaffiliated sellers as described in this
prospectus supplement and in the prospectus, except in the case of ____% of the
mortgage loans, which were purchased by the depositor through its affiliate,
Residential Funding, from HomeComings Financial Network, Inc., a wholly-owned
subsidiary of the master servicer. ____% of the mortgage loans were purchased
from and are being subserviced by __________________ and ____% of the mortgage
loans were purchased from _________________, each an unaffiliated seller. Except
as described in the preceding two sentences, no unaffiliated seller sold more
than ___% of the mortgage loans to Residential Funding.
____% of the Mortgage Loans are being subserviced by Capstead Inc. As
of September 30, 1998, Capstead serviced or subserviced approximately $57.6
billion of conventional one- to four-family residential mortgage loans.
HomeComings and GMAC Mortgage Corporation have agreed to acquire substantially
all of the assets of Capstead and expect to do so before March 31, 1999. The
principal office of Capstead is located at 2711 North Haskell Avenue, Suite 900,
Dallas, Texas 75204, and its telephone number is (214) 874-2323.
Under the terms of the pooling and servicing agreement, the depositor
will assign the representations and warranties made by the related sellers of
the mortgage loans to the trustee for the
S-17
<PAGE>
benefit of the certificateholders and will also make limited representations and
warranties regarding the mortgage loans as of the date of issuance of the
certificates. To the best of the depositor's knowledge, none of the mortgage
loans were sold to Residential Funding by unaffiliated sellers that are
institutions which are currently in receivership or conservatorship or involved
in other insolvency or bankruptcy proceedings, or are no longer in existence.
To the extent that any seller of the mortgage loans does not
repurchase a mortgage loan in the event of a breach of its representations and
warranties with respect to that mortgage loan, neither the depositor nor
Residential Funding will be required to repurchase the mortgage loan unless:
o the breach also constitutes a breach of one of the depositor's
or Residential Funding's representations and warranties with
respect to that mortgage loan and
o the breach materially and adversely affects the interests of
the certificateholders in any such mortgage loan.
In addition, neither the depositor 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 that mortgage loan if the
substance of any such breach also constitutes fraud in the origination of the
affected mortgage loan. A limited amount of losses on mortgage loans as to which
there was fraud in the origination of those mortgage loans will be covered by
the subordination provided by the Class M Certificates and Class B Certificates
as described in this prospectus supplement under "Description of the
Certificates--Allocation of Losses; Subordination."
MORTGAGE POOL CHARACTERISTICS
None of the mortgage loans will have been originated prior to
___________, ____ or will have a maturity date later than _________ 1, 20__. 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 used in this prospectus
supplement the remaining term to maturity means, as of any date of determination
and with respect to any mortgage loan, the number of months equaling the number
of scheduled monthly payments necessary to reduce the then-current Stated
Principal Balance of that mortgage loan to zero, assuming the related mortgagor
will make all scheduled monthly payments but no prepayments, on the mortgage
loan thereafter.
As of the cut-off date, none of the mortgage loans will be one month or
more delinquent in payment of principal and interest. For a description of the
methodology used to categorize mortgage loans as delinquent, see "Pooling and
Servicing Agreement--The Master Servicer" in this prospectus supplement.
Approximately ____% of the mortgage loans will be Buydown Mortgage
Loans.
No mortgage loan provides for deferred interest or negative
amortization.
Included below is a table showing the Credit Scores for some
mortgagors. Credit Scores are obtained by many mortgage lenders in connection
with mortgage loan applications to help assess a
S-18
<PAGE>
borrower's credit-worthiness. In addition, Credit Scores may be obtained by
Residential Funding after the origination of a mortgage loan if the seller does
not provide to Residential Funding a Credit Score. Credit Scores are obtained
from credit reports provided by various credit reporting organizations, each of
which may employ differing computer models and methodologies. The Credit Score
is designed to assess a borrower's credit history at a single point in time,
using objective information currently on file for the borrower at a particular
credit reporting organization. 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 LTV 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 or that any
mortgagor's Credit Score would not be lower if obtained as of the date of this
prospectus supplement.
<TABLE>
<CAPTION>
CREDIT SCORE DISTRIBUTION
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........................................
</TABLE>
- ----------
S-19
<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.
Set forth below is a description of some additional characteristics of
the mortgage loans as of the cut-off date unless otherwise indicated. All
percentages of the mortgage loans are approximate percentages by aggregate
principal balance as of the cut-off date unless otherwise indicated. Unless
otherwise specified, all principal balances of the mortgage loans are as of the
cut-off date and are rounded to the nearest dollar.
<TABLE>
<CAPTION>
MORTGAGE RATES
NUMBER OF PERCENTAGE
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE OF MORTGAGE POOL
- ------------------ -------------- ----------------- ----------------
<S> <C> <C> <C>
.................................... $ %
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
.................................... .
--- ------------ ------
Total..................... $ . %
=== ============ ======
</TABLE>
As of the cut-off date, the weighted average mortgage rate of the
mortgage loans will be approximately ______% per annum.
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
NUMBER OF PERCENTAGE OF
ORIGINAL MORTGAGE LOAN BALANCE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ------------------------------ -------------- ----------------- -------------
<S> <C> <C> <C>
$................................... $ %
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
....................................
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<PAGE>
.
.................................... --- ------------ ------
Total.................... $ . %
=== ============= ======
</TABLE>
As of the cut-off date, the average unpaid principal balance of the
mortgage loans will be approximately $_______.
<TABLE>
<CAPTION>
ORIGINAL LTV RATIOS
NUMBER OF MORTGAGE POOL
ORIGINAL LTV RATIO (%) MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ---------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
.................................... $ %
....................................
....................................
....................................
....................................
....................................
....................................
....................................
.................................... .
--- ------------ ------
Total.................... $ . %
=== ============= ======
</TABLE>
The weighted average LTV ratio at origination of the mortgage loans
will be approximately $________.
The method for calculating the LTV ratio is described in the prospectus
on page __.
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTIONS OF MORTGAGED PROPERTIES
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.................... $ . %
=== ============= ======
</TABLE>
- -------------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
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.
S-21
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE LOAN PURPOSE
NUMBER OF PERCENTAGE OF
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ------------ -------------- ----------------- -------------
<S> <C> <C> <C>
Purchase............................ $ %
Rate/Term Refinance.................
Equity Refinance....................
Total.................... $ . %
=== ============= ======
</TABLE>
The weighted average LTV ratio at origination of rate and term
refinance mortgage loans will be____%. The weighted average LTV ratio at
origination of equity refinance mortgage loans will be ____%.
<TABLE>
<CAPTION>
MORTGAGE LOAN DOCUMENTATION TYPES
NUMBER OF PERCENTAGE OF
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ------------------ -------------- ----------------- -------------
<S> <C> <C> <C>
Full................................ $ %
Reduced............................. .
--- ------------ ------
Total.................... $ . %
=== ============= ======
</TABLE>
The weighted average LTV ratio at origination of the mortgage loans
which were underwritten under a reduced loan documentation program will be
____%. No more than ____% of the reduced loan documentation mortgage loans will
be secured by mortgaged properties located in California.
____% of the mortgage loans were underwritten under a streamlined
refinancing documentation program, which permits some mortgage loans to be
refinanced with only limited verification or updating of underwriting
information obtained at the time that the refinanced mortgage loan was
underwritten. See "Mortgage Loan Program--Underwriting Standards" in the
Prospectus.
<TABLE>
<CAPTION>
OCCUPANCY TYPES
NUMBER OF PERCENTAGE OF
OCCUPANCY MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- --------- -------------- ----------------- -------------
<S> <C> <C> <C>
Primary Residence................................... $ %
Second/Vacation.....................................
Non Owner-occupied.................................. .
--- ------------ ------
Total.................... $ . %
=== ============= ======
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES
NUMBER OF PERCENTAGE OF
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE POOL
- ------------- -------------- ----------------- -------------
<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).
Cooperative Units....................
Leasehold............................ .
--- -------------- ------
Total..................... $ . %
=== ============ =======
</TABLE>
[In connection with each mortgage loan that is secured by a leasehold
interest, the related seller shall have represented to the depositor that, among
other things:
o the use of leasehold estates for residential properties is an
accepted practice in the area where the related mortgaged
property is located
o residential property in the area consisting of leasehold
estates is readily marketable
o the lease is recorded and no party is in any way in breach of
any provision of the lease
o 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
o the remaining term of the lease does not terminate less than
ten years after the maturity date of each such mortgage loan.]
<TABLE>
<CAPTION>
NET MORTGAGE RATES OF DISCOUNT MORTGAGE LOANS
NUMBER OF PRINCIPAL PERCENT OF
NET MORTGAGE RATE(%) MORTGAGE LOANS BALANCE MORTGAGE POOL
-------------------- -------------- ------- -------------
<S> <C> <C> <C>
.......................................... $ %
..........................................
..........................................
..........................................
.......................................... .
--- -------------- ------
Total..................... $ . %
=== ============== =======
</TABLE>
S-23
<PAGE>
As of the cut-off date, the weighted average of the Discount Fractions
of the Discount Mortgage Loans was approximately ______%.
[Some of the aspects of the Cooperative Loans included in the mortgage
pool differ from those of other types of mortgage loans. See "Certain Legal
Aspects of Mortgage Loans--Cooperative Loans" in the Prospectus.]
A portion of the mortgage loans provide for payment of a prepayment
charge. In most cases, the prepayment provisions provide for payment of a
prepayment charge for partial prepayments and full prepayments, other than a
prepayment:
o occurring upon the sale of property securing a mortgage loan,
o made within five years following the origination of the mortgage
loan, and
o in an amount equal to six months' advance interest on the amount
of the prepayment that, when added to all other amounts prepaid
during the twelve-month period immediately preceding the date of
prepayment, exceeds twenty percent (20%) of the original
principal amount of the mortgage loan.
Prepayment charges received on the mortgage loans will not be available for
distribution on the certificates. See "Certain Legal Aspects of the Mortgage
Loans--Default Interest and Limitations on Prepayments" in the prospectus.
PRIMARY MORTGAGE INSURANCE AND PRIMARY HAZARD INSURANCE
Each mortgage loan is required to be covered by a standard hazard
insurance policy, which is referred to as a primary hazard insurance policy. In
addition, to the best of the depositor's knowledge, each mortgage loan with an
LTV ratio at origination in excess of ______% will be insured by a primary
mortgage insurance policy, which is referred to as a primary insurance policy,
covering at least ___% of the principal balance of the mortgage loan at
origination if the LTV ratio is between _____% and _____%, at least ___% of the
balance if the LTV ratio is between _____% and _____%.
Substantially all of the primary insurance policies were issued by
General Electric Mortgage Insurance Corporation, Mortgage Guaranty Insurance
Corporation, United Guaranty Residential Insurance Company, PMI Mortgage
Insurance Company, Commonwealth Mortgage Assurance Company, Republic Mortgage
Insurance Company or Amerin Guaranty Corporation, which collectively are the
primary insurers. Each primary insurer has a claims paying ability currently
acceptable to the rating agencies that have been requested to rate the
certificates; however, there is no assurance as to the actual ability of any
primary insurer to pay claims. See "Insurance Policies on Mortgage Loans" in the
prospectus.
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 the cut-off date. Prior to the issuance of the offered
certificates, mortgage loans may be removed from the mortgage pool as a result
of incomplete documentation or otherwise, if the depositor deems that removal
necessary or
S-24
<PAGE>
appropriate. A limited number of other mortgage loans may be added to the
mortgage pool prior to the issuance of the offered certificates. The depositor
believes that the information in this prospectus supplement will be
substantially representative of the characteristics of the mortgage pool as it
will be constituted at the time the offered certificates are issued although the
range of mortgage rates and maturities and some other characteristics of the
mortgage loans in the mortgage pool may vary.
A current report on Form 8-K will be available to purchasers of the
offered certificates and will be filed, together with the pooling and servicing
agreement, with the commission within fifteen days after the initial issuance of
the offered certificates. In the event mortgage loans are removed from or added
to the mortgage pool as described in the preceding paragraph, that removal or
addition will be noted in the current report.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series _____-S__ Mortgage Pass-Through Certificates will include
the following thirteen classes of Senior Certificates:
[o Class A-1 Certificates, or the PAC Certificates o Class A-2
Certificates, or the TAC Certificates o Class A-3 Certificates, or the
Accretion Directed Certificates o Class A-4 Certificates, or the
Accrual Certificates o Class A-5 Certificates, or the Floater
Certificates o Class A-6 Certificates, or the Inverse Floater
Certificates; and
together with the Floater Certificates, the Adjustable Rate
Certificates
o Class A-7 Certificates, or the Lockout Certificates
o Class A-8 Certificates, or the Super Senior Certificates o Class
A-9 Certificates, or the Senior Support Certificates]
o Class A-P Certificates, or the Principal Only Certificates o
Class A-V Certificates, or the Variable Strip Certificates; and o
Class R-I Certificates and Class R-II Certificates, collectively,
the Residual Certificates
In addition to the Senior Certificates, the Series _____-S__ Mortgage
Pass-Through Certificates will also include six classes of subordinate
certificates which are designated as the Class M-1 Certificates, Class M-2
Certificates and Class M-3 Certificates, and the Class B-1 Certificates, Class
B-2 Certificates and Class B-3 Certificates. Only the Senior Certificates and
Class M Certificates are offered hereby. See "Index of Principal Definitions" in
the prospectus for the meanings of capitalized terms and acronyms not otherwise
defined in this prospectus supplement.
The certificates will evidence the entire beneficial ownership interest
in the trust fund. The trust fund will consist of:
o the mortgage loans
S-25
<PAGE>
o the assets as from time to time that 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
o property acquired by foreclosure of the mortgage loans or deed
in lieu of foreclosure
o any applicable primary insurance policies and primary hazard
insurance policies; and
o all proceeds of any of the foregoing.
The Senior Certificates, other than the Principal Only, Variable Strip
and Residual Certificates, and the Class M Certificates will be available only
in book-entry form through facilities of The Depository Trust Company, and are
collectively referred to as the DTC registered certficates. The DTC registered
certificates will be issued, maintained and transferred on the book-entry
records of DTC and its participants. The DTC registered certificates will be
issued in minimum denominations of $25,000, or $250,000 in the case of the Class
M-2 Certificates and Class M-3 Certificates, and integral multiples of $1 in
excess thereof. The Principal Only Certificates will be issued in registered,
certificated form in minimum denominations of $25,000 and integral multiples of
$1,000 in excess thereof, except for one Principal Only Certificate evidencing
the sum of an authorized denomination thereof and the remainder of the aggregate
initial Certificate Principal Balance of such class of certificates. The
Variable Strip Certificates and Residual Certificates will be issued in
registered, certificated form in minimum denominations of a 20% percentage
interest, except, in the case of one Class R Certificate, as otherwise described
in this prospectus supplement under "Material Federal Income Tax Consequences."
The DTC registered certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. The depositor has
been informed by DTC that DTC's nominee will be Cede & Co. No beneficial owner
will be entitled to receive a certificate of any class in fully registered form,
a definitive certificate, except as described in this prospectus supplement
under "--Book-Entry Registration of Certain of the Senior
Certificates--Definitive Certificates." Unless and until definitive certificates
are issued for the DTC registered certificates under the limited circumstances
described in this prospectus supplement:
o all references to actions by certificateholders with respect
to the DTC registered certificates shall refer to actions
taken by DTC upon instructions from its participants, and
o all references in this prospectus supplement to distributions,
notices, reports and statements to certificateholders with
respect to the DTC registered certificates shall refer to
distributions, notices, reports and statements to DTC or Cede,
as the registered holder of the DTC registered certificates,
for distribution to beneficial owners by DTC in accordance
with DTC procedures.
DTC has advised the depositor that management of DTC is aware that some
computer applications, systems and the like for processing data that are
dependent upon calendar dates, including dates before, on and after January 1,
2000, may encounter Y2K problems. DTC has informed its participants and other
members of the financial community, that it has developed and is implementing a
program so that its systems, as they relate to DTC services like the timely
payment of distributions, including principal and income payments, to
securityholders, book-entry deliveries and settlement of trades with DTC,
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally,
S-26
<PAGE>
DTC's plan includes a testing phase, which, DTC has advised its participants, is
expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as DTC's participants and third party vendors from whom DTC
licenses software and hardware, and third party vendors on whom DTC relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed its
participants that it is contacting and will continue to contact third party
vendors from whom DTC acquires services to:
o impress upon them the importance of those services being Y2K
compliant; and
o determine the extent of their efforts for Y2K remediation and,
as appropriate, testing of their services.
In addition, DTC is in the process of developing any contingency plans
as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has
been provided for informational purposes only and is not intended to serve as a
representation, warranty or contract modification of any kind.
BOOK-ENTRY REGISTRATION OF CERTAIN OF THE OFFERED CERTIFICATES
GENERAL. Beneficial owners that are not participants or indirect
participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, the related DTC registered certificates may do so only
through participants and indirect participants. In addition, beneficial owners
will receive all distributions of principal of and interest on the related DTC
registered certificates from the paying agent through DTC and participants.
Accordingly, beneficial owners may experience delays in their receipt of
payments. Unless and until definitive certificates are issued for the related
DTC registered certificates, it is anticipated that the only registered
certificateholder of the DTC registered certificates will be Cede, as nominee of
DTC. Beneficial owners will not be recognized by the trustee or the master
servicer as certificateholders, as the term is used in the pooling and servicing
agreement, and beneficial owners will be permitted to receive information
furnished to certificateholders and to exercise the rights of certificateholders
only indirectly through DTC, its participants and indirect participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers of DTC
registered certificates among participants and to receive and transmit
distributions of principal of, and interest on, the DTC registered certificates.
participants and indirect participants with which beneficial owners have
accounts with respect to the DTC registered certificates similarly are required
to make book-entry transfers and receive and transmit distributions on behalf of
their respective beneficial owners. Accordingly, although beneficial owners will
not possess physical certificates evidencing their interests in the DTC
registered certificates, DTC's rules provide a mechanism by which beneficial
owners, through their participants and indirect participants, will receive
distributions and will be able to transfer their interests in the DTC registered
certificates.
S-27
<PAGE>
None of the depositor, the master servicer or the trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC registered certificates
held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
DEFINITIVE CERTIFICATES. Definitive certificates will be issued to
beneficial owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions described in the prospectus under
"Description of the Certificates--Form of Certificates."
Upon the occurrence of an event described in the prospectus in the
third paragraph under "Description of the Certificates--Form of Certificates,"
the trustee is required to notify, through DTC, participants who have ownership
of DTC registered certificates as indicated on the records of DTC of the
availability of definitive certificates for their DTC registered certificates.
Upon surrender by DTC of the definitive certificates representing the DTC
registered certificates and upon receipt of instructions from DTC for
re-registration, the trustee will reissue the DTC registered certificates as
definitive certificates issued in the respective principal amounts owned by
individual beneficial owners, and thereafter the trustee and the master servicer
will recognize the holders of the definitive certificates as certificateholders
under the pooling and servicing agreement.
For additional information regarding DTC and the DTC registered
certificates, see "Description of the Certificates--Form of Certificates" in the
Prospectus.
GLOSSARY OF TERMS
The following terms are given the meanings shown below to help describe
the cash flows on the certificates:
[ACCRETION TERMINATION DATE -- The earlier to occur of (i) the
distribution date on which the Certificate Principal Balance of the Accretion
Directed Certificates has been reduced to zero and (ii) the Credit Support
Depletion Date.]
[ACCRUAL DISTRIBUTION AMOUNT -- On each distribution date preceding the
Accretion Termination Date, an amount equal to the amount of Accrued Certificate
Interest on the Accrual Certificates for such date, which will be added to the
Certificate Principal Balance of the Accrual Certificates, and that amount will
be distributed to the holders of the Accretion Directed Certificates, in the
manner and priority set forth in this prospectus supplement, as principal in
reduction of the Certificate Principal Balance of the Accretion Directed
Certificates. The amount that is added to the Certificate Principal Balance of
the Accrual Certificates will thereafter accrue interest at a rate of ____% per
annum. On each distribution date on or after the Accretion Termination Date, the
entire Accrual Distribution Amount for that date will be payable to the holders
of the Accrual Certificates to the extent not required to fully reduce the
amounts of the Accretion Directed Certificates to zero on the Accretion
Termination Date; provided, however, that if the Accretion Termination Date is
the Credit Support Depletion Date, the entire Accrual Distribution Amount for
that date will be payable to the holders of the Accrual Certificates.]
S-28
<PAGE>
ACCRUED CERTIFICATE INTEREST -- With respect to any distribution date,
an amount equal to (a) in the case of each class of offered certificates, other
than the Variable Strip Certificates and Principal Only Certificates, interest
accrued during the related Interest Accrual Period on the Certificate Principal
Balance of the certificates of that class immediately prior to that distribution
date at the related pass-through rate and (b) in the case of the Variable Strip
Certificates, interest accrued during the related Interest Accrual Period on the
related Notional Amount immediately prior to that distribution date at the
then-applicable pass-through rate on that class for that distribution date; in
each case less interest shortfalls, if any, allocated thereto for that
distribution date to the extent not covered with respect to the Senior
Certificates by the subordination provided by the Class B Certificates and Class
M Certificates and, with respect to the Class M Certificates to the extent not
covered by the subordination provided by the Class B Certificates and any class
or classes of Class M Certificates having a lower payment priority, including in
each case:
(i) any Prepayment Interest Shortfall to the extent not
covered by the master servicer as described in this prospectus
supplement under "Description of the Certificates-- Interest
Distributions";
(ii) the interest portions of Realized Losses, including
Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses, and Extraordinary Losses not allocated through subordination;
(iii) the interest portion of any Advances that were made with
respect to delinquencies that were ultimately determined to be Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses; and
(iv) any other interest shortfalls not covered by
subordination, including interest shortfalls relating to the Soldiers'
and Sailors' Civil Relief Act of 1940, or Relief Act, or similar
legislation or regulations, all allocated as described below.
Any reductions will be allocated among the holders of all classes of
certificates in proportion to the respective amounts of Accrued Certificate
Interest that would have been payable on that distribution date absent these
reductions. In the case of each class of Class M Certificates, Accrued
Certificate Interest on that class will be further reduced by the allocation of
the interest portion of certain losses thereto, if any, as described below under
"--Allocation of Losses; Subordination." Accrued Certificate Interest on each
class of Senior Certificates will be distributed on a pro rata basis. Accrued
Certificate Interest on each class of certificates is calculated on the basis of
a 360-day year consisting of twelve 30-day months.
AVAILABLE DISTRIBUTION AMOUNT -- For any distribution date, an amount
equal to:
o the aggregate amount of scheduled payments on the mortgage
loans due on the related due date and received on or prior to
the related determination date, after deduction of the related
master servicing fees and any subservicing fees, which are
collectively referred to as the servicing fees,
o all unscheduled payments, including mortgagor prepayments on
the mortgage loans, Insurance Proceeds, Liquidation Proceeds
and proceeds from repurchases of and
S-29
<PAGE>
substitutions for the mortgage loans occurring during the
preceding calendar month and
o all Advances made for that distribution date, in each case net
of amounts reimbursable therefrom to the master servicer and
any subservicer.
In addition to the foregoing amounts, with respect to unscheduled
collections, not including mortgagor prepayments, the master servicer may elect
to treat such amounts as included in the Available Distribution Amount for the
distribution date in the month of receipt, but is not obligated to do so. As
described in this prospectus supplement under "--Principal Distributions on the
Senior Certificates," any amount with respect to which such election is so made
shall be treated as having been received on the last day of the preceding
calendar month for the purposes of calculating the amount of principal and
interest distributions to any class of certificates. With respect to any
distribution date, the due date is the first day of the month in which that
distribution date occurs and the determination date is the 20th day of the month
in which that distribution date occurs or, if that day is not a business day,
the immediately succeeding business day.
CERTIFICATE PRINCIPAL BALANCE -- For any offered certificate as of any
date of determination, an amount equal to the initial Certificate Principal
Balance of that certificate, reduced by the aggregate of (a) all amounts
allocable to principal previously distributed with respect to that certificate
and (b) any reductions in the Certificate Principal Balance of that certificate
deemed to have occurred in connection with allocations of Realized Losses in the
manner described in this prospectus supplement, provided that, after the
Certificate Principal Balances of the Class B Certificates have been reduced to
zero, the Certificate Principal Balance of any certificate of the class of Class
M Certificates outstanding with the lowest payment priority shall equal the
percentage interest evidenced thereby multiplied by the excess, if any, of (i)
the then-aggregate Stated Principal Balance of all of the mortgage loans over
(ii) the then-aggregate Certificate Principal Balance of all other classes of
certificates then outstanding.
CREDIT SUPPORT DEPLETION DATE -- The first distribution date on which
the Senior Percentage equals 100%.
DISCOUNT FRACTION -- With respect to each Discount Mortgage Loan, a
fraction, expressed as a percentage, the numerator of which is ____% minus the
Net Mortgage Rate for such Discount Mortgage Loan and the denominator of which
is ____%. The Principal Only Certificates will be entitled to payments based on
the Discount Fraction of the Discount Mortgage Loans.
DISCOUNT MORTGAGE LOAN -- Any mortgage loan with a Net Mortgage Rate
less than ____% per annum.
ELIGIBLE FUNDS -- On any distribution date, the portion, if any, of the
Available Distribution Amount remaining after reduction by the sum of the Senior
Interest Distribution Amount, the Senior Principal Distribution Amount,
determined without regard to clause (iv) of its definition, the Principal Only
Distribution Amount, determined without regard to clause (v) of its definition
and the aggregate amount of Accrued Certificate Interest on the Class M, Class
B-1 and Class B-2 Certificates.
S-30
<PAGE>
EXCESS BANKRUPTCY LOSSES --Bankruptcy Losses in excess of the
Bankruptcy Amount.
EXCESS FRAUD LOSSES -- Fraud Losses in excess of the Fraud Loss Amount.
EXCESS SPECIAL HAZARD LOSSES --Special Hazard Losses in excess of the
Special Hazard Amount.
EXCESS SUBORDINATE PRINCIPAL AMOUNT -- With respect to any distribution
date on which the Certificate Principal Balance of the most subordinate class or
classes of certificates then outstanding is to be reduced to zero and on which
Realized Losses are to be allocated to that class or those classes, the amount,
if any, by which (i) the amount of principal that would otherwise be
distributable on that class or those classes of certificates on that
distribution date is greater than (ii) the excess, if any, of the aggregate
Certificate Principal Balance of that class or those classes of certificates
immediately prior to that distribution date over the aggregate amount of
Realized Losses to be allocated to that class or those classes of certificates
on that distribution date, as reduced by any amount calculated pursuant to
clause (v) of the definition of "Principal Only Distribution Amount."
FINAL DISPOSITION -- With respect to a defaulted mortgage loan, a Final
Disposition 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 the mortgage loan.
INTEREST ACCRUAL PERIOD -- For all classes of certificates, the
calendar month preceding the month in which the distribution date occurs.
[LOCKOUT PREPAYMENT PERCENTAGE -- For any distribution date occurring
prior to the distribution date in ____________, 0%. For any distribution date
occurring after the first five years following the closing date, a percentage
determined as follows: o for any distribution date during the sixth year after
the closing date, 30% o for any distribution date during the seventh year after
the closing date, 40% o for any distribution date during the eighth year after
the closing date, 60% o for any distribution date during the ninth year after
the closing date, 80%; and o for any distribution date thereafter, 100%.]
[LOCKOUT SCHEDULED PERCENTAGE -- For any distribution date occurring
prior to the distribution date in ___________, 0% and for any distribution date
thereafter, 100%.]
NON-DISCOUNT MORTGAGE LOAN --The mortgage loans other than the Discount
Mortgage Loans.
NOTIONAL AMOUNT -- As of any date of determination, the Notional Amount
of the Variable Strip Certificates is equal to the aggregate Stated Principal
Balance of the mortgage loans immediately prior to that date. Reference to a
Notional Amount with respect to any Variable Strip
S-31
<PAGE>
Certificate is solely for convenience in specific calculations and does not
represent the right to receive any distributions allocable to principal.
PRINCIPAL ONLY COLLECTION SHORTFALL -- With respect to each Final
Disposition of a Discount Mortgage Loan in connection with that distribution
date or any prior distribution date, the extent that the amount included under
clause (iii) of the definition of Principal Only Distribution Amount for that
distribution date was less than the amount described in (a) under clause (iii)
of the definition of Principal Only Distribution Amount. Notwithstanding any
other provision of this prospectus supplement, any distribution relating to any
Principal Only Collection Shortfall, to the extent not covered by any amounts
otherwise distributable to the Class B-3 Certificates, shall result in a
reduction of the amount of principal distributions on that distribution date on
(i) first, the Class B-1 Certificates and Class B-2 Certificates and (ii)
second, the Class M Certificates, in each case in reverse order of their payment
priority.
PRINCIPAL ONLY DISTRIBUTION AMOUNT -- On each distribution date, a
distribution allocable to principal made to holders of the Principal Only
Certificates equal to the Available Distribution Amount remaining after the
Senior Interest Distribution Amount is distributed, equal to the aggregate of:
(i) the related Discount Fraction of the principal portion of
the scheduled monthly payment on each Discount Mortgage Loan due on the
related due date, whether or not received on or prior to the related
determination date, less the Discount Fraction of the principal portion
of any related Debt Service Reductions which together with other
Bankruptcy Losses are in excess of the Bankruptcy Amount;
(ii) the related Discount Fraction of the principal portion of
all unscheduled collections on each Discount Mortgage Loan received
during the preceding calendar month, other than amounts received in
connection with a Final Disposition of a Discount Mortgage Loan
described in clause (iii) below, including full and partial mortgagor
prepayments, repurchases of Discount Mortgage Loans or, in the case of
a substitution, amounts representing a principal adjustment, as
required by the pooling and servicing agreement, Liquidation Proceeds
and Insurance Proceeds, to the extent applied as recoveries of
principal;
(iii) in connection with the Final Disposition of a Discount
Mortgage Loan that did not result in any Excess Special Hazard Losses,
Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses,
an amount equal to the lesser of (a) the applicable Discount Fraction
of the Stated Principal Balance of that Discount Mortgage Loan
immediately prior to that distribution date and (b) the aggregate
amount of collections on that Discount Mortgage Loan to the extent
applied as recoveries of principal;
(iv) any amounts allocable to principal for any previous
distribution date calculated pursuant to clauses (i) through (iii)
above that remain undistributed; and
(v) an amount equal to the aggregate of the Principal Only
Collection Shortfalls, less any amounts paid under this clause on a
prior distribution date, until paid in full;
S-32
<PAGE>
PROVIDED, that distributions under this clause (v) shall only be made
to the extent of Eligible Funds (as described in the definition of
Eligible Funds) on any distribution date.
SENIOR ACCELERATED DISTRIBUTION PERCENTAGE -- For any distribution date
occurring prior to the distribution date in _____________, 100%. The Senior
Accelerated Distribution Percentage for any distribution date occurring after
the first five years following the closing date will be as follows:
o for any distribution date during the sixth year after the
closing date, the Senior Percentage for that distribution date
plus 70% of the Subordinate Percentage for that distribution
date
o for any distribution date during the seventh year after the
closing date, the Senior Percentage for that distribution date
plus 60% of the subordinate percentage for that distribution
date
o for any distribution date during the eighth year after the
closing date, the Senior Percentage for that distribution date
plus 40% of the Subordinate Percentage for that distribution
date
o for any distribution date during the ninth year after the
closing date, the Senior Percentage for that distribution date
plus 20% of the Subordinate Percentage for that distribution
date; and
o for any distribution date thereafter, the Senior Percentage
for that distribution date.
If on any distribution date the Senior Percentage exceeds the initial Senior
Percentage, the Senior Accelerated Distribution Percentage for that distribution
date will once again equal 100%.
Any scheduled reduction to the Senior Accelerated Distribution
Percentage shall not be made as of any distribution date unless either:
(a)(i)(X) the outstanding principal balance of mortgage loans
delinquent 60 days or more averaged over the last six months, as a
percentage of the aggregate outstanding Certificate Principal Balance
of the Class M Certificates and Class B Certificates, is less than 50%
or (Y) the outstanding principal balance of mortgage loans delinquent
60 days or more averaged over the last six months, as a percentage of
the aggregate outstanding principal balance of all mortgage loans
averaged over the last six months, does not exceed 2%, and
(ii) Realized Losses on the mortgage loans to date for that
distribution date, if occurring during the sixth, seventh, eighth,
ninth or tenth year, or any year thereafter, after the closing date,
are less than 30%, 35%, 40%, 45% or 50%, respectively, of the sum of
the initial Certificate Principal Balances of the Class M Certificates
and Class B Certificates; or
(b)(i) the outstanding principal balance of mortgage loans
delinquent 60 days or more averaged over the last six months, as a
percentage of the aggregate outstanding principal balance of all
mortgage loans averaged over the last six months, does not exceed 4%,
and
S-33
<PAGE>
(ii) Realized Losses on the mortgage loans to date for that
distribution date, if occurring during the sixth, seventh, eighth,
ninth or tenth year, or any year thereafter, after the Closing Date,
are less than 10%, 15%, 20%, 25% or 30%, respectively, of the sum of
the initial Certificate Principal Balances of the Class M Certificates
and Class B Certificates.
Notwithstanding the foregoing, upon reduction of the Certificate Principal
Balances of the Senior Certificates, other than the Principal Only Certificates,
to zero, the Senior Accelerated Distribution Percentage will equal 0%.
SENIOR INTEREST DISTRIBUTION AMOUNT -- The aggregate amount of Accrued
Certificate Interest to be distributed to the holders of the Senior Certificates
for that Distribution Date.
SENIOR PERCENTAGE -- As of each distribution date, the percentage equal
to the aggregate Certificate Principal Balance of the Senior Certificates, other
than the Principal Only Certificates, immediately prior to that distribution
date divided by the aggregate Stated Principal Balance of all of the mortgage
loans, other than the Discount Fraction of the Discount Mortgage Loans,
immediately prior to that distribution date. The Senior Percentage will
initially equal approximately _____% and will in no event exceed 100%. The
initial Senior Percentage is less than the initial percentage interest in the
trust fund evidenced by the Senior Certificates in the aggregate because that
percentage is calculated without regard to either the Certificate Principal
Balance of the Principal Only Certificates or the Discount Fraction of the
Stated Principal Balance of each Discount Mortgage Loan.
SENIOR PRINCIPAL DISTRIBUTION AMOUNT -- With respect to any
distribution date, the lesser of (a) the balance of the Available Distribution
Amount remaining after the Senior Interest Distribution Amount and Principal
Only Distribution Amount have been distributed and (b) the sum of:
(i) the product of (A) the then-applicable Senior Percentage
and (B) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly
payments on the mortgage loans, other than the related
Discount Fraction of the principal portion of those payments,
with respect to each Discount Mortgage Loan, due on the
related due date, whether or not received on or prior to the
related determination date, less the principal portion of Debt
Service Reductions, other than the related Discount Fraction
of the principal portion of the Debt Service Reductions with
respect to each Discount Mortgage Loan, which together with
other Bankruptcy Losses are in excess of the Bankruptcy
Amount;
(2) the principal portion of all proceeds of the
repurchase of a mortgage loan or, in the case of a
substitution, amounts representing a principal adjustment,
other than the related Discount Fraction of the principal
portion of the proceeds, with respect to each Discount
Mortgage Loan, as required by the pooling and servicing
agreement during the preceding calendar month; and
S-34
<PAGE>
(3) the principal portion of all other unscheduled
collections received during the preceding calendar month,
other than full and partial mortgagor prepayments and any
amounts received in connection with a Final Disposition of a
mortgage loan described in clause (ii) below, to the extent
applied as recoveries of principal, other than the related
Discount Fraction of the principal portion of those
unscheduled collections, with respect to each Discount
Mortgage Loan;
(ii) in connection with the Final Disposition of a mortgage
loan (x) that occurred in the preceding calendar month and (y) that did
not result in any Excess Special Hazard Losses, Excess Fraud Losses,
Excess Bankruptcy Losses or Extraordinary Losses, an amount equal to
the lesser of:
(1) the then-applicable Senior Percentage of the
Stated Principal Balance of the mortgage loan, other than the
related Discount Fraction of the Stated Principal Balance,
with respect to a Discount Mortgage Loan; and
(2) the then-applicable Senior Accelerated
Distribution Percentage of the related unscheduled
collections, including Insurance Proceeds and Liquidation
Proceeds, to the extent applied as recoveries of principal, in
each case other than the portion of the collections, with
respect to a Discount Mortgage Loan, included in clause (iii)
of the definition of Principal Only Distribution Amount;
(iii) the then-applicable Senior Accelerated Distribution
Percentage of the aggregate of all full and partial mortgagor
prepayments made by the respective mortgagors of the mortgage loans
during the preceding calendar month, other than the related Discount
Fraction of mortgagor prepayments, with respect to each Discount
Mortgage Loan;
(iv) any Excess Subordinate Principal Amount for that
distribution date; and
(v) any amounts allocable to principal for any previous
distribution date calculated pursuant to clauses (i) through (iii)
above that remain undistributed to the extent that any of those amounts
are not attributable to Realized Losses which were allocated to the
Class M Certificates or Class B Certificates.
SUBORDINATE PERCENTAGE -- As of any date of determination a percentage
equal to 100% minus the Senior Percentage as of that date.
INTEREST DISTRIBUTIONS
Holders of each class of Senior Certificates other than the Principal
Only Certificates will be entitled to receive interest distributions in an
amount equal to the Accrued Certificate Interest on that class on each
distribution date, to the extent of the Available Distribution Amount for that
distribution date, commencing on the first distribution date in the case of all
classes of Senior Certificates entitled to interest distributions.
S-35
<PAGE>
Holders of each class of Class M Certificates will be entitled to
receive interest distributions in an amount equal to the Accrued Certificate
Interest on that class on each distribution date, to the extent of the Available
Distribution Amount for that distribution date after distributions of interest
and principal to the Senior Certificates, reimbursements for some Advances to
the master servicer and distributions of interest and principal to any class of
Class M Certificates having a higher payment priority.
The Principal Only Certificates are not entitled to distributions of
interest.
Prepayment Interest 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 these prepayments in part
are applied to reduce the outstanding principal balance of the related mortgage
loans as of the due date in the month of prepayment.
However, with respect to any distribution date, any Prepayment Interest
Shortfalls resulting from prepayments in full during the preceding calendar
month will be offset by the master servicer, but only to the extent those
Prepayment Interest Shortfalls do not exceed an amount equal to the lesser of
(a) one-twelfth of 0.125% of the Stated Principal Balance of the mortgage loans
immediately preceding that distribution date and (b) the sum of the master
servicing fee payable to the master servicer for its master servicing activities
and reinvestment income received by the master servicer on amounts payable with
respect to that distribution date. Prepayment Interest Shortfalls resulting from
partial prepayments will not be offset by the master servicer from master
servicing compensation or otherwise. No assurance can be given that the master
servicing compensation available to cover Prepayment Interest Shortfalls will be
sufficient therefor. See "Pooling and Servicing Agreement--Servicing and Other
Compensation and Payment of Expenses" in this prospectus supplement.
If on any distribution date the Available Distribution Amount is less
than Accrued Certificate Interest on the Senior Certificates for that
distribution date, the shortfall will be allocated among the holders of all
classes of Senior Certificates in proportion to the respective amounts of
Accrued Certificate Interest for that distribution date. In addition, the amount
of any such interest shortfalls that are covered by subordination, specifically,
interest shortfalls not described in clauses (i) through (iv) in the third
preceding paragraph, will be unpaid Accrued Certificate Interest and will be
distributable to holders of the certificates of those classes entitled to those
amounts on subsequent distribution dates, in each case to the extent of
available funds after interest distributions as required in this prospectus
supplement.
These shortfalls could occur, for example, if delinquencies on the
mortgage loans were exceptionally high and were concentrated in a particular
month and Advances by the master servicer did not cover the shortfall. Any
amounts so carried forward will not bear interest. Any interest shortfalls will
not be offset by a reduction in the servicing compensation of the master
servicer or otherwise, except to the limited extent described in the preceding
paragraph with respect to Prepayment Interest Shortfalls resulting from
prepayments in full.
S-36
<PAGE>
The pass-through rates on all classes of offered certificates, other
than [the Adjustable Rate,] Variable Strip and Principal Only Certificates, are
fixed and are listed on page S-__ of this prospectus supplement.
[The pass-through rates on the Adjustable Rate Certificates are
calculated as follows:
(1) The pass-through rate on the Class A-5 Certificates with
respect to the initial Interest Accrual Period is _____% per annum, and
as to any Interest Accrual Period thereafter, will be a per annum rate
equal to ____% plus the arithmetic mean of the London interbank offered
rate quotations for one-month Eurodollar deposits, determined monthly
as described in this prospectus supplement, with a maximum rate of
____% per annum and a minimum rate of ____% per annum.
(2) The pass-through rate on the Class A-6 Certificates with
respect to the initial Interest Accrual Period is _______% per annum,
and as to any Interest Accrual Period thereafter, will be a per annum
rate equal to _________% minus the product of LIBOR and _________, with
a maximum rate of __________% per annum and a minimum rate of 0.00% per
annum.
The pass-through rates on the Adjustable Rate Certificates for the
current and immediately preceding Interest Accrual Period may be obtained by
telephoning the trustee at (312) 407-4660.]
The pass-through rate on the Variable Strip Certificates on each
distribution date will equal the weighted average, as of the due date in the
month preceding the month in which that 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 its Net Mortgage Rate minus ____%, but not
less than 0.00%. As of the cut-off date, the pool strip rates on the mortgage
loans range between 0.00% and ----% per annum. The initial pass-through rate on
the Variable Strip Certificates is ______% per annum.
As described in this prospectus supplement, the Accrued Certificate
Interest allocable to each class of certificates, other than the Principal Only
Certificates, which are not entitled to distributions of interest, is based on
the Certificate Principal Balance of that class or, in the case of the Variable
Strip Certificates, on the Notional Amount.
At the option of the initial holder of the Variable Strip Certificates,
any Variable Strip Certificate can be exchanged by that holder for one or more
Variable Strip Certificates that represent, in the aggregate, the same Notional
Amount, and the pass-through rate and Notional Amount of each Variable Strip
Certificate so exchanged will be based on the pool strip rates and Stated
Principal Balances of the mortgage loans corresponding to that Variable Strip
Certificate.
[DETERMINATION OF LIBOR
LIBOR for any Interest Accrual Period after the initial Interest
Accrual Period will be determined as described in the three succeeding
paragraphs.
S-37
<PAGE>
On each distribution date, LIBOR shall be established by the trustee
and as to any Interest Accrual Period, LIBOR will equal the rate for United
States dollar deposits for one month which appears on the Dow Jones Telerate
Screen Page 3750 as of 11:00 A.M., London time, on the second LIBOR Business Day
prior to the first day of that Interest Accrual Period--the LIBOR rate
adjustment date. Telerate Screen Page 3750 means the display designated as page
3750 on the Telerate Service or any other page as may replace page 3750 on that
service for the purpose of displaying London interbank offered rates of major
banks. If the rate does not appear on that page or any other page as may replace
that page on that service, or if the service is no longer offered, any other
service for displaying LIBOR or comparable rates as may be selected by the
trustee after consultation with the master servicer, the rate will be the
reference bank rate.
The reference bank rate will be determined on the basis of the rates at
which deposits in the U.S. Dollars are offered by the reference banks, which
shall be three major banks that are engaged in transactions in the London
interbank market, selected by the trustee after consultation with the master
servicer. The reference bank rate will be determined as of 11:00 A.M., London
time, on the day that is one LIBOR business day prior to the immediately
preceding distribution date to prime banks in the London interbank market for a
period of one month in amounts approximately equal to the aggregate Certificate
Principal Balance of the Adjustable Rate Certificates then outstanding. The
trustee will request the principal London office of each of the reference banks
to provide a quotation of its rate. If at least two quotations are provided, the
rate will be the arithmetic mean of the quotations. If on that date fewer than
two quotations are provided as requested, the rate will be the arithmetic mean
of the rates quoted by one or more major banks in New York City, selected by the
trustee after consultation with the master servicer, as of 11:00 A.M., New York
City time, on that date for loans in U.S. Dollars to leading European banks for
a period of one month in amounts approximately equal to the aggregate
Certificate Principal Balance of the Adjustable Rate Certificates then
outstanding. If no quotations can be obtained, the rate will be LIBOR for the
prior distribution date, or in the case of the first LIBOR rate adjustment date,
_____% with respect to the Adjustable Rate Certificates; provided however, if,
under the priorities listed previously in this paragraph, LIBOR for a
distribution date would be based on LIBOR for the previous distribution date for
the third consecutive distribution date, the trustee shall select an alternative
comparable index over which the trustee has no control, used for determining
one-month Eurodollar lending rates that is calculated and published or otherwise
made available by an independent party. LIBOR business day means any day other
than (i) a Saturday or a Sunday or (ii) a day on which banking institutions in
the city of London, England are required or authorized by law to be closed.
The establishment of LIBOR by the trustee and the trustee's subsequent
calculation of the pass-through rates applicable to the Adjustable Rate
Certificates for the relevant Interest Accrual Period, in the absence of
manifest error, will be final and binding.]
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Except as provided below, holders of the Senior Certificates, other
than the Variable Strip Certificates, which are not entitled to distributions of
principal, and the Principal Only Certificates, will be entitled to receive on
each distribution date, in the priority described in this prospectus supplement
and to the extent of the portion of the Available Distribution Amount remaining
after
S-38
<PAGE>
the distribution of the Senior Interest Distribution Amount and the Principal
Only Distribution Amount are distributed, a distribution allocable to principal
equal to Senior Principal Distribution Amount.
Distributions of principal on the Senior Certificates on each
distribution date will be made, after distribution of the Senior Interest
Distribution Amount, as follows:
(a) Prior to the occurrence of the Credit Support Depletion Date:
(i) the Principal Only Distribution Amount shall be
distributed to the Principal Only Certificates, in reduction of its
Certificate Principal Balance, until its Certificate Principal
Balance is reduced to zero;
[(ii) an amount equal to the Accrual Distribution Amount shall
be distributed to the Class A-3 and Class A-4 Certificates in the
following manner and priority:
(A) FIRST, to the Class A-3 Certificates, until its
Certificate Principal Balance has been reduced to zero; and
(B) SECOND, to the Class A-4 Certificates, until its
Certificate Principal Balance
has been reduced to zero;
(iii) the balance of the Senior Principal Distribution Amount
remaining after the distribution described in clause (ii) above shall
be distributed to the Class R-I and Class R-II Certificates, on a pro
rata basis, until their Certificate Principal Balances have been
reduced to zero;
(iv) from the balance of the Senior Principal Distribution
Amount remaining after the distributions described in clauses (ii) and
(iii) above, to the Class A-7 Certificates in reduction of its
Certificate Principal Balance, until its Certificate Principal Balance
has been reduced to zero, an amount equal to the sum of the following:
(A) the Class A-7 Certificates' pro rata share, based
on its Certificate Principal Balance relative to the aggregate
Certificate Principal Balance of all classes of Certificates,
other than the Principal Only Certificates, of the aggregate
of the amounts described in clauses (i), (ii) and (vi) of the
first paragraph under "Principal Distributions on the Senior
Certificates" without any application of the Senior Percentage
or Senior Accelerated Distribution Percentage; and
(B) the Lockout Prepayment Percentage of the Class A-7
Certificates' pro rata share, based on its Certificate
Principal Balance relative to the aggregate Certificate
Principal Balance of all classes of Certificates, other than
the Principal Only Certificates, of the aggregate of the
amounts described in clause (iii) of the first paragraph under
"Principal Distribution on the Senior Certificates" without
any application of the Senior Accelerated Distribution
Percentage;
S-39
<PAGE>
PROVIDED THAT if the aggregate of the amounts set forth in clauses (i),
(ii), (iii) and (v) of the definition of Senior Principal Distribution
Amount is more than the balance of the Available Distribution Amount
remaining after the Senior Interest Distribution Amount and Principal
Only Distribution Amount have been distributed, the amount paid to the
Class A-7 Certificates under this clause (iv) shall be reduced by an
amount equal to the Class A-7 Certificates' pro rata share, based on
its aggregate Certificate Principal Balance relative to the aggregate
Certificate Principal Balance of the Senior Certificates, other than
the Principal Only Certificates, of that difference; and
(v) the balance of the Senior Principal Distribution Amount
remaining after the distributions, if any, described in clauses (ii)
through (iv) above shall be distributed in the following order of
priority:
(A) FIRST, concurrently, to the Class A-2 Certificates,
Class A-8 Certificates and Class A-9 Certificates, on a pro
rata basis, until their Certificate Principal Balances have
been reduced to zero;
(B) SECOND, concurrently, until the Certificate
Principal Balance of the Class A- 5 Certificates has been
reduced to zero:
(1) _____________% to the Class A-6 Certificates;
and
(2) _____________% to the Class A-5 Certificates;
(C) THIRD, concurrently, until the Certificate
Principal Balance of the Class A-6 Certificates has been
reduced to zero:
(1) ______________% to the Class A-6
Certificates; and
(2) ______________% to the Class A-4
Certificates;
(D) FOURTH, to the Class A-4 Certificates, until its
Certificate Principal Balance has been reduced to zero;
(E) FIFTH, concurrently, to the Class A-1 Certificates
and Class A-3 Certificates, on a pro rata basis, until the
Certificate Principal Balances thereof have been reduced to
zero; and
(F) SIXTH, to the Class A-7 Certificates until its
Certificate Principal Balance has been reduced to zero.]
(b) On or after the occurrence of the Credit Support Depletion
Date, all priorities relating to distributions as described in clause
(a) above relating to principal among the Senior Certificates, other
than the Principal Only Certificates, will be disregarded. Instead,
S-40
<PAGE>
an amount equal to the Discount Fraction of the principal portion of
scheduled or unscheduled payments received or advanced relating to
Discount Mortgage Loans will be distributed to the Principal Only
Certificates, and the Senior Principal Distribution Amount will be
distributed to the Senior Certificates remaining pro rata in accordance
with their respective outstanding Certificate Principal Balances and
the Senior Interest Distribution Amount will be distributed as
described under "Interest Distributions."
(c) After reduction of the Certificate Principal Balances of
the Senior Certificates, other than the Principal Only Certificates, to
zero but prior to the Credit Support Depletion Date, the Senior
Certificates, other than the Principal Only Certificates, will be
entitled to no further distributions of principal and the Available
Distribution Amount will be paid solely to the holders of the Principal
Only, Variable Strip, Class M and Class B Certificates, in each case as
described in this prospectus supplement.
[The following table sets forth for each distribution date the
applicable Planned Principal Balances for the PAC Certificates and the
applicable Targeted Principal Balances for the TAC Certificates.
THERE IS NO ASSURANCE THAT SUFFICIENT FUNDS WILL BE AVAILABLE ON ANY
DISTRIBUTION DATE TO REDUCE THE CERTIFICATE PRINCIPAL BALANCE OF THE PAC
CERTIFICATES AND TAC CERTIFICATES TO THE PLANNED PRINCIPAL BALANCE OR TARGETED
PRINCIPAL BALANCE, AS APPLICABLE, FOR THAT DISTRIBUTION DATE, OR THAT
DISTRIBUTIONS WILL NOT BE MADE IN EXCESS OF THOSE AMOUNTS FOR THAT DISTRIBUTION
DATE.
<TABLE>
<CAPTION>
PLANNED PRINCIPAL BALANCES AND TARGETED PRINCIPAL BALANCES
DISTRIBUTION DATE PLANNED PRINCIPAL BALANCES TARGETED PRINCIPAL BALANCES
- ----------------- -------------------------- ---------------------------
<S> <C> <C>
Initial Balance........................ $ $
____________ 25, ____..................
____________ 25, ____..................
____________ 25, ____ AND THEREAFTER...
</TABLE>
The Planned Principal Balance and Targeted Principal Balance for each
distribution date listed in the tables above were calculated based on
assumptions, including the assumption that prepayments on the mortgage loans
occur each month at a constant level between approximately ___% SPA and
approximately ___% SPA with respect to the PAC Certificates and that prepayments
on the mortgage loans occur at a constant level of approximately ___% SPA, with
respect to the TAC Certificates. The performance of the mortgage loans may
differ from the assumptions used in determining the Planned Principal Balance
and Targeted Principal Balance. The Planned Principal Balance and Targeted
Principal Balance listed in the tables above are final and binding regardless of
any error or alleged error in making the calculations.
There can be no assurance that funds available for distributions of
principal in reduction of the Certificate Principal Balance of the PAC
Certificates and TAC Certificates will be sufficient or
S-41
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will not be in excess of, amounts needed to reduce their Certificate Principal
Balances and amounts to the applicable Planned Principal Balance and Targeted
Principal Balance for any distribution date. Distributions in reduction of the
Certificate Principal Balance of the PAC Certificates or TAC Certificates may
commence significantly earlier, other than as to a class for which the above
tables reflect a distribution on the first distribution date, or later than the
first distribution date for each class shown in the tables above. Distributions
of principal in reduction of the Certificate Principal Balance of the PAC
Certificates or TAC Certificates may end significantly earlier or later than the
last distribution date for each class shown in the above tables. See "Prepayment
and Yield Considerations in this prospectus supplement for a further discussion
of the assumptions used to produce the above tables and the effect of
prepayments on the mortgage loans on the rate of payments of principal and on
the weighted average lives of those certificates.]
PRINCIPAL DISTRIBUTIONS ON THE CLASS M CERTIFICATES
Holders of each class of the Class M Certificates will be entitled to
receive on each distribution date, to the extent of the portion of the Available
Distribution Amount remaining after:
o the sum of the Senior Interest Distribution Amount, Principal
Only Distribution Amount and Senior Principal Distribution
Amount is distributed
o reimbursement is made to the master servicer for some Advances
remaining unreimbursed following the final liquidation of the
related mortgage loan to the extent described below under
"Advances"
o the aggregate amount of Accrued Certificate Interest and
principal required to be distributed to any class of Class M
Certificates having a higher payment priority on that
distribution date is distributed to holders of that class of
Class M Certificates and
o the aggregate amount of Accrued Certificate Interest required
to be distributed to that class of Class M Certificates on
that distribution date is distributed to those Class M
Certificates,
a distribution allocable to principal in the sum of the following:
(i) the product of (A) the then-applicable related Class M
Percentage and (B) the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly
payments on the mortgage loans, other than the related
Discount Fraction of the principal portion of those payments
with respect to a Discount Mortgage Loan, due on the related
due date, whether or not received on or prior to the related
determination date, less the principal portion of Debt Service
Reductions, other than the related Discount Fraction of the
principal portion of the Debt Service Reductions with respect
to a Discount Mortgage Loan, which together with other
Bankruptcy Losses are in excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of the
repurchase of a mortgage loan or, in the case of a
substitution, amounts representing a principal adjustment,
other than the related Discount Fraction of the principal
portion of the proceeds with
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<PAGE>
respect to a Discount Mortgage Loan, as required by the
pooling and servicing agreement during the preceding calendar
month; and
(3) the principal portion of all other unscheduled
collections received during the preceding calendar month,
other than full and partial mortgagor prepayments and any
amounts received in connection with a Final Disposition of a
mortgage loan described in clause (ii) below, to the extent
applied as recoveries of principal, other than the related
Discount Fraction of the principal amount of those unscheduled
collections, with respect to a Discount Mortgage Loan;
(ii) that class' pro rata share, based on the Certificate
Principal Balance of each class of Class M Certificates and Class B
Certificates then outstanding, of all amounts received in connection
with the Final Disposition of a mortgage loan, other than the related
Discount Fraction of those amounts with respect to a Discount Mortgage
Loan, (x) that occurred during the preceding calendar month and (y)
that did not result in any Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses, to the extent
applied as recoveries of principal and to the extent not otherwise
payable to the Senior Certificates;
(iii) the portion of full and partial mortgagor prepayments,
other than the Discount Fraction of those mortgagor prepayments with
respect to a Discount Mortgage Loan, made by the respective mortgagors
during the preceding calendar month allocable to that class of Class M
Certificates as described in the third succeeding paragraph;
(iv) if that class is the most senior class of certificates
then outstanding, an amount equal to the Excess Subordinate Principal
Amount, if any; and
(v) any amounts allocable to principal for any previous
distribution date calculated pursuant to clauses (i) through (iii)
above that remain undistributed to the extent that any of those amounts
are not attributable to Realized Losses which were allocated to any
class of Class M Certificates with a lower payment priority or the
Class B Certificates.
References in this prospectus supplement to "payment priority" of the
Class M Certificates refer to a payment priority among those classes as follows:
first, to the Class M-1 Certificates; second, to the Class M-2 Certificates; and
third, to the Class M-3 Certificates.
As to each class of Class M Certificates, on any distribution date, any
Accrued Certificate Interest thereon remaining unpaid from any previous
distribution date will be distributable to the extent of available funds.
Notwithstanding the foregoing, if the Certificate Principal Balances of the
Class B Certificates have been reduced to zero, on any distribution date, with
respect to the class of Class M Certificates outstanding on that distribution
date with the lowest payment priority, Accrued Certificate Interest thereon
remaining unpaid from any previous distribution date, except in the limited
circumstances provided in the pooling and servicing agreement, will not be
distributable.
All mortgagor prepayments not otherwise distributable to the Senior
Certificates will be allocated on a pro rata basis among the class of Class M
Certificates with the highest payment
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priority then outstanding and each other class of Class M Certificates and Class
B Certificates for which certain loss levels established for that class in the
pooling and servicing agreement have not been exceeded. The related loss level
on any distribution date would be satisfied as to any Class M-2, Class M-3 or
Class B Certificates, respectively, only if the sum of the current percentage
interests in the mortgage pool evidenced by that class and each class, if any,
subordinate thereto were at least equal to the sum of the initial percentage
interests in the mortgage pool evidenced by that class and each class, if any,
subordinate thereto.
The Class M-1, Class M-2 and Class M-3 Percentages will initially equal
approximately ____%, ____% and ____%, respectively, and will in no event exceed
100%. They will each be adjusted for each distribution date to be the percentage
equal to the Certificate Principal Balance of the related class of Class M
Certificates immediately prior to that distribution date divided by the
aggregate Stated Principal Balance of all of the mortgage loans, other than the
related Discount Fraction of each Discount Mortgage Loan, immediately prior to
that distribution date. The initial Class M-1, Class M-2 and Class M-3
Percentages are greater than the initial percentage interests in the trust fund
evidenced by the Class M-1, Class M-2 and Class M-3 Certificates, respectively,
because the Class M-1, Class M-2 and Class M-3 Percentages are calculated
without regard to the Discount Fraction of the Stated Principal Balance of each
Discount Mortgage Loan.
As stated above under "--Principal Distributions on the Senior
Certificates," the Senior Accelerated Distribution Percentage will be 100%
during the first five years after the closing date, unless the Certificate
Principal Balances of the Senior Certificates, other than the Principal Only
Certificates, are reduced to zero before the end of that five-year period, and
will thereafter equal 100% whenever the Senior Percentage exceeds the initial
Senior Percentage. Furthermore, as described in this prospectus supplement, the
Senior Accelerated Distribution Percentage will exceed the Senior Percentage
during the sixth through ninth years following the closing date, and scheduled
reductions to the Senior Accelerated Distribution Percentage may be postponed
due to the loss and delinquency experience of the mortgage loans. Accordingly,
each class of the Class M Certificates will not be entitled to any mortgagor
prepayments for at least the first five years after the closing date, unless the
Certificate Principal Balances of the Senior Certificates (other than the
Principal Only Certificates) have been reduced to zero before the end of such
period, and may receive no mortgagor prepayments or a disproportionately small
portion of mortgagor prepayments relative to the in this prospectus supplement.
ALLOCATION OF LOSSES; SUBORDINATION
The subordination provided to the Senior Certificates by the Class B
Certificates and Class M Certificates and the subordination provided to each
class of Class M Certificates by the Class B Certificates and by any class of
Class M Certificates subordinate thereto will cover Realized Losses on the
mortgage loans that are Defaulted Mortgage Losses, Fraud Losses, Bankruptcy
Losses and Special Hazard Losses. Any Realized Losses which are not Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses will be allocated as follows:
o first, to the Class B Certificates
o second, to the Class M-3 Certificates
o third, to the Class M-2 Certificates; and
o fourth, to the Class M-1 Certificates
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in each case until the Certificate Principal Balance of that class of
certificates has been reduced to zero; and thereafter, if any Realized Loss is
on a Discount Mortgage Loan, to the Principal Only Certificates in an amount
equal to the related Discount Fraction of the principal portion of the Realized
Loss, and the remainder of the Realized Losses and the entire amount of Realized
Losses on Non-Discount Mortgage Loans among all the remaining classes of Senior
Certificates on a pro rata basis [,except that the Realized Losses otherwise
allocable to the Super Senior Certificates will be allocated to the Senior
Support Certificates, until the Certificate Principal Balance of the Senior
Support Certificates has been reduced to zero].
Any allocation of a Realized Loss, other than a Debt Service Reduction,
to a certificate will be made by reducing: o its Certificate Principal Balance,
in the case of the principal portion of the Realized Loss, in each case until
the Certificate Principal Balance of that class has been reduced to zero, and o
the Accrued Certificate Interest thereon, in the case of the interest portion of
the Realized Loss, by the amount so allocated as of the distribution date
occurring in the month following the calendar month in which the Realized Loss
was incurred. In addition, any allocation of a Realized Loss to a Class M
Certificate may also be made by operation of the payment priority to the Senior
Certificates described under "--Principal Distributions on the Senior
Certificates" and any class of Class M Certificates with a higher payment
priority.
As used in this prospectus supplement, subordination refers to the
provisions discussed above for the sequential allocation of Realized Losses
among the various classes, as well as all provisions effecting those allocations
including the priorities for distribution of cash flows in the amounts described
in this prospectus supplement.
As described in the prospectus, in some circumstances the master
servicer may permit a servicing modification--the modification of a defaulted
mortgage loan to reduce the applicable mortgage rate or to reduce its
outstanding principal amount. Any principal reduction of this type shall
constitute a Realized Loss at the time of the reduction, and the amount by which
each monthly payment is reduced by any mortgage rate reduction shall constitute
a Realized Loss in the month in which each such reduced monthly payment is due.
Servicing modification reductions shall be allocated when incurred (as
provided above) in the same manner as other Realized Losses as described in this
prospectus supplement. Any Advances made on any mortgage loan will be reduced to
reflect any related servicing modifications previously made. No servicing
modification will have the effect of reducing the mortgage rate below the sum of
the servicing fee rate and the pool strip rate as in effect at the cut-off date.
The mortgage rate and Net Mortgage Rate as to any mortgage loan will be deemed
not reduced by any servicing modification, so that the calculation of Accrued
Certificate Interest payable on the offered certificates will not be affected by
the servicing modification.
Allocations of the principal portion of Debt Service Reductions to each
class of Class M Certificates and Class B Certificates will result from the
priority of distributions of the Available Distribution Amount as described in
this prospectus supplement, which distributions shall be made
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<PAGE>
first to the Senior Certificates, second to the Class M Certificates in the
order of their payment priority and third to the Class B Certificates. An
allocation of the interest portion of a Realized Loss as well as the principal
portion of Debt Service Reductions will not reduce the level of subordination,
as that term is defined in this prospectus supplement, until an amount in
respect thereof has been actually disbursed to the Senior Certificateholders or
the Class M Certificateholders, as applicable.
The holders of the offered certificates will not be entitled to any
additional payments with respect to Realized Losses from amounts otherwise
distributable on any classes of certificates subordinate thereto, except in
limited circumstances in respect of any Excess Subordinate Principal Amount, or
in the case of Principal Only Collection Shortfalls, to the extent of Eligible
Funds. Accordingly, the subordination provided to the Senior Certificates, other
than the Principal Only Certificates, and to each class of Class M Certificates
by the respective classes of certificates subordinate thereto with respect to
Realized Losses allocated on any distribution date will be effected primarily by
increasing the Senior Percentage, or the respective Class M Percentage, of
future distributions of principal of the remaining mortgage loans. Because the
Discount Fraction of each Discount Mortgage Loan will not change over time, the
protection from losses provided to the Principal Only Certificates by the Class
M Certificates and Class B Certificates is limited to the prior right of the
Principal Only Certificates to receive distributions in respect of principal as
described in this prospectus supplement. Furthermore, principal losses on the
mortgage loans that are not covered by subordination will be allocated to the
Principal Only Certificates only to the extent they occur on a Discount Mortgage
Loan and only to the extent of the related Discount Fraction of those losses.
The allocation of principal losses on the Discount Mortgage Loans may result in
those losses being allocated in an amount that is greater or less than would
have been the case had those losses been allocated in proportion to the
Certificate Principal Balance of the Principal Only Certificates. Thus, the
Senior Certificates, other than the Principal Only Certificates, will bear the
entire amount of losses that are not allocated to the Class M Certificates and
Class B Certificates, other than the amount allocable to the Principal Only
Certificates, which losses will be allocated among all classes of Senior
Certificates, other than the Principal Only Certificates, as described in this
prospectus supplement.
Because the Principal Only Certificates are entitled to receive in
connection with the Final Disposition of a Discount Mortgage Loan, on any
distribution date, an amount equal to all unpaid Principal Only Collection
Shortfalls to the extent of Eligible Funds on that distribution date, shortfalls
in distributions of principal on any class of Class M Certificates could occur
under some circumstances, even if that class is not the most subordinate class
of certificates then outstanding.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses, Extraordinary Losses or other losses of a type not covered by
subordination on Non-Discount Mortgage Loans will be allocated on a pro rata
basis among the Senior Certificates, other than the Principal Only Certificates,
Class M Certificates and Class B Certificates. Any Realized Losses so allocated
to the Senior Certificates or Class M Certificates will be allocated without
priority among the various classes of Senior Certificates, other than the
Principal Only Certificates, or Class M Certificates. The principal portion of
these losses on Discount Mortgage Loans will be allocated to the Principal Only
Certificates in an amount equal to their related Discount Fraction, and the
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<PAGE>
remainder of the losses on Discount Mortgage Loans will be allocated among the
remaining certificates on a pro rata basis.
An allocation of a Realized Loss on a "pro rata basis" among two or
more classes of certificates means an allocation to each of those classes of
certificates on the basis of its then outstanding Certificate Principal Balance
prior to giving effect to distributions to be made on that distribution date in
the case of an allocation of the principal portion of a Realized Loss, or based
on the Accrued Certificate Interest thereon in respect of that distribution date
in the case of an allocation of the interest portion of a Realized Loss.
In order to maximize the likelihood of distribution in full of the
Senior Interest Distribution Amount, Principal Only Distribution Amount and
Senior Principal Distribution Amount, on each distribution date, holders of
Senior Certificates have a right to distributions of the Available Distribution
Amount that is prior to the rights of the holders of the Class M Certificates
and Class B Certificates, to the extent necessary to satisfy the Senior Interest
Distribution Amount, Principal Only Distribution Amount and Senior Principal
Distribution Amount. Similarly, holders of the Class M Certificates have a right
to distributions of the Available Distribution Amount prior to the rights of
holders of the Class B Certificates, and holders of any class of Class M
Certificates with a higher payment priority have a right to distributions of the
Available Distribution Amount prior to the rights of holders of any class of
Class M Certificates with a lower payment priority.
The application of the Senior Accelerated Distribution Percentage, when
it exceeds the Senior Percentage, to determine the Senior Principal Distribution
Amount will accelerate the amortization of the Senior Certificates, other than
the Principal Only Certificates, in the aggregate relative to the actual
amortization of the mortgage loans. The Principal Only Certificates will not
receive more than the Discount Fraction of any unscheduled payment relating to a
Discount Mortgage Loan. To the extent that the Senior Certificates in the
aggregate, other than the Principal Only Certificates, are amortized faster than
the mortgage loans, in the absence of offsetting Realized Losses allocated to
the Class M Certificates and Class B Certificates, the percentage interest
evidenced by the Senior Certificates in the trust fund will be decreased, with a
corresponding increase in the interest in the trust fund evidenced by the Class
M and Class B Certificates, thereby increasing, relative to their respective
Certificate Principal Balances, the subordination afforded the Senior
Certificates by the Class M Certificates and Class B Certificates collectively.
In addition, if losses on the mortgage loans exceed the amounts described in
this prospectus supplement under "--Principal Distributions on the Senior
Certificates," a greater percentage of full and partial mortgagor prepayments
will be allocated to the Senior Certificates in the aggregate, other than the
Principal Only Certificates, than would otherwise be the case, thereby
accelerating the amortization of the Senior Certificates relative to the Class M
and Class B Certificates.
The priority of payments, including principal prepayments, among the
Class M Certificates, as described in this prospectus supplement, also has the
effect during some periods, in the absence of losses, of decreasing the
percentage interest evidenced by any class of Class M Certificates with a higher
payment priority, thereby increasing, relative to its Certificate Principal
Balance, the subordination afforded to that class of the Class M Certificates by
the Class B Certificates and any class of Class M Certificates with a lower
payment priority.
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<PAGE>
The Special Hazard Amount shall initially be equal to $_________. As of
any date of determination following the cut-off date, the Special Hazard Amount
shall equal $__________ less the sum of (A) any amounts allocated through
subordination relating to Special Hazard Losses and (B) the Adjustment Amount.
The Adjustment Amount will be equal to an amount calculated under the terms of
the pooling and servicing agreement.
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 third anniversary of the cut-off date an amount equal to 1.00%
of the aggregate principal balance of all of the mortgage loans as of the
cut-off date minus the aggregate amounts allocated through Subordination with
respect to Fraud Losses up to that date of determination and (Y) from the third
to the fifth anniversary of the cut-off date, an amount equal to (1) the lesser
of (a) the Fraud Loss Amount as of the most recent anniversary of the cut-off
date and (b) 0.50% of the aggregate principal balance of all of the mortgage
loans as of the most recent anniversary of the cut-off date minus (2) the
aggregate amounts allocated through subordination with respect to Fraud Losses
since the most recent anniversary of the cut-off date up to that date of
determination. On and after the fifth anniversary of the cut-off date, the Fraud
Loss Amount shall be zero and Fraud Losses shall not be allocated through
subordination.
The Bankruptcy Amount will initially be equal to $________. As of any
date of determination on or after the first anniversary of the cut-off date, the
Bankruptcy Amount will equal the excess, if any, of (1) the lesser of (a) the
Bankruptcy Amount as of the business day next preceding the most recent
anniversary of the cut-off date and (b) an amount calculated under the terms of
the pooling and servicing agreement, which amount as calculated will provide for
a reduction in the Bankruptcy Amount, over (2) the aggregate amount of
Bankruptcy Losses allocated solely to the Class M Certificates or Class B
Certificates through subordination since that 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:
o 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
o either:
o the related mortgage loan is not in default with regard to
payments due thereunder or
o 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 relating to that mortgage loan are being advanced on
a current basis by the master servicer or a subservicer.
The Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount may
be further reduced as described in the prospectus under "Subordination."
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ADVANCES
Prior to each distribution date, the master servicer is required to
make Advances which were due on the mortgage loans on the immediately preceding
due date and delinquent on the business day next preceding the related
determination date.
These Advances are required to be made only to the extent they are
deemed by the master servicer to be recoverable from related late collections,
Insurance Proceeds, Liquidation Proceeds or amounts otherwise payable to the
holders of the Class B Certificates or Class M Certificates. The purpose of
making these Advances is to maintain a regular cash flow to the
certificateholders, rather than to guarantee or insure against losses. The
master servicer will not be required to make any Advances with respect to
reductions in the amount of the monthly payments on the mortgage loans due to
Debt Service Reductions or the application of the Relief Act or similar
legislation or regulations. Any failure by the master servicer to make an
Advance as required under the pooling and servicing agreement will constitute an
event of default thereunder, in which case the trustee, as successor master
servicer, will be obligated to make any Advance, in accordance with the terms of
the pooling and servicing agreement.
All Advances will be reimbursable to the master servicer on a first
priority basis from either (a) late collections, Insurance Proceeds and
Liquidation Proceeds from the mortgage loan as to which such unreimbursed
Advance was made or (b) as to any Advance that remains unreimbursed in whole or
in part following the final liquidation of the related mortgage loan, from any
amounts otherwise distributable on any of the Class B Certificates or Class M
Certificates; provided, however, that any Advances that were made with respect
to delinquencies which ultimately were determined to be Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses
are reimbursable to the master servicer out of any funds in the Custodial
Account prior to distributions on any of the certificates and the amount of
those losses will be allocated as described in this prospectus supplement.
In addition, if the Certificate Principal Balances of the Class M
Certificates and Class B Certificates have been reduced to zero, any Advances
previously made which are deemed by the master servicer to be nonrecoverable
from related late collections, Insurance Proceeds and Liquidation Proceeds may
be reimbursed to the master servicer out of any funds in the Custodial Account
prior to distributions on the Senior Certificates. The effect of these
provisions on any class of the Class M Certificates is that, with respect to any
Advance which remains unreimbursed following the final liquidation of the
related mortgage loan, the entire amount of the reimbursement for that Advance
will be borne first by the holders of the Class B Certificates or any class of
Class M Certificates having a lower payment priority to the extent that the
reimbursement is covered by amounts otherwise distributable to those classes,
and then by the holders of that class of Class M Certificates (except as
provided above) to the extent of the amounts otherwise distributable to them.
YEAR 2000 CONSIDERATIONS
OVERVIEW OF THE YEAR 2000 ISSUE
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The Y2K issue is the term used to describe the potential failure of
information technology components on or after January 1, 2000 because existing
computer programs, applications and microprocessors frequently use only two
digits to identify a year. Since the Year 2000 is also a leap year, there could
be additional business disruptions as a result of the inability of many computer
systems to recognize February 29, 2000.
The failure to correct or replace computer programs, applications and
microprocessors with Y2K-ready alternatives may adversely impact the operations
of Residential Funding at the turn of the century. The responsibilities of
Residential Funding as the master servicer include collecting payments from the
subservicers relating to the mortgage loans, calculating the Available
Distribution Amount for each distribution date, remitting that amount to the
trustee prior to each distribution date, calculating the amount of principal and
interest payments to be made to the certificateholders on each distribution
date, and preparing the monthly statement to be sent to certificateholders on
each distribution date.
OVERVIEW OF RESIDENTIAL FUNDING'S Y2K PROJECT
In January 1997, Residential Funding commenced activities to determine
the impact of Y2K on its critical computer systems. In April 1998, Residential
Funding established a formal Y2K project team to address Y2K issues. The Y2K
project team remains in place and continues to work on solving problems related
to the Year 2000. In addition, the Y2K project team coordinates its efforts with
the Y2K programs established by General Motors Acceptance Corporation and
General Motors Corporation.
Members of the Y2K project team, together with relevant personnel from
Residential Funding's business units have developed and implemented a six-phase
management strategy (as discussed below), which is being applied to information
technology and non-information technology components throughout the
organization. Residential Funding's components primarily consist of the
following:
o HARDWARE, including mainframe computers, desktop computers and
network devices;
o FACILITIES EQUIPMENT, including elevators, telephone systems,
heating systems and security systems;
o SOFTWARE APPLICATIONS, including vendor purchased
applications, in-house developed applications and end-user
developed applications;
o BUSINESS PARTNER COMMUNICATION LINKS, which primarily provide
data transmissions to and from business partners; and
o BUSINESS PARTNERS DATA SYSTEMS, which primarily process data
for Residential Funding.
The six phases by which the Y2K project team will seek to achieve Y2K
readiness throughout Residential Funding are as follows:
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PHASE OBJECTIVE
Phase I -- Awareness To promote Y2K awareness throughout
Residential Funding. Emphasis has
been placed on ensuring that
components recently purchased or
to be purchased by business units
are Y2K-ready prior to the
implementation of those
components.
Phase II -- Inventory To create an inventory of all components
and assess the Y2K risks associated with
those components.
Phase III -- Assessment To determine which components are not
Y2K-ready and decide whether those
components should be replaced, retired
or repaired.
Phase IV -- Renovation To execute component replacement,
retirement or repair to ensure Y2K
readiness.
Phase V -- Validation To test components that have been
repaired to ensure Y2K readiness and
validate "mission critical" components
that were assessed as Y2K-ready in Phase
III.
Phase VI -- Implementation To deploy repaired and validated
components.
In order to execute the six-phase plan, a combination of internal
resources and external contractors have been, and will be, employed by the Y2K
project team.
Y2K PROJECT STATUS
As of November 30, 1998, the Y2K project team had substantially
completed the six phases for internal "mission critical" components. However,
several software applications used by Residential Funding in its role as master
servicer are still in the final three phases of the six-phase management plan.
Residential Funding expects that all phases with respect to those applications
will be substantially completed by January 31, 1999.
The Y2K project team anticipates that its efforts with respect to all
internal components will be substantially complete by March 31, 1999. This
includes substantial completion of:
o renovation and validation of any non-mission critical
components that the Y2K project team and related business
units determine to be necessary
o validation of any remaining "mission critical" components that
are either completing in-house remediation or waiting for a
vendor upgrade, and
o Y2K business continuity planning activities discussed below.
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The potential impact on Residential Funding of problems related to Y2K,
however, will not depend solely on the corrective measures undertaken by the Y2K
project team. The manner in which Y2K issues are addressed by business partners,
governmental agencies and other entities that provide data to, or receive data
from, Residential Funding, or whose financial condition or operational
capability is important to Residential Funding and its ability to act as master
servicer, will have a significant impact upon Residential Funding. These
entities include, among others, subservicers, the trustee, the custodian and
some depositary institutions, as well as their respective suppliers and vendors.
Accordingly, Residential Funding is communicating with some of these parties to
assess their Y2K readiness and evaluate any potential impact on Residential
Funding.
Due to the various dates by which Residential Funding's business
partners anticipate being Y2K ready, it is expected that the Y2K project team
will continue to spend significant time assessing Y2K business partner issues
throughout 1999. Any business partner, including any subservicer, the trustee
and the custodian, that:
o has not provided Residential Funding appropriate documentation
supporting its Y2K efforts
o has not responded in a timely manner to Residential Funding's
inquiries regarding their Y2K efforts or
o does not expect to be Y2K-ready until after June 30, 1999 has been,
and will be, placed in an "at risk" category. Residential Funding will carefully
monitor the efforts and progress of its "at risk" business partners, and if
additional steps are necessary Residential Funding will reassess the risk and
act accordingly.
During 1998, Residential Funding also commenced a formal business
continuity plan that is designed to address potential Y2K problems and other
possible disruptions. Residential Funding's business continuity plan has the
following four phases:
<TABLE>
<CAPTION>
PHASE OBJECTIVE
<S> <C>
Phase I -- Business Impact Assessment To assess the impact upon Residential
Funding business units if "mission
critical" components were suddenly
not available or significantly
impaired as a result of a natural
disaster or other type of
disruption, including as a result
of Y2K.
Phase II -- Strategic Development To develop broad, strategic plans
regarding the manner in which
Residential Funding will operate in the
aftermath of a natural disaster or other
type of disruption, including as a result of
Y2K.
S-52
<PAGE>
Phase III -- Business Continuity Planning To develop detailed procedures on how
Residential Funding and individual
business units will continue to operate in
the aftermath of a natural disaster or
other type of disruption, including as a
result of Y2K.
Phase IV -- Validation To test the plans developed in Phases II
and III above.
</TABLE>
As of December 15, 1998, Residential Funding had substantially
completed Phases I and II of its business continuity plan. Residential Funding
anticipates that Phase III will be substantially complete by March 31, 1999 and
Phase IV will be substantially complete by June 30, 1999.
RISKS RELATED TO Y2K
Although Residential Funding's remediation efforts are directed at
eliminating its Y2K exposure, there can be no assurance that these efforts will
fully mitigate the effect of all Y2K problems. If Residential Funding fails to
identify or correct any material Y2K problem, there could be significant
disruptions in its normal business operations. Such disruptions could have a
material adverse effect on Residential Funding's ability to
o collect, and monitor any subservicer's collection of, payments
on the mortgage loans
o distribute those collections to the trustee and
o provide reports to certificateholders as described in this
prospectus supplement.
Furthermore, if any subservicer, the trustee or any other business partner or
any of their respective vendors or third party service providers are not
Y2K-ready, the ability to (a) service the mortgage loans in the case of any
subservicer or any of their respective vendors or third party service providers
and (b) make distributions to certificateholders in the case of the trustee or
any of its vendors or third party service providers, may be materially and
adversely affected.
This section entitled "Year 2000 Considerations" contains
forward-looking statements within the meaning of Section 27A of the Securities
Act. All statements in this section that are not statements of historical fact
are forward-looking statements. Forward-looking statements made in this Y2K
discussion are subject to some risks and uncertainties. Important factors that
could cause results to differ materially from the forward-looking statements
include, among other things, the ability of Residential Funding to successfully
identify components that may pose Y2K problems, the nature and amount of
programming required to fix the affected components, the costs of labor and
consultants related to these efforts, the continued availability of resources,
both personnel and technology, and the ability of business partners that
interface with Residential Funding to successfully address their Y2K issues.
S-53
<PAGE>
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and the aggregate amount of distributions on the
offered certificates will be affected by the rate and timing of principal
payments on the mortgage loans and the amount and timing of mortgagor defaults
resulting in Realized Losses. The yields may be adversely affected by a higher
or lower than anticipated rate of principal payments on the mortgage loans in
the trust fund. The rate of principal payments on the mortgage loans will in
turn be affected by the amortization schedules of the mortgage loans, the rate
and timing of mortgagor prepayments on the mortgage loans by the mortgagors,
liquidations of defaulted mortgage loans and purchases of mortgage loans due to
breaches of some representations and warranties.
The timing of changes in the rate of prepayments, liquidations and
purchases of the mortgage loans may, and the timing of Realized Losses will,
significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. In addition, the rate of prepayments of the mortgage loans and the
yield to investors on the certificates may be affected by refinancing programs,
which may include general or targeted solicitations, as described under
"Maturity and Prepayment Considerations" in the prospectus. Since the rate and
timing of principal payments on the mortgage loans will depend on future events
and on a variety of factors, as described in this prospectus supplement and in
the prospectus under "Yield Considerations" and "Maturity and Prepayment
Considerations", no assurance can be given as to the rate or the timing of
principal payments on the offered certificates.
The mortgage loans in most cases may be prepaid by the mortgagors at
any time without payment of any prepayment fee or penalty, although a portion of
the mortgage loans provide for payment of a prepayment charge, which may have a
substantial effect on the rate of prepayment of those mortgage loans. See
"Description of the Mortgage Pool--Mortgage Pool Characteristics."
Most of the mortgage loans contain due-on-sale clauses. As described
under "Description of the Certificates--Principal Distributions on the Senior
Certificates" and "--Principal Distributions on the Class M Certificates" in
this prospectus supplement, during specified periods all or a disproportionately
large percentage of principal prepayments on the mortgage loans will be
allocated among the Senior Certificates, other than the [Lockout Certificates
and the] Principal Only Certificates, and during specified periods no principal
prepayments or, relative to the related Class M Percentage, a disproportionately
small portion of principal prepayments on the mortgage loans will be distributed
to the Lockout Certificates and to each class of Class M Certificates. In
addition to the foregoing, if on any distribution date, the loss level
established for the Class M-2 Certificates or Class M-3 Certificates is exceeded
and a class of Class M Certificates having a higher payment priority is then
outstanding, the Class M-2 Certificates or Class M-3 Certificates, as the case
may be, will not receive distributions relating to principal prepayments on that
distribution date. [Furthermore, if the Certificate Principal Balances of the
Senior Certificates, other than the Lockout Certificates and the Principal Only
Certificates, have been reduced to zero, the Lockout Certificates may, under
some circumstances, receive all mortgagor prepayments made during the preceding
calendar month to the extent not paid to the Principal Only Certificates. ]
S-54
<PAGE>
Prepayments, liquidations and purchases of the mortgage loans will
result in distributions to holders of the offered certificates of principal
amounts which would otherwise be distributed over the remaining terms of the
mortgage loans. Factors affecting prepayment, including defaults and
liquidations, of mortgage loans include changes in mortgagors' housing needs,
job transfers, unemployment, mortgagors' net equity in the mortgaged properties,
changes in the value of the mortgaged properties, mortgage market interest
rates, solicitations and servicing decisions. In addition, if prevailing
mortgage rates fell significantly below the mortgage rates on the mortgage
loans, the rate of prepayments, including refinancings, would be expected to
increase. Conversely, if prevailing mortgage rates rose significantly above the
mortgage rates on the mortgage loans, the rate of prepayments on the mortgage
loans would be expected to decrease.
The rate of defaults on the mortgage loans will also affect the rate
and timing of principal payments on the mortgage loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. The rate of default on mortgage loans which are refinance or limited
documentation mortgage loans, and on mortgage loans with high LTV ratios, may be
higher than for other types of mortgage loans. Furthermore, the rate and timing
of prepayments, defaults and liquidations on the mortgage loans will be affected
by the general economic condition of the region of the country in which the
related mortgaged properties are located. The risk of delinquencies and loss is
greater and prepayments are less likely in regions where a weak or deteriorating
economy exists, as may be evidenced by, among other factors, increasing
unemployment or falling property values. See "Maturity and Prepayment
Considerations" in the prospectus.
As described under "Description of the Certificates--Allocation of
Losses; Subordination" and "--Advances," amounts otherwise distributable to
holders of one or more classes of the Class M Certificates may be made available
to protect the holders of the Senior Certificates and holders of any Class M
Certificates with a higher payment priority against interruptions in
distributions due to some mortgagor delinquencies, to the extent not covered by
Advances. These delinquencies may affect the yields to investors on those
classes of the Class M Certificates, and, even if subsequently cured, may affect
the timing of the receipt of distributions by the holders of those classes of
Class M Certificates. Furthermore, the Principal Only Certificates will share in
the principal portion of Realized Losses on the mortgage loans only to the
extent that they are incurred with respect to Discount Mortgage Loans and only
to the extent of the related Discount Fraction. Thus, after the Class B
Certificates and the Class M Certificates are retired or in the case of Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses and
Extraordinary Losses, the Senior Certificates, other than the Principal Only
Certificates, may be affected to a greater extent by losses on Non-Discount
Mortgage Loans than losses on Discount Mortgage Loans. In addition, a higher
than expected rate of delinquencies or losses will also affect the rate of
principal payments on one or more classes of the Class M Certificates if it
delays the scheduled reduction of the Senior Accelerated Distribution Percentage
or affects the allocation of prepayments among the Class M Certificates and
Class B Certificates.
The periodic increase in interest paid by the mortgagor of a Buydown
Mortgage Loan may increase the risk of default with respect to the related
mortgage loan. See "Mortgage Loan Program--Underwriting Standards" and "Yield
Considerations" in the Prospectus.
S-55
<PAGE>
The amount of interest otherwise payable to holders of the offered
certificates will be reduced by any interest shortfalls to the extent not
covered by subordination or the master servicer, including Prepayment Interest
Shortfalls and, in the case of each class of the Class M Certificates, the
interest portions of Realized Losses allocated solely to that class of
certificates. These shortfalls will not be offset by a reduction in the
servicing fees payable to the master servicer or otherwise, except as described
in this prospectus supplement with respect to some Prepayment Interest
Shortfalls. See "Yield Considerations" in the Prospectus and "Description of the
Certificates--Interest Distributions" in this prospectus supplement for a
discussion of the effect of principal prepayments on the mortgage loans on the
yield to maturity of the offered certificates and possible shortfalls in the
collection of interest.
The yield to investors in the offered certificates will be affected by
Prepayment Interest Shortfalls allocable thereto in the month preceding any
distribution date to the extent that those shortfalls exceed the amount offset
by the master servicer. See "Description of the Certificates--Interest
Distributions" in this prospectus supplement.
In addition, the yield to maturity on each class of the offered
certificates will depend on, among other things, the price paid by the holders
of the offered certificates and the related pass-through rate. The extent to
which the yield to maturity of an offered certificate is sensitive to
prepayments will depend, in part, upon the degree to which it is purchased at a
discount or premium. In general, if a class of offered certificates is purchased
at a premium and principal distributions thereon occur at a rate faster than
assumed at the time of purchase, the investor's actual yield to maturity will be
lower than anticipated at the time of purchase. Conversely, if a class of
offered certificates is purchased at a discount and principal distributions
thereon occur at a rate slower than assumed at the time of purchase, the
investor's actual yield to maturity will be lower than anticipated at the time
of purchase. For additional considerations relating to the yield on the
certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the prospectus.
SEQUENTIALLY PAYING CERTIFICATES: The Senior Certificates, other than
the Principal Only Certificates and Variable Strip Certificates, are entitled to
receive distributions in accordance with various priorities for payment of
principal as described in this prospectus supplement. Distributions of principal
on classes having an earlier priority of payment will be affected by the rates
of prepayment of the mortgage loans early in the life of the mortgage pool. The
timing of commencement of principal distributions and the weighted average lives
of certificates with a later priority of payment will be affected by the rates
of prepayment of the mortgage loans both before and after the commencement of
principal distributions on those classes.
[SENIOR SUPPORT CERTIFICATES: Investors in the Senior Support
Certificates should be aware that because the Senior Support Certificates do not
receive any portion of principal prepayments prior to the distribution date
occurring in _______________ and prior to the distribution date occurring in
________________ will receive a disproportionately small portion of principal
prepayments, unless the Certificate Principal Balances of the Senior
Certificates, other than the Senior Support Certificates and Principal Only
Certificates, have been reduced to zero, the weighted average lives of the
Senior Support Certificates will be longer than would otherwise be the case. The
effect on the market value of the Senior Support Certificates of changes in
market interest rates or
S-56
<PAGE>
market yields for similar securities may be greater than for other classes of
Senior Certificates entitled to those distributions.]
[ACCRETION DIRECTED CERTIFICATES AND ACCRUAL CERTIFICATES: Prior to the
Accretion Termination Date, the Accretion Directed Certificates and Accrual
Certificates, as and to the extent described in this prospectus supplement, will
receive as monthly principal distributions the Accrual Distribution Amount.
Prior to the Accretion Termination Date, interest shortfalls allocated to the
Accrual Certificates will reduce the amount added to the amount of those
certificates relating to interest accrued thereon and will result in a
corresponding reduction of the amount available for distributions relating to
principal on the Accretion Directed Certificates and Accrual Certificates.
Furthermore, because these interest shortfalls will result in the Certificate
Principal Balance of the Accrual Certificates being less than it would otherwise
be, the amount of interest that will accrue in the future on the Accrual
Certificates and be available for distributions relating to principal on the
Accretion Directed Certificates and Accrual Certificates will be reduced.
Accordingly, the weighted average lives of the Accretion Directed Certificates
and Accrual Certificates would be extended.]
[PAC CERTIFICATES: The PAC Certificates have been structured so that
principal distributions will be made in the amounts determined by using the
table described in this Prospectus supplement, assuming that prepayments on the
mortgage loans occur each month at a constant level within the PAC targeted
range, which is between approximately ___% SPA and approximately ___% SPA, and
based on some other assumptions.
There can be no assurance that funds available for distribution of
principal on the PAC Certificates result in their Certificate Principal Balance
equaling their Planned Principal Balance for any distribution date. To the
extent that prepayments occur at a level below the PAC targeted range, the funds
available for principal distributions on the PAC Certificates on each
distribution date may be insufficient to reduce the Certificate Principal
Balance of the PAC Certificates to their Planned Principal Balance for that
distribution date, and the weighted average lives of the PAC Certificates may be
extended. Conversely, to the extent that prepayments occur at a level above the
PAC targeted range, after the Certificate Principal Balances of the TAC
Certificates and Accrual Certificates have been reduced to zero, the Certificate
Principal Balance of the PAC Certificates may be reduced below their Planned
Principal Balance and the weighted average lives of the PAC Certificates may be
reduced. In addition, the averaging of high and low mortgagor prepayment rates,
even if the average prepayment level is within the PAC targeted range, will not
ensure the distributions on the PAC Certificates of an amount that will result
in their Certificate Principal Balance equaling their Planned Principal Balance
on any distribution date because the balance of the Senior Principal
Distribution Amount remaining after distribution on the PAC Certificates will be
distributed on each distribution date and therefore will not be available for
distributions on the PAC Certificates.
Investors in the PAC Certificates should be aware that the
stabilization provided by the TAC Certificates and Accrual Certificates is
sensitive to the rate of mortgagor prepayments on the mortgage loans, and that
the Certificate Principal Balances of the TAC Certificates and Accrual
Certificates may be reduced to zero significantly earlier than anticipated. The
Certificate Principal
S-57
<PAGE>
Balance of the TAC Certificates and Accrual Certificates is equal to
approximately ____% of the Certificate Principal Balance of the PAC
Certificates.]
[TAC CERTIFICATES: The TAC Certificates have been structured so that
principal distributions will be made in the amounts determined by using the
table and the cash flow allocation provisions described in this prospectus
supplement, assuming that prepayments on the mortgage loans occur each month at
a constant level of approximately ___% SPA, and based on certain other
assumptions.
There can be no assurance that funds available for distribution of
principal on the TAC Certificates will result in their Certificate Principal
Balances equaling their respective Targeted Principal Balances for any
distribution date. To the extent that prepayments occur at a level below ___%
SPA, the funds available for principal distributions on the TAC Certificates on
each distribution date may be insufficient to reduce the Certificate Principal
Balances of the TAC Certificates to their Targeted Principal Balance for that
distribution date, and the weighted average life of the TAC Certificates may be
extended. Conversely, to the extent that prepayments occur at a level above ___%
SPA, the Certificate Principal Balance of the TAC Certificates may be reduced
below their Targeted Principal Balances and the weighted average lives of the
TAC Certificates may be reduced.
Investors in the TAC Certificates should be aware that the
stabilization provided by the Accrual Certificates is sensitive to the rate of
principal prepayments on the mortgage loans, and that the Certificate Principal
Balance of the Accrual Certificates may be reduced to zero significantly earlier
than anticipated. The aggregate initial Certificate Principal Balance of the
related Accrual Certificates is approximately _____% of the aggregate initial
Certificate Principal Balance of the TAC Certificates.]
[PAC CERTIFICATES AND TAC CERTIFICATES: It is very unlikely that the
mortgage loans will prepay at any particular constant rate. Furthermore, the
Planned Principal Balances and Targeted Principal Balances listed in the table
under "Description of the Certificates--Principal Distributions on the Senior
Certificates" were calculated based on assumptions which may differ from the
actual performance of the mortgage loans. The actual prepayment rates that will
result in the Certificate Principal Balances of the PAC Certificates equaling
their Planned Principal Balances listed in the table may differ from the rates
used to calculate those amounts, and the actual prepayment rates that will
result in the Certificate Principal Balances of the TAC Certificates equaling
their Targeted Principal Balances listed in the table may differ from the rates
used to calculate those amounts. The prepayment rates that will result in the
Certificate Principal Balances of the PAC Certificates and TAC Certificates
equaling those amounts may vary over time as a result of the actual prepayment
experience of the mortgage loans. Moreover, because the Planned Principal
Balances and Targeted Principal Balances were calculated using some assumptions
regarding the mortgage loans, the actual prepayment behavior of the individual
mortgage loans could be such that:
o the amount available for distributions of principal in
reduction of the PAC Certificates may not result in their
Certificate Principal Balances equaling their
S-58
<PAGE>
Planned Principal Balances even if prepayments were at a
constant speed within the PAC targeted range, and
o the amount available for distributions of principal in
reduction of the TAC Certificates may not result in their
respective Certificate Principal Balances equaling their
respective Targeted Principal Balances even if prepayments
were at a constant speed of approximately ___% SPA.]
[LOCKOUT CERTIFICATES: Investors in the Lockout Certificates should be
aware that because the Lockout Certificates do not receive any distributions of
payments of principal prior to the distribution date occurring in
______________, unless the Certificate Principal Balances of the Senior
Certificates, other than the Lockout Certificates and Principal Only
Certificates, have been reduced to zero, the weighted average life of the
Lockout Certificates will be longer than would otherwise be the case. The effect
on the market value of the Lockout Certificates of changes in market interest
rates or market yields for similar securities will be greater than for other
classes of Senior Certificates entitled to principal distributions. ]
CERTIFICATES WITH SUBORDINATION FEATURES: After the Certificate
Principal Balances of the Class B Certificates have been reduced to zero, the
yield to maturity on the class of Class M Certificates then outstanding with the
lowest payment priority will be extremely sensitive to losses on the mortgage
loans and the timing of those losses because the entire amount of losses that
are covered by Subordination will be allocated to that class of Class M
Certificates. See "--Class M-2 and Class M-3 Certificate Yield Considerations"
below. Furthermore, because principal distributions are paid to some classes of
Senior Certificates and Class M Certificates before other classes, holders of
classes having a later priority of payment bear a greater risk of losses than
holders of classes having earlier priority for distribution of principal.
ASSUMED FINAL DISTRIBUTION DATE: The assumed final distribution date
with respect to each class of the offered certificates is __________ 25, _____,
which is the distribution date immediately following the latest scheduled
maturity date for any mortgage loan. No event of default, change in the
priorities for distribution among the various classes or other provisions under
the pooling and servicing agreement will arise or become applicable solely by
reason of the failure to retire the entire Certificate Principal Balance of any
class of certificates on or before its assumed final distribution date.
WEIGHTED AVERAGE LIFE: Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security to the
date of distribution to the investor of each dollar distributed in reduction of
principal of the security assuming no losses. The weighted average life of the
offered certificates will be influenced by, among other things, the rate at
which principal of the mortgage loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement, the
prepayment speed assumption, represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of new mortgage
loans. A prepayment assumption of 100% PSA assumes constant prepayment rates of
0.20% per annum of the then outstanding principal balance of the mortgage
S-59
<PAGE>
loans in the first month of the life of the mortgage loans and an additional
0.20% per annum in each month thereafter until the 30th month. Beginning in the
30th month and in each month thereafter during the life of the mortgage loans,
100% PSA assumes a constant prepayment rate of 6% per annum each month. As used
in the table below, "0% PSA" assumes prepayment rates equal to 0% of PSA--no
prepayments. Correspondingly, "100% PSA" and "___% PSA" assumes prepayment rates
equal to 100% of PSA and ___% of PSA, respectively, and so forth. PSA 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 captioned "Percent of Initial Certificate Principal Balance
Outstanding at the Following Percentages of PSA" has been prepared on the basis
of assumptions as listed in this paragraph regarding the weighted average
characteristics of the Mortgage Loans that are expected to be included in the
trust fund as described under "Description of the Mortgage Pool" in this
Prospectus supplement and their performance. The table assumes, among other
things, that: (i) as of the date of issuance of the offered certificates, the
mortgage loans have the following characteristics:
<TABLE>
<CAPTION>
Discount Non-Discount
Mortgage Loans Mortgage Loans
-------------- --------------
<S> <C> <C>
Aggregate principal balance.................... $ $
Weighted average mortgage rate................. % %
Weighted average servicing fee rate............ % %
Weighted average original term to
maturity (months).............................
Weighted average remaining term to
maturity (months).............................
</TABLE>
(ii) the scheduled monthly payment for each mortgage loan has been
based on its outstanding balance, mortgage rate and remaining term to maturity,
so that the mortgage loan will amortize in amounts sufficient for its repayment
over its remaining term to maturity; (iii) none of the unaffiliated sellers, the
master servicer or the depositor will repurchase any mortgage loan, as described
under "Mortgage Loan Program--Representations by Sellers" and "Description of
the Certificates--Assignment of the Trust Fund Assets" in the prospectus, and
neither the master servicer nor the depositor exercises any option to purchase
the mortgage loans and thereby cause a termination of the trust fund; (iv) there
are no delinquencies or Realized Losses on the mortgage loans, and principal
payments on the mortgage loans will be timely received together with
prepayments, if any, at the respective constant percentages of PSA set forth in
the table; (v) there is no Prepayment Interest Shortfall or any other interest
shortfall in any month; (vi) payments on the certificates will be received on
the 25th day of each month, commencing in ____________; (vii) payments on the
mortgage loans earn no reinvestment return; (viii) there are no additional
ongoing trust fund expenses payable out of the trust fund; and (ix) the
certificates will be purchased on ___________, ____ . Clauses (i) through (ix)
above are collectively referred to as the structuring assumptions.
The actual characteristics and performance of the mortgage loans will
differ from the assumptions used in constructing the table below, which is
hypothetical in nature and is provided only to give a general sense of how the
principal cash flows might behave under varying prepayment
S-60
<PAGE>
scenarios. For example, it is very unlikely that the mortgage loans will prepay
at a constant level of PSA until maturity or that all of the mortgage loans will
prepay at the same level of PSA. Moreover, the diverse remaining terms to
maturity and mortgage rates of the mortgage loans could produce slower or faster
principal distributions than indicated in the table at the various constant
percentages of PSA specified, even if the weighted average remaining term to
maturity and weighted average mortgage rate of the mortgage loans are as
assumed. Any difference between the assumptions and the actual characteristics
and performance of the mortgage loans, or actual prepayment or loss experience,
will affect the percentages of initial Certificate Principal Balances
outstanding over time and the weighted average lives of the classes of offered
certificates.
In accordance with the foregoing discussion and assumptions, the
following table indicates the weighted average life of each class of offered
certificates, other than the Variable Strip Certificates and Residual
Certificates, and sets forth the percentages of the initial Certificate
Principal Balance of each class of offered certificates that would be
outstanding after each of the distribution dates at the various percentages of
PSA shown.
S-61
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PSA
Class A-1 Class A-2 Class A-3
--------- --------- ---------
DISTRIBUTION DATE % % % % % % % % % % % % % % %
------------------------------------------------------------------------------------------
<S> <C>
Initial Percentage
Weighted Average Life in Years (**)....
</TABLE>
- ----------------
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a certificate of any class is determined
by (i) multiplying the net reduction, if any, of the Certificate
Principal Balance by the number of years from the date of issuance of
the certificate to the related distribution date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net
reduction of the Certificate Principal Balance described in (i) above.
This table has been prepared based on the structuring assumptions,
including the assumptions relating to the characteristics and performance of the
mortgage loans, which differ from their actual characteristics, and should be
read in conjunction therewith.
(TABLE CONTINUED ON NEXT PAGE.)
S-62
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PSA
Class A-4 Class A-5 Class A-6
-------------------------- ------------------------ ------------------------
DISTRIBUTION DATE % % % % % % % % % % % % % % %
------------------------------------------------------------------------------------------
<S> <C>
Initial Percentage
</TABLE>
Weighted Average Life in Years (**)....
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a certificate of any class is determined
by (i) multiplying the net reduction, if any, of the Certificate
Principal Balance by the number of years from the date of issuance of
the certificate to the related distribution date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net
reduction of the Certificate Principal Balance described in (i) above.
This table has been prepared based on the structuring assumptions,
including the assumptions relating to the characteristics and performance of the
mortgage loans, which differ from their actual characteristics, and should be
read in conjunction therewith.
(TABLE CONTINUED FROM PREVIOUS PAGE AND CONTINUED ON NEXT PAGE.)
S-63
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PSA
Class A-7 Class A-8 Class A-9
-------------------------- ------------------------ ------------------------
DISTRIBUTION DATE % % % % % % % % % % % % % % %
------------------------------------------------------------------------------------------
<S> <C>
Initial Percentage
</TABLE>
Weighted Average Life in Years (**)....
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a certificate of any class is determined
by (i) multiplying the net reduction, if any, of the Certificate
Principal Balance by the number of years from the date of issuance of
the certificate to the related distribution date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net
reduction of the Certificate Principal Balance described in (i) above.
This table has been prepared based on the structuring assumptions,
including the assumptions relating to the characteristics and performance of the
mortgage loans, which differ from their actual characteristics, and should be
read in conjunction therewith.
(TABLE CONTINUED FROM PREVIOUS PAGE AND CONTINUED ON NEXT PAGE.)
S-64
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PSA
Class A-P Class M-1, M-2 and M-3
------------------------- ------------------------
DISTRIBUTION DATE % % % % % % % % % %
------------------------------------------------------------
Initial Percentage
Weighted Average Life in Years (**)....
* Indicates a number that is greater than zero but less than 0.5%.
** The weighted average life of a certificate of any class is determined
by (i) multiplying the net reduction, if any, of the Certificate
Principal Balance by the number of years from the date of issuance of
the certificate to the related distribution date, (ii) adding the
results, and (iii) dividing the sum by the aggregate of the net
reduction of the Certificate Principal Balance described in (i) above.
This table has been prepared based on the structuring assumptions,
including the assumptions relating to the characteristics and performance of the
mortgage loans, which differ from their actual characteristics, and should be
read in conjunction therewith.
(TABLE CONTINUED FROM PREVIOUS PAGE.)
S-65
<PAGE>
[ADJUSTABLE RATE CERTIFICATE YIELD CONSIDERATIONS
The yield to investors on the Floater Certificates will be sensitive,
and the yield to investors on the Inverse Floater Certificates will be extremely
sensitive, to fluctuations in the level of LIBOR. The pass-through rate on the
Floater Certificates will vary with LIBOR and the pass-through rate on the
Inverse Floater Certificates will vary inversely with and at a multiple of
LIBOR. The pass-through rates on the Adjustable Rate Certificates are subject to
maximum and minimum pass-through rates, and are therefore limited despite
changes in LIBOR in some circumstances. Changes in the level of LIBOR may not
correlate with changes in prevailing mortgage interest rates or changes in other
indices. It is possible that lower prevailing mortgage interest rates, which
might be expected to result in faster prepayments, could occur concurrently with
an increased level of LIBOR. Investors in the Adjustable Rate Certificates
should also fully consider the effect on the yields on those certificates of
changes in the level of LIBOR.
To illustrate the significance of changes in the level of LIBOR and
prepayments on the yield to maturity on the Adjustable Rate Certificates, the
following tables indicate the approximate pre-tax yields to maturity on a
corporate bond equivalent basis under the different constant percentages of PSA
and varying levels of LIBOR indicated. Because the rate of distribution of
principal on the certificates will be related to the actual amortization,
including prepayments, of the mortgage loans, which will include mortgage loans
that have remaining terms to maturity shorter or longer than assumed and
mortgage rates higher or lower than assumed, the pre-tax yields to maturity on
the Adjustable Rate Certificates are likely to differ from those shown in the
following tables, even if all the mortgage loans prepay at constant percentages
of PSA and the level of LIBOR, the weighted average remaining term to maturity
and the weighted average mortgage rate of the mortgage loans are as assumed. Any
differences between the assumptions and the actual characteristics and
performance of the mortgage loans and of the certificates may result in yields
being different from those shown in the tables. Discrepancies between assumed
and actual characteristics and performance underscore the hypothetical nature of
the tables, which are provided only to give a general sense of the sensitivity
of yields in varying prepayment scenarios and different levels of LIBOR.
In addition, it is highly unlikely that the mortgage loans will prepay
at a constant level of PSA until maturity, that all of the mortgage loans will
prepay at the same rate, or that the level of LIBOR will remain constant. The
timing of changes in the rate of prepayments may significantly affect the actual
yield to maturity to an investor, even if the average rate of principal
prepayments is consistent with an investor's expectation. In general, the
earlier the payment of principal of the mortgage loans, the greater the effect
on an investor's yield to maturity. As a result, the effect on an investor's
yield of principal prepayments occurring at a rate higher or lower than the rate
anticipated by the investor during the period immediately following the issuance
of the certificates will not be equally offset by a subsequent like reduction or
increase in the rate of principal prepayments.
The tables below are based on the structuring assumptions, including
the assumptions regarding the characteristics and performance of the mortgage
loans and the certificates, which may differ from their actual characteristics
and performance, and assuming further that:
o on each LIBOR rate adjustment date, LIBOR will be at the level
shown
S-66
<PAGE>
o the aggregate purchase prices of the Class A-5 Certificates
and Class A-6 Certificates are $__________ and $_________,
respectively, in each case, including accrued interest, and
o the initial pass-through rates on the Class A-5 Certificates
and Class A-6 Certificates are described on page S-__ of this
prospectus supplement.
There can be no assurance that the mortgage loans will have the assumed
characteristics, will prepay at any of the rates shown in the tables or at any
other particular rate, that the pre-tax yield to maturity on the Adjustable Rate
Certificates will correspond to any of the pre-tax yields to maturity shown in
this prospectus supplement, that the level of LIBOR will correspond to the
levels shown in the table or that the aggregate purchase price of the Adjustable
Rate Certificates will be as assumed. In addition to any other factors an
investor may deem material, each investor must make its own decision as to the
appropriate prepayment assumption to be used and the appropriate levels of LIBOR
to be assumed in deciding whether or not to purchase an Adjustable Rate
Certificate.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS A-5 CERTIFICATES TO PREPAYMENTS AND LIBOR
PERCENTAGE OF PSA
LIBOR % % % % %
----- --- --- --- --- ---
%
%
%
%
% and above
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS A-6 CERTIFICATES TO PREPAYMENTS AND LIBOR
PERCENTAGE OF PSA
LIBOR 0% 100% 275% 400% 500%
----- --- ---- ---- ---- ----
%
%
%
%
% and above
Each pre-tax yield to maturity listed in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the Adjustable Rate Certificates,
would cause the discounted present value of the assumed stream of cash flows to
equal the assumed purchase price for those certificates. Accrued interest is
included in the assumed purchase price and is used in computing the corporate
bond equivalent yields shown. These yields do not take into account the
different interest rates at which investors may be able to reinvest
S-67
<PAGE>
funds received by them as distributions on the Adjustable Rate Certificates, and
thus do not reflect the return on any investment in the Adjustable Rate
Certificates when any reinvestment rates other than the discount rates are
considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yield to maturity on the
Adjustable Rate Certificates is likely to differ from those shown in the tables,
even if all of the mortgage loans prepay at the indicated constant percentages
of PSA over any given time period or over the entire life of the certificates.
There can be no assurance that the mortgage loans will prepay at any
particular rate or that the yield on the Adjustable Rate Certificates will
conform to the yields described in this prospectus supplement. Moreover, the
various remaining terms to maturity and mortgage rates of the mortgage loans
could produce slower or faster principal distributions than indicated in the
preceding tables at the various constant percentages of PSA specified, even if
the weighted average remaining term to maturity and weighted average mortgage
rate of the mortgage loans are as assumed. Investors are urged to make their
investment decisions based on their determinations as to anticipated rates of
prepayment under a variety of scenarios. Investors in the Adjustable Rate
Certificates should fully consider the risk that a rapid rate of prepayments on
the mortgage loans could result in the failure of those investors to fully
recover their investments.
For additional considerations relating to the yield on the
certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.]
PRINCIPAL ONLY CERTIFICATE [AND][,] VARIABLE STRIP CERTIFICATE [AND SUPER SENIOR
CERTIFICATE] YIELD CONSIDERATIONS
Because the Principal Only Certificates will be purchased at a
discount, the pre-tax yield on the Principal Only Certificates will be adversely
affected by slower than expected payments of principal, including prepayments,
defaults, liquidations and purchases of mortgage loans due to a breach of a
representation and warranty, on the Discount Mortgage Loans.
The yield to maturity on the [Super Senior Certificates and the]
Variable Strip Certificates will be extremely sensitive to both the timing of
receipt of prepayments and the overall rate of principal prepayments and
defaults on the mortgage loans, which rate may fluctuate significantly over
time. Investors in the [Super Senior Certificates and the] Variable Strip
Certificates should fully consider the risk that a rapid rate of prepayments on
the mortgage loans could result in the failure of those investors to fully
recover their investments. Solely with respect to the Variable Strip
Certificates, because the pool strip rates on the Discount Mortgage Loans equal
0.00%, the yield to investors on the Variable Strip Certificates will not be
affected by prepayments on the Discount Mortgage Loans.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the [Super Senior Certificates,] Principal Only Certificates and
Variable Strip Certificates to various constant rates of prepayment on the
mortgage loans. The tables are prepared by projecting the monthly
S-68
<PAGE>
aggregate payments on the [Super Senior Certificates ,] Principal Only
Certificates and Variable Strip Certificates and computing the corresponding
pre-tax yields to maturity on a corporate bond equivalent basis, based on the
structuring assumptions, including the assumptions regarding the characteristics
and performance of the mortgage loans, which differ from their actual
characteristics and performance and assuming the aggregate purchase prices,
including accrued interest, set forth below. Any differences between the
assumptions and the actual characteristics and performance of the mortgage loans
and of the Principal Only Certificates and Variable Strip Certificates may
result in yields being different from those shown in the tables. Discrepancies
between assumed and actual characteristics and performance underscore the
hypothetical nature of the tables, which are provided only to give a general
sense of the sensitivity of yields in varying prepayment scenarios.
[PRE-TAX YIELD TO MATURITY OF THE CLASS A-8
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
ASSUMED PURCHASE PRICE % % % % %
- ---------------------- -- -- -- -- --
$ % % % % % ]
PRE-TAX YIELD TO MATURITY OF THE PRINCIPAL ONLY
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
ASSUMED PURCHASE PRICE % % % % %
- ---------------------- -- -- -- -- --
$ % % % % %
PRE-TAX YIELD TO MATURITY OF THE VARIABLE STRIP
CERTIFICATES AT THE FOLLOWING PERCENTAGES OF PSA
ASSUMED PURCHASE PRICE % % % % %
- ---------------------- -- -- -- -- --
$ % % % % %
Each pre-tax yield to maturity set forth in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the [Super Senior Certificates,]
Principal Only Certificates and Variable Strip Certificates, would cause the
discounted present value of the assumed stream of cash flows to equal the
assumed purchase price listed in the applicable table. 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 [Super Senior Certificates,] Principal
Only Certificates and Variable Strip Certificates, and thus do not reflect the
return on any investment in the [Super Senior Certificates,] Principal Only
Certificates and Variable Strip Certificates when any reinvestment rates other
than the discount rates are considered.
S-69
<PAGE>
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the mortgage loans will be prepaid according
to one particular pattern. For this reason, and because the timing of cash flows
is critical to determining yields, the pre-tax yields to maturity on the [Super
Senior Certificates,] Principal Only Certificates and Variable Strip
Certificates are likely to differ from those shown in the tables, even if all of
the mortgage loans prepay at the constant percentages of PSA indicated in the
tables above over any given time period or over the entire life of the
certificates.
A lower than anticipated rate of principal prepayments on the Discount
Mortgage Loans will have a material adverse effect on the yield to maturity of
the Principal Only Certificates. The rate and timing of principal prepayments on
the Discount Mortgage Loans may differ from the rate and timing of principal
prepayments on the mortgage pool. In addition, because the Discount Mortgage
Loans have Net Mortgage Rates that are lower than the Net Mortgage Rates of the
Non-Discount Mortgage Loans, and because mortgage loans with lower Net Mortgage
Rates are likely to have lower mortgage rates, the Discount Mortgage Loans are
likely to prepay under most circumstances at a lower rate than the Non-Discount
Mortgage Loans. In addition, holders of the Variable Strip Certificates in most
cases 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 than on
the other offered certificates if the mortgage loans with higher mortgage rates
prepay faster than the mortgage loans with lower mortgage rates. Because
mortgage loans having higher pool strip rates usually have higher mortgage
rates, these mortgage loans are more likely to be prepaid under most
circumstances than are mortgage loans having lower pool strip rates.
There can be no assurance that the mortgage loans will prepay at any
particular rate or that the yield on the [Super Senior Certificates,] Principal
Only Certificates and Variable Strip Certificates will conform to the yields
described in this prospectus supplement. Moreover, the various remaining terms
to maturity and mortgage rates of the mortgage loans could produce slower or
faster principal distributions than indicated in the preceding table at the
various constant percentages of PSA specified, even if the weighted average
remaining term to maturity and weighted average mortgage rate of the mortgage
loans are as assumed. Investors are urged to make their investment decisions
based on their determinations as to anticipated rates of prepayment under a
variety of scenarios. Investors in the Variable Strip Certificates should fully
consider the risk that a rapid rate of prepayments on the mortgage loans could
result in the failure of those investors to fully recover their investments.
For additional considerations relating to the yield on the
certificates, see "Yield Considerations" and "Maturity and Prepayment
Considerations" in the Prospectus.
CLASS M-2 AND CLASS M-3 CERTIFICATE YIELD CONSIDERATIONS
If the aggregate Certificate Principal Balance of the Class B
Certificates is reduced to zero, the yield to maturity on the Class M-3
Certificates will become extremely sensitive to losses on the mortgage loans and
the timing of those losses that are covered by subordination, because the entire
amount of those losses will be allocated to the Class M-3 Certificates.
S-70
<PAGE>
The aggregate initial Certificate Principal Balance of the Class B
Certificates is equal to approximately ____% of the aggregate principal balance
of the mortgage loans as of the cut-off date. If the Certificate Principal
Balances of the Class B Certificates and Class M-3 Certificates have been
reduced to zero, the yield to maturity on the Class M-2 Certificates will become
extremely sensitive to losses on the mortgage loans and the timing of those
losses that are covered by subordination, because the entire amount of those
losses will be allocated to the Class M-2 Certificates. The aggregate initial
Certificate Principal Balance of the Class M-3 Certificates and Class B
Certificates is equal to approximately ____% of the aggregate principal balance
of the mortgage loans as of the cut-off date.
Defaults on mortgage loans may be measured relative to a default
standard or model. The model used in this Prospectus supplement, the standard
default assumption, represents an assumed rate of default each month relative to
the then outstanding performing principal balance of a pool of new mortgage
loans. A default assumption of 100% SDA assumes constant default rates of 0.02%
per annum of the then outstanding principal balance of the mortgage loans in the
first month of the life of the mortgage loans and an additional 0.02% per annum
in each month thereafter until the 30th month. Beginning in the 30th month and
in each month thereafter through the 60th month of the life of the mortgage
loans, 100% SDA assumes a constant default rate of 0.60% per annum each month.
Beginning in the 61st month and in each month thereafter through the 120th month
of the life of the mortgage loans, 100% SDA assumes that the constant default
rate declines each month by 0.0095% per annum, and that the constant default
rate remains at 0.03% per annum in each month after the 120th month. For the
purposes of the tables below, it is assumed that there is no delay between the
default and liquidation of the mortgage loans. As used in the table below, "0%
SDA" assumes default rates equal to 0% of SDA--no defaults. Correspondingly,
"200% SDA" assumes default rates equal to 200% of SDA, and so forth. SDA does
not purport to be a historical description of default experience or a prediction
of the anticipated rate of default of any pool of mortgage loans, including the
mortgage loans in this mortgage pool.
The following tables indicate the sensitivity of the yield to maturity
on the Class M-2 Certificates and Class M-3 Certificates to various rates of
prepayment and varying levels of aggregate Realized Losses by projecting the
monthly aggregate cash flows on the Class M-2 Certificates and Class M-3
Certificates and computing the corresponding pre-tax yield to maturity on a
corporate bond equivalent basis. The tables are based on the structuring
assumptions, except assumption (iv), including the assumptions regarding the
characteristics and performance of the mortgage loans, which differ from their
actual characteristics and performance, and assuming further that:
o defaults and final liquidations on the mortgage loans occur on
the last day of each month at the respective SDA percentages
set forth in the tables
o 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
o 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 PSA set forth in the table
o there are no Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or Extraordinary Losses
S-71
<PAGE>
o clauses (a)(i), (b)(i) and (b)(ii) in the definition of the
Senior Accelerated Distribution Percentage are not applicable
and
o the purchase prices of the Class M-2 Certificates and Class
M-3 Certificates will be approximately $__________ and
$___________, respectively, including accrued interest.
Investors should also consider the possibility that aggregate losses
incurred may not in fact be materially reduced by higher prepayment speeds
because mortgage loans that would otherwise ultimately default and be liquidated
may be less likely to be prepaid. In addition, investors should be aware that
the following table is based upon the assumption that the Class M-2 Certificates
and Class M-3 Certificates are priced at a discount. Since prepayments will
occur at par, the yield on the Class M-2 Certificates and Class M-3 Certificates
may increase due to those prepayments, even if losses occur. Any differences
between the assumptions and the actual characteristics and performance of the
mortgage loans and of the certificates may result in yields different from those
shown in the tables. Discrepancies between assumed and actual characteristics
and performance underscore the hypothetical nature of the tables, which are
provided only to give a general sense of the sensitivity of yields in varying
Realized Loss and prepayment scenarios.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS M-2 CERTIFICATES AND CLASS M-3 CERTIFICATES
TO PREPAYMENTS AND REALIZED LOSSES
CLASS M-2 CERTIFICATES
PERCENTAGE OF PSA
-------------------------------------------------
PERCENTAGE OF LOSS SEVERITY
SDA PERCENTAGE % % % % %
--- ---------- --- --- --- --- ---
0% N/A
100% 30%
200% 30%
300% 30%
400% 30%
CLASS M-3 CERTIFICATES
PERCENTAGE OF PSA
-------------------------------------------------
PERCENTAGE OF LOSS SEVERITY
SDA PERCENTAGE % % % % %
--- ---------- --- --- --- --- ---
0 N/A
100% 30%
200% 30%
300% 30%
400% 30%
Each pre-tax yield to maturity listed in the preceding tables was
calculated by determining the monthly discount rate which, when applied to the
assumed stream of cash flows to be paid on the
S-72
<PAGE>
Class M-2 Certificates or Class M-3 Certificates, as applicable, would cause the
discounted present value of the assumed stream of cash flows to equal the
assumed purchase price referred to above, and converting that rate to a
corporate bond equivalent yield. Accrued interest, if any, is included in the
assumed purchase price and is used in computing the corporate bond equivalent
yields shown. These yields do not take into account the different interest rates
at which investors may be able to reinvest funds received by them as
distributions on the Class M-2 Certificates or Class M-3 Certificates, and thus
do not reflect the return on any investment in the Class M-2 Certificates or
Class M-3 Certificates when any reinvestment rates other than the discount rates
set forth in the preceding tables are considered.
The following table sets forth the amount of Realized Losses that would
be incurred with respect to the certificates in the aggregate under each of the
scenarios in the preceding tables, expressed as a percentage of the aggregate
outstanding principal balance of the mortgage loans as of the cut-off date:
AGGREGATE REALIZED LOSSES
PERCENTAGE OF PSA
-------------------------------------------------
PERCENTAGE OF LOSS SEVERITY
SDA PERCENTAGE % % % % %
--- ---------- --- --- --- --- ---
100% 30%
200% 30%
300% 30%
400% 30%
Notwithstanding the assumed percentages of SDA, loss severity
percentages and prepayment rates reflected in the preceding table, it is highly
unlikely that the mortgage loans will be prepaid or that Realized Losses will be
incurred according to one particular pattern. For this reason, and because the
timing of cash flows is critical to determining yields, the actual pre-tax
yields to maturity on the Class M-2 Certificates and Class M-3 Certificates are
likely to differ from those shown in the tables. There can be no assurance that
the mortgage loans will prepay at any particular rate or that Realized Losses
will be incurred at any particular level or that the yield on the Class M-2
Certificates or Class M-3 Certificates will conform to the yields described in
this prospectus supplement. Moreover, the various remaining terms to maturity
and mortgage rates of the mortgage loans could produce slower or faster
principal distributions than indicated in the preceding tables at the various
constant percentages of PSA specified, even if the weighted average remaining
term to maturity and weighted average mortgage rate of the mortgage loans are as
assumed.
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment and Realized Losses under a
variety of scenarios. Investors in the Class M-2 Certificates and particularly
in the Class M-3 Certificates should fully consider the risk that Realized
Losses on the mortgage loans could result in the failure of those investors to
fully recover their investments. For additional considerations relating to the
yield on the certificates, see "Yield Considerations" and "Maturity and
Prepayment Considerations" in the prospectus.
S-73
<PAGE>
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE RESIDUAL CERTIFICATES
The Residual Certificateholders' after-tax rate of return on their
Residual Certificates will reflect their pre-tax rate of return, reduced by the
taxes required to be paid with respect to the Residual Certificates. Holders of
Residual Certificates may have tax liabilities with respect to their Residual
Certificates during the early years of the trust fund's term that substantially
exceed any distributions payable thereon during any such period. In addition,
holders of Residual Certificates may have tax liabilities with respect to their
Residual Certificates the present value of which substantially exceeds the
present value of distributions payable thereon and of any tax benefits that may
arise with respect thereto. Accordingly, the after-tax rate of return on the
Residual Certificates may be negative or may otherwise be significantly
adversely affected. The timing and amount of taxable income attributable to the
Residual Certificates will depend on, among other things, the timing and amounts
of prepayments and losses experienced with respect to the mortgage pool.
The Residual Certificateholders should consult their tax advisors as to
the effect of taxes and the receipt of any payments made to those holders in
connection with the purchase of the Residual Certificates on after-tax rates of
return on the Residual Certificates. See "Material Federal Income Tax
Consequences"in this prospectus supplement and "Material Federal Income Tax
Consequences" in the prospectus.
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued under a pooling and servicing agreement
dated as of ____________ 1, ____, among the depositor, the master servicer, and
_________________, as trustee. Reference is made to the prospectus for important
information in addition to that described herein regarding the terms and
conditions of the pooling and servicing agreement and the offered certificates.
The trustee will appoint ____________________________ to serve as custodian in
connection with the certificates. The offered certificates will be transferable
and exchangeable at the corporate trust office of the trustee, which will serve
as certificate registrar and paying agent. The depositor 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.
Under the pooling and servicing agreement, transfers of Residual
Certificates are prohibited to any non-United States person. Transfers of the
Residual Certificates are additionally restricted as described in the pooling
and servicing agreement. See "Material Federal Income Tax Consequences" in this
Prospectus supplement and "Material Federal Income Tax Consequences
- --REMICs--Tax on Transfers of REMIC Residual Certificates to Certain
Organizations" and "--Taxation of Owners of REMIC Residual
Certificates--Noneconomic REMIC Residual Certificates" in the prospectus. In
addition to the circumstances described in the prospectus, the depositor may
terminate the trustee for cause under specified circumstances. See "The Pooling
and Servicing Agreement--The Trustee" in the prospectus.
S-74
<PAGE>
THE MASTER SERVICER
Residential Funding, an indirect wholly-owned subsidiary of GMAC
Mortgage and an affiliate of the depositor, will act as master servicer for the
certificates under 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 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 at the dates indicated. The tables set
forth information for the total mortgage loan portfolio and for mortgage loans
underwritten under a reduced loan documentation program described under
"Mortgage Loan Program--Underwriting Standards" in the prospectus.
As used in this prospectus supplement, a loan is considered to be "30
to 59 days" or "30 or more days" delinquent when a payment due on any due date
remains unpaid as of the close of business on the last business day immediately
prior to the next following monthly due date. The determination as to whether a
loan falls into this category is made as of the close of business on the last
business day of each month. Delinquency information presented in this prospectus
supplement as of the cut-off date is determined and prepared as of the close of
business on the last business day immediately prior to the cut-off date.
<TABLE>
<CAPTION>
TOTAL LOAN PORTFOLIO DELINQUENCY EXPERIENCE
AT DECEMBER 31, 1994 AT DECEMBER 31, 1995 AT DECEMBER 31, 1996
----------------------- -------------------------- -----------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------- ---------- ------- ---------- ------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio 90,531 $23,461,455 102,531 $25,892,632 116,118 $29,568,270
Period of Delinquency
30 to 59 days 1,382 342,166 1,932 453,020 2,249 547,873
60 to 89 days 355 96,953 437 100,919 411 100,176
90 days or more 445 104,382 347 73,287 329 77,614
Foreclosures Pending 728 202,166 899 247,985 925 245,637
----------- ----------- ----------- ----------- ----------- -----------
Total Delinquent
Loans 2,910 745,667 3,615 875,211 3,914 971,301
=========== =========== =========== =========== =========== ===========
Percent of Loan
Portfolio 3.214% 3.178% 3.526% 3.380% 3.371% 3.285%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1998 AT MARCH 31, 1999
------------------------ --------------------- ---------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------- ---------- ------- ---------- ------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio 147,742 $35,987,149 164,378 $41,048,258 163,039 $41,373,425
Period of Delinquency
30 to 59 days 2,734 582,199 2,454 574,997 2,108 507,331
60 to 89 days 495 101,150 369 85,292 349 80,355
90 days or more 271 52,824 368 84,426 372 87,170
Foreclosures Pending 904 231,994 544 132,205 516 123,952
----------- ----------- ----------- ----------- ----------- -----------
Total Delinquent
Loans 4,404 968,167 3,735 876,920 798,808 3,345
=========== =========== =========== =========== =========== ===========
Percent of Loan
Portfolio 2.981% 2.690% 2.272% 2.136% 2.052% 1.931%
</TABLE>
- ------------------------
o The table relates to the mortgage loans referred to above. Some of
the information reported above may differ from information for the
same periods reported by the depositor in previous years, because
the depositor's methodology for determining the total portfolio
differed in previous years, but these differences in the data are
not material.
o Does not include foreclosures pending.
S-75
<PAGE>
<TABLE>
<CAPTION>
TOTAL REDUCED DOCUMENTATION LOAN PORTFOLIO DELINQUENCY EXPERIENCE
AT DECEMBER 31, 1994 AT DECEMBER 31, 1995 AT DECEMBER 31, 1996
----------------------- -------------------------- -----------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------- ---------- ------- ---------- ------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio $24,047 $5,183,728 25,645 $5,230,083 27,603 $5,941,996
Period of
Delinquency
30 to 59 days 438 104,204 524 121,992 528 112,386
60 to 89 days 107 29,184 133 30,622 108 22,995
90 days or more 160 39,866 90 19,845 85 22,438
Foreclosures Pending 294 89,731 316 92,592 320 95,862
------- ---------- ------ ---------- ------ ----------
Total Delinquent
Loans 999 $ 262,984 1,063 $ 265,050 1,041 $ 253,681
======= ========== ====== ========== ====== ==========
Percent of Loan
Portfolio 4.154% 5.073% 4.145% 5.068% 3.771% 4.619%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1998 AT MARCH 31, 1999
------------------------ --------------------- ---------------------
BY NO. BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF AMOUNT OF AMOUNT OF AMOUNT
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------- ---------- ------- ---------- ------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio 33,212 $6,116,561 34,791 $6,239,996 34,117 $6,150,579
Period of
Delinquency
30 to 59 days 640 126,977 576 106,876 461 90,923
60 to 89 days 123 28,564 93 18,844 82 17,706
90 days or more 69 12,872 84 18,619 97 20,590
Foreclosures Pending 272 67,379 158 37,471 146 34,346
------ ---------- ------ ---------- ------ ------------
Total Delinquent
Loans 1,104 $ 235,791 911 $ 181,809 786 $ 163,565
====== ========== ====== ========== ====== ============
Percent of Loan
Portfolio 3.324% 3.855% 2.619% 2.914% 2.304% 2.659%
</TABLE>
- -----------
o The table relates to the mortgage loans referred to above. Some of the
information reported above may differ from information for the same periods
reported by the depositor in previous years, because the depositor's
methodology for determining the total portfolio differed in previous years,
but these differences in the data are not material.
o Does not include foreclosures pending.
The following tables set forth information concerning foreclosed
mortgage loans and loan loss experience of Residential Funding as of the dates
indicated, 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 that period.
<TABLE>
<CAPTION>
TOTAL LOAN PORTFOLIO FORECLOSURE EXPERIENCE
AT OR FOR AT OR FOR AT OR FOR AT OR FOR AT OR FOR AT OR FOR
THE YEAR ENDED THE YEAR ENDED THE YEAR ENDED THE YEAR ENDED THE YEAR ENDED THE PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996 1997 1998 1999
---------------- --------------- ---------------- --------------- --------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio............ $23,461,455 $25,892,632 $29,568,270 $35,987,149 $41,048,258 $41,373,425
Average Portfolio Balance....... $23,045,103 24,182,873 28,285,392 32,155,215 31,941,101 41,445,760
Foreclosed Loans................ $ 142,905 116,189 91,995 90,927 43,723 33,340
Liquidated Foreclosed Loans..... $ 312,370 243,509 280,704 178,081 155,482 21,185
Foreclosed Loans Ratio.......... 0.609% 0.449% 0.311% 0.253% 0.107% 0.081%
Gross Loss...................... $ 97,640 82,690 89,912 42,988 40,050 4,561
Gross Loss Ratio................ 0.416% 0.319% 0.304% 0.119% 0.098% 0.011%
Covered Loss.................... 84,107 53,357 58,800 29,455 17,257 2,427
Net Loss........................ $ 13,532 29,333 31,111 13,533 22,793 2,134
Net Loss Ratio.................. 0.058% 0.113% 0.105% 0.038% 0.056% 0.005%
Excess Recovery................. $ 94 345 438 238 645 501
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TOTAL REDUCED DOCUMENTATION LOAN PORTFOLIO FORECLOSURE EXPERIENCE
AT OR FOR AT OR FOR AT OR FOR AT OR FOR AT OR FOR AT OR FOR
THE YEAR ENDED THE YEAR ENDED THE YEAR ENDED THE YEAR ENDED THE YEAR ENDED THE PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996 1997 1998 1999
---------------- --------------- ---------------- --------------- --------------- -----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio $5,183,728 $5,230,083 $5,491,996 $6,116,561 $6,239,996 $6,105,579
Average Portfolio Balance $5,260,893 5,129,445 5,419,953 5,757,996 5,001,079 6,159,680
Foreclosed Loans $ 60,979 37,554 26,961 25,067 11,464 8,877
Liquidated Foreclosed Loans $ 146,203 96,103 82,103 50,629 34,351 5,127
Foreclosed Loans Ratio 1.176% 0.718% 0.491% 0.410% 0.184% 0.145%
Gross Loss $ 50,312 36,507 31,840 14,009 9,220 595
Gross Loss Ratio 0.971% 0.698% 0.580% 0.229% 0.148% 0.010%
Covered Loss $ 44,043 22,155 20,838 9,443 3,714 430
Net Loss $ 6,269 14,351 11,001 4,566 5,506 164
Net Loss Ratio 0.121% 0.274% 0.200% 0.075% 0.088% 0.003%
Excess Recovery $ 45 140 216 77 150 313
</TABLE>
- -----------------
o The tables above relate only to the mortgage loans referred to above.
The table relates to the mortgage loans referred to above. Some of the
information reported above may differ from information for the same
periods reported by the depositor in previous years, because the
depositor's methodology for determining the total portfolio differed in
previous years, but these differences in the data are not material.
o For purposes of these tables, Foreclosed Loans includes the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by Residential Funding, by investors or by an
insurer following foreclosure or delivery of a deed in lieu of
foreclosure and which had not been liquidated by the end of the period
indicated.
o Liquidated Foreclosed Loans is the sum of the principal balances of the
foreclosed loans liquidated during the period indicated.
o Gross Loss is the sum of the gross losses less net gains (Excess
Recoveries) on all mortgage loans liquidated during the period
indicated. Gross Loss for any mortgage loan is equal to the difference
between (a) the principal balance plus accrued interest plus all
liquidation expenses related to that 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
below. Net gains from the liquidation of mortgage loans are identified
below.
o Covered Loss, for the period indicated, is equal to the aggregate of
all proceeds received in connection with liquidated mortgage loans from
mortgage pool insurance, special hazard insurance (but not including
primary mortgage insurance, special 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.
o Net Loss is determined by subtracting Covered Loss from Gross Loss. Net
Loss indicated here may reflect Excess Recovery. Net Loss includes
losses on mortgage loan pools which do not have the benefit of credit
enhancement.
The loss and delinquency experience of the master servicer, as shown in
the tables above, reflects a stable, consistently managed servicing operation.
Loss and delinquency levels during these periods were consistently within the
ranges anticipated by management. The loss and delinquency levels have declined
over the years shown in the above tables. This decline is attributable primarily
to generally favorable and improving economic conditions over this time period.
[Text will be revised to reflect the actual data as needed.] There can be no
S-77
<PAGE>
assurance that the experience shown in the above tables will be indicative of
future loss and delinquency experience of the total portfolio, or of the
mortgage loans in the trust.
There can be no assurance that factors beyond Residential Funding's
control, such as weakening national or local economic conditions, higher
interest rates, higher unemployment rates, a decline in the availability of
refinancing, or downturns in real estate markets, will not result in increased
rates of delinquencies and foreclosure losses in the future. A general
deterioration of the real estate market in regions where the mortgaged
properties are located may result in higher delinquencies, delays in foreclosure
and lower sales prices with higher losses upon liquidation. A general weakening
of the economy may result in decreases in the financial strength of borrowers
and decreases in the value of collateral serving as security for loans, causing
an increase in delinquencies and higher net losses on liquidated loans.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicing fees for each mortgage loan are payable out of the
interest payments on that mortgage loan. The servicing fees relating to each
mortgage loan will be at least ____% per annum and not more than ____% per annum
of the outstanding principal balance of that mortgage loan, with a weighted
average servicing fee of approximately ______% per annum. The servicing fees
consist of (a) servicing compensation payable to the master servicer in respect
of its master servicing activities and (b) subservicing and other related
compensation payable to the subservicer, including any payment due to prepayment
charges on the related mortgage loans and 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 for its
master servicing activities will be at least 0.03% per annum and not more than
0.08% per annum of the outstanding principal balance of each mortgage loan, with
a weighted average of approximately ______%. As described in the prospectus, a
subservicer is entitled to servicing compensation in a minimum amount equal to
0.25% per annum of the outstanding principal balance of each mortgage loan
serviced by it. The master servicer is obligated to pay some ongoing expenses
associated with the trust fund and incurred by the master servicer in connection
with its responsibilities under the pooling and servicing agreement. See "The
Pooling and Servicing Agreement--Servicing and Other Compensation and Payment of
Expenses" in the prospectus for information regarding other possible
compensation to the master servicer and subservicers and for information
regarding expenses payable by the master servicer.
VOTING RIGHTS
There are 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 and may be taken by holders of certificates entitled
in the aggregate to that percentage of the voting rights. 98% of all voting
rights will be allocated among all holders of the Certificates, other than the
Interest Only Certificates and Residual Certificates, in proportion to their
then outstanding Certificate Principal Balances, 1.0% of all voting rights will
be allocated among the holders of the Variable Strip Certificates and 0.5% and
0.5% of all voting rights will be allocated among the holders of the Class R-I
Certificates and Class R-II Certificates, respectively, in proportion to the
percentage interests evidenced by their respective certificates. The pooling and
servicing agreement may be amended without the consent of the holders of the
Residual Certificates in specified circumstances.
S-78
<PAGE>
TERMINATION
The circumstances under which the obligations created by the pooling and
servicing agreement will terminate relating to the offered certificates are
described in "The Pooling and Servicing Agreement--Termination; Retirement of
Certificates" in the Prospectus. The master servicer or the depositor will have
the option, on any distribution date on which the aggregate Stated Principal
Balance of the mortgage loans is less than 10% of the aggregate principal
balance of the mortgage loans as of the cut-off date, either to purchase all
remaining mortgage loans and other assets in the trust fund, thereby effecting
early retirement of the offered certificates or to purchase, in whole but not in
part, the certificates. Any such purchase of mortgage loans and other assets of
the trust fund shall be made at a price equal to the sum of (a) 100% of the
unpaid principal balance of each mortgage loan or the fair market value of the
related underlying mortgaged properties with respect to defaulted mortgage loans
as to which title to such mortgaged properties has been acquired if such fair
market value is less than such unpaid principal balance, net of any unreimbursed
Advance attributable to principal, as of the date of repurchase plus (b) accrued
interest thereon at the Net Mortgage Rate to, but not including, the first day
of the month in which the repurchase price is distributed.
Distributions on the certificates relating to any optional termination
will be paid, first, to the Senior Certificates, second, to the Class M
Certificates in the order of their payment priority and, third, to the Class B
Certificates. The proceeds of any such distribution may not be sufficient to
distribute the full amount to each class of certificates if the purchase price
is based in part on the fair market value of the underlying mortgaged property
and the fair market value is less than 100% of the unpaid principal balance of
the related mortgage loan. Any such purchase of the certificates will be made at
a price equal to 100% of their Certificate Principal Balance plus, except with
respect to the Principal Only Certificates, the sum of interest thereon, or with
respect to the Variable Strip Certificates, on their Notional Amount, for the
immediately preceding Interest Accrual Period at the then-applicable
pass-through rate and any previously unpaid Accrued Certificate Interest. Upon
the purchase of such certificates or at any time thereafter, at the option of
the masters or the depositor, 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
depositor.
Upon presentation and surrender of the offered certificates in
connection with the termination of the trust fund or a purchase of certificates
under the circumstances described in the two preceding paragraphs, the holders
of the offered certificates will receive an amount equal to the Certificate
Principal Balance of that class plus interest thereon for the immediately
preceding Interest Accrual Period at the then-applicable pass-through rate, or,
with respect to the Variable Strip Certificates, interest for the immediately
preceding Interest Accrual Period on their Notional Amount, plus any previously
unpaid Accrued Certificate Interest. However, distributions to the holders of
the most subordinate class of certificates outstanding will be reduced, as
described in the preceding paragraph, in the case of the termination of the
trust fund resulting from a purchase of all the assets of the trust fund.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
___________________, counsel to the depositor, has filed with the
depositor's registration statment an opinion 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 two REMICs under the
Internal Revenue Code ("REMIC I" and "REMIC II," each a REMIC).
S-79
<PAGE>
For federal income tax purposes:
o the Class R-I Certificates will constitute the sole class of
"residual interests" in REMIC I
o each class of Senior Certificates, other than the Residual
Certificates, the Class M Certificates and the Class B Certificates
will represent ownership of "regular interests" in REMIC II and
will generally be treated as debt instruments of REMIC II and
o the Class R-II Certificates will constitute the sole class of
"residual certificates" in REMIC II.
See "Material Federal Income Tax Consequences--REMICs" in the
prospectus.
For federal income tax purposes, the Class __________ Certificates will,
[the Class _________ Certificates may] [and all other Classes of Offered
Certificates will not] be treated as having been issued with original issue
discount. The prepayment assumption that will be used in determining the rate of
accrual of original issue discount, market discount and premium, if any, for
federal income tax purposes will be based on the assumption that, subsequent to
the date of any determination the mortgage loans will prepay at a rate equal to
___% PSA. No representation is made that the mortgage loans will prepay at that
rate or at any other rate. See "Material Federal Income Tax
Consequences--General" and "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the prospectus.
The Internal Revenue Service has issued original issue discount
regulations under sections 1271 to 1275 of the Internal Revenue Code that
address the treatment of debt instruments issued with original issue discount.
The OID regulations suggest that original issue discount with respect to
securities similar to the Variable Strip Certificates that represent multiple
uncertificated REMIC regular interests, in which ownership interests will be
issued simultaneously to the same buyer, 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 Variable
Strip 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 uncertificated regular interests as a
single debt instrument as described 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, the amount of original issue discount allocable to that
period would be zero and the certificateholder will be permitted to offset that
negative amount only against future original issue discount, if any,
attributable to those certificates.
In some circumstances the OID regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, it is possible that the holder of a
certificate may be able to select a method for recognizing original issue
discount that differs from that used by the master servicer in preparing reports
to the certificateholders and the IRS.
Some of the classes of offered certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
one of those classes of certificates will be treated as holding a certificate
with amortizable bond premium will depend on the certificateholder's purchase
price and the distributions remaining to be made on the certificate at the time
of its acquisition by the certificateholder. Holders of those classes of
certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Material Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" and
"--Premium" in the prospectus.
S-80
<PAGE>
The offered certificates will be treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue Code and "real estate assets" under
Section 856(c)(4)(A) of the Internal Revenue 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
Internal Revenue Code generally to the extent that the offered certificates are
treated as "real estate assets" under Section 856(c)(4)(A) of the Internal
Revenue Code. Moreover, the offered certificates, other than the Residual
Certificates, will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Internal Revenue Code if transferred to another REMIC on its
startup day in exchange for a regular or residual interest therein.
However,
prospective investors in offered certificates that will be generally treated as
assets described in Section 860G(a)(3) of the Internal Revenue Code should note
that, notwithstanding that treatment, any repurchase of a certificate pursuant
to the right of the master servicer or the depositor to repurchase the offered
certificates may adversely affect any REMIC that holds the offered certificates
if the repurchase is made under circumstances giving rise to a Prohibited
Transaction Tax. See "The Pooling and Servicing Agreement--Termination" in this
prospectus supplement and "Material Federal Income Tax Consequences--REMICs--
Characterization of Investments in REMIC Certificates" in the prospectus.
For further information regarding federal income tax consequences of
investing in the offered certificates, see "Material Federal Income Tax
Consequences--REMICs" in the prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES
The IRS has issued REMIC regulations under the provisions of the
Internal Revenue Code that significantly affect holders of Residual
Certificates. The REMIC regulations impose restrictions on the transfer or
acquisition of some residual interests, including the Residual Certificates. The
pooling and servicing agreement includes other provisions regarding the transfer
of Residual Certificates, including:
o the requirement that any transferee of a Residual Certificate
provide an affidavit representing that the transferee: o is not a
disqualified organization o is not acquiring the Residual
Certificate on behalf of a
disqualified organization and
o will maintain that status and will obtain a similar affidavit
from any person to whom the transferee shall subsequently
transfer a Residual Certificate
o a provision that any transfer of a Residual Certificate to a
disqualified organization shall be null and void and
o a grant to the master servicer of the right, without notice to the
holder or any prior holder, to sell to a purchaser of its choice
any Residual Certificate that shall become owned by a disqualified
organization despite the first two provisions above.
In addition, under the pooling and servicing agreement, the Residual
Certificates may not be transferred to nonUnited States persons.
The REMIC regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on the residual interests, unless "no significant purpose of the transfer
was to impede the assessment or collection of tax." Based on the REMIC
regulations, the Residual Certificates may constitute noneconomic residual
interests
S-81
<PAGE>
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
relating to the income on the Residual Certificates. All transfers of the
Residual Certificates will be restricted in accordance with the terms of the
pooling and servicing agreement that are intended to reduce the possibility of
any transfer of a Residual Certificate being disregarded to the extent that the
Residual Certificates constitute noneconomic residual interests. See "Material
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 term of the
REMIC that significantly exceeds the amount of cash distributions received by
the Residual Certificateholders from the REMIC with respect to those periods.
Furthermore, the tax on that income may exceed the cash distributions with
respect to those periods. Consequently, Residual Certificateholders should have
other sources of funds sufficient to pay any federal income taxes due in the
earlier years of the REMIC's term as a result of their ownership of the Residual
Certificates. In addition, the required inclusion of this amount of taxable
income during the REMIC's earlier accrual periods and the deferral of
corresponding tax losses or deductions until later accrual periods or until the
ultimate sale or disposition of a Residual Certificate, or possibly later under
the "wash sale" rules of Section 1091 of the Internal Revenue 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 the Residual Certificates over their life.
An individual, trust or estate that holds, whether directly or
indirectly through pass-through entities, a Residual Certificate, may have
significant additional gross income with respect to, but may be limited on the
deductibility of, servicing and trustee's fees and other administrative expenses
properly allocable to the REMIC in computing the certificateholder's regular tax
liability and will not be able to deduct those fees or expenses to any extent in
computing the certificateholder's alternative minimum tax liability. See
"Material Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Residual Certificates--Possible Pass-Through of Miscellaneous Itemized
Deductions" in the prospectus.
Residential Funding will be designated as the "tax matters person" with
respect to the REMIC 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 Class R Certificates.
Purchasers of the Residual Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in the
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"in this prospectus supplement and "Material Federal Income
Tax Consequences--REMICs--Taxation of Owners of REMIC Residual Certificates" in
the prospectus.
METHOD OF DISTRIBUTION
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<PAGE>
In accordance with the terms and conditions of an underwriting
agreement, dated _________________, ____________________ will serve as
underwriter and has agreed to purchase and the depositor has agreed to sell the
Senior Certificates other than the Class A-P Certificates and Class A-V
Certificates, and the Class M Certificates, except that a de minimis portion of
the Residual Certificates will be retained by Residential Funding, and that
portion is not offered hereby. The certificates being sold to the underwriter
are referred to as the underwritten certificates. It is expected that delivery
of the underwritten certificates, other than the Residual Certificates, will be
made only in book-entry form through the Same Day Funds Settlement System of
DTC, and that the delivery of the Residual Certificates will be made at the
offices of the underwriter, ____________, _________, on or about
__________________ against payment therefor in immediately available funds.
In connection with the underwritten certificates, the underwriter has
agreed, in accordance with the terms and conditions of the underwriting
agreement, to purchase all of the underwritten certificates if any of its
underwritten certificates are purchased thereby.
The underwriting agreement provide that the obligations of the
underwriter to pay for and accept delivery of the underwritten certificates are
subject to, among other things, the receipt of legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of the
depositor's registration statement shall be in effect, and that no proceedings
for that purpose shall be pending before or threatened by the Commission.
The distribution of the underwritten 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 depositor from the sale of the underwritten certificates, before deducting
expenses payable by the depositor, will be approximately _______% of the
aggregate Certificate Principal Balance of the underwritten certificates plus
accrued interest thereon from the cut-off date.
The underwriter may effect these transactions by selling the
underwritten certificates to or through dealers, and those dealers may receive
compensation in the form of underwriting discounts, concessions or commissions
from the underwriter for whom they act as agent. In connection with the sale of
the underwritten certificates, the underwriter may be deemed to have received
compensation from the depositor in the form of underwriting compensation. The
underwriter and any dealers that participate with the underwriter in the
distribution of the underwritten certificates may be deemed to be underwriters
and any profit on the resale of the underwritten certificates positioned by them
may be deemed to be underwriting discounts and commissions under the Securities
Act.
The underwriting agreement provides that the depositor will indemnify
the underwriter, and that under limited circumstances the underwriter will
indemnify the depositor, against some liabilities under the Securities Act, or
contribute to payments required to be made in respect thereof.
The Class A-P Certificates and Class A-V Certificates may be offered by
the depositor from time to time directly or through an underwriter or agent in
one or more negotiated transactions, or otherwise, at varying prices to be
determined at the time of sale. However, there is currently no underwriting
arrangement in effect for these certificates. Proceeds to the depositor from any
sale of the Class A-P Certificates or Class A-V Certificates will equal the
purchase price paid by their purchaser, net of any expenses payable by the
depositor and any compensation payable to any underwriter or agent.
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<PAGE>
There is currently no secondary market for the offered certificates.
The underwriter intends to make a secondary market in the underwritten
certificates but is not obligated to do so. There can be no assurance that a
secondary market for the offered certificates will develop or, if it does
develop, that it will continue. The offered certificates will not be listed on
any securities exchange.
The primary source of information available to investors concerning the
offered certificates will be the monthly statements discussed in the prospectus
under "Description of the Certificates--Reports to Certificateholders," which
will include information as to the outstanding principal balance of the offered
certificates. There can be no assurance that any additional information
regarding the offered certificates will be available through any other source.
In addition, the depositor is not aware of any source through which price
information about the offered certificates will be available on an ongoing
basis. The limited nature of this information regarding the offered certificates
may adversely affect the liquidity of the offered certificates, even if a
secondary market for the offered certificates becomes available.
LEGAL OPINIONS
Certain legal matters relating to the certificates will be passed upon
for the depositor by ______________________, ____________, ____________ and for
the underwriter by __________________, __________________, _________________.
RATINGS
It is a condition of the issuance of the Senior Certificates [, other
than the Principal Only and Variable Strip Certificates,] that they be rated
"AAA" by ___________________ and __________________. [It is a condition to the
issuance of the Principal Only and the Variable Strip Certificates that they be
rated "AAAr" by ________________ and "AAA" by _______________.] It is a
condition of the issuance of the Class M-1, Class M-2 and Class M-3 Certificates
that they be rated not lower than "AA," "A" and "BBB," respectively, by
------------------.
[_________________'s ratings on mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of payments required
under the pooling and servicing agreement. _________________'s ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
certificates. _________________'s rating on the certificates does not, however,
constitute a statement regarding frequency of prepayments on the mortgages. See
"Certain Yield and Prepayment Considerations" in this prospectus supplement. The
"r" of the "AAAr" rating of the Principal Only and Variable Strip Certificates
by _________________'s is attached to highlight derivative, hybrid, and certain
other obligations that _________________'s believes may experience high
volatility or high variability in expected returns due to non-credit risks.
Examples of such obligations are:
o securities whose principal or interest return is indexed to
equities, commodities, or currencies
o certain swaps and options; and
o interest only and principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that
an obligation will exhibit no volatility or variability in total return.]
S-84
<PAGE>
[The ratings assigned by _________________ to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which they are entitled under the transaction structure.
_________________'s ratings reflect its analysis of the riskiness of the
underlying mortgage loans and the structure of the transaction as described in
the operative documents. _________________'s ratings do not address the effect
on the certificates' yield attributable to prepayments or recoveries on the
underlying mortgage loans. Further, the rating on the Variable Strip
Certificates does not address whether investors therein will recoup their
initial investments. The rating on the Principal Only Certificates only
addresses the return of its Certificate Principal Balance. The rating on the
Residual Certificates only addresses the return of its Certificate Principal
Balance and interest on the Residual Certificates at the related pass-through
rate.]
The depositor has not requested a rating on the Senior Certificates by
any rating agency other than _________________ and _________________ or on the
Class M Certificates by any rating agency other than _________________. However,
there can be no assurance as to whether any other rating agency will rate the
Senior Certificates or Class M Certificates, or, if it does, what rating would
be assigned by any 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 _________________, and the Class M
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. The ratings of the Variable Strip
Certificates do not address the possibility that the holders of those
certificates may fail to fully recover their initial investments. In the event
that the ratings initially assigned to the offered certificates are subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the offered
certificates.
LEGAL INVESTMENT
The Senior Certificates and Class M-1 Certificates will constitute
"mortgage related securities" for purposes of SMMEA so long as they are rated in
at least the second highest rating category by one of the rating agencies, and,
as such, are legal investments for some 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. Some
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.
One or more classes of the offered certificates may be viewed as
"complex securities" under TB13a, which applies to thrift institutions regulated
by the OTS.
The depositor 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.
S-85
<PAGE>
See "Legal Investment Matters" in the prospectus.
ERISA CONSIDERATIONS
A fiduciary of any ERISA plan, any insurance company, whether through
its general or separate accounts, or any other person investing ERISA plan
assets of any ERISA 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 Internal Revenue 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 ERISA plan assets of, an ERISA 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 ERISA plan must be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act.
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, as described under
"ERISA Considerations--Insurance Company General Accounts" in the prospectus.
The DOL issued proposed regulations under Section 401(c) on December 22, 1997,
but the required final regulations have not been issued as of the date of this
prospectus supplement.
Because the exemptive relief afforded by the exemption or any similar
exemption that may be available will not likely apply to the purchase, sale or
holding of the Class M Certificates, no Class M Certificate or any interest
therein may be acquired or held by any ERISA plan, any trustee or other person
acting on behalf of any ERISA plan, or any other person using ERISA plan assets
to effect such acquisition or holding-- a plan investor--unless:
o the acquirer or holder is an insurance company o the source of funds
used to acquire or hold the certificate or interest therein is an
"insurance company general account", as defined in U.S. Department
of Labor Prohibited Transaction Class Exemption 95-60 and
o the conditions in Sections I and III of PTCE 95-60 have been
satisfied.
Each beneficial owner of a Class M Certificate or any interest therein
shall be deemed to have represented, by virtue of its acquisition or holding of
that certificate or interest therein, that either (i) it is not a plan investor
or (ii) (1) it is an insurance company, (2) the source of funds used to acquire
or hold the certificate or interest therein is an "insurance company general
account", as such term is defined in PTCE 95-60, and (3) the conditions in
Sections I and III of PTCE 95-60 have been satisfied.
If any Class M Certificate or any interest therein is acquired or held
in violation of the provisions of the preceding paragraph, the next preceding
permitted beneficial owner will be treated as the beneficial owner of that Class
M Certificate, retroactive to the date of transfer to the purported beneficial
owner. Any purported beneficial owner whose acquisition or holding of any such
certificate or interest therein was effected in violation of the provisions of
the preceding paragraph shall indemnify and hold harmless the depositor, the
trustee, the master servicer, any subservicer, and the trust from and against
any and all liabilities, claims, costs or expenses incurred by those parties as
a result of that acquisition or holding.
S-86
<PAGE>
Investors in the Class M Certificates are urged to obtain from a
transferee of those certificates a certification of the transferee's eligibility
to purchase the certificates in the form of the representation letter attached
as Annex I to this prospectus supplement.
Because the exemptive relief afforded by the exemption or any similar
exemption that might be available also will not likely apply to the purchase,
sale or holding of the Residual Certificates, transfers of those certificates to
any plan investor will not be registered by the trustee unless the transferee
provides the depositor, the trustee and the master servicer with an opinion of
counsel satisfactory to those entities, which opinion will not be at the expense
of those entities, that the purchase of those certificates by or on behalf of
the plan investor is:
o permissible under applicable law
o will not constitute or result in a non-exempt prohibited
transaction under ERISA or Section 4975 of the Internal Revenue
Code and
o will not subject the depositor, the trustee or the master servicer
to any obligation in addition to those undertaken in the pooling
and servicing agreement.
Any fiduciary or other investor of ERISA plan assets that proposes to
acquire or hold the offered certificates on behalf of or with ERISA plan assets
of any ERISA plan should consult with its counsel with respect to: (i) whether
the specific and general conditions and the other requirements in the exemption
would be satisfied, or whether any other prohibited transaction exemption would
apply, and (ii) the potential applicability of the general fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Internal Revenue Code to the proposed investment.
See "ERISA Considerations" in the prospectus.
The sale of any of the offered certificates to an ERISA plan is in no
respect a representation by the depositor or the underwriter that such an
investment meets all relevant legal requirements relating to investments by
ERISA plans generally or any particular ERISA plan, or that such an investment
is appropriate for ERISA plans generally or any particular ERISA plan.
S-87
<PAGE>
ANNEX I
ERISA REPRESENTATION LETTER
[date]
Residential Funding Corporation
8400 Normandale Lake Boulevard, Suite 600
Minneapolis, Minnesota 55437
Residential Funding Mortgage Securities I, Inc.
8400 Normandale Lake Boulevard, Suite 600
Minneapolis, Minnesota 55437
[Trustee]
Re: Residential Funding Mortgage Securities I, Inc.
Mortgage Pass-Through Certificates, Series ____-S__, Class M- __
Dear Sirs:
[__________________________] (the "Purchaser") intends to purchase from
[__________________________] (the "Seller") $[____________] initial Certificate
Principal Balance of the above-referenced certificates, issued under the pooling
and servicing agreement, dated as of __________ 1, _________, among Residential
Funding Mortgage Securities I, Inc., as seller, Residential Funding Corporation,
as master servicer and ___________________, as trustee. All terms used in this
ERISA Representation Letter and not otherwise defined shall have the meanings
set forth in the pooling and servicing agreement.
The Purchaser hereby certifies, represents and warrants to, and
covenants with the Seller, the trustee and the master servicer that, either:
(a) The Purchaser is not an ERISA plan, or any other person,
including an investment manager, a named fiduciary or a trustee of any
Plan, acting, directly or indirectly, on behalf of or purchasing any
certificate with "plan assets" of any ERISA plan within the meaning of
the DOL regulation at 29 C.F.R. ss.2510.3-101; or
(b) The Purchaser is an insurance company, the source of funds
to be used by which to purchase the certificates is an "insurance
company general account", as the term is defined in DOL Prohibited
Transaction Class Exemption 95-60, and the conditions in Sections I and
III of PTCE 95-60 have been satisfied.
In addition, the Purchaser hereby certifies, represents and warrants to,
and covenants with, the Seller, the trustee and the master servicer that the
Purchaser will not transfer the certificates to any ERISA plan or person unless
that ERISA plan or person meets the requirements in either (a) or (b) above.
Very truly yours,
S-88
<PAGE>
By: ___________________
Name:_________________
Title:__________________
S-89
<PAGE>
RESIDENTIAL FUNDING MORTGAGE SECURITIES I, INC.
$ ------------------
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES______-S__
PROSPECTUS SUPPLEMENT
[NAME OF UNDERWRITER]
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE
TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THE CERTIFICATES OFFERED HEREBY IN ANY STATE WHERE THE OFFER
IS NOT PERMITTED.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
offered certificates, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until __________,
- -----.
S-90
<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............... $3,336,000
----------
Legal Fees and Expenses............................. 1,200,000
Accounting Fees and Expenses........................ 480,000
Trustee's Fees and Expenses
(including counsel fees)..................... 600,000
Printing and Engraving Fees......................... 480,000
Rating Agency Fees.................................. 1,875,000
Miscellaneous..................................... 480,000
----------
Total ............................................. $8,451,000
----------
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
<PAGE>
-2-
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the 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.
<PAGE>
-3-
Certain controlling persons of the Registrant may also be entitled to
indemnification from General Motors Acceptance Corporation, an indirect parent
of the Registrant. Under Section 145, General Motors Acceptance Corporation may
or shall, subject to various exceptions and limitations, indemnify its directors
or officers and may purchase and maintain insurance as follows:
(a) The Certificate of Incorporation, as amended, of General
Motors Acceptance Corporation provides that no director shall be
personally liable to General Motors Acceptance Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's
duty of loyalty to General Motors Acceptance Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
under Section 174, or any successor provision thereto, of the Delaware
Corporation Law, or (iv) for any transaction from which the director
derived an improper personal benefit.
(b) Under Article VI of its By-Laws, General Motors Acceptance
Corporation shall indemnify and advance expenses to every director and
officer (and to such person's heirs, executors, administrators or other
legal representatives) in the manner and to the full extent permitted
by applicable law as it presently exists, or may hereafter be amended,
against any and all amounts (including judgments, fines, payments in
settlement, attorneys' fees and other expenses) reasonably incurred by
or on behalf of such person in connection with any threatened, pending
or completed action, suit or proceeding, whether civil, criminal
administrative or investigative (a "proceeding"), in which such
director or officer was or is made or is threatened to be made a party
or is otherwise involved by reason of the fact that such person is or
was a director or officer of General Motors Acceptance Corporation, or
is or was serving at the request of General Motors Acceptance
Corporation, as a director, officer, employee, fiduciary or member of
any other corporation, partnership, joint venture, trust, organization
or other enterprise. General Motors Acceptance Corporation shall not be
required to indemnify a person in connection with a proceeding
initiated by such person if the proceeding was not authorized by the
Board of Directors of General Motors Acceptance Corporation. General
Motors Acceptance Corporation shall pay the expenses of directors and
officers incurred in defending any proceeding in advance of its final
disposition ("advancement of expenses"; provided, however, that the
payment of expenses incurred by a director or officer in advance of the
final disposition of the proceeding shall be made only upon receipt of
an undertaking by the director or officer to repay all amounts advanced
if it should be ultimately determined that the director or officer is
not entitled to be indemnified under Article VI of the By-Laws or
otherwise. If a claim for indemnification or advancement of expenses by
an officer or director under Article VI of the By-Laws is not paid in
full within ninety days after a written claim therefor has been
received by General Motors Acceptance Corporation, the claimant may
file suit to recover the unpaid amount of such
<PAGE>
-4-
claim, and if successful in whole or in part, shall be entitled to the
requested indemnification or advancement of expenses under applicable
law. The rights conferred on any person by Article VI of the By-Laws
shall not be exclusive of any other rights which such person may have
or hereafter acquire under any statute, provision of the Certificate of
Incorporation, By-Laws, agreement, vote of stockholders or
disinterested directors of General Motors Acceptance Corporation or
otherwise. The obligation, if any, of General Motors Acceptance
Corporation to indemnify any person who was or is serving at its
request as a director, officer or employee of another corporation,
partnership, joint venture, trust, organization or other enterprise
shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint
venture, trust, organization or other enterprise.
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 Delaware General Corporation 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 General Corporation 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 (incorporated by reference
to Exhibit 1.1 to the Registrant's Registrations Statement
(File No. 333-72493)).
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 (incorporated by reference to Exhibit 5.1 to the
Registrant's Registration Statement (File No. 333-72493).
5.2* -- Opinion of Orrick, Herrington & Sutcliffe with respect to
legality (incorporated by reference to Exhibit 5.2 to the
Registrant's Registration Statement (File No. 333-72493).
5.3* -- Opinion of Stroock & Stroock & Lavan with respect to
legality (incorporated by reference to Exhibit 5.3 to the
Registrant's Registration Statement (File No. 333-72493).
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.
8.3* -- Opinion of Stroock & Stroock & Lavan with respect to
certain tax matters (included with Exhibit 5.3).
23.1* -- Consent of Thacher Proffitt & Wood (included as part of
Exhibit 5.1 and Exhibit 8.1).
<PAGE>
-6-
23.2* -- Consent of Orrick, Herrington & Sutcliffe (included as
part of Exhibit 5.2 and Exhibit 8.2).
23.3* -- Consent of Stroock & Stroock & Lavan (included as part of
Exhibit 5.3 and Exhibit 8.3).
24.1* -- Power of Attorney (incorporated by reference to Exhibit
24.1 to the Registrant's Registrations Statement (File No.
333-72493)).
- ------------------
* Not filed herewith.
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.
<PAGE>
-7-
(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.
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 Amendment No. 3 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Minneapolis, State of Minnesota, as of
the 30th day of June, 1999.
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 Amendment No. 3
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Bruce J. Paradis Director and President June 30, 1999
- --------------------------------- (Principal Executive
Bruce J. Paradis Officer)
/s/ Bruce J. Paradis * Director, Executive Vice June 30, 1999
- --------------------------------- President and Chief Financial
Davee L. Olson Officer (Principal Financial
Officer)
/s/ Bruce J. Paradis * Director and June 30, 1999
- --------------------------------- Assistant Treasurer
Dennis W. Sheehan
/s/ Bruce J. Paradis * Controller (Principal June 30, 1999
- --------------------------------- Accounting Officer)
Jack R. Katzmark
</TABLE>
*By: /s/ Bruce J. Paradis
--------------------
Bruce J. Paradis
Attorney-in-fact
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
NUMBER DESCRIPTION LOCATION OF EXHIBIT
IN SEQUENTIAL
NUMBERING SYSTEM
<S> <C> <C>
1.1* Form of Underwriting Agreement (incorporated by reference to
Exhibit 1.1 to the Registrant's Registration Statement (File No. 333-
72493))
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
(incorporated by reference to Exhibit 5.1 to the Registrant's
Registration Statement (File No. 333-72493)).
5.2* Opinion of Orrick, Herrington & Sutcliffe with respect to
legality (incorporated by reference to Exhibit 5.2 to the
Registrant's Registration Statement (File No. 333-72493)).
5.3* Opinion of Stroock & Stroock & Lavan with respect to legality
(incorporated by reference to Exhibit 5.3 to the Registrant's
Registration Statement (File No. 333-72493)).
8.1* Opinon of Thacher Proffitt & Wood with respect to certain tax
matters (included in Exhibit 5.1).
<PAGE>
-3-
8.2 Opinion of Orrick, Herrington & Sutcliffe with respect to certain tax
matters.
8.3* Opinion of Stroock & Stroock & Lavan with respect to certain tax
matters (included in Exhibit 5.3).
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).
23.3* Consent of Stroock & Stroock & Lavan (included as part of
Exhibit 5.3 and Exhibit 8.3). Power of Attorney (incorporated by
reference to Exhibit 24.1 to the
24.1* Registrant's Registration Statement (File No. 333-72493))
</TABLE>
* Not filed herewith.
EXHIBIT 8.2
[Orrick, Herrington & Sutcliffe LLP letterhead]
June 30, 1999
Residential Funding Mortgage Securities I, Inc.
8400 Normandale Lake Boulevard, Suite 600
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 "Material 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 February
17, 1999, as amended (the "Registration Statement"). Such description includes a
discussion of the material income tax ramifications of the proposed issuance,
and in our opinion the description is accurate in all material respects. To the
extent that such description explicitly states our opinion, we hereby confirm
and adopt such opinion herein.
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
