[Thacher Proffitt & Wood Letterhead]
April 14, 1999
Mr. Dominic Minore
Division of Corporation Finance
United States Securities
and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 1-4, Room 1006
Washington, D.C. 20549
Re: Residential Funding Mortgage Securities I, Inc.
Registration Statement on Form S-3
Amendment No. 1
Commission File No. 333-72493
Dear Mr. Minore:
On behalf of Residential Funding Mortgage Securities, Inc. (the
"Depositor"), we have filed with the Securities and Exchange Commission today
(via the EDGAR system) Amendment No. 1 (the "Amendment") to the referenced
Registration Statement. A copy of this letter is being transmitted via EDGAR
contemporaneously with the filing of the Amendment.
In addition, a paper paper copy of this letter is being delivered to you
via Federal Express together with a paper copy of Amendment No. 1. In addition a
paper copy of Amendment No. 1, marked to show changes from the initial filing is
also enclosed.
On behalf of the Depositor, we are setting forth the Depositor's responses
to your comment letter, dated March 22, 1999, concerning the Depositor's
Registration Statement on Form S-3, filed on February 17, 1999. The responses
follow each of your comments, which have been restated below. Capitalized terms
not defined herein have the meanings assigned to them in the Registration
Statement.
General Requirements/Plain English
1. Comment
We can see how you applied certain plain English formatting principles to
your document. However, you have not made use of enough plain English principles
for us to give you a complete set of comments on the forepart of the document.
While we have provided a few comments to help you get started on your first
amendment, we suggest you review carefully the final plain English rules and the
Plain English Handbook issued by the Office of Investor Education and
Assistance. If you do not have these documents, they are available on our web
site at www.sec.gov.
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 2.
Response
As we have discussed, the Depositor's parent, RFC, participated in the
plain English pilot program beginning in September 1998, through an affiliated
registrant, Residential Accredit Loans, Inc. A form of plain English prospectus
supplement and base prospectus was submitted on September 4, 1998. RFC
participated in an extensive conference call on October 7, 1998 with Mr. John
White of the SEC, in which a number of specific suggestions were made by Mr.
White. Mr.White's suggestions were incorporated into the form of disclosure used
by the Depositor starting in October 1998 and are reflected in the forms filed
with the Registration Statement.
RFC has been a leader in plain English compliance, and takes these
requirements seriously. We believe that the forms initially filed with the
Depositor's Registration Statement substantially comply with the plain English
requirements.
However, we understand that the SEC is looking to industry leaders to
advance to a higher level of plain English implementation. With this in mind, we
have closely edited the cover, summary and risk factor sections of the documents
and have made a substantial number of changes.
2. Comment
In the summary, your goal is to orient the reader with the transaction by
highlighting the most important points. Those points can be explained in greater
detail in the body of the document. For example, on page S-7 you state that "the
depositor will establish a trust with respect to the Series ___-S__
Certificates..." Is this information investors will use to make their investment
decisions?
Response
We have closely edited the summary and have removed significant amounts of
detail.
Immediate Takedown
3. Comment
We note the inclusion of the red herring language. Please advise us as to
whether you plan to do an immediate takedown. If you do, include a prospectus
supplement for that takedown in a pre-effective amendment.
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 3.
Response
We do not plan to do an immediate takedown, and we are aware of your
policy regarding immediate takedowns. We understand that the inclusion of red
herring language in the prospectus filed with a registration statement is
customary. Please see our response to comment 38 as to the format of the
prospectus supplement.
Registration Statement/Cover Page
4. Comment
We note your intention to utilize Rule 429 in connection with registration
statement #333- 57481. Supplementally confirm that the underlying assets
associated with this previous registration statement are the same as those
described in the current registration statement.
Response
We confirm that the underlying assets associated with this previous
registration statement are the same as those described in the current
registration statement.
5. Comment
We note that a trust may include a variety of mortgage collateral. To the
extent this mortgage collateral includes securities disclose that these
securities will (i) either (a) have been previously registered under the
Securities Act of 1933 or (b) are eligible for sale under Rule 144(k); and (ii)
will be acquired in bona fide secondary market transactions not from the issuer
or its affiliate. Participants or interests in mortgages, other financial assets
or mortgage backed securities are securities which must satisfy these
requirements.
Response
We understand that the comment reflects the SEC's policy towards the
availability of Form S-3 in a resecuritization transaction. Generally, the
Depositor agrees to comply with this policy.
However, we believe that the Depositor should be allowed to use the
Registration Statement to resecuritize classes of Certificates from prior
transactions that were: 1) issued by a trust formed by the Depositor or any
other similar depositor entity wholly-owned by RFC, 2) described in and offered
under a prospectus, and 3) either a) never sold by the Depositor in the initial
offering to an unaffiliated person, with the initial offering having been
abandoned as to such class, or b) acquired by RFC or an affiliate in a secondary
market transaction.
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 4.
Please note that the Depositor issued a number of these transactions under
a predecessor to its current registration statement in 1993, including RFMSI
Series 1993-MZ1, Series 1993-MZ2 and Series 1993-MZ3. Each of these involved an
offering under the registration statement of a series backed by Class M
Certificates issued in prior transactions by trusts formed by RFMSI, which were
themselves offered under the Depositor's registration statement but were never
sold to unaffiliated persons. In these transactions, complete and current
information was provided about the Class M Certificates being resecuritized, and
about the underlying mortgage pools.
We believe that these transactions continue to be eligible under Form S-3,
and that all SEC policy concerns relating to resecuritizations are addressed. In
these transactions: 1) the Depositor would have access to and would be able to
provide all material information necessary on the resecuritized assets, both at
the time of resecuritization and on an ongoing basis, 2) to the extent that the
resecuritized assets were issued by trusts formed by the Depositor, the
Depositor has full issuer liability for the resecuritized assets at the time of
the resecuritization, and 3) in all cases, RFC has controlling person liability
for the resecuritized assets at the time of the resecuritization.
6. Comment
In this regard, please be advised that if the securities constitute 20% or
more of the pool, you must provide all of the information that would be provided
in a direct offering of the securities. For offerings comprising less than 10%
of the pool, provide statistical information about the securities, and for
offerings in the range between the two provide intermediate-type disclosure.
Please supplementally confirm that you are aware of and will comply with the
staff's position.
Response
The Depositor is aware of and will comply with the staff's position
expressed in comment 6.
7. Comment
Please note that asset-backed offerings with significant asset
concentration may involve one or more co-issuers.
Response
The Depositor is aware of and will comply with the staff's position
expressed in comment 7.
8. Comment
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Mr. Dominic Minore
April 14, 1999 Page 5.
To the extent that an offering consists of securities backed by MBS of one
issuer or related issuers, please be advised that we believe each of the
underlying issuers must be reporting pursuant to Section 12 or 15(d) at the time
of the offering (and if the underlying issuer ceases reporting, your trust must
continue to provide the same information regarding the MBS in your reports) and
the prospectus supplement must clearly and concisely disclose the material terms
of the MBS.
In connection with Exchange Act reporting, if the trust issuing the
underlying MBSs has outstanding securities held by non-affiliates in excess of
$75 million and files periodic reports with the commission you may refer to the
underlying issuer's periodic reports in lieu of direct disclosure of this
information. The securities of government-sponsored enterprises which have a
comparable market float and which make information publicly available comparable
to that of Exchange Act reporting ABS entities may be treated similarly.
Response
The Depositor is aware of and will comply with the staff's position
expressed in comment 8.
9. Comment
You include disclosure disclaiming the "accuracy of the information in
this prospectus or the related prospectus supplement as of any date other than
the dates stated on their respective covers." Please revise this disclosure to
clearly indicate that the document is accurate as of each date used.
Response
The requested revision has been made.
Base Prospectus
The Trusts/General, page 10
10. Comment
The limiting language in this subsection is inappropriate (i.e. "unless
otherwise specified in the related Prospectus Supplement.") The Prospectus
Supplement may expand upon disclosure presented in the base prospectus, but may
not limit or contradict it. Please revise this disclosure and other similar
references in the document.
Response
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 6.
The Depositor has reviewed each use of the phrase cited in the comment.
Many of these phrases will be deleted in the referenced subsection, and
throughout the document. With regard to the continued use of such phrases, the
Depositor believes that in some instances it needs this type of language to
retain the flexibility to make a modification of a general rule. For example, on
page 38 of the base prospectus, under "Description of the
Certificates--Distributions--Principal and Interest on the Certificates", the
fifth sentence in the first paragraph appropriately begins "Unless otherwise
specified in the related Prospectus Supplement..." because in most cases
interest will accrue during the calendar month preceding the month of the
Distribution Date, but in some instances, interest will accrue, for example,
from Distribution Date to Distribution Date. The Depositor feels that the use of
such phrases is necessary to a limited extent to minimize the size of the Base
Prospectus while not compromising the level of disclosure that investors
receive.
11. Comment
State that only a maximum of 5% of the aggregate mortgage
securities/mortgage loans, as they will be constituted at the time of the
applicable cut-off date, will deviate from the characteristics that are
described in the applicable prospectus supplement.
Response
The requested revision has been made.
12. Comment
Provide an exclusive list of properties which constitute "certain other
dwelling units."
Response
The requested revision has been made.
13. Comment
If the mortgage loans securing any series include a concentration of
properties in a state experiencing adverse economic conditions compared to other
states, or a concentration of properties within a particular region of a state
with adverse economic conditions greater than those of the state as a whole,
address such concentration (including any associated risks) in the prospectus
supplement.
Response
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 7.
The Depositor will comply with comment 13. Please note that the form of
Prospectus Supplement includes a risk factor addressing geographic
concentration.
The Mortgage Loans, page 12
14. Comment
Supplementally confirm that no trust will include 20%, or more, delinquent
loans. Refer to SEC No-Action Letter The Bond Market Association (Available
October 16, 1997).
Response
The Depositor is aware of and will comply with the staff's position
expressed in comment 14, as set forth in the cited No-Action Letter.
15. Comment
Further, please note, non-performing loans do not constitute assets that
by their terms, convert into cash within a finite time period and therefore you
may not issue securities backed by such assets on Form S-3.
Response
The Depositor will comply with comment 15.
16. Comment
The applicable prospectus supplement should include separate risk factors
addressing the specific risks pertaining to negatively-amortizing loans and
balloon mortgage loans.
Response
The Depositor will comply with comment 16.
17. Comment
Subsection (9) makes reference to "another type of mortgage loan described
in the related Prospectus Supplement." Please note that the base prospectus and
all corresponding supplements must specifically describe all assets to be held
by any trust. Please revise.
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 8.
Response
The requested revision has been made by deleting subsection (9).
18. Comment
Clarify whether the "Additional Collateral" will be trust property at the
time that the related "Additional Collateral Loan" is transferred to the trust.
If so, supplementally provide us with your analysis of why the existence of
"Additional Collateral" in the trust is consistent with the Form S-3 Instruction
I.B.5. definition of "asset-backed security." We may have further comment.
Response
The Additional Collateral will not be property of the trust. The relevant
trust assets will consist only of the Additional Collateral Loans, which qualify
as receivables under the definition of "asset-backed security". These loans have
typical mortgage loan payment terms, which meet the requirements of the
definition. The Additional Collateral Loans will be secured by the mortgaged
real property, and by the pledged financial assets referred to in the
disclosure. When the trust is formed, the mortgage (under which the real
property is pledged) will be assigned to the trustee. Similarly, the security
interest of the lender in the Additional Collateral will be assigned to the
trustee. However, these assignments are made only to protect the trustee's
interests in the collateral for the Additional Collateral Loan, and to assure
the proper servicing of those loans, and therefore are permitted under the
definition.
19. Comment
Please provide enhanced disclosure regarding the use of funds pledged by a
limited liability company. The current disclosure does not clearly explain the
role of the limited liability company in the overall structure of the
transaction.
Response
The disclosure has been revised in response to comment 19. The limited
liability company has no obligations with respect to the Pledged Assets other
than to pledge the funds to the owner of the Pledged Asset Mortgage Loan and to
invest the funds until they are used to pay all or a portion of a loss on the
Mortgage Loan or are released. The circumstances under which the funds may be
released are described in the disclosure.
20. Comment
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 9.
Reference is made to the second and fourth full paragraphs of page 17.
Since assets may be repurchased and re-marketed please tell us which instruction
you are relying on for the use of Form S-3.
Response
The arrangements described in the second full paragraph on page 17 apply
in the very limited circumstances under which 1) the Mortgage Pool contains
Convertible ARM Loans, and 2) the Mortgagor exercises his option to convert to a
fixed rate. If the converted Mortgage Loan were not removed from the pool,
payments on the loan would continue to service the Certificates. However,
investors in Certificates backed by ARM Loans generally desire a pure floating
rate investment, not a hybrid fixed/floating rate investment. Thus, it is common
to provide one of the arrangements described in this paragraph in order to
remove any converted Mortgage Loan from a pool.
The percentage of an ARM Loan pool consisting of Convertible ARM Loans
would generally be small, and the likelihood of exercise of the conversion
option is uncertain and beyond the control of the Depositor. As a result, the
arrangements described would be invoked only on a very infrequent basis. Thus,
we believe that the requirement that the "security [be] primarily serviced by
the cashflows" from the receivables in the pool is satisfied.
The fourth full paragraph on page 17 is intended to address changes in the
composition of the Mortgage Pool only during the period from the printing of the
Prospectus Supplement up to the closing date. Under these circumstances, the
pool would not change after the closing date, and no issue arises under the
definition of "asset-backed security." A clarification has been made to the
disclosure.
21. Comment
In addition, since assets may be repurchased and remarketed please provide
your analysis regarding the registrant's status as an investment company.
Response
Generally, the Certificates qualify for exemption under Section
(3)(c)(5)(C) of the Investment Company Act of 1940. In addition, we believe that
the arrangements described in the second full paragraph on page 17 would not
preclude reliance on Rule 3a-7 under the 1940 Act. For reasons similar to those
discussed under response 20, the requirement under clause (a)(1) that the
"securities ... depend primarily on the cash flow from eligible assets" is
satisfied. Furthermore, the provisions under which the converted Mortgage Loans
may be removed from the pool comply with the requirements of clause (a)(3),
including the requirement that the assets not be disposed of for the primary
purpose of recognizing gains or decreasing losses.
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 10.
Mortgage Loan Program, page 19
22. Comment
Remove the limiting language (i.e. "generally") from the second sentence
of the first paragraph. All similar limitations should be removed from the
document since the parameters of any transaction must be completely described in
the base prospectus.
Response
We have reviewed the use of the word "generally" and similar limitations
wherever they appear. In many instances, we have eliminated these terms, where
the limitation that they express is not significant or meaningful. In some
instances, however, we have retained the use of these terms, as needed in order
to prevent the statements made from being inaccurate. Where their use is
retained, there are no undisclosed exceptions or limitations to the statements
made that are material to investors.
Qualifications of Sellers, page 23
23. Comment
We note the disclosure which states that the "FDIC" may have no obligation
to repurchase any Mortgage Loan for a breach of a representation and warranty."
The factors affecting the FDIC's obligation to do so should be described in the
document.
Response
The sentence referred to has been deleted.
Subservicing, page 28
24. Comment
While internal summaries may not be complete, please note that they must
contain all material aspects of the subject matter addressed. Please revise the
disclosure to indicate this fact.
Response
The requested revisions have been made.
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 11.
Description of Certificates, page 30
25. Comment
Please note that senior/subordinate securities must be identified on the
cover page of each prospectus supplement.
Response
The Depositor will comply with comment 25. Our form of Prospectus
Supplement includes on the cover information identifying the senior or
subordinate status of these classes.
Credit Enhancement, page 53
26. Comment
We note that the credit enhancement with respect to one or more classes of
certificates of a series may include a third party credit enhancement. If 10% or
more of the cash flow to a trust of a series is represented by payments from one
entity or a group of affiliated entities, provide summarized financial
statements of such entity; if 20% or more of the cash flow to the group of
affiliated entities, provide audited financial information of such entity in
accordance with Regulation S-X. By way of analogy, see Staff Accounting
Bulletins 71 and 71A. Please be advised that such disclosure obligations apply
not only to the prospectus or the related prospectus supplement but also to
periodic reports filed under the Exchange Act. Accordingly, confirm
supplementally that the Registrant is aware of and will comply with the
foregoing disclosure obligations.
Response
The Depositor is aware of and will comply with the staff's position
expressed in comment 26.
Other Financial Obligations Related to the Certificates, page 61
27. Comment
Identify the counterparty to a swap, cap, floor or similar agreement in
the related prospectus supplement, and file the agreement as an exhibit in a
current report on Form 8-K. To the extent there are material risks for investors
that are specific to the agreement or the counterparty, provide disclosure in
the related prospectus supplement. To the extent a trust's credit exposure
pursuant to the agreement equals or exceeds 20% of the trust's assets, the
registrant must provide audited financial statements of the counterparty.
Similarly, to the extent a trust's credit exposure pursuant to an agreement
equals 10% or more but less than 20% of the trust's assets, the registrant must
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 12.
provide summarized financial statements of the counterparty. Furthermore, a
trust's credit exposure of 20% or more pursuant to an agreement might raise
co-registrant issues with respect to a counterparty.
Response
The Depositor will comply with comment 27.
Termination; Retirement of Certificates, page 70
28. Comment
Supplementally advise us of your intentions regarding compliance with the
tender offer provisions of the Exchange Act.
Response
We believe that the tender offer provisions of the Exchange Act do not
apply to the exercise of a unilateral call option that is imbedded in the terms
of the Certificates at the time of issuance. Holders of the Certificates have no
option or discretion as to whether to tender their securities when that call
option is exercised.
29. Comment
It appears that each series may be subject to optional early termination.
Disclose the parameters of this potential feature (for example, 5% of the trust
principal balance outstanding purchased for the outstanding principal and
interest amount). To the extent the repurchase threshold is significant (that
is, above 10%) title the securities callable and, to the extent the purchase
price is not the outstanding amount then accrued and payable on the
certificates, describe how the purchase price will be determined and include
appropriate risk factor disclosure.
Response
The Depositor will comply with comment 29. The disclosure has been revised
to reflect your comments.
Certain Legal Aspects of Mortgage Loans, page 77
Cooperative Loans, page 78
30. Comment
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 13.
We note the disclosure that states "unless otherwise specified in the
related Prospectus Supplement, all Cooperative buildings relating to the
Cooperative Loans are located in the State of New York." Since all assets must
be fully described in the base prospectus this reference to the prospectus
supplement is inappropriate. Please revise.
Response
The disclosure has been revised by removing the quoted statement.
Federal Income Tax Consequences, page 90/Legal Matters, page 119
31. Comment
Remove the limiting language (i.e. "certain") from the heading of this
section.
Response
The requested change has been made.
32. Comment
Revise the disclosure to clarify that an opinion of counsel will be filed
prior to each issuance as an exhibit to a post-effective amendment or in a
Current Report on Form 8-K. You must file an opinion pursuant to the federal
securities laws when the securities are issued unless your original opinion,
filed pre-effectively, covers all of the tax issues in each take down. We are
not referring to the closing tax opinion which is between you and the
underwriter.
Response
We have revised our tax opinion filed with the registration statement so
that it confirms and adopts the portions of the tax disclosure (in the base
prospectus and as supplemented in any prospectus supplement) that are identified
as stating our firm's opinion. The foregoing applies to any series of
Certificates for which a REMIC election is made and for which we are named as
Depositor's counsel in the prospectus supplement. Similar changes have been made
in the tax opinions of Orrick, Herrington & Sutcliffe and Stroock & Stroock &
Lavan filed with Amendment No. 1.
As a result of these changes, for all series of Certificates for which a
REMIC election is made, we believe that the requirements of comment 32 have been
complied with, without the need
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 14.
for a separate opinion be filed for each takedown. Please see our response to
comment 33, as to non- REMIC transactions.
33. Comment
We note the disclosure in the second paragraph that states all opinions
contemplate a REMIC election. The registrant should either warrant that a REMIC
election will be made in all instances or the tax section should include a
non-REMIC opinion.
Response
It is anticipated that substantially all series of Certificates offered
under the Registration Statement will involve a REMIC election. However, it is
possible to issue a very limited category of structures more efficiently without
a REMIC election, by treating the pool as a grantor trust for federal income tax
purposes. In such a transaction, a separate grantor trust tax disclosure would
be included in the prospectus supplement. Alternatively, if a series were issued
using a FASIT election, a separate FASIT tax disclosure would be included in the
prospectus supplement. In all other respects, any such series will fall within
the terms of the Certificates described in the base prospectus. In either case,
a separate tax opinion on the grantor trust or FASIT disclosure would be filed
prior to issuance, as contemplated in comment 32.
The disclosure in the second paragraph on page 90 preserves this
flexibility, while avoiding the inclusion in the base prospectus of over 30
additional pages of grantor trust/FASIT tax disclosure that will not apply in
the vast majority of cases.
Sales of REMIC Certificates, pages 105-106
34. Comment
Identify the treasury regulations you reference in the final paragraph of
this section.
Response
The reference to these regulations has been deleted.
Reporting and Other Administrative Matters, page 107
35. Comment
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 15.
When would the REMIC administrator not have the authority to act on behalf
of the REMIC and REMIC residual certificate holders? Please revise.
Response
The word "generally" has been removed.
Methods of Distribution, page 118
36. Comment
To the extent the price charged to investors changes, confirm your
intention to file pricing supplements reflecting these changes in price.
Response
The Depositor does not believe that the instructions to Form S-3, Item 16
of Schedule A to the Securities Act of 1933 or Item 501 of Regulation S-K
require the filing of pricing supplements setting forth the different prices to
the public that may occur when the underwriters offer the securities from time
to time at varying prices to be negotiated at the time of sale, because that is
the method by which the price is determined. Furthermore, to require disclosure
and filing of pricing information in connection with various sales made after
the issuance date would be burdensome for issuers for a variety of reasons.
First, there could be many different prices to the public, each of which could
require a pricing supplement. Second, the costs of the transaction would
increase because of the time and expense of preparing and filing the supplements
and additional compensation to the underwriters for the additional burden of
providing the necessary information to the issuer. Third, there is additional
risk to the Depositor because it will be responsible for filing pricing
supplements relating to transactions about which it has no direct knowledge.
Finally, the requirement to file such supplements would not seem to add any
investor protection that would outweigh the burden on issuers. The purchasers at
issue are aware of the price they are paying for the securities, and are for the
most part sophisticated institutional investors who price the securities based
on, among other considerations, their own investment needs and their own
informed assumptions regarding a variety of factors, including market rates and
prepayment speeds. The price paid by other investors at different times with
different investment objectives would not seem to offer meaningful protection
for investors.
Accordingly, the Depositor does not currently intend to file pricing
supplements setting forth the different prices to the public at which sales of
its securities are made. If, however, the Commission either through rulemaking
or an interpretive release requires the filing of such supplements, the
Depositor will, of course, comply with the Commission's ruling.
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 16.
Incorporation of Certain Information by Reference, page 120
37. Comment
Revise this section to clearly explain the concept of incorporation by
reference. This disclosure should succinctly state which document controls as a
result of its incorporation by reference.
Response
The requested revisions have been made.
Prospectus Supplement
Cover Page
38. Comment
The cover page, as well as the body, of the prospectus supplement includes
an extensive amount of detail that appears to be deal specific. For example, the
cover page states that the trust will issue nineteen classes of certificates.
Will all take-downs from this shelf adhere to the parameters disclosed on the
cover page? When responding to this comment please also consider our comment
regarding a possible immediate take-down.
Response
The form of prospectus supplement is an illustrative form representing a
typical, but hypothetical, transaction of the issuer. The form filed does not
reflect any specific transaction contemplated in the future. For ease of
reading, we used a minimal amount of bracketing in the form initially filed. In
Amendment No. 1, we will use more bracketing to identify provisions that would
be most likely to vary from deal to deal.
We think that the amount of detail on the cover is not excessive.
Generally, the content of the cover is similar to that in the form of supplement
used by PNC Mortgage Securities Corp., in its registration statement which
became effective earlier this year. We include additional disclosure under
"Credit Enhancement" on the cover to properly identify the subordinate nature of
the Class M Certificates. As used in any transaction, all cover information will
fit on one page and will use an appropriate typeface.
39. Comment
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 17.
Since the plain English portions of your document should not contain
defined terms, please move the reference to the index of terms so that it
follows your risk factors section.
Response
We have made the change requested.
Summary, page S-3
40. Comment
Under a separate caption, identify the issuer of the securities.
Response
The requested revision has been made.
Risk Factors, page S-11
41. Comment
Present the risks associated with an investment in these securities in
more concrete terms and avoid using boilerplate. For example, the following risk
factors provide no specific insight into the risks associated with an investment
in your certificates: "Losses may occur on the mortgage loans due to a variety
of causes", "Geographic concentration may affect risk of loss on the mortgage
loans", "An investor's yield to maturity will depend on various factors", "The
rate of prepayments on the mortgage loans will be affected by various factors",
and "Each class of offered certificates has different prepayment and yield
considerations."
Response
The headings of the sections in the Risk Factors section have been revised
in accordance with your comment.
Book-Entry Registration of Certain of the Offered Certificates, page S-25
42. Comment
Please include appropriate risk factor disclosure regarding the book-entry
registration system.
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 18.
Response
We do not believe that a risk factor section is necessary regarding
book-entry registration. The vast majority of investors in the Depositor's
securities prefer book-entry registration notwithstanding the drawbacks of that
system. We are aware of risk factor disclosure used by other issuers, but we
nevertheless do not believe that book-entry registration raises actual material
risks for investors.
Risks related to Y2K, page S-44
43. Comment
What consideration have you given to including this information in the
risk factors section?
Response
Based on the Depositor's progress in implementing its Year 2000 plan, as
described in the referenced section, we do not believe that Year 2000 issues
raise actual material risks for investors.
The Master Servicer, page S-62
44. Comment
In addition to portfolio performance data, the prospectus supplement
should also include similar statistical pool data, as applicable. Please revise.
Response
We understand your comment to refer to the inclusion of actual performance
data from mortgage pools previously securitized by the Depositor. We believe
that disclosure is not required and would be inappropriate.
The existing portfolio performance data of the Master Servicer adequately
describes the Master Servicer's average experience, and provides a basis for
comparison with other servicers. However, this disclosure is not intended as a
projection of the likely experience on the pool being sold. Inclusion of prior
pool data goes beyond the information needed to evaluate the Master Servicer's
overall performance, and in the context of a prospectus supplement would be
likely to be misconstrued as a projection of future performance on the pool
being sold. Moreover, each pool is unique, and the actual performance on any
specific prior pool is simply not relevant to the offering of a new pool.
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 19.
The Depositor files 8-K reports on all of its outstanding securities,
under which it reports the actual performance of pools previously sold. The
Depositor continues to file these reports for the life of the transaction, and
does not de-register as other issuers do. This information is readily available
to investors through the SEC's website. Prior pool performance is also posted by
RFC on its website, and is available through a variety of other sources. This
information is useful to investors in the prior pools, and to rating agencies,
analysts and other persons who follow RFC.
However, prior pool information simply does not constitute offering
information necessary to be given to investors in a new offering. Offering
information should be limited to information about the pool being sold, the
structure and terms of the securities being sold, and general information on the
Depositor's underwriting guidelines and RFC's overall servicing performance,
together with the method of distribution and other required disclosures. In the
context of a new offering, performance data about a specific prior pool would be
no more relevant than a discussion of the structure used in a prior transaction,
or the tax consequences of a prior transaction.
Finally, inclusion of prior pool data would not be practicable. The
Depositor has issued over 325 separate pools in public offerings aggregating
approximately $85.2 billion, many of which could be viewed as similar to some
degree to a new pool. This mountain of information is far beyond the scope of
the prospectus supplement for any new offering. The only appropriate means of
distributing this information is through publication in the ordinary course of
business, which RFC already does.
45. Comment
Accompanying the tables with a management's discussion and analysis
section that discusses trends and reasons for changes in the tables, trends that
management is aware of that are expected to impact the future performance of the
portfolio, and an explanation of any anomalies.
Response
We do not believe that the requested disclosure would be necessary or
appropriate. As stated above, the purpose of the disclosure about the Master
Servicer's portfolio performance is to provide historical information, and to
provide a ready basis for comparison with other servicers who provide similar
historical information. The purpose of the disclosure is not to provide a basis
for making a projection about the Master Servicer's future overall performance,
or a projection about the future performance of the pool being sold. We believe
that a discussion of trends and their impact on future performance would run
counter to the reasons for including the disclosure.
The Master Servicer's portfolio performance history should not be viewed
as comparable to an earnings statement or the results of operations of a
company. To a very large extent, the portfolio history is a result of the effect
of national and regional economic conditions on the financial condition of the
borrowers included in the portfolio, and on the value of their homes. Any
attempt
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 20.
to project the future portfolio performance of the Master Servicer would
necessarily involveprojections of future economic conditions, which are far
beyond the scope of offering information required to be included in the
prospectus supplement.
It should be noted that investors purchase the Certificates either in
reliance upon the rating, or based on their own assumed future loss and
delinquency rates. Similarly, the rating agencies make their own assumptions
about the expected loss and delinquency performance of the pool. These
assumptions are not necessarily extrapolated from the Master Servicer's
portfolio performance history, and the Depositor is not responsible for and may
not even be aware of these assumptions. Nor is the inclusion of the Master
Servicer's portfolio performance history intended to support any assumptions
made by others. Rather, the primary purpose of the disclosure is to provide a
basis for comparison with other servicers.
Certain Federal Income Tax Consequences, page S-65
46. Comment
Revise the first sentence of this section to clearly indicate that
counsel's tax opinion will be delivered prior to sales of each series.
Response
Please see our response to comment 32.
Thacher, Proffitt & Wood Opinion - Exhibit 5.1
47. Comment
The exclusions appearing in subsections (ii) through (iv) and (a) through
(b) appear inappropriate. How can counsel provide a valid legality opinion once
these matters are assumed? Supplementally explain the propriety of these
assumptions or revise the opinion to address our concerns.
Response
All of the exclusions in clauses (i) through (iv) are limited in the
immediately preceding language which states "except for the matters that are
specifically addressed in the opinions expressed below". In other words, the
opinion letter is not assuming away the matters as to which the opinions are
expressed. Clauses (a) and (b) merely confirm that no independent review of
factual representations and covenants of any other party is being conducted,
which are responsibilities of those parties. In other words, the opinion letter
is based upon the facts - or in this case prospective
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 21.
facts - as represented by those parties. These same or somewhat broader
qualifications have been contained for many years in all of counsel's closing
opinions for mortgage-backed securities transactions and have been accepted by
underwriters and rating agencies without exception. Moreover, in contrast to
closing opinions with respect to transactions that have been completed or the
registration of securities that have already been issued, this opinion letter
relates to prospective issuances and transactions that have not yet occurred and
is necessarily limited to general concepts of legality and enforceability.
48. Comment
Counsel may not limit its opinion to the General Corporation Law of the
State of Delaware. Counsel may limit its opinion to a specific state, but this
limitation must encompass both statutory and case law. Please revise.
Response
The reference in the opinion letter to the Delaware General Corporation
Law has been used by counsel as stated for many years and is necessarily
intended and understood by opinion addressees including underwriters and rating
agencies, who accept this formulation without exception, to mean that statute as
interpreted by judicial decisions. However, in order to avoid any ambiguity, the
opinion letter has been revised to include those additional words.
49. Comment
An opinion as to the accuracy of disclosure does not satisfy the
requirements of item 601(b)(8) of Regulation S-K. Counsel must clearly identify
those portions of the document that represent its opinion. Counsel must also
adopt and confirm those sections as its opinion.
Response
The requested changes have been made.
Orrick, Herrington & Sutcliffe LLP Opinion - Exhibit 5.2/8.2
50. Comment
An opinion as to the accuracy of disclosure does not satisfy the
requirements of item 601(b)(8) of Regulation S-K. Counsel must clearly identify
those portions of the document that represent its opinion. Counsel must also
adopt and confirm those sections as its opinion.
Response
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 22.
The requested changes have been made.
Stroock & Stroock & Lavan LLP Opinion - Exhibit 5.3
51. Comment
An opinion as to the accuracy of disclosure does not satisfy the
requirements of item 601(b)(8) of Regulation S-K. Counsel must clearly identify
those portions of the document that represent its opinion. Counsel must also
adopt and confirm those sections as its opinion.
Response
The requested changes have been made.
52. Comment
Some of the opinions reference specific state law even though the
disclosure in the document does not. Are state law opinions being rendered?
Please advise or revise accordingly.
Response
The opinions rendered in paragraphs one and two relate to the
enforceability of the Pooling and Servicing Agreement and the valid issuance of
the Certificates. Both of these matters are governed by New York law and that is
why the paragraph immediately following the numerated opinions specifically
references New York law. The opinion rendered in paragraph three, by contrast,
is governed by federal law and that is why the paragraph immediately following
the numerated opinions additionally references the Federal law of the United
States.
General
53. Comment
Comments are provided for the core and prospectus supplement. However, to
the extent comments issued with respect to one apply to both, please consider
and revise one or both as appropriate. Comments issued with respect to this form
of prospectus supplement should be considered in any other prospectus
supplements where analogous or similar disclosure issues arise.
Response
Your comment is acknowledged.
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 23.
54. Comment
The staff notes that prospectus supplements may differ in form and content
from that presented in the registration statement. You should be advised that if
novel or unique securities are to be offered under this registration statement,
we intend to review and, if necessary, comment upon the disclosure in the 424(b)
prospectus. You may wish to supplementally furnish the staff with copies of the
draft pages prior to the use of the prospectus supplement that includes novel or
unique features. We would review these draft pages on a expedited basis.
Response
Your comment is acknowledged.
Year 2000 Disclosure
55. Comment
Please see Staff Legal Bulletin No. 5 (CF/IM), as revised. In this
bulletin, we explain what public companies should disclose about Year 2000
issues in their filings. Please supplementally confirm to us that you disclose
in this filing all required information about Year 2000 issues.
Response
The Depositor's Year 2000 disclosure is included in the form of Prospectus
Supplement under "Year 2000 Considerations." We believe that this disclosure
includes all information required to be disclosed by the Depositor. In helping
the Depositor prepare this disclosure, we reviewed SEC Release No. 33-7558, as
well as the Staff Legal Bulletin cited.
* * * * *
If you should have any questions concerning this response letter, please
do not hesitate to call the undersigned at (212) 912-7450, David Ansel at (212)
912-7881 or Robert Olin at (212) 912- 8387.
Very truly yours,
/s/ Stephen S. Kudenholdt
Stephen S. Kudenholdt
<PAGE>
Mr. Dominic Minore
April 14, 1999 Page 24.
Enclosures
cc: Mark Green
Assistant Director
David Sparks, Esq.
Senior Counsel
Division of Corporation Finance
(Mail Stop 7-2)
United States Securities
and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
<PAGE>
REGISTRATION NO. 333-72493
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3/A
AMENDMENT NO. 1 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)
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
Approximate date of commencement of proposed sale to the public: From time
to time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]_________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------
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)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through $1,000,000 100% $1,000,000 $278.00
Certificates (Issuable in Series)
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) $4,133,115,783.60 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 $4,134,115,783.60. 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.
-----------------------------
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 $4,133,115,783.60
aggregate principal amount of Mortgage Pass-Through Certificates, constitutes
Post-Effective Amendment No. 2 to Registration Statement 333-57481.
<PAGE>
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.
<PAGE>
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION APRIL 14, 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
- --------------------------------------------------------------------------------
You should carefully consider the risk factors discussed in the accompanying
prospectus supplement under the heading "Risk Factors." The certificates of any
series offered by this prospectus and the accompanying prospectus supplement
will represent ownership interests only in the trust created for the related
series and will not represent ownership interests in or obligations of
Residential Funding Mortgage Securities, I, Inc., Residential Funding
Corporation or any of their affiliates.
This prospectus may be used to offer and sell the certificates only if
accompanied by the related prospectus supplement.
- --------------------------------------------------------------------------------
The depositor may periodically issue certificates representing interests in
trusts that consist primarily of mortgage collateral as described in this
prospectus and in the accompanying prospectus supplement. The certificates will
be issued in series and each series of certificates will represent interests in
a different trust established by the depositor.
Offered Certificates
The certificates in a series will represent interests in a trust and will be
paid only from the assets of that trust. The certificates may consist of
multiple classes of certificates, and, if so, each class may:
o receive a specified fixed or variable rate of interest;
o have a higher or lower priority relative to other classes in the
series with respect to distributions of principal and/or interest from
the trust and/or allocations of any losses;
o represent interests in a part or all of the trust assets;
o receive distributions of principal and/or interest at specified times;
and
o have a specified form of credit enhancement.
You can find specific information regarding each class of offered certificates
in the related prospectus supplement.
Mortgage Collateral
Each trust will consist primarily of one of the following types of mortgage
collateral grouped into one or more mortgage pools that are described in detail
in the prospectus supplement and include:
o mortgage loans or other similar security interests secured by first
liens on one- to four-family residential properties;
o interests in mortgage securities and whole or partial participations
in mortgage loans; and
o combinations of mortgage loans and additional collateral.
Credit Enhancement
If so specified in the related prospectus supplement, credit enhancement for a
series of securities may include any one or any combination of one or more
classes of subordinate certificates, financial guaranty insurance policy,
mortgage pool insurance policy, letter of credit, bankruptcy bond, special
hazard insurance policy, credit derivatives or reserve fund. In addition to or
in lieu of the foregoing, credit enhancement may be provided by means of
overcollateralization of the certificates to the extent the principal balance of
the mortgage loans is greater than the principal balance of the certificates.
Underwriting
The certificates may be offered to the public through different methods as
described in "Methods of Distribution" in this prospectus.
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
<PAGE>
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.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Principal Definitions"
beginning on page 137.
2
<PAGE>
Table of Contents
Page
INTRODUCTION..................................................................4
THE TRUSTS....................................................................4
General....................................................................4
The Mortgage Loans.........................................................6
MORTGAGE LOAN PROGRAM........................................................13
Underwriting Standards....................................................13
Qualifications of Sellers.................................................17
Representations by Sellers................................................18
Subservicing..............................................................23
DESCRIPTION OF THE CERTIFICATES..............................................26
General...................................................................26
Form of Certificates......................................................27
Assignment of Trust Assets................................................29
Review of Mortgage Loans..................................................31
Spread....................................................................32
Payments on Mortgage Loans; Deposits to Certificate Account...............32
Withdrawals from the Custodial Account....................................36
Distributions.............................................................37
Example of Distributions..................................................39
Advances..................................................................40
Prepayment Interest Shortfalls............................................41
Reports to Certificateholders.............................................42
Collection and Other Servicing Procedures.................................43
Special Servicing and Special Servicing Agreements........................44
Realization Upon Defaulted Mortgage Loans.................................45
SUBORDINATION................................................................47
General...................................................................47
Overcollateralization.....................................................49
DESCRIPTION OF CREDIT ENHANCEMENT............................................49
General...................................................................49
Letters of Credit.........................................................51
Mortgage Pool Insurance Policies..........................................51
Special Hazard Insurance Policies.........................................53
Bankruptcy Bonds..........................................................54
Reserve Funds.............................................................55
Certificate Insurance Policies; Surety Bonds..............................55
Maintenance of Credit Enhancement.........................................56
Reduction or Substitution of Credit Enhancement...........................57
OTHER FINANCIAL OBLIGATIONS RELATED TO THE
CERTIFICATES..............................................................57
Swaps and Yield Supplement Agreements.....................................57
Purchase Obligations......................................................58
INSURANCE POLICIES ON MORTGAGE LOANS.........................................58
Primary Mortgage Insurance Policies.......................................58
Standard Hazard Insurance on Mortgaged Properties.........................60
THE DEPOSITOR................................................................61
RESIDENTIAL FUNDING CORPORATION..............................................61
THE POOLING AND SERVICING AGREEMENT..........................................62
Servicing and Other Compensation and Payment of Expenses..................62
Evidence as to Compliance.................................................63
Certain Matters Regarding the Master Servicer and the Depositor
.........................................................................64
Events of Default.........................................................65
Rights Upon Event of Default..............................................65
Amendment.................................................................66
Termination; Retirement of Certificates...................................67
The Trustee...............................................................68
YIELD CONSIDERATIONS.........................................................69
MATURITY AND PREPAYMENT CONSIDERATIONS.......................................72
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS......................................74
The Mortgage Loans........................................................75
Environmental Legislation.................................................84
Soldiers' and Sailors' Civil Relief Act of 1940...........................85
Default Interest and Limitations on Prepayments...........................86
Forfeitures in Drug and RICO Proceedings..................................86
Negative Amortization Loans...............................................86
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
.........................................................................87
General...................................................................87
REMICs....................................................................88
STATE AND OTHER TAX CONSEQUENCES............................................107
ERISA CONSIDERATIONS........................................................107
Plan Asset Regulations...................................................108
Prohibited Transaction Exemption.........................................109
Insurance Company General Accounts.......................................111
Representations from Investing Plans.....................................112
Tax-Exempt Investors.....................................................112
Consultation with Counsel................................................113
LEGAL INVESTMENT MATTERS....................................................113
USE OF PROCEEDS.............................................................114
METHODS OF DISTRIBUTION.....................................................115
LEGAL MATTERS...............................................................116
FINANCIAL INFORMATION.......................................................116
ADDITIONAL INFORMATION......................................................116
REPORTS TO CERTIFICATEHOLDERS...............................................116
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE................................................................117
INDEX OF PRINCIPAL DEFINITIONS..............................................118
<PAGE>
INTRODUCTION
The Mortgage Pass-Through Certificates (the "Certificates") offered hereby
may be sold from time to time in series, as described in the related supplement
to this Prospectus (each, a "Prospectus Supplement"). Each series of
Certificates will represent in the aggregate the entire beneficial ownership
interest, excluding any interest retained by Residential Funding Mortgage
Securities I, Inc. (the "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 (the "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 (each, a "Pooling and Servicing Agreement") among the
Depositor and the trustee (the "Trustee") and master servicer (the "Master
Servicer") specified in the related Prospectus Supplement.
THE TRUSTS
General
The Mortgage Loans and other assets described below and in the related
Prospectus Supplement will be held in a trust (each 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 a pool (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 pass-through certificates evidencing interests
in Mortgage Loans ("Mortgage Securities")).
As specified in the related Prospectus Supplement, each Trust 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"). The Mortgaged Properties may include vacation, second
and non-owner-occupied homes. If specified in the related Prospectus Supplement
relating to a series of Certificates, a Mortgage Pool may contain cooperative
apartment loans ("Cooperative Loans") evidenced by promissory notes
("Cooperative Notes") secured by security interests in shares issued by
cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the related
buildings. 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.
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.
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
4
<PAGE>
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 described in the related Prospectus
Supplement (the "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 Bond, 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 (the "Master
Servicer" or "Residential Funding"), from affiliates of the Depositor including
HomeComings Financial Network, Inc. and GMAC Mortgage Corporation ("Affiliated
Sellers"), or from banks, savings and loan associations, mortgage bankers,
investment banking firms, the FDIC and other mortgage loan originators or
sellers not affiliated with the Depositor ("Unaffiliated Sellers"; Unaffiliated
Sellers and Affiliated Sellers are collectively referred to in this Prospectus
as "Sellers"), all as described below under "Mortgage Loan Program." If a
Mortgage Pool is composed of Mortgage Loans acquired by the Depositor directly
from Sellers other than Residential Funding, the related Prospectus Supplement
will specify the extent of Mortgage Loans so acquired. The characteristics of
the Mortgage Loans are as described in the related Prospectus Supplement. 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 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 either directly or indirectly to
the Depositor by one or more Sellers identified in the related Prospectus
Supplement, concurrently with the issuance of the related series of Certificates
(a "Designated Seller Transaction"). 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
5
<PAGE>
Prospectus under "Methods of Distribution." The related Prospectus Supplement
for a Mortgage Pool composed of Mortgage Loans acquired by the Depositor in 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,
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 the term "Mortgage Pool" includes the Mortgage Loans
underlying any Mortgage Securities.
Notwithstanding any other reference in this Prospectus to the Master
Servicer, with respect to a series of Certificates as to which the Trust
includes Mortgage Securities, the entity that services and administers those
Mortgage Securities on behalf of the holders of the Certificates may be referred
to as the "Manager," if so specified in the related Prospectus Supplement. The
Manager, if any, will be identified 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 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 Commonwealth of Puerto Rico (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
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monthly payments of principal and interest and terms at origination or
modification of not more than 15 years;
(2) Fixed-rate, fully-amortizing mortgage loans, which may include
mortgage loans converted from adjustable-rate mortgage loans or otherwise
modified, providing for level monthly payments of principal and interest
and terms at origination or modification of more than 15 years, but not
more than 30 years;
(3) Fully-amortizing adjustable-rate mortgage loans ("ARM Loans")
having an original or modified term to maturity of not more than 30 years
with a related interest rate (a "Mortgage Rate") which 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 sum of a fixed percentage set forth in the
related Mortgage Note (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 index. The scheduled monthly payment will be adjusted as
and when described in the related Prospectus Supplement to an amount that
would fully amortize the Mortgage Loan over its remaining term on a level
debt service basis; provided that increases in the scheduled monthly
payment may be subject to limitations as specified in the related
Prospectus Supplement. If an adjustment to the Mortgage Rate on a Mortgage
Loan causes the amount of interest accrued thereon in any month to exceed
the scheduled monthly payment on the Mortgage Loan, the resulting amount
of interest that has accrued but is not then payable ("Deferred Interest")
will be added to the principal balance of 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
- --------
* The index (the "Index") for a particular Mortgage Pool will be specified
in the related Prospectus Supplement and may include one of the following
indexes: (i) the weekly average yield on U.S. Treasury securities adjusted
to a constant maturity of either three months, six months or one year,
(ii) the weekly auction average investment yield of U.S. Treasury bills of
six months, (iii) the daily Bank Prime Loan rate made available by the
Federal Reserve Board, (iv) the cost of funds of member institutions for
the Federal Home Loan Bank of San Francisco, or (v) the interbank offered
rates for U.S. dollar deposits in the London market, each calculated as of
a date prior to each scheduled interest rate adjustment date which will be
specified in the related Prospectus Supplement.
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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 mortgage loans ("Balloon Loans"), which are fixed-rate
mortgage loans having original or modified terms to maturity of 5 or 7
years in most cases as described in the related Prospectus Supplement,
with level monthly payments of principal and interest based on a 30-year
amortization schedule. The amount of the monthly payment will remain
constant until the maturity date, upon which date the full outstanding
principal balance on such Balloon Loan will be due and payable (such
amount, the "Balloon Amount"); or
(8) 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. In
addition, if so specified in the related Prospectus Supplement, a Mortgage Pool
will contain "Additional Collateral Loans" purchased from Unaffiliated Sellers
(each an "Additional Collateral Loan Seller"), that have a loan-to-value ratio
(each, a "Loan-to-Value Ratio") at origination in excess of 80% but not greater
than 100% and are secured, in addition to the related Mortgaged Property and in
lieu of any primary mortgage insurance, by additional collateral which will
consist of (i) a security interest in financial assets owned by the Mortgagor
(which will consist of securities, insurance policies, annuities, certificates
of deposit, cash, accounts or similar assets) and/or (ii) a third party
guarantee (usually by a relative of the Mortgagor), which in turn is secured by
a security interest in financial assets (as described above) or residential
property owned by the guarantor. The collateral referred to in clauses (i) and
(ii) above is referred to in this Prospectus as "Additional Collateral."
The amount of Additional Collateral for any Mortgage Loan generally will
not exceed 30% of the principal amount of the Mortgage Loan (the "Additional
Collateral Requirement"), and the requirement to maintain Additional Collateral
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
borrower under the Mortgage Loan (each, a "Mortgagor") or an increase in the
appraised value of the related Mortgaged Property.
The Additional Collateral Loan Seller 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 by the Additional Collateral Loan Seller from such Additional
Collateral and thereafter remitted to the Trustee.
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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 Mortgage Loans (the "Pledged Asset Mortgage Loans") that have
Loan-to-Value Ratios at origination of up to 100% and are secured, in addition
to the related Mortgaged Property, by funds (the "Pledged Assets") pledged by a
limited liability company. The limited liability company is a special purpose
entity formed for the purpose of holding and pledging to the owner of each
Pledged Asset Mortgage Loan the Pledged Assets, which funds will have been
remitted to the limited liability company at the direction of or for the benefit
of the Mortgagor. Each Pledged Amount 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 subject to certain 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 (each, a "Modified Mortgage
Loan"). 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.
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 is subject to
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termination and the cooperative shares are subject to cancellation 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: (i) 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, (ii) a
representation by the originator of the Mortgage Loan (which representation may
be based solely on (i) above) or (iii) 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.
Additional information, including information regarding a Loan-to-Value
Ratio of the Mortgage Loans underlying each series of Certificates, will be
supplied in the related Prospectus Supplement. In the case of purchase Mortgage
Loans, the Loan-to-Value Ratio is defined in most cases as the ratio, expressed
as a percentage, of the principal amount of the Mortgage Loan at origination to
the lesser of (1) the appraised value determined in an appraisal obtained at
origination of the Mortgage Loan and (2) the sales price for the related
Mortgaged Property, except that in the case of certain employee or preferred
customer loans, the denominator of the ratio may be the sales price.
In the case of certain non-purchase Mortgage Loans including refinance,
modified or converted Mortgage Loans, the Loan-to-Value Ratio at origination is
defined 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 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 described below) 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
Loan-to-Value Ratio may be determined at the time of purchase from the related
Seller based on the ratio of the current loan amount to the current value of the
related Mortgaged Property which value may be supported by either:
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 Loan-to-Value Ratio may be significantly lower than the
ratio determined at origination.
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The denominator of the applicable ratio described in the preceding three
paragraphs shall be referred to in this Prospectus as 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 Loan-to-Value 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 Loan-to-Value 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 Loan-to-Value Ratios may no longer be accurate
valuations of the Mortgaged Properties, particularly where the Loan-to-Value
Ratio was not determined at the time of purchase as described above. Certain
Mortgaged Properties may be located in regions where property values have
declined significantly since the time of origination. In addition, a
Loan-to-Value calculation does not take into account any secondary financing.
Under the 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 Loan-to-Value Ratio
is not greater than 100%. Secondary financing is readily available and may be
obtained by a Mortgagor from a lender including the Seller at any time
(including at origination).
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to which a
portion of the proceeds are used to refinance an existing mortgage loan, and the
remaining proceeds may be retained by the Mortgagor or used for purposes
unrelated to the Mortgaged Property. Alternatively, the Mortgage Loans may be
"rate and term refinance" Mortgage Loans, as to which substantially all of the
proceeds (net of related costs incurred by the Mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms of the existing mortgage
loan.
The Mortgage Loans may be mortgage loans that have been consolidated
and/or have had various terms changed, mortgage loans that have been converted
from adjustable rate mortgage loans to fixed rate mortgage loans, or
construction loans which have been converted to permanent mortgage loans. In
addition, a Mortgaged Property may be subject to secondary financing at the time
of origination of the Mortgage Loan or at any time thereafter.
If so specified in the related Prospectus Supplement, a portion of the
proceeds of a Mortgage Loan may be held by the originator and used to reimburse
the Mortgagor for certain costs of construction of or improvements to the
related Mortgaged Property. The Appraised Value of 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
loan-to-value ratio of the Mortgage Loan could be higher than that assumed at
the time of origination of the Mortgage Loan. In addition, the application of
any unused proceeds could cause the rate of payment of principal on the Mortgage
Loan to be faster than that assumed.
A Mortgage Pool may contain ARM Loans which allow the Mortgagors to
convert the adjustable rates on those Mortgage Loans to a fixed rate at one or
more specified periods during the life of the Mortgage Loans (each, a
"Convertible Mortgage Loan"), in most cases not later than ten years subsequent
to the date of origination. If specified in the related Prospectus Supplement,
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upon any conversion, the Depositor will repurchase or Residential Funding, 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 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, certain of the Mortgage
Loans may be subject to temporary buydown plans ("Buy-Down Mortgage Loans")
under which the monthly payments made by the Mortgagor during the early years of
the Mortgage Loan (the "Buy-Down Period") will be less than the scheduled
monthly payments on the Mortgage Loan, the resulting difference to be made up
from:
o an amount (such amount, exclusive of investment earnings thereon,
being hereinafter referred to as "Buy-Down Funds") contributed by the
seller of the Mortgaged Property or another source and placed in a
custodial account (the "Buy-Down Account");
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's underwriting standards, the
Mortgagor under each Buy-Down Mortgage Loan will be qualified based on the
initial reduced monthly payment amount. See "Mortgage Loan Program--Underwriting
Standards" for a discussion of loss and delinquency considerations relating to
Buy-Down Mortgage Loans.
The related Prospectus Supplement will provide material information
concerning the types and characteristics of the Mortgage Loans included in the
related Mortgage Pool. A Current Report on Form 8-K (a "Form 8-K") will be
available upon request to holders of the related series of Certificates and will
be filed, together with the related Pooling and Servicing Agreement with the
Securities and Exchange Commission (the "Commission") within fifteen days after
the initial issuance of 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
other mortgage servicing institutions ("Subservicers"), 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
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addition to or in lieu of the Master Servicer for a series of Certificates, the
related Prospectus Supplement may identify a certificate administrator (the
"Certificate Administrator") for the Trust. The Certificate Administrator may be
an affiliate of the Depositor or the Master Servicer. 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 its obligation to enforce certain
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, from Sellers. The Mortgage
Loans will have been originated in accordance with the Depositor's underwriting
standards or alternative underwriting criteria as described below under
"Underwriting Standards" or as described in the related Prospectus Supplement.
Underwriting Standards
General Standards
The Depositor's underwriting standards with respect to the Mortgage Loans
will conform to those published in Residential Funding's Seller Guide, excluding
the underwriting standards relating to the expanded criteria program, the
expanded credit program and the home equity program (together with Residential
Funding's Servicer Guide, the "Guide," as modified from time to time). The
underwriting standards contained in the 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 or by a designated third party.
In some circumstances, however, the Mortgage Loans may be underwritten only by
the Seller. See "--Guide Standards--Qualifications of Sellers." Residential
Funding may perform only sample quality assurance reviews to determine whether
the Mortgage Loans in any Mortgage Pool were underwritten in accordance with
applicable standards.
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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 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 Guide. A portion of the Mortgage
Loans will be purchased in negotiated transactions, which may be governed by
agreements ("Master Commitments") relating to ongoing purchases of Mortgage
Loans by Residential Funding, from Sellers who will represent that the Mortgage
Loans have been originated in accordance with underwriting standards agreed to
by Residential Funding. Residential Funding, on behalf of the Depositor, will
review only a limited portion of the Mortgage Loans in any delivery of such
Mortgage Loans from the related Seller for conformity with the applicable
underwriting standards. 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. The Depositor, or
Residential Funding 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 or the Depositor.
The level of review by Residential Funding 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 (i) factors relating
to the experience and status of the Seller, (ii) characteristics of the specific
Mortgage Loan, including the principal balance, the Loan-to-Value Ratio, the
loan type or loan program, and (iii) the applicable credit score of the related
Mortgagor used in connection with the origination of the Mortgage Loan (as
determined based on a credit scoring model acceptable to the 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 Loan-to-Value Ratio, property type and use, and documentation level, may
depend on the borrower's credit score.
The underwriting standards utilized in negotiated transactions and Master
Commitments, the underwriting standards of insurance companies issuing
certificates and the underwriting standards applicable to Mortgage Loans
underlying Mortgage Securities may vary substantially from the underwriting
standards contained in the 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 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. Moreover, there can be
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no assurance that every Mortgage Loan was originated in conformity with the
applicable underwriting standards in all material respects, or that the quality
or performance of Mortgage Loans underwritten pursuant to varying standards as
described above will be equivalent under all circumstances. In the case of a
Designated Seller Transaction, the applicable underwriting standards will be
those of the Seller or of the originator of the Mortgage Loans, and will be
described in the related Prospectus Supplement.
The Depositor, either directly or indirectly through Residential Funding,
will also purchase Mortgage Loans from its affiliates, including GMAC Mortgage
Corporation and HomeComings Financial Network, Inc., with underwriting standards
in accordance with the Guide or as otherwise agreed to by the Depositor.
However, in certain 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, or its
affiliates, in limited circumstances preferential interest rates may be allowed,
and Primary Insurance Policies may not be required in connection with a
Loan-to-Value Ratio over 80%. As to any series of Certificates representing
interests in such Mortgage Loans, credit enhancement may be provided covering
losses on 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 will review any
affiliate's mortgage loans for conformity with the underwriting standards
contained in the Guide.
Guide Standards
The following is a brief description of the underwriting standards set
forth in the Guide for full documentation loan programs. Initially, a
prospective borrower (other than a trust if the trust is the borrower) is
required to fill out a detailed application providing pertinent credit
information. As part of the application, the borrower is required to provide a
current balance sheet describing assets and liabilities and a statement of
income and expenses, as well as an authorization to apply for a credit report
which summarizes the borrower's credit history with merchants and lenders and
any record of bankruptcy. In addition, an employment verification is obtained
which reports the borrower's current salary and may contain the length of
employment and an indication as to whether it is expected that the borrower will
continue 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.
In determining the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraiser is
required to verify that the property is in good condition and that construction,
if new, has been completed. The appraisal is based on various factors, including
the market value of comparable homes and the cost of replacing the improvements.
Alternatively, property valuations may be made under various other methods, as
described above under "The Mortgage Pools--The Mortgage Loans."
Certain information, including the "Credit Scores" for a portion of the
Mortgages of the Mortgage Loans underlying each series of Certificates will be
supplied in the related Prospectus Supplement. Credit Scores are obtained by
many mortgage lenders in connection with mortgage
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loan applications to help assess a 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, 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 (for
example, the Loan-to-Value Ratio, the collateral for the mortgage loan, or the
debt to income ratio). There can be no assurance that the Credit Scores of the
Mortgagors will be an accurate predictor of the likelihood of repayment of the
related Mortgage Loans 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 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.
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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 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 Guide will be varied in
appropriate cases, including "limited" or "reduced loan documentation" mortgage
loan programs. Certain reduced loan documentation programs, for example, do not
require income, employment or asset verifications. In most cases, in order to be
eligible for a reduced loan documentation program, the Loan-to-Value Ratio must
meet applicable guidelines, the borrower must have a good credit history and the
borrower's eligibility for 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 nor any other entity will be so obligated. Furthermore, to
the extent that the appraised value of the related Mortgaged Property has
declined, the actual Loan-to-Value Ratio with respect to such Mortgage Loan will
be higher than the Loan-to-Value Ratio set forth with respect thereto in the
related Prospectus Supplement.
In its evaluation of mortgage loans that have more than twelve months of
payment experience, Residential Funding tends to place greater weight on payment
history and 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 based on the borrower's credit
score and payment history, with no current income verification, and under
alternative property valuation methods described above under "The Mortgage
Pools--The Mortgage Loans."
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. See "Certain Legal Aspects of the
Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
The 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 Federal Deposit Insurance Corporation (the "FDIC") and investment
banking firms) will have been approved by Residential Funding for participation
in Residential Funding's loan purchase program. In determining whether to
approve a seller for participation in the loan purchase program, Residential
Funding will consider, among other things, the financial status (including the
net worth) of the seller,
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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 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).
As specified in the related Prospectus Supplement, the qualifications
required of Sellers for approval by Residential Funding as participants in its
loan purchase programs may not apply to Sellers in Designated Seller
Transactions. To the extent the Seller in a Designated Seller Transaction fails
to or is unable to repurchase any Mortgage Loan due to a breach of
representation and warranty, neither the Depositor, Residential Funding nor any
other entity will have assumed the representations and warranties and any
related losses will be borne by the Certificateholders or by the credit
enhancement, if any.
Representations by Sellers
Except as described above, 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
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
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
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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 below. 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 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; 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, 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, Residential Funding,
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 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's knowledge, if required, the
Mortgage Loans are the subject of a Primary Insurance Policy;
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o Residential Funding had good title to each Mortgage Loan and each
Mortgage Loan is subject to no offsets, defenses or counterclaims
except as may be provided under the Relief Act and except with respect
to any buydown agreement for a Buy-Down Mortgage Loan;
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's
knowledge, assessment lien against any Mortgaged Property.
In the event of a breach of a representation or warranty made by
Residential Funding that materially adversely affects the interests of the
Certificateholders in a Mortgage Loan, Residential Funding will be obligated to
repurchase or substitute for that Mortgage Loan as described below. In addition,
Residential Funding will be obligated to repurchase or substitute for as
described below any Mortgage Loan as to which it is discovered that the related
Mortgage is not a valid first lien on the related Mortgaged Property subject
only to (a) liens of real property taxes and assessments not yet due and
payable, (b) covenants, conditions and restrictions, rights of way, easements
and other matters of public record as of the date of recording of 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 will be obligated to repurchase or substitute
for that Mortgage Loan in the manner described below. However, Residential
Funding will not be required to repurchase or substitute for any Mortgage Loan
if the circumstances giving rise to 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 certain limited
circumstances, modifications to the interest rate and principal and interest
payments may have been made with respect to one or more of the related Mortgage
Loans between the Cut-off Date and the Closing Date. Neither Residential Funding
nor any Seller will be required to purchase or substitute for any Mortgage Loan
as a result of 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 insofar
as the agreement relates to the representations and warranties made by a Seller
or Residential Funding, as the case may be, relating to the Mortgage Loan and
any remedies provided for with respect to any breach of the representations and
warranties. If a Seller or Residential Funding, as the case may be, cannot cure
a breach of any representation or warranty made by it in respect of a Mortgage
Loan which materially and adversely affects the interests of the
Certificateholders in that Mortgage Loan within 90 days after notice from the
Master Servicer, the Seller or Residential Funding, as the case may be, will be
obligated to purchase the Mortgage Loan at a price (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
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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 as
provided above, rather than repurchase the Mortgage Loan, Residential Funding
may, at its sole option, remove the Mortgage Loan (a "Deleted Mortgage Loan")
from the Trust and cause the Depositor to substitute in its place another
Mortgage Loan of like kind (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 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 (the "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 a Loan-to-Value 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, including a
Seller in a Designated Seller Transaction, will have no option to substitute for
a Mortgage Loan that it is obligated to repurchase in connection with a breach
of a representation and warranty.
The Master Servicer will be required under the applicable Pooling and
Servicing Agreement to use its best reasonable efforts to enforce this purchase
or substitution obligation for the benefit of the Trustee and the
Certificateholders, using practices it would employ in its good faith business
judgment and which are normal and usual in its general mortgage servicing
activities; provided, however, that this purchase or substitution obligation
will not become an obligation of the Master Servicer in the event the Seller or
Residential Funding, as the case may be, fails to honor 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
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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 certain loss amounts. Any such settlement could lead to losses on
the Mortgage Loans which would be borne by the related credit enhancement, and
to the extent not available, on the related Certificates.
Furthermore, the Master Servicer may pursue foreclosure or similar
remedies concurrently with pursuing any remedy for a breach of a representation
and warranty. However, the Master Servicer is not required to continue to pursue
both 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's
representations has occurred, the Seller's purchase obligation will not become
an obligation of the Depositor or Residential Funding. In the case of a
Designated Seller Transaction where the Seller fails to repurchase a Mortgage
Loan and neither the Depositor, Residential Funding 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.
The foregoing obligations will constitute the sole remedies available to
Certificateholders or the Trustee for a breach of any representation by a Seller
or by Residential Funding in its capacity as a seller of Mortgage Loans to the
Depositor, or for any other event giving rise to the obligations as described
above.
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, as described above, or by the
Depositor or the Master Servicer, as described below under "Description of the
Certificates--Assignment of Mortgage Loans," Residential Funding, 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's consent to the transfer of subservicing rights relating to
any Mortgage Loans to a successor servicer, Residential Funding 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'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.
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Subservicing
The Seller of a Mortgage Loan will usually act as the Subservicer for that
Mortgage Loan under an agreement between Residential Funding and the Subservicer
(a "Subservicing Agreement") unless servicing is released to the Master Servicer
or has been transferred to a servicer approved by Residential Funding. The
Master Servicer may, but is not obligated to, assign 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 certain 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:
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 certain 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 certain taxes and insurance premiums not paid on a timely basis by
Mortgagors. In addition, a Subservicer is obligated to pay to the Master
Servicer interest on the amount of any partial prepayment of principal received
and applied to reduce the outstanding principal balance of a Mortgage Loan from
the date of application of that payment to the first day of the following month.
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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,
subject to any limitation in the related Prospectus Supplement, transfer its
servicing obligations to another entity that has been approved for participation
in Residential Funding's loan purchase programs, but only with the approval of
the Master Servicer.
As compensation for its servicing duties, the Subservicer will be entitled
to a monthly servicing fee, to the extent the related Mortgage Loan payment has
been collected, in a minimum amount set forth in the related Prospectus
Supplement. The Subservicer or Master Servicer may also be entitled to collect
and retain, as part of its servicing compensation, any late charges or
prepayment penalties, as provided in the Mortgage Note or related instruments.
The Subservicer will be reimbursed by the Master Servicer for certain
expenditures which it makes, 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, as the case may be, required at the time it
committed to purchase the Mortgage Loan. See "The Pooling and Servicing
Agreement--Servicing and Other Compensation and Payment of Expenses."
Each Subservicer will be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Subservicer in its servicing
capacity. Each Subservicer is required to maintain a fidelity bond and an errors
and omissions policy with respect to its officers, employees and other persons
acting on its behalf or on behalf of the Master Servicer.
Each Subservicer will be required to service each Mortgage Loan 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. Subject to 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 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
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Subservicing Agreement may contain provisions different from those described
above which are in effect in the original Subservicing Agreements. However, the
Pooling and Servicing Agreement for each Trust 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 certain 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 (the "Registration Statement") of which this
Prospectus is a part. Each Pooling and Servicing Agreement will be filed with
the Commission as an exhibit to a Form 8-K. The following summaries (together
with additional summaries under "The Pooling and Servicing Agreement" below)
describe 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 Certificates, of which one or more classes of
Certificates (collectively, the "Senior Certificates") may be senior
in right of payment to any other class or classes of Certificates
(collectively, the "Subordinate Certificates"), and as to which
certain classes of Senior or Subordinate Certificates may be senior to
other classes of Senior or Subordinate Certificates, as described in
the respective Prospectus Supplement (any such series, a
"Senior/Subordinate Series");
o one or more classes of Certificates (collectively, the "Mezzanine
Certificates") which are Subordinate Certificates but which are senior
to other classes of Subordinate Certificates in respect of such
distributions or losses;
o one or more classes of 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 (each, a "Strip Certificate");
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
Certificates with respect to which certain accrued interest will not
be distributed but rather will be added to their principal balance
(the "Accrual Certificates") on 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 Cut-off Date (as defined
in the applicable Prospectus Supplement) occurs (each, a "Distribution
Date"); or
o other types of classes of Certificates, as described in the related
Prospectu Supplement.
Credit support for each series of Certificates will be provided by a
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy, Bankruptcy
Bond, Letter of Credit, Purchase Obligation, Reserve Fund, Certificate Insurance
Policy, Surety Bond or other credit enhancement as described
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under "Description of Credit Enhancement," or by the subordination of one or
more classes of Certificates as described under "Subordination" or by any
combination of the foregoing.
Form of Certificates
As specified in the related Prospectus Supplement, the Certificates of
each series will be issued either as physical certificates or in book-entry
form. If issued as physical certificates, the Certificates will be in fully
registered form only in the denominations specified in the related Prospectus
Supplement, and will be transferable and exchangeable at the corporate trust
office of the person appointed under the related Pooling and Servicing Agreement
to register the Certificates (the "Certificate Registrar"). No service charge
will be made for any registration of exchange or transfer of Certificates, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. The term "Certificateholder" or "Holder" as used in this
Prospectus 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 ("DTC"), or Cedel Bank, SA ("CEDEL") or the Euroclear System
("Euroclear") (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 Certificates so issued ("Book-Entry
Certificates"), the record holder of those Certificates will be DTC's nominee.
CEDEL and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective depositaries (the "Depositaries"), which in turn will
hold 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
participating organizations ("DTC Participants," and together with the CEDEL and
Euroclear participating organizations, "Participants") and facilitates the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in the accounts of Participants. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include other organizations. Other institutions that are
not Participants but clear through or maintain a custodial relationship with
Participants (those institutions, "Indirect Participants") have indirect access
to DTC's clearance system.
Unless otherwise specified in the related Prospectus Supplement, no person
acquiring an interest in any Book-Entry Certificate (each such person, a
"Beneficial Owner") will be entitled to receive a Certificate representing 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 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-
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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 or
Euroclear participant as a result of a transaction with a DTC Participant (other
than a depositary holding on behalf of CEDEL or Euroclear) will be credited
during a subsequent securities settlement processing day (which must be a
business day for CEDEL or Euroclear, as the case may be) immediately following
the DTC settlement date. Credits or any transactions in those securities settled
during this processing will be reported to the relevant Euroclear Participant or
CEDEL Participants on that business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a DTC Participant (other than the depositary for CEDEL or
Euroclear) will be received with value on the DTC settlement date, but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant Depositaries; however, 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
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
CEDEL, as a professional depository, holds securities for its
participating organizations ("CEDEL Participants") and facilitates the clearance
and settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. As a professional
depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute.
Euroclear was created to hold securities for participants of Euroclear
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty
Trust Company of New York (the "Euroclear Operator"), under contract with
Euroclear Clearance Systems S.C., a Belgian co-operative corporation (the
"Clearance Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Clearance
Cooperative.
The Clearance Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. The Euroclear Operator is the Belgian branch of a New
York banking corporation
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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
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
Distributions 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.
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 Loan-to-Value Ratio at
origination or modification, without regard to any secondary financing.
If so specified in the related Prospectus Supplement, and subject to the
rules of membership of Merscorp, Inc. and/or Mortgage Electronic Registration
Systems, Inc. (together, "MERS") MERS, assignments of the mortgages for the
Mortgage Loans in the related Trust will be registered electronically through
Mortgage Electronic Registration Systems, Inc. (the "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.
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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) (as described below) a set of legal documents relating to each
Mortgage Loan that are in possession of the Depositor, including: (i) the
Mortgage Note and any modification or amendment thereto endorsed without
recourse either in blank or to the order of the Trustee or its nominee; (ii) the
Mortgage (except for any Mortgage not returned from the public recording office)
with evidence of recording indicated thereon or, in the case of a Cooperative
Loan, on the related financing statement; (iii) an assignment in recordable form
of the Mortgage, or 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 (iv) 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, 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 will agree to repurchase or substitute for that
type of Mortgage Loan in certain 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 (i) secure a specific obligation for the benefit
of a specified person (a "Direct Puerto Rico Mortgage") or (ii) secure an
instrument transferable by endorsement (an "Endorsable Puerto Rico Mortgage").
Endorsable Puerto Rico Mortgages do not require an assignment to transfer the
related lien. Rather, transfer of those mortgages follows an effective
endorsement of the related Mortgage Note and, therefore, delivery of the
assignment referred to in clause (iii) of 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
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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 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 above under "Mortgage Loan Program--Representations by Sellers" but
subject to the provisions described below under "--Realization Upon Defaulted
Mortgage Loans." There can be no assurance that the applicable Subservicer or
Seller will fulfill its obligation to purchase any Mortgage Loan as described
above. 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 (each, a "Custodian") 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 certain identifying information in
respect of each such Mortgage Loan, for example, original Loan-to-Value 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 as described above 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
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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 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 above
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.
Under each Pooling and Servicing Agreement, the Master Servicer, either
directly or through Subservicers, will service and administer the Mortgage Loans
assigned to the Trustee as described below.
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 part of the assets transferred to the related Trust (the "Excess
Spread") or will be excluded from the assets transferred to the related Trust
(the "Excluded Spread"). The interest portion of a Realized Loss or
Extraordinary Loss and any partial recovery of interest in respect of the
Mortgage Loans or Mortgage Securities will be allocated between the owners of
any Excess Spread or Excluded Spread and the Certificateholders entitled to
payments of interest as provided in the applicable Pooling and Servicing
Agreement.
Payments on Mortgage Loans; Deposits to Certificate Account
Each Subservicer servicing a Mortgage Loan under a Subservicing Agreement
will establish and maintain an account (the "Subservicing Account") which meets
the requirements described in the Guide from time to time, and is otherwise
acceptable to the Master Servicer. A Subservicing Account must be established
with a Federal Home Loan Bank or with a depository institution (including the
Subservicer itself) whose accounts are insured by the National Credit Union
Share Insurance Fund or the FDIC, and any such depository institution must meet
the minimum rating criteria contained in the Guide. Except as otherwise
permitted by the applicable nationally recognized statistical rating agency or
agencies (each a "Rating Agency") 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 may be held therein.
A Subservicer is required to deposit into its Subservicing Account on a
daily basis all amounts described above under "Mortgage Loan
Program--Subservicing by Sellers" that are received by it in respect of the
Mortgage Loans, less its servicing or other compensation. On or before the date
specified in the Subservicing Agreement, which date may be no later than the
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business 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, certain partial prepayments and liquidation proceeds which must be
remitted to the Master Servicer within five business days of receipt. The
Subservicer is also required to advance on the scheduled date of remittance any
monthly installment of principal and interest, less its servicing or other
compensation, on any Mortgage Loan for which payment was not received from the
Mortgagor. Unless otherwise specified in the related Prospectus Supplement, this
obligation of the Subservicer to advance continues through the first of the
month following the date on which the related Mortgaged Property is sold at a
foreclosure sale or is acquired by the Trust 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 all amounts, net of unreimbursed liquidation expenses and insured
expenses incurred, and unreimbursed Servicing Advances made, by the
related Subservicer, received and retained in connection with the
liquidation of any defaulted Mortgage Loan, by foreclosure or
otherwise ("Liquidation Proceeds"), including all proceeds of any
Special Hazard Insurance Policy, Bankruptcy Bond, Mortgage Pool
Insurance Policy, Primary Insurance Policy and any title, hazard or
other insurance policy or guaranty covering any Mortgage Loan in the
Mortgage Pool (together with any payments under any Letter of Credit,
"Insurance Proceeds") or proceeds from any alternative arrangements
established in lieu of any such insurance and described in the
applicable Prospectus Supplement, other than proceeds to be applied to
the restoration of the related property or released to the Mortgagor
in accordance with the Master Servicer's normal servicing procedures;
o any Buy-Down Funds and, if applicable, investment earnings thereon,
required to be paid to Certificateholders, as described below;
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, 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 below; and
o any amounts required to be transferred from the Certificate Account to
the Custodial Account.
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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, in the name of the Trustee for the benefit of the holders of each
series of Certificates, an account for the disbursement of payments on the
Mortgage Loans evidenced by each series of Certificates (the "Certificate
Account"). Both the Custodial Account and the Certificate Account must be
either:
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 certain permitted investments, which are generally limited to
United States government securities and other investments that are rated, at the
time of acquisition, in one of the categories permitted by the related Pooling
and Servicing Agreement ("Permitted Investments"). A Certificate Account may be
maintained as an interest-bearing or a non-interest-bearing account, or funds
therein may be invested in Permitted Investments as described below. The
Custodial Account may contain funds relating to more than one series of Mortgage
Pass-Through Certificates as well as payments received on other mortgage loans
and assets serviced or master serviced by the Master Servicer that have been
deposited into the Custodial Account.
Unless otherwise 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:
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
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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 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 Subservicing Agreement described above the amount, if
any, of the Buy-Down Funds (and, if applicable, investment earnings thereon) for
each Buy-Down Mortgage Loan that, when added to the amount due from the
Mortgagor on 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 certain Mortgage Loan programs. Any
Buy-Down Funds so remitted to the Master Servicer in connection with a
prepayment described in the preceding sentence will be deemed to reduce the
amount that would be required to be paid by
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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 agreement relating to each
Buy-Down Mortgage Loan (the "Buy-Down Agreement"). If the Mortgagor defaults
during the Buy-Down Period with respect to a Buy-Down Mortgage Loan and the
property securing that Buy-Down Mortgage Loan is sold in liquidation either by
the Master Servicer, the Primary Insurer, the insurer under the Mortgage Pool
Insurance Policy (the "Pool Insurer") or any other insurer, the Subservicer will
be required to withdraw from the Buy-Down Account the Buy-Down Funds and all
investment earnings thereon, if any, and remit the same to the Master Servicer
or, if instructed by the Master Servicer, pay the same to the Primary Insurer or
the Pool Insurer, as the case may be, if the Mortgaged Property is transferred
to 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 above under "Payments on Mortgage Loans; Deposits to
Certificate Account;"
o to reimburse itself or any Subservicer for Advances, or for amounts
advanced to cover taxes, insurance premiums or similar expenses
("Servicing Advances") as to any Mortgaged Property, out of late
payments or collections on the Mortgage Loan with respect to which
those Advances or Servicing Advances were made;
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, 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 Advance previously
made which the Master Servicer has determined to not be ultimately
recoverable from Liquidation Proceeds, Insurance Proceeds or
otherwise (a "Nonrecoverable Advance"), subject to any limitations
described in the Pooling and Servicing Agreement as described in the
related Prospectus Supplement;
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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 "Paying Agent"). 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 (the "Record Date").
Notwithstanding any other reference in this Prospectus to a Distribution
Date, with respect to a series of Certificates as to which the Trust includes
Mortgage Securities, the date on which distributions are to be made to the
holders of the Certificates may be referred to as the "Payment Date," if so
specified in the related Prospectus Supplement.
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. The
"Percentage Interest" represented by a Certificate of a particular class will be
equal to the percentage obtained by dividing the initial principal balance or
notional amount of that Certificate by the aggregate initial amount or notional
balance of all the Certificates of that 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
(each, a "Pass-Through Rate"), which may be a fixed, variable or adjustable
Pass-Through Rate, or any combination of two or more
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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 Record
Date 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. The "Distribution Amount" for a class of Certificates for
any Distribution Date will be the portion, if any, of the amount to be
distributed to 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.
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.
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 "Determination
Date"), the Master Servicer will determine the amounts of principal and interest
which will be passed through to Certificateholders on the immediately succeeding
Distribution Date. Prior to the close of business on the business day next
succeeding each Determination Date, the Master Servicer will furnish a statement
to the Trustee 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.
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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
Mortgage Loan (each, a "Due Date" and
June 2-July 1 (D) collectively, the "Due Period").
- -------------------------------------------------------------------------------
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, Due Periods, remittance dates, Determination Dates and/or Distribution
Dates than those set forth above.
(A)The initial principal balance of the Mortgage Pool will be the aggregate
principal balance of the Mortgage Loans at the close of business on June 1
after deducting principal payments due on or before 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.
(B)Any principal payments received in advance of the scheduled Due Date and not
accompanied by a payment of interest for any period following the date of
payment ("Principal Prepayments") may be received at any time during this
period and will be remitted to the Master Servicer as described in (E)
below for distribution to Certificateholders as described in (F) below.
When a Mortgage Loan is prepaid in full, interest on the amount prepaid is
collected from the Mortgagor only to the date of payment. Partial Principal
Prepayments are applied so as to reduce the principal balances of the
related Mortgage Loans as of the first day of the month in which the
payments are made; no interest will be paid to Certificateholders 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
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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 certain Principal Prepayments in part
received by Subservicers during the month of December will have been remitted
to the Master Servicer within five business days of receipt).
(F)OnJuly 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 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)OnJuly 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.
Advances
The Master Servicer will agree to advance (either out of its own funds,
funds advanced to it by Subservicers or funds being held in the Custodial
Account for future distribution), for the benefit of the Certificateholders, on
or before each Distribution Date, an amount equal to the aggregate of all
scheduled payments of principal (other than any Balloon Amount in the case of a
Balloon Loan) and interest at the applicable Pass-Through Rate or Net Mortgage
Rate, as the case may be (an "Advance"), which were delinquent as of the close
of business on the business day preceding the Determination Date on the Mortgage
Loans, but only to the extent that 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 below under "--Collection and Other Servicing Practices," and no
Advance will be required in connection with any reduction in amounts payable
under the Relief Act or as a result of certain actions taken by a bankruptcy
court. As specified in the related Prospectus Supplement with respect to any
series of Certificates as to which the Trust 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
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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 (e.g., late payments made by the related Mortgagor, any related
Liquidation Proceeds and Insurance Proceeds, proceeds of any applicable form of
credit enhancement, or proceeds of any Mortgage Loan purchased by the Depositor,
Residential Funding, a Subservicer or a Seller under the circumstances described
above).
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 above.
With respect to any Senior/Subordinate Series, so long as the related
Subordinate Certificates remain outstanding and subject to limitations 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 certain
taxes and insurance premiums not paid by Mortgagors on a timely basis. Funds so
advanced may be reimbursable to the Master Servicer to the extent permitted by
the Pooling and Servicing Agreement. Notwithstanding the foregoing, if the
Master Servicer exercises its option, if any, to purchase the assets of a Trust
as described under "The Pooling and Servicing Agreement--Termination; Retirement
of Certificates" below, the Master Servicer will be deemed to have been
reimbursed for all related Advances previously made by it and not theretofore
reimbursed to it.
The Master Servicer's obligation to make Advances may be supported by
another entity, a letter of credit or other method as may be described in the
related Pooling and Servicing Agreement. In the event that the short-term or
long-term obligations of the provider of 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. The
shortfall between a full month's interest due with respect to a Mortgage Loan
and the amount of interest paid or recovered with respect thereto in the event
of a prepayment or liquidation is referred to as a "Prepayment Interest
Shortfall."
If so specified in the related Prospectus Supplement, to the extent funds
are available from the Servicing Fee, the Master Servicer may make an additional
payment to Certificateholders with respect to any Mortgage Loan that prepaid in
full during the related prepayment period equal to the amount, if any, necessary
to assure that, on the related Distribution Date, the Available Distribution
Amount would include with respect to each such Mortgage Loan an amount equal to
interest at the Mortgage Rate (less the Servicing Fee and Excluded Spread, if
any) for that Mortgage Loan from the date of the prepayment to the related Due
Date (that amount, "Compensating Interest"). Compensating Interest will be
limited to the aggregate amount specified in the related Prospectus
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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;
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.
Each amount set forth in the first two items in the list above will be
expressed as a dollar amount per Single Certificate. As to a particular class of
Certificates, a "Single Certificate" generally will evidence a Percentage
Interest obtained by dividing $1,000 by the initial principal balance or
notional balance of all the Certificates of that class, except as otherwise
provided in the related Pooling and Servicing Agreement. In addition to the
information described above, reports
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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 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
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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-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 certain specified conditions. The
original Mortgagor may be released from liability on a Mortgage Loan if the
Master Servicer or Subservicer shall have determined in good faith that 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 (a "Special Servicer"), which will be responsible for the
servicing of certain delinquent Mortgage
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Loans. 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.
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 certain 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 Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be issued to the Trustee or to its nominee on behalf of Certificateholders.
Notwithstanding any acquisition of title and cancellation of the related
Mortgage Loan, the Mortgage Loan (an "REO Mortgage Loan") will be considered for
most purposes to be an outstanding Mortgage Loan held in the Trust until the
time when the Mortgaged Property is sold and all recoverable Liquidation
Proceeds and Insurance Proceeds have been received with respect to the defaulted
Mortgage Loan (a "Liquidated Mortgage Loan").
For purposes of calculations of amounts distributable to
Certificateholders in respect of an REO Mortgage Loan, the amortization schedule
in effect at the time of any 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 below) 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
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time to the extent provided in the related Pooling and Servicing Agreement, for
making payments to Certificateholders.
With respect to a Mortgage Loan in default, the Master Servicer may pursue
foreclosure or similar remedies concurrently with pursuing any remedy for a
breach of a representation and warranty. However, the Master Servicer is not
required to continue to pursue both 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 certain 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 subject to certain 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 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."
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For a discussion of legal rights and limitations associated with the
foreclosure of a Mortgage Loan, see "Certain Legal Aspects of Mortgage Loans."
SUBORDINATION
General
A Senior/Subordinate Series of Certificates will consist of one or more
classes of Senior Certificates and one or more classes of Subordinate
Certificates, as specified in the related Prospectus Supplement. Subordination
of the Subordinate Certificates of any Senior/Subordinate Series will be
effected by the following method, unless an alternative method is specified in
the related Prospectus Supplement. In addition, certain classes of Senior or
Subordinate Certificates may be senior to other classes of Senior or Subordinate
Certificates, as specified in the related Prospectus Supplement.
With respect to any Senior/Subordinate Series, the total amount available
for distribution on each Distribution Date, as well as the method for allocating
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.
With respect to any defaulted Mortgage Loan that is finally liquidated,
the amount of loss realized, if any (as described in the related Pooling and
Servicing Agreement, a "Realized Loss"), will equal the portion of the Stated
Principal Balance remaining after application of all amounts recovered (net of
amounts reimbursable to the Master Servicer for related Advances and expenses)
towards interest and principal owing on the Mortgage Loan. With respect to a
Mortgage Loan the principal balance of which has been reduced in connection with
bankruptcy proceedings, the amount of the reduction will be treated as a
Realized Loss. The "Stated Principal Balance" of any Mortgage Loan as of any
date of determination is equal to 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
thereon has been allocated to any Certificates on or before that date.
If so provided in the Pooling and Servicing Agreement, the Master Servicer
may be permitted, under certain circumstances, to purchase any Mortgage Loan
that is three or more months delinquent in payments of principal and interest,
at the Purchase Price. Any Realized Loss subsequently incurred in connection
with any such Mortgage Loan will be borne by the then-current Certificateholders
of the class or classes that would have borne 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.
With respect to Realized Losses resulting from physical damage to
Mortgaged Properties that are usually of the same type as are covered under a
Special Hazard Insurance Policy, the amount thereof that may be allocated to the
Subordinate Certificates of the related series may be limited to an amount (the
"Special Hazard Amount") specified in the related Prospectus Supplement. See
"Description of Credit Enhancement--Special Hazard Insurance Policies." If so,
any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding classes of Certificates of the related series,
either on a pro rata basis in proportion to their outstanding principal
balances, or as otherwise provided in the related Prospectus Supplement. The
respective amounts of other specified types of losses (including Fraud Losses
and Bankruptcy Losses) that may be borne solely by the Subordinate Certificates
may be similarly limited to an amount (with respect to Fraud Losses, the "Fraud
Loss Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Amount"),
and the Subordinate Certificates may provide no coverage with respect to 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.
As described above, the rights of holders of the various classes of
Certificates of any series to receive distributions of principal and interest is
determined by the aggregate outstanding principal balance of each 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 certain specified periods, which will have the
effect, absent offsetting losses, of accelerating the amortization of the Senior
Certificates and increasing the respective percentage ownership interest
evidenced by the Subordinate Certificates in the related Trust, with a
corresponding decrease in the percentage of the outstanding principal balances
of the Senior Certificates, thereby preserving the availability of the
subordination provided by the Subordinate Certificates. In addition, as
described above, certain 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.
If so provided in the related Prospectus Supplement, certain amounts
otherwise payable on any Distribution Date to holders of Certificates may be
deposited into a Reserve Fund. Amounts held
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in any Reserve Fund may be applied as described under "Description of Credit
Enhancement--Reserve Funds" and in the related Prospectus Supplement.
In lieu of the foregoing provisions, subordination may be effected in the
following manner, or in any other manner as may be described in the related
Prospectus Supplement. The rights of the holders of Subordinate Certificates to
receive any or a specified portion of distributions with respect to the Mortgage
Loans may be subordinated to the extent of the amount described in the related
Prospectus Supplement (the "Subordinate Amount"). As specified in the related
Prospectus Supplement, the Subordinate Amount may be subject to reduction based
upon the amount of losses borne by the holders of the Subordinate Certificates
as a result of 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 above. 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 attributable to the Mortgagor's failure to make any payment of
principal or interest as required under the Mortgage Note, but not
including Special Hazard Losses, Extraordinary Losses or other losses
resulting from damage to a Mortgaged Property, Bankruptcy Losses or
Fraud Losses (any such losses, "Defaulted Mortgage Losses");
o of a type generally covered by a Special Hazard Insurance Policy (any
such losses, "Special Hazard Losses");
o attributable to certain actions which may be taken by a bankruptcy
court in connection with a Mortgage Loan, including a reduction by a
bankruptcy court of the principal balance of or the Mortgage Rate on a
Mortgage Loan or an extension of its maturity (any such losses,
"Bankruptcy Losses"); and
o incurred on defaulted Mortgage Loans as to which there was fraud in
the origination of the Mortgage Loans (any such losses, "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
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thereon. If losses occur that exceed the amount covered by credit support or are
of a type that is not covered by the credit support, Certificateholders will
bear their allocable share of deficiencies. In particular, Defaulted Mortgage
Losses, Special Hazard Losses, Bankruptcy Losses and Fraud Losses in excess of
the amount of coverage provided therefor and losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks ("Extraordinary Losses") will not be covered. To the extent that the
credit enhancement for any series of Certificates is exhausted, the
Certificateholders will bear all further risks of loss not otherwise insured
against.
As described below and in the related Prospectus Supplement, (i) coverage
with respect to Defaulted Mortgage Losses may be provided by a Mortgage Pool
Insurance Policy, (ii) coverage with respect to Special Hazard Losses may be
provided by a Special Hazard Insurance Policy, (iii) coverage with respect to
Bankruptcy Losses may be provided by a Bankruptcy Bond and (iv) 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 certain cash amounts, a deposit of cash into a Reserve Fund or
other pledged assets, or by banks, insurance companies, guarantees or any
combination thereof identified in the related Prospectus Supplement. Coverage
may also be provided by representations made by Residential Funding 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 Loan-to-Value 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, subject to the limitations set forth in any such insurance policy. As
described in the Pooling and Servicing Agreement, credit support may apply to
all of the Mortgage Loans or to certain Mortgage Loans contained in a Mortgage
Pool.
Each Prospectus Supplement will include a description of:
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;
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 (the "Credit
Enhancer"), if applicable. The Pooling and Servicing Agreement or other
documents may be modified in connection with the provisions of any credit
enhancement arrangement to provide for reimbursement rights, control rights or
other provisions that may be required by the Credit Enhancer. To the extent
provided in the applicable Prospectus Supplement and the Pooling and Servicing
Agreement, the credit enhancement
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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 Commission in connection with the
issuance of the related series of Certificates.
Letters of Credit
If any component of credit enhancement as to any series of Certificates is
to be provided by a letter of credit (the "Letter of Credit"), a bank (the
"Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter of
Credit. The Letter of Credit may provide direct coverage with respect to the
Mortgage Loans. The Letter of Credit Bank, the amount available under the Letter
of Credit with respect to each component of credit enhancement, the 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 (each, a
"Mortgage Pool Insurance Policy") obtained by the Depositor for a Trust will be
issued by the Pool Insurer. Each Mortgage Pool Insurance Policy, subject to the
limitations described below and in the Prospectus Supplement, if any, will cover
Defaulted Mortgage Losses in an amount equal to a percentage specified in the
applicable Prospectus Supplement of the aggregate principal balance of the
Mortgage Loans on the Cut-off Date. As described under "--Maintenance of Credit
Enhancement," the Master Servicer will use its best reasonable efforts to
maintain the Mortgage Pool Insurance Policy and to present claims thereunder to
the Pool Insurer on behalf of itself, the Trustee and the Certificateholders.
The Mortgage Pool Insurance Policies, however, are not blanket policies against
loss, since claims thereunder may only be made respecting particular defaulted
Mortgage Loans and only upon satisfaction of specified conditions precedent
described below. Unless specified in the related Prospectus Supplement, the
Mortgage Pool Insurance Policies may not cover losses due to a failure to pay or
denial of a claim under a Primary Insurance Policy, irrespective of the reason
therefor.
Each Mortgage Pool Insurance Policy will provide that no claims may be
validly presented thereunder unless, among other things:
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;
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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 certain
expenses incurred by the Master Servicer or Subservicer on behalf of the Trustee
and Certificateholders, or (b) to pay the amount by which the sum of the
outstanding principal balance of the defaulted Mortgage Loan plus accrued and
unpaid interest at the Mortgage Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Mortgaged Property, in either case net of certain amounts paid or assumed to
have been paid under any related Primary Insurance Policy.
Certificateholders will experience a shortfall in the amount of interest
payable on the related Certificates in connection with the payment of claims
under a Mortgage Pool Insurance Policy because the Pool Insurer is only required
to remit unpaid interest through the date a claim is paid rather than through
the end of the month in which 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 Instrument are insufficient to restore the damaged
property to a condition sufficient to permit recovery under the Mortgage Pool
Insurance Policy, the Master Servicer is not required to expend its own funds to
restore the damaged property unless it determines that (a) 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, (i) fraud or negligence in the origination or servicing of a
Mortgage Loan, including misrepresentation by the Mortgagor, the Seller or other
persons involved in the origination thereof, (ii) failure to construct a
Mortgaged Property in accordance with plans and specifications or (iii)
bankruptcy, except if specified in the related Prospectus Supplement an
endorsement to the Mortgage Pool Insurance Policy provides for insurance against
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.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related series of Certificates by the
aggregate amount of claims paid less the aggregate of the net amounts realized
by the Pool Insurer upon disposition of all foreclosed properties. The amount of
claims paid includes certain expenses incurred by the Master Servicer or
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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 coverage
will be limited. See "--Special Hazard Insurance Policies" below. As a result,
certain hazard risks will not be insured against and may be borne by
Certificateholders.
Special Hazard Insurance Policies
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained for a Trust will be issued by the insurer named in
the related Prospectus Supplement (the "Special Hazard Insurer"). Each Special
Hazard Insurance Policy subject to limitations described below and in the
related Prospectus Supplement, if any, will protect the related
Certificateholders from Special Hazard Losses which are (i) losses due to direct
physical damage to a Mortgaged Property other than any loss of a type covered by
a hazard insurance policy or a flood insurance policy, if applicable, and (ii)
losses from partial damage caused by reason of the application of the
co-insurance clauses contained in hazard insurance policies. See "Insurance
Policies on Mortgage Loans." A Special Hazard Insurance Policy will not cover
losses occasioned by war, civil insurrection, certain governmental actions,
errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, chemical contamination or waste by the
Mortgagor. Aggregate claims under a Special Hazard Insurance Policy will be
limited to the amount set forth in the related Pooling and Servicing Agreement
and will be subject to reduction as 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.
Subject to the foregoing limitations, a Special Hazard Insurance Policy
will provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent 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
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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 certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by 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 certain expenses will not affect the total Insurance
Proceeds paid to Certificateholders, but will affect the relative amounts of
coverage remaining under the related Special Hazard Insurance Policy and
Mortgage Pool Insurance Policy.
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.
Bankruptcy Bonds
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 an amount less than the then outstanding principal balance of the
Mortgage Loan secured by the Mortgaged Property (such difference, 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 reduction in the amount of the
Monthly Payment on the related Mortgage Loan, but not any permanent forgiveness
of principal (a "Debt Service Reduction"). See "Certain Legal Aspects of
Mortgage Loans--Anti-Deficiency Legislation and Other Limitations on Lenders."
Any Bankruptcy Bond to provide coverage for Bankruptcy Losses resulting from
proceedings under the federal Bankruptcy Code obtained for a Trust will be
issued by an insurer named in the related Prospectus Supplement. The level of
coverage under each Bankruptcy Bond will be set forth in the related Prospectus
Supplement.
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Reserve Funds
If so specified in the related Prospectus Supplement, the Depositor will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash or Permitted Investments in specified amounts, or any other
instrument satisfactory to the Rating Agency or Agencies, which will be applied
and maintained in the manner and under the conditions specified in the related
Pooling and Servicing Agreement. In the alternative or in addition to 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. 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 (each, a "Certificate
Insurance Policy") or guaranties or one or more surety bonds (each, a "Surety
Bond"), 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 subject to any limitations and exceptions described in, the related
Prospectus Supplement.
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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.
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 Bond, Certificate Insurance Policy or Surety
Bond, as applicable, on a timely basis, unless the premiums are paid directly by
the Trust. In the event the related insurer ceases to be a "Qualified Insurer"
because it ceases to be qualified under applicable law to transact the insurance
business or coverage is terminated for any reason other than exhaustion of that
coverage, the Master Servicer will use its best reasonable efforts to obtain
from another Qualified Insurer a comparable replacement insurance policy with a
total coverage equal to the then outstanding coverage of 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 ("Freddie Mac"), the Federal
National Mortgage Association ("Fannie Mae") or any successor entity, the Master
Servicer will review, not less often than monthly, the financial condition of
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, subject to the same cost limit. Any losses in market value of
the Certificates associated with any reduction or withdrawal in rating by an
applicable Rating Agency shall be borne by the Certificateholders.
If any property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related hazard insurance policy or any applicable
Special Hazard Insurance Policy are insufficient to restore the damaged property
to a condition sufficient to permit recovery under any Letter of Credit,
Mortgage Pool Insurance Policy or any related Primary Insurance Policy, the
Master Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that 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, subject to 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.
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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 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 (collectively, "Swaps"), and other yield
supplement agreements or similar yield maintenance arrangements that do not
involve swap agreements or other notional principal contracts (collectively,
"Yield Supplement Agreements").
An interest rate Swap is an agreement between two parties
("Counterparties") to exchange a stream of interest payments on an agreed
hypothetical or "notional" principal amount. No principal amount is exchanged
between the Counterparties to an interest rate Swap. In the typical Swap, one
party agrees to pay a fixed rate on a notional principal amount, while the
Counterparty pays a floating rate based on one or more reference interest rates
including the London Interbank Offered Rate ("LIBOR"), a specified bank's prime
rate or U.S. Treasury Bill rates. Interest rate Swaps also permit Counterparties
to exchange a floating rate obligation based upon one reference interest rate
(such as LIBOR) for a floating rate obligation based upon another referenced
interest rate (such as U.S. Treasury Bill rates).
The Swap market has grown substantially in recent years with a significant
number of banks and financial service firms acting both as 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 certain circumstances, there can be no assurance that the Trust will be
able to terminate a Swap or Yield Supplement Agreement when it would be
economically advantageous to the Trust 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 (a "Purchase Obligation") that would become applicable on one or more
specified dates, or upon the occurrence of one or more specified events, or on
demand made by or on behalf of the applicable Certificateholders. A Purchase
Obligation may be in the form of a conditional or unconditional purchase
commitment, liquidity facility, remarketing agreement, maturity guaranty, put
option or demand feature. The terms and conditions of each Purchase Obligation,
including the purchase price, timing and payment procedure, will be described in
the related Prospectus Supplement. A Purchase Obligation with respect to
Mortgage Loans may apply to those Mortgage Loans or to the related Certificates.
Each Purchase Obligation may be a secured or unsecured obligation of 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 Mortgage Insurance Policies
Unless otherwise specified in the related Prospectus Supplement, (i) each
Mortgage Loan having a Loan-to-Value Ratio at origination of over 80% will be
covered by a primary mortgage guaranty insurance policy (a "Primary 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 Loan-to-Value Ratio
equal
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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 Loan-to-Value 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 Loan-to-Value Ratio of the
Mortgage Loan is reduced to 80% or less (or a lesser specified percentage) based
on an appraisal of the Mortgaged Property after the related Closing Date or as a
result of principal payments that reduce the principal balance of the Mortgage
Loan after 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 Loan-to-Value 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 (a "Primary 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 certain 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;
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: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in
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advance by the Primary Insurer, real estate taxes, protection and preservation
expenses and foreclosure and related costs; (ii) in the event of any physical
loss or damage to the Mortgaged Property, have the Mortgaged Property restored
to at least its condition at the effective date of the Primary Insurance Policy
(ordinary wear and tear excepted); and (iii) tender to the Primary Insurer good
and merchantable title to, and possession of, the Mortgaged Property.
For any Certificates offered 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 Loan-to-Value Ratio at origination in excess of 80% and was not the
subject of a Primary Insurance Policy (and was not included in any exception to
the standard or covered by alternate credit enhancement as described in the
related Prospectus Supplement) and that the Mortgage Loan has a then current
Loan-to-Value Ratio in excess of 80%, then the Master Servicer is required to
use its reasonable efforts to obtain and maintain a Primary Insurance Policy to
the extent that 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 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, subject to
the conditions and exclusions specified in each policy. The policies relating to
the Mortgage Loans will be underwritten by different insurers under different
state laws in accordance with different applicable state forms and therefore
will not contain identical terms and conditions, the basic terms thereof are
dictated by respective state laws. 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
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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.
THE DEPOSITOR
The Depositor is an indirect wholly-owned subsidiary of GMAC Mortgage
Group, Inc. ("GMAC Mortgage"), 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, which is also an indirect wholly-owned subsidiary
of GMAC Mortgage. 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, an affiliate of the Depositor, will act as the Master
Servicer or Manager for a series of Certificates.
Residential Funding buys conventional mortgage loans under several loan
purchase programs from mortgage loan originators or sellers nationwide,
including affiliates, that meet its seller/servicer eligibility requirements and
services mortgage loans for its own account and for others. Residential
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Funding's principal executive offices are located at 8400 Normandale Lake
Boulevard, Suite 600, Minneapolis, Minnesota 55437. Its telephone number is
(612) 832-7000. Residential Funding conducts operations from its headquarters in
Minneapolis and from offices located in California, New York, Florida, Georgia
and Maryland. At December 31, 1998, Residential Funding 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'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 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.
THE POOLING AND SERVICING AGREEMENT
As described above 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 certain 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, 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
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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, certain reasonable duties of the Master Servicer
may be performed by an affiliate of the Master Servicer who will be entitled to
compensation therefor.
The Master Servicer will pay or cause to be paid 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 examination conducted by
that firm substantially in accordance with standards established by the
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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 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
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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 (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 certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings regarding the Master
Servicer and certain actions by the Master Servicer indicating its
insolvency or inability to pay its obligations.
A default 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
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Mortgage Loans under certain circumstances) and will be entitled to similar
compensation arrangements. In the event that the Trustee would be obligated to
succeed the Master Servicer but is unwilling so to act, it may appoint or if it
is unable so to act, it shall appoint or petition a court of competent
jurisdiction for the appointment of, a Fannie Mae- or Freddie Mac-approved
mortgage servicing institution with a net worth of at least $10,000,000 to act
as successor to the Master Servicer under the Pooling and Servicing Agreement
(unless otherwise set forth in the Pooling and Servicing Agreement). Pending
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.
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" (a "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
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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 (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 "United States 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
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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 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 above 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 subject to 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 certain 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 described above, if so specified in the related Prospectus Supplement, a
holder of a class of Certificates of the related series (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 Certificate evidencing an interest in a Call Class will be referred to as a
"Call Certificate." 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 100% of the principal balance of the Certificates as of the day of that
purchase plus accrued interest thereon at the applicable Pass-Through Rate (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.
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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. 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 Mortgage Rates (net of servicing fees and any Excess
Spread or Excluded Spread) of the related Mortgage Loans (the "Net Mortgage
Rate") for the month preceding the Distribution Date. An adjustable Pass-Through
Rate may be calculated by reference to an index or otherwise.
The aggregate payments of interest on a class of Certificates, and the
yield to maturity thereon, will be affected by the rate of payment of principal
on the Certificates, or the rate of reduction in the notional amount of
Certificates entitled to payments of interest only, and, in the case
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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 certain 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
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
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amount. See "Description of the Certificates--Prepayment Interest Shortfalls."
Neither full or partial principal prepayments nor Liquidation Proceeds will be
distributed until the Distribution Date in the month following receipt. See
"Maturity and Prepayment Considerations."
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans and thus the yield on the
Certificates. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance or limited documentation mortgage loans, and on Mortgage
Loans with high Loan-to-Value Ratios, may be higher than for other types of
Mortgage Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans will be affected by the general economic
condition of the region of the country in which the related Mortgaged Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values. The risk of loss may also be greater on mortgage loans with
Loan-to-Value Ratios greater than 80% and with no Primary Insurance Policies.
The yield on any class of Certificates and the timing of principal payments 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 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'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
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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 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;
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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 certain 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 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, certain Mortgage Securities included in a Mortgage Pool may
be backed by underlying Mortgage Loans having differing interest rates.
Accordingly, the rate at which principal payments are received on the related
Certificates will, to 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
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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.
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 certain 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 certain 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 (i.e., 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 certain deed of trust,
transactions, the directions of the beneficiary.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans may include Cooperative Loans. Each Cooperative
Note evidencing a Cooperative Loan will be secured by a security interest in
shares issued by the related corporation (a "Cooperative") that owns the related
apartment building, which is a corporation entitled to be treated as a housing
cooperative under federal tax law, and in the related proprietary lease or
occupancy agreement granting exclusive rights to occupy a specific dwelling unit
in the Cooperative's building. The security agreement will create a lien upon,
or grant a security interest in, the Cooperative shares and proprietary leases
or occupancy agreements, the priority of which will depend on, 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.
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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 or ordinary expenses. An
ownership interest in a Cooperative and accompanying occupancy rights may be
financed through a Cooperative Loan evidenced by a Cooperative Note and secured
by an assignment of and a security interest in the occupancy agreement or
proprietary lease and a security interest in the related shares of the related
Cooperative. The lender generally takes possession of the share certificate and
a counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the Cooperative Note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares. See "--Foreclosure on Shares of Cooperatives" below.
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Tax Aspects of Cooperative Ownership
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Internal Revenue Code of 1986 (the "Code")) of a corporation that qualifies as a
"cooperative housing corporation" within the meaning of Section 216(b)(1) of the
Code is allowed a deduction for amounts paid or accrued within his or her
taxable year to the corporation representing his or her proportionate share of
certain interest expenses and real estate taxes allowable as a deduction under
Section 216(a) of the Code to the corporation under Sections 163 and 164 of the
Code. In order for a corporation to qualify under Section 216(b)(1) of the Code
for its taxable year in which 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 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 Code with respect to those years. In view of the significance of the tax
benefits accorded tenant-stockholders of a corporation that qualifies under
Section 216(b)(1) of the Code, the likelihood that 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 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.
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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 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
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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, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay
rent or other obligations or charges owed by 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.
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Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
A foreclosure on the Cooperative shares is accomplished by public sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner. Whether
a sale has been conducted in a "commercially reasonable" manner will depend on
the facts in each case. In determining commercial reasonableness, a court will
look to the notice given the debtor and the method, manner, time, place and
terms of the sale and the sale price. Generally, a sale conducted according to
the usual practice of creditors selling similar collateral in the same area will
be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "--Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust, 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 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
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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 certain
circumstances, including circumstances where the disposition of the collateral,
which, in the case of a Cooperative Loan, would be the shares of the Cooperative
and the related proprietary lease or occupancy agreement, was not conducted in a
commercially reasonable manner.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its collateral and/or
enforce a deficiency judgment. For example, under the federal bankruptcy law,
all actions against the debtor, the debtor's property and any co-debtor are
automatically stayed upon the filing of a bankruptcy petition. Moreover, a court
having federal bankruptcy jurisdiction may permit a debtor through its Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default 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 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.
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Certain tax liens arising under the Code may, in certain circumstances,
have priority over the lien of a mortgage, deed to secure debt or deed of trust.
This may have the effect of delaying or interfering with the enforcement of
rights with respect to a defaulted Mortgage Loan.
In addition, substantive requirements are imposed upon mortgage lenders in
connection with the origination and the servicing of mortgage loans by numerous
federal and some state consumer protection laws. These laws include the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit
Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related
statutes. These federal laws impose specific statutory liabilities upon lenders
who originate mortgage loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the mortgage loans.
Some of the Mortgage Loans may be subject to special rules, disclosure
requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994
(such Mortgage Loans, "High Cost Loans"), if those Mortgage Loans were
originated on or after October 1, 1995, are not mortgage loans made to finance
the purchase of the mortgaged property and have interest rates or origination
costs in excess of prescribed levels. Purchasers or assignees of any High Cost
Loan, including any Trust, could be liable for all claims and subject to all
defenses arising under these provisions 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 (the "Garn-St Germain Act"), preempts state constitutional,
statutory and case law that prohibit the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, subject
to 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
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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 ("Title V"), provides that state usury limitations shall not apply
to certain types of residential first mortgage loans, including cooperative
loans, originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first three
months of 1980. The Office of Thrift Supervision (the "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, 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 ("Title VIII").
Title VIII provides that, notwithstanding any state law to the contrary, (i)
state-chartered banks may originate alternative mortgage instruments in
accordance with regulations promulgated by the Comptroller of the Currency with
respect to the origination of alternative mortgage instruments by national
banks, (ii) state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions and (iii) all other non-federally chartered
housing creditors, including state-chartered
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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 ("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 mortgaged property may
become liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Conservation Act") amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for a lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
Other federal and state laws in 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, certain federal statutes and certain states by statute impose a lien
for any cleanup costs incurred by that state on the property that is the subject
of the cleanup costs (an "Environmental Lien"). All subsequent liens on that
property are usually subordinated
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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 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 (the "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 certain
circumstances, during an additional three month period thereafter. Thus, in the
event that the Relief Act or similar legislation or regulations applies to any
Mortgage Loan which goes into default, there may be delays in payment and losses
on the related Certificates in connection therewith. Any other interest
shortfalls, deferrals or forgiveness of payments on the Mortgage Loans resulting
from similar legislation or regulations may result in delays in payments or
losses to Certificateholders of the related series.
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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 ("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 ("DIDMC") and as a result, a mortgage loan that
provided for negative amortization violated New Hampshire's requirement that
first mortgage loans provide for computation of interest on a simple interest
basis. The court did not address the applicability of the Alternative Mortgage
Transaction Parity Act of 1982, which authorizes a lender to make residential
mortgage loans that provide for negative amortization. As a result, the
enforceability of compound interest on mortgage loans that provide for negative
amortization is unclear. The case, which was decided by the First Circuit Court
of Appeals, is binding authority only on Federal District Courts in Maine, New
Hampshire, Massachusetts, Rhode Island and Puerto Rico.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Code and does not purport to discuss all federal
income tax consequences that may be applicable to particular categories of
investors, some of which, 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
(the "REMIC Provisions") of the Code. The Prospectus Supplement for each series
of Certificates will indicate whether a REMIC election or elections will be made
for the related Trust 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 issuance of the related Certificates. Furthermore, the tax
discussion relating to that structure will be provided in the Prospectus
Supplement for that series.
The following discussion is based in part upon the rules governing
original issue discount that are described in Sections 1271 through 1273 and
Section 1275 of the Code and in the Treasury regulations issued thereunder (the
"OID Regulations"), and in part upon the REMIC Provisions and the Treasury
regulations issued thereunder (the "REMIC Regulations"). The OID Regulations,
which are effective with respect to debt instruments issued on or after April 4,
1994, do not adequately address certain issues relevant to, and in some
instances provide that they are not applicable to, securities similar to the
Certificates.
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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" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for that status during any taxable
year, the 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 below. Although
the 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 Code and assets described in Section
7701(a)(19)(C) of the 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 Code to the extent that those Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3)(C) of the Code if
transferred to another REMIC on its startup day in exchange for regular or
residual interests in that REMIC. The determination as to the percentage of the
REMIC's assets that constitute assets described in the foregoing sections of the
Code will be made with respect to each calendar quarter based on the average
adjusted basis of each category of the assets held by the REMIC during 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
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purposes of all of the foregoing sections. In addition, in some instances
Mortgage Loans (including Additional Collateral Loans) may not be treated
entirely as assets described in the foregoing sections. If the assets of a REMIC
include Additional Collateral Loans, the non-real property collateral, while
itself not an asset of the REMIC, could cause the Mortgage Loans not to qualify
for one or more of those characterizations. If so, the related Prospectus
Supplement will describe the Mortgage Loans (including Additional Collateral
Loans) that may not be so treated. The REMIC Regulations do provide, however,
that payments on Mortgage Loans held pending distribution are considered part of
the Mortgage Loans for purposes of Section 856(c)(4)(A) of the Code.
Tiered REMIC Structures
For some series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related Trust as REMICs ("Tiered
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 Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on the Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates
General
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC Regular Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC
Regular Certificates under an accrual method.
Original Issue Discount
Some REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount 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 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.
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The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of 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 (the "Committee Report") accompanying the Tax Reform
Act of 1986 indicates that the regulations will provide that the prepayment
assumption used with respect to a REMIC Regular Certificate must be the same as
that used in pricing the initial offering of the REMIC Regular Certificate. The
prepayment assumption used by the Master Servicer in reporting original issue
discount for each series of REMIC Regular Certificates (the "Prepayment
Assumption") will be consistent with this standard and will be disclosed in the
related Prospectus Supplement. However, neither the 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 REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for 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 ("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
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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 Date, and that portion of the interest paid on the first
Distribution Date in excess of interest accrued for a number of days
corresponding to the number of days from the Closing Date to the first
Distribution Date should be included in the stated redemption price of 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
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
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based on the Mortgage Loans being prepaid at a rate equal to the Prepayment
Assumption and (2) using a discount rate equal to the original yield to maturity
of the Certificate. For these purposes, the original yield to maturity of the
Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of 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 Section 1276 of the 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
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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 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 Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is to be used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect 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
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under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income.
In addition, under Section 1277 of the Code, a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any 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 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, further treating the Certificateholder as having made the election to
amortize premium generally. See "--Market Discount." The Committee Report states
that the same rules that apply to accrual of market discount, which rules will
require use of a Prepayment Assumption in accruing market discount with respect
to REMIC Regular Certificates without regard to whether those Certificates have
original issue discount, will also apply in amortizing bond premium under
Section 171 of the Code.
Realized Losses
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire 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 Code until the holder's Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to 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
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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 of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that 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 below in "--Taxable Income of the REMIC"
and will be taxable to the REMIC Residual Certificateholders without regard to
the timing or amount of cash distributions by the REMIC. Ordinary income derived
from REMIC Residual Certificates will be "portfolio income" for purposes of the
taxation of taxpayers subject to limitations under Section 469 of the Code on
the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased 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.
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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 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 (that is, under the constant yield method taking into account
the Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include 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
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Regular Certificates. It is anticipated that each REMIC will elect under Section
171 of the Code to amortize any premium on the Mortgage Loans. Premium on any
Mortgage Loan to which 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 a price in excess of
the stated redemption price of that class (the excess, "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of 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 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 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 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
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carried forward indefinitely to future calendar quarters and, subject to the
same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which 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.
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
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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 (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates."
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions; provided, however, that for purposes
of (ii), alternative minimum taxable income is determined without regard to the
special rule that taxable income cannot be less than excess inclusions. The
latter rule has the effect of preventing nonrefundable tax credits from reducing
the taxpayer's income tax to an amount lower than the alternative minimum tax on
excess inclusions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to 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
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 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 certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If 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
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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 certain 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.
Mark-to-Market Rules
On December 24, 1996, the IRS released final regulations (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a REMIC Residual Certificate acquired on or after January 4, 1995
is not treated as a security and thus may not be marked to market. Prospective
purchasers of a REMIC Residual Certificate should consult their tax advisors
regarding the possible application of the mark-to-market requirement to REMIC
Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of 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 subject to the
limitation of Section 67 of the 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 Code provides that the amount of itemized
deductions otherwise
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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 subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates or
trusts, no deduction will be allowed for such holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of such fees and other deductions will be
included in the holder's gross income. Accordingly, the REMIC Certificates may
not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates or
trusts. 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" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the Certificate, which rate is computed and published
monthly by the IRS) of the total anticipated excess inclusions with respect to
the REMIC Residual Certificate for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
anticipated excess inclusions must be determined as of the date that the REMIC
Residual Certificate is transferred and must be based on events that have
occurred up to the time of 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 (i) residual interests in the entity are not held by disqualified
organizations and (ii) information necessary for the application of the tax
described herein will be made available. Restrictions on the transfer of REMIC
Residual Certificates and other provisions that are intended to meet this
requirement will be included in the Pooling and Servicing Agreement, including
provisions (a) requiring any transferee of a REMIC Residual Certificate to
provide an affidavit representing that it is not a "disqualified organization"
and is not acquiring the REMIC Residual Certificate on behalf of a "disqualified
organization," undertaking to maintain that status and agreeing to obtain a
similar affidavit from any person to whom it shall transfer the REMIC Residual
Certificate, (b) providing that any transfer of a REMIC Residual Certificate to
a "disqualified person" shall be null and void and (c) granting to the Master
Servicer the right, without notice to the holder or any prior holder, to sell to
a purchaser of its choice any REMIC Residual Certificate that shall become owned
by a "disqualified organization" despite (a) and (b) above.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in that entity,
then a tax will be imposed on the entity equal to the product of
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(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.
For these purposes, a "disqualified organization" 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)
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.
For these purposes, a "pass-through entity" means 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.
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.
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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 previously unrecognized market discount
that accrued during the period the Certificate was held. See "--Taxation of
Owners of REMIC Regular Certificates-- Discount."
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which 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 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 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 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 Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to 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
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is not anticipated that any REMIC will engage in any prohibited transactions in
which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (the
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to 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 Code, the
REMIC will be treated as a partnership and REMIC Residual Certificateholders
will be treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Trustee will file REMIC federal income tax returns on behalf of
the related REMIC and the entity identified as the REMIC Administrator in the
related Pooling and Servicing Agreement (the "REMIC Administrator") will prepare
the REMIC federal
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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 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 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.
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Backup Withholding with Respect to REMIC Certificates
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of 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" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not be subject to United States federal
income or withholding tax 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 Code), and which was treated as a United States
person on August 19, 1996, may elect to continue to be treated as a United
States person notwithstanding the previous sentence. It is possible that the IRS
may assert that the foregoing tax exemption should not apply with respect to a
REMIC Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions 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.
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New Withholding Regulations
The Treasury Department has issued new regulations (the "New Regulations")
which make modifications to the withholding, backup withholding and information
reporting rules described above. The New Regulations attempt to unify
certification requirements and modify reliance standards. The New Regulations
will generally be effective for payments made after December 31, 1999, subject
to certain transition rules. Prospective investors are urged to consult their
tax advisors regarding the New Regulations.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "United
States Federal Income Tax Consequences," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and disposition
of the Certificates offered hereunder. State tax law may differ substantially
from the corresponding federal tax law, and the discussion above does not
purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax advisors
with respect to the various tax consequences of investments in the Certificates
offered hereby.
ERISA CONSIDERATIONS
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") impose fiduciary and prohibited transaction
restrictions on employee pension and welfare benefit plans subject to ERISA
("ERISA Plans") and on certain other retirement plans and arrangements,
including individual retirement accounts and annuities, Keogh plans, bank
collective investment funds and insurance company general and separate accounts
in which those ERISA Plans are invested. Section 4975 of the Code imposes
essentially the same prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code and on individual
retirement accounts described in Section 408 of the Code (collectively,
"Tax-Favored Plans").
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
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 Code, however, is subject to the
prohibited transaction rules in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those
of investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "plan assets" of ERISA Plans and Tax-Favored Plans (collectively,
"Plans") and persons ("Parties in Interest" under ERISA or "Disqualified
Persons" under the Code, collectively, "Parties in Interest") who have specified
relationships to the Plans, unless a statutory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to a penalty (or an excise tax) imposed under Section
502(i) of ERISA or Section 4975 of the Code, unless a statutory or
administrative exemption is available with respect to any transaction of this
sort.
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Plan Asset Regulations
An investment of Plan Assets in Certificates may cause the underlying
Mortgage Loans, Mortgage Securities or any other assets included in a Trust to
be deemed "plan assets" of the Plan. The U.S. Department of Labor (the "DOL")
has promulgated regulations at 29 C.F.R. Section 2510.3-101 (the "DOL
Regulations") concerning whether or not a Plan's assets would be deemed to
include an interest in the underlying assets of an entity, 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
Code, when a Plan 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,
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 reliance upon the availability of any exception under the DOL Regulations.
For purposes of this section, the term "plan assets" ("Plan Assets") or "assets
of a Plan" has the meaning specified in the DOL Regulations and includes an
undivided interest in the underlying assets of certain entities in which a Plan
invests.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust 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 Plan or of a Plan holding an
interest in such an entity. If so, the acquisition or holding of Certificates by
or on behalf of the investing Plan could also give rise to a prohibited
transaction under ERISA and/or Section 4975 of the Code, unless some statutory
or administrative exemption is available. Certificates acquired by a Plan would
be assets of that Plan. Under the DOL Regulations, a Trust, including the
Mortgage Loans, Mortgage Securities or any other assets held in the Trust, may
also be deemed to be assets of each Plan that acquires Certificates. Special
caution should be exercised before Plan Assets are used to acquire a Certificate
in those circumstances, especially if, with respect to the 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 Plan Assets; or (ii)
has authority or responsibility to give, or regularly gives, investment advice
with respect to 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 Plan Assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets, and any person who provides investment
advice with respect to the 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 Plan Assets,
then any party exercising management or discretionary control with respect to
those Plan Assets may be deemed to be a Plan "fiduciary," and thus subject to
the fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, if the Mortgage Loans, Mortgage Securities or any other assets held in
a Trust were to constitute Plan Assets, then the acquisition or holding of
Certificates by, on behalf of a Plan or with Plan Assets, as well as the
operation of such Trust, may constitute or result in a prohibited transaction
under ERISA and the Code.
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Prohibited Transaction Exemption
The DOL has issued an individual exemption, Prohibited Transaction
Exemption ("PTE") 94-29, 59 Fed. Reg. 14674 (March 29, 1994) as amended by PTE
97-34, 62 Fed. Reg. 39021 (July 21, 1997) (the "Exemption"), to Residential
Funding and certain of its affiliates, which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on the prohibited transactions pursuant to Section
4975(a) and (b) of the Code, certain transactions, among others, relating to the
servicing and operation of mortgage pools of certain secured obligations
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 Plan or with Plan Assets must be on terms that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an unrelated
party. Second, the Exemption only applies to Certificates evidencing rights and
interests that are not subordinated to the rights and interests evidenced by the
other Certificates of the same trust. Third, the Certificates at the time of
acquisition by a Plan or with Plan Assets must be rated in one of the three
highest generic rating categories by Standard & Poor's, a division of McGraw
Hill Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch IBCA, Inc. (collectively, the "Exemption Rating Agencies").
Fourth, the Trustee cannot be an affiliate of any other member of the
"Restricted Group" which consists of any Underwriter, the 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 Plan or Plan Asset investor must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Commission under
the Securities Act of 1933, as amended. In addition, except as otherwise
specified in the related Prospectus Supplement, the exemptive relief afforded by
the Exemption may not apply to any Certificates where the related Trust contains
a Swap.
The Exemption also requires that each Trust meet the following
requirements:
o the Trust must consist solely of assets of the type that have been
included in other investment pools
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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 Plan or with 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 Plan or with Plan
Assets.
A fiduciary of or other investor of Plan Assets contemplating purchasing a
Certificate must make its own determination that the general conditions
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
Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in connection
with the direct or indirect sale, exchange, transfer, holding or the direct or
indirect acquisition or disposition in the secondary market of Certificates by
or with Plan Assets. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E) and 406(a)(2) of ERISA for the acquisition or holding of a
Certificate by or with Plan Assets of an Excluded Plan by any person who has
discretionary authority or renders investment advice with respect to Plan Assets
of the Excluded Plan. For purposes of the Certificates, an "Excluded Plan" is a
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
Code by reason of Section 4975(c)(1)(E) of the Code, in connection with (1) the
direct or indirect sale, exchange or transfer of Certificates in the initial
issuance of Certificates between the Depositor or an Underwriter and a Plan when
the person who has discretionary authority or renders investment advice with
respect to the investment of the relevant Plan Assets in the Certificates is (a)
a mortgagor with respect to 5% or less of the fair market value of the assets of
a Trust or (b) an affiliate of such a person, (2) the direct or indirect
acquisition or disposition in the secondary market of Certificates by a Plan or
with Plan Assets and (3) the holding of Certificates by a Plan or with Plan
Assets.
Additionally, if specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c) of the Code, for
transactions in connection with the servicing, management and operation of the
Mortgage Pools. The 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 Code by reason of Section 4975(c) of
the Code, for transactions in connection with the servicing, management and
operation of the Mortgage Pools, provided that the general conditions of the
Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code, if those restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party in Interest with respect to an investing Plan, or
a Plan holding interests in the investing entity holding Plan Assets, by virtue
of
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providing services to the Plan or the Plan Assets, or by virtue of having
specified relationships to such a person, solely as a result of the Plan's
ownership of Certificates.
Before purchasing a Certificate, a fiduciary or other investor of Plan
Assets should itself confirm that (a) the Certificates constitute "certificates"
for purposes of the Exemption and (b) the specific and general conditions
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 Plan
Asset investor should consider its general fiduciary obligations under ERISA in
determining whether to purchase any Certificates with Plan Assets.
Any fiduciary or other Plan Asset investor that proposes to purchase
Certificates on behalf of a Plan or with Plan Assets should consult with its
counsel with respect to the potential applicability of ERISA and the Code to
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 Plan Asset investor should consider the
availability of the Exemption or Prohibited Transaction Class Exemption ("PTCE")
83-1 ("PTCE 83-1") for certain transactions involving mortgage pool investment
trusts. However, PTCE 83-1 does not provide exemptive relief with respect to
Certificates evidencing interests in Trusts which include Cooperative Loans or
certain types of Mortgage Securities, or which contain a Swap. In addition, the
fiduciary or other Plan Asset investor should consider the availability of other
class exemptions granted by the DOL, which provide relief from certain of the
prohibited transaction provisions of ERISA and the related excise tax provisions
of Section 4975 of the Code, including Sections I and III of PTCE 95-60,
regarding transactions by insurance company general accounts. The related
Prospectus Supplement may contain additional information regarding the
application of the Exemption, PTCE 83-1, PTCE 95-60 or other DOL class exemption
with respect to the Certificates offered thereby. There can be no assurance that
any of these exemptions will apply with respect to any particular Plan's or
other Plan Asset investor's investment in the Certificates or, even if an
exemption were deemed to apply, that any exemption would apply to all prohibited
transactions that may occur in connection with 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 Code, including the prohibited
transaction restrictions imposed by ERISA and the related excise taxes imposed
by Section 4975 of the Code, for transactions involving an insurance company
general account. Under Section 401(c) of ERISA, the DOL published proposed
regulations on December 22, 1997, [but the required final regulations (the
"401(c) Regulations") have not been issued as of the date of this Prospectus.]
The 401(c) Regulations are to provide guidance for the purpose of
determining, in cases where insurance policies or annuity contracts supported by
an insurer's general account are issued to or for the benefit of a Plan on or
before December 31, 1998, which general account assets constitute Plan Assets.
Section 401(c) of ERISA generally provides that, until the date which is 18
months after the 401(c) Regulations become final, no person shall be subject to
liability under Part 4 of Title I of ERISA or Section 4975 of the Code on the
basis of a claim that the assets of an insurance company general account
constitute Plan Assets, unless (i) as otherwise provided by the Secretary of
Labor in the 401(c) Regulations to prevent avoidance of the regulations or (ii)
an action
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is brought by the Secretary of Labor for certain breaches of fiduciary duty
which would also constitute a violation of federal or state criminal law. Any
assets of an insurance company general account which support insurance policies
or annuity contracts issued to a Plan after December 31, 1998 or issued to Plans
on or before December 31, 1998 for which the insurance company does not comply
with the 401(c) Regulations may be treated as Plan Assets. In addition, because
Section 401(c) does not relate to insurance company separate accounts, separate
account assets are still treated as Plan Assets of any Plan invested in 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 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 Plan, to a
trustee or other person acting on behalf of any Plan, or to any other person
using 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 Plan or with Plan Assets is permissible
under applicable law, will not constitute or result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code and will not subject the
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 Plan or with Plan Assets is permissible under applicable law, will
not constitute or result in a non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the 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 Plan that is exempt from federal income taxation under Section 501 of
the Code (a "Tax-Exempt Investor") nonetheless will be subject to federal income
taxation to the extent that its income is "unrelated business taxable income"
("UBTI") within the meaning of Section 512 of the Code. All "excess inclusions"
of a REMIC allocated to a REMIC Residual Certificate held by a Tax-Exempt
Investor will be considered UBTI and thus will be subject to federal income tax.
See "United States Federal Income Tax Consequences-- Taxation of Owners of REMIC
Residual Certificates--Excess Inclusions."
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Consultation with Counsel
There can be no assurance that the Exemption or any other DOL exemption
will apply with respect to any particular Plan that acquires the Certificates
or, even if all of the conditions specified therein were satisfied, that the
exemption would apply to all transactions involving a Trust. Prospective Plan
investors should consult with their legal counsel concerning the impact of ERISA
and the Code and the potential consequences to their specific circumstances
prior to making an investment in the Certificates.
Any fiduciary or other investor of Plan Assets that proposes to acquire or
hold Certificates on behalf of a Plan or with Plan Assets should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code to the proposed investment and the Exemption
and the availability of exemptive relief under PTCE 83-1, Sections I and III of
PTCE 95-60 or any other DOL class exemption.
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. If so specified in the related
Prospectus Supplement, 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 ("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.
On April 23, 1998, the Federal Financial Institutions Examination Council
issued a revised supervisory policy statement (the "1998 Policy Statement")
applicable to all depository institutions, setting forth guidelines for
investments in "high-risk mortgage securities." The 1998 Policy
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Statement was adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC, the National Credit Union Administration
(the "NCUA") and the 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 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" ("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 certain investors either
to purchase certain classes of Certificates or to purchase any class of
Certificates representing more than a specified percentage of the investors'
assets. The 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
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
114
<PAGE>
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 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.
115
<PAGE>
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
The Depositor has filed the Registration Statement with the Commission.
The Depositor is also subject to some of the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and,
accordingly, will file reports thereunder with the Commission. The Registration
Statement and the exhibits thereto, and reports and other information filed by
the Depositor pursuant to the Exchange Act can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at certain of its Regional Offices located as
follows: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048 and electronically through
the Commission's Electronic Data Gathering, Analysis and Retrieval System at the
Commission's Web Site (http://www.sec.gov).
REPORTS TO CERTIFICATEHOLDERS
Monthly reports which contain information concerning the trust fund for a
series of certificates will be sent by or on behalf of the master servicer or
the trustee to each holder of record of the certificates of the related series.
See "Description of the Certificates--Reports to Certificateholders." Reports
forwarded to holders will contain financial information that has not been
116
<PAGE>
examined or reported upon by an independent certified public accountant. The
depositor will file with the 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.
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 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.
117
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
1998 Policy Statement......................................................113
401(C) Regulations.........................................................111
Accrual Certificates........................................................26
Additional Collateral........................................................8
Additional Collateral Loan Seller............................................8
Additional Collateral Requirement............................................8
Advance.....................................................................40
Affiliated Sellers...........................................................5
Appraised Value.............................................................11
ARM Loans....................................................................7
Balloon Amount...............................................................8
Balloon Loans................................................................8
Bankruptcy Amount...........................................................48
Bankruptcy Losses...........................................................49
Beneficial Owner............................................................27
Book-Entry Certificates.....................................................27
Buy-Down Account............................................................12
Buy-Down Agreement..........................................................36
Buy-Down Funds..............................................................12
Buy-Down Mortgage Loans.....................................................12
Buy-Down Period.............................................................12
Call Certificate............................................................68
Call Class..................................................................68
Call Price..................................................................68
CEDEL ......................................................................27
CEDEL Participants..........................................................28
CERCLA......................................................................84
Certificate Account.........................................................34
Certificate Administrator...................................................13
Certificate Insurance Policy................................................55
Certificate Registrar.......................................................27
Certificateholder...........................................................27
Certificates.................................................................4
Clearance Cooperative.......................................................28
Closing Date................................................................90
Code ......................................................................77
Commission..................................................................12
Committee Report............................................................90
Compensating Interest.......................................................41
Conservation Act............................................................84
Contributions Tax..........................................................104
Convertible Mortgage Loan...................................................11
Cooperative.................................................................75
Cooperative Loans............................................................4
Cooperative Note............................................................75
Cooperative Notes............................................................4
Counterparties..............................................................57
Credit Enhancer.............................................................50
Credit Scores...............................................................15
Custodial Account...........................................................21
Custodian...................................................................31
Debt Service Reduction......................................................54
Defaulted Mortgage Losses...................................................49
Deferred Interest............................................................7
Deficient Valuation.........................................................54
Deleted Mortgage Loan.......................................................21
Depositaries................................................................27
Designated Seller Transaction................................................5
Determination Date..........................................................38
DIDMC ......................................................................86
Direct Puerto Rico Mortgage.................................................30
Disqualified Persons.......................................................107
Distribution Amount.........................................................38
Distribution Date...........................................................26
DOL .....................................................................108
DOL Regulations............................................................108
DTC ......................................................................27
DTC Participants............................................................27
Due Date....................................................................39
Due Period..................................................................39
Eligible Account............................................................34
Endorsable Puerto Rico Mortgage.............................................30
Environmental Lien..........................................................84
ERISA .....................................................................107
ERISA Plans................................................................107
Euroclear...................................................................27
Euroclear Operator..........................................................28
Euroclear Participants......................................................28
Excess Spread...............................................................32
Exchange Act...............................................................116
Excluded Spread.............................................................32
Exemption..................................................................109
Exemption Rating Agencies..................................................109
Extraordinary Losses........................................................50
Fannie Mae..................................................................56
FDIC ......................................................................17
Form 8-K....................................................................12
Fraud Loss Amount...........................................................48
Fraud Losses................................................................49
Freddie Mac.................................................................56
Garn-St Germain Act.........................................................82
Guide ......................................................................13
High Cost Loans.............................................................82
Holder......................................................................27
Index .......................................................................7
Indirect Participants.......................................................27
118
<PAGE>
Insurance Proceeds..........................................................33
IRS ......................................................................90
Issue Premium...............................................................97
Letter of Credit............................................................51
Letter of Credit Bank.......................................................51
LIBOR ......................................................................57
Liquidated Mortgage Loan....................................................45
Liquidation Proceeds........................................................33
Loan-to-Value Ratio..........................................................8
Manager......................................................................6
Mark-to-Market Regulations.................................................100
Master Commitments..........................................................14
Master Servicer...........................................................4, 5
MERS ......................................................................29
MERS(R) System..............................................................29
Mezzanine Certificates......................................................26
Modified Mortgage Loan.......................................................9
Mortgage Loans...............................................................4
Mortgage Notes...............................................................4
Mortgage Pool................................................................4
Mortgage Pool Insurance Policy..............................................51
Mortgage Rate................................................................7
Mortgage Securities..........................................................4
Mortgaged Properties.........................................................4
Mortgages....................................................................4
Mortgagor....................................................................8
NCUA .....................................................................114
Net Mortgage Rate...........................................................69
New Regulations............................................................107
Nonrecoverable Advance......................................................36
Note Margin..................................................................7
OID Regulations.............................................................87
OTS .................................................................83, 114
Overcollateralization.......................................................49
Participants................................................................27
Parties in Interest........................................................107
Pass-Through Rate...........................................................37
Paying Agent................................................................37
Payment Date................................................................37
Percentage Interest.........................................................37
Permitted Investments.......................................................34
Plan Assets................................................................108
Plans .....................................................................107
Pledged Asset Mortgage Loans.................................................9
Pledged Assets...............................................................9
Pool Insurer................................................................36
Pooling and Servicing Agreement..............................................4
Prepayment Assumption.......................................................90
Prepayment Interest Shortfall...............................................41
Primary Insurance Policy....................................................58
Primary Insurer.............................................................59
Principal Prepayments.......................................................39
Prohibited Transactions Tax................................................103
Prospectus Supplement........................................................4
PTCE .....................................................................111
PTCE 83-1..................................................................111
PTE .....................................................................109
Puerto Rico Mortgage Loans...................................................6
Purchase Obligation.........................................................58
Purchase Price..............................................................20
Qualified Insurer...........................................................56
Qualified Substitute Mortgage Loan..........................................21
Rating Agency...............................................................32
Realized Loss...............................................................47
Record Date.................................................................37
Registration Statement......................................................26
Relief Act..................................................................85
REMIC ......................................................................66
REMIC Administrator........................................................104
REMIC Provisions............................................................87
REMIC Regular Certificates..................................................88
REMIC Regulations...........................................................87
REMIC Residual Certificates.................................................88
REO Mortgage Loan...........................................................45
Reserve Fund................................................................55
Residential Funding..........................................................5
RICO ......................................................................86
Seller......................................................................22
Sellers......................................................................5
Senior Certificates.........................................................26
Senior/Subordinate Series...................................................26
Servicing Advances..........................................................36
Single Certificate..........................................................42
SMMEA .....................................................................113
Special Hazard Amount.......................................................48
Special Hazard Insurance Policy.............................................53
Special Hazard Insurer......................................................53
Special Hazard Losses.......................................................49
Special Servicer............................................................44
Stated Principal Balance....................................................47
Strip Certificate...........................................................26
Subordinate Amount..........................................................49
Subordinate Certificates....................................................26
Subservicers................................................................12
Subservicing Account........................................................32
Subservicing Agreement......................................................23
Surety Bond.................................................................55
Swaps ......................................................................57
Tax-Exempt Investor........................................................112
Tax-Favored Plans..........................................................107
TB 13a.....................................................................114
Terms and Conditions........................................................29
119
<PAGE>
Tiered REMICs...............................................................89
Title V.....................................................................83
Title VIII..................................................................83
Trust .......................................................................4
Trust Fund...................................................................4
UBTI .....................................................................112
UCC ......................................................................80
Unaffiliated Sellers.........................................................5
Yield Supplement Agreements.................................................57
120
<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 APRIL 14, 1999
Prospectus supplement dated ____________, ____ (to prospectus dated
____________, ____)
$ -----------------
Residential Funding Mortgage Securities I, Inc.
Depositor
Residential Funding Corporation
Master Servicer
Mortgage Pass-Through Certificates, Series ____-S__
- -------------------------------------------------------------------------------
You should consider carefully the risk factors beginning on page S- in this
prospectus supplement and page in the prospectus.
The certificates will represent ownership interests only in the trust created
for Series _____-S__ and will not represent ownership interests in or
obligations of Residential Funding Mortgage Securities, I, Inc., Residential
Funding Corporation or any of their affiliates.
This prospectus supplement may be used to offer and sell the offered
certificates only if accompanied by the prospectus.
- -------------------------------------------------------------------------------
Offered Certificates
The trust created for the Series _____-S__ certificates will hold a pool of one-
to four-family residential first mortgage loans. The trust will issue [sixteen]
classes of offered certificates, including [thirteen] senior certificates and
three classes of Class M Certificates. You can find a list of these classes,
together with their principal balances, pass-through rates and certain other
characteristics, on Page S-__ of this prospectus supplement. The certificates
will not be listed on any exchange.
Credit Enhancement
Credit enhancement for the offered certificates will be provided by three
classes of Class B Certificates and the Class M Certificates. The Class B
Certificates are subordinated to all of the offered certificates. Each class of
Class M Certificates is subordinated to the senior certificates and any Class M
Certificates with a higher payment priority.
Underwriting
_______________________will offer to the public the [Class A-1] Certificates
through [Class A-9] Certificates, Class M Certificates and Class R Certificates
at varying prices to be determined at the time of sale.
________________________'s commission will be the difference between the price
it pays to the depositor for the underwritten certificates and the amount it
receives from the sale of the underwritten certificates to the public. The
proceeds to the depositor from the sale of the underwritten certificates to
________________________will be approximately _____% of the principal balance of
the underwritten certificates plus accrued interest, before deducting expenses.
See "Method of Distribution" in this prospectus supplement.
The depositor may offer the Class A-P and Class A-V Certificates to the public
from time to time, directly or through an underwriter or agent, in negotiated
transactions or otherwise at varying prices that will be determined at the time
of sale. The proceeds to the depositor from any sale of the Class A-P or Class
A-V Certificates will equal the difference between the price paid to the
depositor for the certificates and the sum of the depositor's related expenses
and the compensation paid to any underwriter or agent.
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.
[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
Summary Page
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-__
Available Distribution Amount...........................................S-__
Interest Distributions..................................................S-__.
[Determination of LIBOR.................................................-__]
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......................................................-__]
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-__
Certain 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.
Legalinvestment.............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
- ------------------------------------------------------------------------------
Pass-Through Initial CertiInitial Rating Designations
Class Rate Principal Bal(_____ /_____)
- ------------------------------------------------------------------------------
Class A Certificates:
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
[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] ____% $ AAA/AAA0 Senior/Residual
- ------------------------------------------------------------------------------
[R-II ____% $ AAA/AAA0 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:
Adjustable Rates: Initial Formula Maximum Minimum
Class A-5: _______% LIBOR + _____% _____% ____%
Class A-6: _______% __%-(__xLIBOR)) _____% 0.00%
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 that
will initially be 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 below 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--The 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:
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 certain 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 certain
portion of the principal
S-5
<PAGE>
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 among the senior certificates,
subject to the special rules mentioned below.
Not all losses will be allocated in the priority described above. Losses due to
natural disasters such as floods and earthquakes, fraud by a mortgagor, or
bankruptcy of a mortgagor will be allocated as described above only up to
specified amounts. Losses of these types in excess of the specified amount and
losses due to certain other extraordinary events will be allocated among all
outstanding classes of certificates in proportion to their remaining principal
balances or accrued interest, subject to the special rules mentioned below.
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 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.
S-6
<PAGE>
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
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 is subject to change or withdrawal 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 the Secondary Mortgage Market Enhancement Act of 1984. 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 eligible for purchase by persons investing
assets of employee benefit plans or individual retirement accounts subject to
important considerations. 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 "Certain Federal Income Tax
Consequences" in this prospectus supplement and in the prospectus.
S-7
<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. Losses may be increased if the values of the
related mortgaged properties have declined since the origination of
the related mortgage loans and the borrowers' equity in such mortgaged
properties has decreased. [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. The economic impact of these events may also be felt in
areas beyond the region immediately affected by the disaster or
disturbance. The properties underlying the mortgage loans may be
concentrated in these regions. Concentration may result in greater
losses to certificateholders than those generally present for similar
mortgage-backed securities without such concentration. [Concentrations
material to an individual offering will be disclosed.]
S-8
<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 available with
a lower payment priority. Therefore, if the Class B Certificates are
no longer outstanding, subsequent losses will be allocated to the
Class M-3, Class M-2 and Class M-1 Certificates, in that order, in
each case until that class is no longer outstanding. If the Class M
Certificates are no longer outstanding, any additional losses will be
allocated among the senior certificates. You should also be aware that
the credit enhancement provided for certain types of losses is
limited. [describe any aspects of the credit enhancement that can be
reduced with the consent of the rating agencies.]
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
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. The
certificates will not be listed on any exchange. 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
S-9
<PAGE>
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.
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.
S-10
<PAGE>
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.
[Class A-1 Certificates
The Class A-1 Certificates will generally receive payments of
principal on each distribution date in an amount determined by
using the table entitled "Planned Principal Balances and Targeted
Principal Balances," assuming that the rate of prepayments on the
mortgage loans are within a range as described under "Description
of the Certificates-- Distributions of Principal." However, if
prepayments occur at a rate below that range, the amount of funds
available for distribution of principal on the Class A-1
Certificates may not be sufficient to reduce the principal
balance thereof to the amount in the table, and as a result, the
weighted average life of the Class A-1 Certificates will be
extended. Conversely, if prepayments occur at a rate above that
range, and if the principal balance of certain classes of
certificates as described under "Description of
Certificates--Certain Yield and Prepayment Considerations," are
reduced to zero, the principal balance on the Class A-1
Certificates may be reduced below the amount in the table, and as
a result, the weighted average life of the Class A-1 Certificates
will be reduced.]
[Class A-2 Certificates
The Class A-2 Certificates will generally receive payments of
principal on each distribution date in an amount determined by
using the table entitled "Planned Principal Balances and Targeted
Principal Balances," assuming a specific rate of prepayment on
the mortgage loans as described under "Description of the
Certificates--Distributions of Principal." However, if
prepayments occur at a rate slower than that rate, the amount of
funds available for distribution of principal on the Class A-2
Certificates may not be sufficient to reduce the principal
balance thereof to the amount in the table, and as a result, the
weighted average life of the Class A-2 Certificates will be
extended. Conversely, if prepayments occur at a rate faster than
that rate, and if the principal balance of certain classes of
certificates as described under "Description of
Certificates--Certain Yield and Prepayment Considerations," are
reduced to zero, the principal balance on the Class A-2
Certificates may be reduced below the amount in the table, and as
a result, 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 until certain conditions have been
met as described under "Description of Certificates--Certain
Yield and Prepayment Considerations," these certificates will
likely experience greater price and yield volatility than
mortgage pass-through certificates that are otherwise similar but
which are entitled to current distributions of interest.
Investors should consider whether this volatility is suitable to
their investment needs.]
S-11
<PAGE>
[Class A-5 Certificates and Class A-6 Certificates
The Class A-5 Certificates and Class A-6 Certificates will accrue
interest at an adjusting rate determined separately for each
distribution date according to an index described in this
prospectus supplement under "Description of the
Certificates--Determination of LIBOR." The interest rate on the
Class A-6 Certificates will vary inversely with a multiple of the
index. 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 the index.
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 the amount of principal
needed to reduce the principal balances of the Class A-1
Certificates and Class A-2 Certificates to the respective amounts
in the tables herein entitled "Planned Principal Balances and
Targeted Principal Balances." 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.]
[Class A-9 Certificates
Investors in the Class A-9 Certificates should be aware that
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 as described herein.
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 ____%.
Investors in the Class A-P Certificates should be aware that
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 ____%.
S-12
<PAGE>
Investors in the Class A-V Certificates should be aware that
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
Losses on the mortgage loans will be allocated among the
certificates in the manner described in this prospectus
supplement. The yield to investors in the Class M Certificates
will be sensitive to the rate and timing of losses on the
mortgage loans. Losses, other than specified amounts of certain
types of losses, will be allocated to the most subordinate class
of Class M Certificates or Class B Certificates outstanding.
See "Summary--Credit Enhancement--Allocation of Losses" and
"Description of the Certificates--Allocation of Losses;
Subordination" in this prospectus supplement.
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-13
<PAGE>
INTRODUCTION
The Depositor will establish a trust (the "Trust") with respect to Series
____-S__ on the Closing Date, under a pooling and servicing agreement (the
"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 (the "Mortgage Pool")
secured by one- to four-family residential properties with terms to maturity of
not more than thirty years.
You can find a listing of the pages where capitalized terms used both in
the prospectus and this prospectus supplement are defined under the caption
"Index" beginning on page [__] in the prospectus.
DESCRIPTION OF THE MORTGAGE POOL
General
The Mortgage Pool will consist of _____ mortgage loans ("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 (each, a "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 ("HomeComings"). ____% 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.
("Capstead"). 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 benefit of the Certificateholders and will
also make certain limited representations and warranties regarding the Mortgage
Loans as of the date of issuance of the Certificates. To the best of the
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 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 the breach
materially and adversely affects the interests of the Certificateholders in any
such Mortgage Loan.
S-14
<PAGE>
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 certain
Mortgagors. 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 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 Loan-to-Value Ratio, the collateral for
the mortgage loan, or the debt to income ratio. There can be no assurance that
the Credit Scores of the Mortgagors will be an accurate predictor of the
likelihood of repayment of the related Mortgage Loans or that any Mortgagor's
Credit Score would not be lower if obtained as of the date of this Prospectus
Supplement.
Credit Score Distribution
S-15
<PAGE>
Number of Percent of
Credit Score Range Mortgage Loans Principal Balance Mortgage Pool
.................................. $ %
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
..................................
Not Available (1).................
Subtotal with Credit Score........
Total Pool........................
- ----------
(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.
Mortgage Rates
Number of Percentage
Mortgage Rates (%) Mortgage Loans Principal Balance of Mortgage Pool
......................... $ %
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
Total.......... $ . %
=== ============ ======
S-16
<PAGE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans will be approximately ______% per annum.
Original Mortgage Loan Principal Balances
Number of Percentage of
Original Mortgage Loan Balance Mortgage Loans Principal Balance Mortgage Pool
$........................ $ %
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
.........................
......................... .
Total......... $ . %
=== ============ ======
As of the Cut-off Date, the average unpaid principal balance of the
Mortgage Loans will be approximately $-------.
Original Loan-To-Value Ratios
Number of Percentage of
Original Loan-to-Value Ratio (%) Mortgage Loans Principal Balance Mortgage Pool
......................... $ %
.........................
.........................
.........................
.........................
.........................
.........................
.........................
......................... .
Total............... $ . %
=== ============ =======
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will be approximately ____%.
S-17
<PAGE>
Geographic Distributions of Mortgaged Properties
Number of Principal Balance Percentage of
State Mortgage Loans Mortgage Pool
California............... $ %
Connecticut..............
Illinois.................
New Jersey...............
New York.................
Other (1)................ .
--- ------------- ----
Total.......... $ . %
=== ============ ======
(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.
Mortgage Loan Purpose
Number of Principal Balance Percentage of
Loan Purpose Mortgage Loans Mortgage Pool
Purchase................. $ %
Rate/Term Refinance......
Equity Refinance......... .
--- ------------- ----
Total........... $ . %
=== ============ ======
The weighted average Loan-to-Value Ratio at origination of rate and term
refinance Mortgage Loans will be____%. The weighted average Loan-to-Value Ratio
at origination of equity refinance Mortgage Loans will be ____%.
S-18
<PAGE>
Mortgage Loan Documentation Types
Number of Principal Balance Percentage of
Documentation Type Mortgage Loans Mortgage Pool
Full..................... $ %
Reduced.................. .
--- ------------- ----
Total........... $ . %
=== ============ ======
The weighted average Loan-to-Value 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 certain 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.
Occupancy Types
Number of Percentage of
Occupancy Mortgage Loans Principal Balance Mortgage Pool
Primary Residence.................. $ %
Second/Vacation....................
Non Owner-occupied................. .
---- ---------------- ----
Total.................... $ . %
=== ============ ======
Mortgaged Property Types
Number of Principal Balance Percentage of
Property Type Mortgage Loans Mortgage Pool
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................ .
---- -------------- ----
S-19
<PAGE>
Total......... $ . %
=== ============ =======
[In connection with each Mortgage Loan that is secured by a leasehold
interest, the related Seller shall have represented to the Company that, among
other things:
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.]
Net Mortgage Rates of Discount Mortgage Loans
Number of Principal Percent of
Net Mortgage Rate(%) Mortgage Loans Balance Mortgage Pool
............................. $ %
.............................
.............................
.............................
.............................
Total........................ $ %
=== =========== ====
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 occurring upon the sale of property securing a Mortgage Loan) made
within five years following the origination of the Mortgage Loan, 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 (a "Primary Hazard Insurance Policy"). In addition, to the best
of the Depositor's knowledge, each Mortgage Loan with a Loan-to-Value Ratio at
origination in excess of ______% will be insured by a primary mortgage insurance
policy (a "Primary Insurance Policy") covering at least ___% of the principal
balance of the Mortgage Loan at origination if the Loan-to-Value Ratio is
between _____% and _____%, at least ___% of the balance if the Loan-to-Value
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
S-20
<PAGE>
Mortgage Insurance Company, Commonwealth Mortgage Assurance Company, Republic
Mortgage Insurance Company or Amerin Guaranty Corporation (collectively, the
"Primary Insurers"). Each Primary Insurer has a claims paying ability currently
acceptable to the Rating Agencies that have been requested to rate the
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 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 Securities and Exchange Commission within fifteen days after
the initial issuance of the Offered Certificates. In the event Mortgage Loans
are removed from or added to the Mortgage Pool as described in the preceding
paragraph, that removal or addition will be noted in the Current Report on Form
8-K.
DESCRIPTION OF THE CERTIFICATES
General
The Series _____-S__ Mortgage Pass-Through Certificates will include the
following thirteen classes (the "Senior Certificates"):
[ o Class A-1 Certificates (the "PAC Certificates")
o Class A-2 Certificates (the "TAC Certificates")
o Class A-3 Certificates (the "Accretion Directed Certificates")
o Class A-4 Certificates (the "Accrual Certificates")
o Class A-5 Certificates (the "Floater Certificates")
o Class A-6 Certificates (the "Inverse Floater Certificates"; and
together with the Floater Certificates, the "Adjustable Rate
Certificates")
o Class A-7 Certificates (the "Lockout Certificates")
o Class A-8 Certificates (the "Super Senior Certificates")
o Class A-9 Certificates (the "Senior Support Certificates")]
o Class A-P Certificates (the "Principal Only Certificates")
o Class A-V Certificates (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 (collectively, the "Class M
Certificates") and the Class B-1 Certificates, Class B-2 Certificates and Class
B-3 Certificates (collectively, the "Class B Certificates" and, together with
the Class M Certificates and Senior Certificates, the "Certificates"). Only the
Senior Certificates and Class M Certificates (together, the "Offered
Certificates") are offered hereby. See "Index of Principal Definitions" in the
Prospectus for the meanings of capitalized terms and acronyms not otherwise
defined in this Prospectus Supplement.
S-21
<PAGE>
The Certificates will evidence the entire beneficial ownership interest in
the Trust Fund. The Trust Fund will consist of:
o the Mortgage Loans
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 Principal Only Certificates will be entitled to payments based on the
Discount Fraction of the Discount Mortgage Loans. A "Discount Mortgage Loan" is
any Mortgage Loan with a Net Mortgage Rate less than ____% per annum. With
respect to each Discount Mortgage Loan, the "Discount Fraction" is equal to a
fraction, expressed as a percentage, the numerator of which is ____% minus the
Net Mortgage Rate for such Discount Mortgage Loan and the denominator of which
is ____%. The Mortgage Loans other than the Discount Mortgage Loans are referred
to in this Prospectus Supplement as the "Non-Discount Mortgage Loans."
The Senior Certificates (other than the Principal Only, Variable Strip and
Residual Certificates) and the Class M Certificates (together, the "DTC
Registered Certificates") will be available only in book-entry form through
facilities of The Depository Trust Company ("DTC"). 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 "Certain Federal Income Tax Consequences."
The DTC Registered Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. The Depositor has
been informed by DTC that DTC's nominee will be Cede & Co. ("Cede"). No
Beneficial Owner will be entitled to receive a certificate of any class in fully
registered form (a "Definitive Certificate"), except as described below under
"--Book-Entry Registration of Certain of the Senior Certificates--Definitive
Certificates." Unless and until Definitive Certificates are issued for the DTC
Registered Certificates under the limited circumstances described in this
Prospectus Supplement, all references to actions by Certificateholders with
respect to the DTC Registered Certificates shall refer to actions taken by DTC
upon instructions from its Participants, and all references 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 ("Systems") that
are dependent upon calendar dates, including dates before, on and after January
1, 2000, may encounter "Year 2000" problems. DTC has informed its Participants
and other members of the financial community (the "Industry") that it has
developed and is implementing a program so that its Systems, as they relate to
the timely payment of distributions, including principal and income payments, to
securityholders, book-entry deliveries and settlement of trades with DTC ("DTC
Services") continue to function appropriately. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which, DTC has advised the Industry, 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
S-22
<PAGE>
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 the
Industry that it is contacting and will continue to contact third party vendors
from whom DTC acquires services to (i) impress upon them the importance of those
services being Year 2000 compliant; and (ii) determine the extent of their
efforts for Year 2000 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 to the Industry 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 (the "Rules"), DTC is required to make book-entry transfers of
DTC Registered Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, 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, the 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.
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.
S-23
<PAGE>
Available Distribution Amount
The "Available Distribution Amount" for any Distribution Date is 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 (collectively,
the "Servicing Fees"),
o certain unscheduled payments, including Mortgagor prepayments
on the Mortgage Loans, Insurance Proceeds, Liquidation
Proceeds and proceeds from repurchases of and substitutions
for the Mortgage Loans occurring during the preceding calendar
month and
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, (i) the "Due Date" is the first day of the month in which
that Distribution Date occurs and (ii) 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.
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.
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 certain Advances to
the Master Servicer and distributions of interest and principal to any class of
Class M Certificates having a higher payment priority.
With respect to any Distribution Date, "Accrued Certificate Interest" will
be equal to (a) in the case of each class of 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 below;
(ii) the interest portions of Realized Losses, including Special
Hazard Losses in excess of the Special Hazard Amount ("Excess Special
Hazard Losses"), Fraud Losses in excess of the Fraud Loss Amount ("Excess
Fraud Losses"), Bankruptcy Losses in excess of the Bankruptcy Amount
("Excess Bankruptcy Losses") and losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain
other risks ("Extraordinary Losses"), not allocated through Subordination;
S-24
<PAGE>
(iii) the interest portion of any Advances that were made with
respect to delinquencies that were ultimately determined to be Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses; and
(iv) any other interest shortfalls not covered by Subordination,
including interest shortfalls relating to the Relief Act 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. The Principal Only
Certificates are not entitled to distributions of interest.
The "Interest Accrual Period" for all classes of Certificates is the
calendar month preceding the month in which the Distribution Date occurs.
The "Prepayment Interest Shortfall" for any Distribution Date is equal to
the aggregate shortfall, if any, in collections of interest, adjusted to the
related Net Mortgage Rates, resulting from Mortgagor prepayments on the Mortgage
Loans during the preceding calendar month. These 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.
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.
S-25
<PAGE>
[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 ("LIBOR") (subject to 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 _________ (subject to 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%. The "Net Mortgage Rate" on each Mortgage Loan is equal to
its Mortgage Rate minus the rate per annum at which the related master servicing
and subservicing fees accrue (the "Servicing Fee Rate"). As of the Cut-off Date,
the Pool Strip Rates on the Mortgage Loans range between 0.00% and ____% 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.
The "Certificate Principal Balance" of any Offered Certificate as of any
date of determination is 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.
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. 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. Reference to a Notional
Amount with respect to any Variable Strip Certificate is solely for convenience
in specific calculations and does not represent the right to receive any
distributions allocable to principal.
[Determination of LIBOR
LIBOR for any Interest Accrual Period after the initial Interest Accrual
Period will be determined as described below.
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
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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 ("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, 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 described above, 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 the aggregate amount of Accrued Certificate Interest to be distributed to
the holders of the Senior Certificates for that Distribution Date (the "Senior
Interest Distribution Amount") and the Principal Only Distribution Amount are
distributed, a distribution allocable to principal equal to the sum of the
following:
(i) the product of (A) the then-applicable Senior Percentage and (B)
the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on
the Mortgage Loans (other than the related Discount Fraction of the
principal portion of 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;
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(2) the principal portion of all proceeds of the repurchase of
a Mortgage Loan or, in the case of a substitution, certain amounts
representing a principal adjustment (other than the related
Discount Fraction of the principal portion of the proceeds, with
respect to each Discount Mortgage Loan) as required by the Pooling
and Servicing Agreement during the preceding calendar month; and
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month (other than full and
partial Mortgagor prepayments 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" below;
(iii) the then-applicable Senior Accelerated Distribution Percentage
of the aggregate of all full and partial Mortgagor prepayments made by the
respective Mortgagors of the Mortgage Loans 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.
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 the amounts described in clauses (i) through (v) of the
immediately preceding paragraph shall be referred to in this Prospectus
Supplement as the "Senior Principal Distribution Amount."
With respect to any Distribution Date on which the Certificate Principal
Balance of the most subordinate class or classes of Certificates then
outstanding is to be reduced to zero and on which Realized Losses are to be
allocated to that class or those classes, the "Excess Subordinate Principal
Amount" is equal to 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."
Holders of the Principal Only Certificates will be entitled to receive on
each Distribution Date, to the extent of the excess, if any, of the Available
Distribution Amount remaining after the Senior Interest Distribution Amount is
distributed, a distribution allocable to principal (the "Principal Only
Distribution Amount") equal to the aggregate of:
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(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, certain amounts
representing a principal adjustment, as required by the Pooling and
Servicing Agreement, Liquidation Proceeds and Insurance Proceeds, to the
extent applied as recoveries of principal;
(iii) in connection with the Final Disposition of a Discount
Mortgage Loan that did not result in any Excess Special Hazard Losses,
Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses, an
amount equal to the lesser of (a) the applicable Discount Fraction of the
Stated Principal Balance of 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) with respect to each Final Disposition of a Discount Mortgage
Loan in connection with that Distribution Date or any prior Distribution
Date, to the extent that the amount included under clause (iii) above for
that Distribution Date was less than the amount described in (a) under
clause (iii) above (each of these shortfalls, a "Principal Only Collection
Shortfall"), 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; provided, that distributions under
this clause (v) shall only be made to the extent of Eligible Funds (as
described below) on any Distribution Date.
A "Final Disposition" of a defaulted Mortgage Loan is deemed to have
occurred upon a determination by the Master Servicer that it has received all
Insurance Proceeds, Liquidation Proceeds and other payments or cash recoveries
which the Master Servicer reasonably and in good faith expects to be finally
recoverable with respect to the Mortgage Loan.
"Eligible Funds" on any Distribution Date means the portion, if any, of
the Available Distribution Amount remaining after reduction by the sum of the
Senior Interest Distribution Amount, the Senior Principal Distribution Amount,
determined without regard to clause (iv) 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.
Notwithstanding any other provision hereof, 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.
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance of the Mortgage Loan as of the
Cut-off Date, after application of all scheduled principal payments due on or
before the Cut-off Date, whether or not received, reduced by all amounts
allocable to principal that have been distributed to Certificateholders with
respect to that Mortgage Loan on or before that date, and as further reduced to
the extent that any Realized Loss on the Mortgage Loan has been allocated to one
or more classes of Certificates on or before the date of determination.
The "Senior Percentage," which initially will equal approximately _____%
and will in no event exceed 100%, will be recalculated for each Distribution
Date to be the percentage equal to the aggregate Certificate Principal Balance
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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 "Subordinate Percentage" as of any date of determination is equal to
100% minus the Senior Percentage as of that date. 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.
The "Senior Accelerated Distribution Percentage" for any Distribution Date
occurring prior to the Distribution Date in _____________ will equal 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
described above shall not be made as of any Distribution Date unless either:
(a)(i)(X) the outstanding principal balance of Mortgage Loans
delinquent 60 days or more averaged over the last six months, as a
percentage of the aggregate outstanding Certificate Principal Balance of
the Class M Certificates and Class B Certificates, is less than 50% or (Y)
the outstanding principal balance of Mortgage Loans delinquent 60 days or
more averaged over the last six months, as a percentage of the aggregate
outstanding principal balance of all Mortgage Loans averaged over the last
six months, does not exceed 2%, and
(ii) Realized Losses on the Mortgage Loans to date for 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
(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.
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Notwithstanding the foregoing, upon reduction of the Certificate Principal
Balances of the Senior Certificates (other than the Principal Only Certificates)
to zero, the Senior Accelerated Distribution Percentage will equal 0%. See
"Subordination" in the Prospectus.
[The "Lockout Scheduled Percentage" for any Distribution Date occurring
prior to the Distribution Date in ___________will be 0% and for any Distribution
Date thereafter, will be 100%. The "Lockout Prepayment Percentage" for any
Distribution Date occurring prior to the Distribution Date in ____________ will
be 0%. The Lockout Prepayment 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, 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%.]
Distributions of principal on the Senior Certificates on each Distribution
Date will be made, after distribution of the Senior Interest Distribution Amount
as described under "Interest Distributions", as follows:
(a) Prior to the occurrence of the Credit Support Depletion Date (as
defined below):
(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;
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provided that if the aggregate of the amounts set forth in clauses (i),
(ii), (iii) and (vi) of the first paragraph under "Principal Distributions
on the Senior Certificates" is more than the balance of the Available
Distribution Amount remaining after the Senior Interest Distribution
Amount and 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 above relating to
principal among the Senior Certificates (other than the Principal Only
Certificates) will be disregarded and an amount equal to the Discount
Fraction of the principal portion of scheduled or unscheduled payments
received or advanced 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 "Credit Support Depletion Date" is the first Distribution Date on
which the Senior Percentage equals 100%.
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[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.
Planned Principal Balances and Targeted Principal Balances
Distribution Date Planned Principal Balances Targeted Principal Balances
Initial Balance........... $ $
____________ 25, ____.....
____________ 25, ____.....
____________ 25, ____ and thereafter
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 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 certain Advances
remaining unreimbursed following the final liquidation of the
related Mortgage Loan to the extent described below under
"Advances"
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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, certain amounts
representing a principal adjustment, (other than the related
Discount Fraction of the principal portion of the proceeds with
respect to a Discount Mortgage Loan) as required by the Pooling and
Servicing Agreement during the preceding calendar month; and
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month (other than full and
partial Mortgagor prepayments 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 below;
(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.
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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 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, which initially will
equal approximately ____%, ____% and ____%, respectively, and will in no event
exceed 100%, will each be adjusted for each Distribution Date to be the
percentage equal to the Certificate Principal Balance of the related class of
Class M Certificates immediately prior to 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 are subject to
postponement based on the loss and delinquency experience of the Mortgage Loans.
Accordingly, each class of the Class M Certificates will not be entitled to any
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
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
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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 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 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, "Debt Service Reduction" means a
reduction in the amount of the monthly payment due to certain bankruptcy
proceedings, but does not include any permanent forgiveness of principal. As
used 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, under certain circumstances the Master
Servicer may permit the modification of a defaulted Mortgage Loan to reduce the
applicable Mortgage Rate or to reduce its outstanding principal amount (a
"Servicing Modification"). 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.
As used in this Prospectus Supplement, the Mortgage Rate and Net Mortgage Rate
as to any Mortgage Loan will not be reduced by any 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 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
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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 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.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
last day of the month in which the Mortgage Loan was finally liquidated, after
application of all amounts recovered, net of amounts reimbursable to the Master
Servicer or the related Subservicer for Advances and expenses, including
attorneys' fees, towards interest and principal owing on the Mortgage Loan. This
amount of loss realized and any Special Hazard Losses, Fraud Losses and
Bankruptcy Losses are referred to in this Prospectus Supplement as "Realized
Losses."
In order to maximize the likelihood of distribution in full of the Senior
Interest Distribution Amount, Principal Only Distribution Amount and Senior
Principal Distribution Amount, on each Distribution Date, holders of Senior
Certificates have a right to distributions of the Available Distribution Amount
that is prior to the rights of the holders of the Class M Certificates and Class
B Certificates, to the extent necessary to satisfy the Senior Interest
Distribution Amount, Principal Only Distribution Amount and Senior Principal
Distribution Amount. Similarly, holders of the Class M Certificates have a right
to distributions of the Available Distribution Amount prior to the rights of
holders of the Class B Certificates, and holders of any class of Class M
Certificates with a higher payment priority have a right to distributions of the
Available Distribution Amount prior to the rights of holders of any class of
Class M Certificates with a lower payment priority.
The application of the Senior Accelerated Distribution Percentage, when it
exceeds the Senior Percentage, to determine the Senior Principal Distribution
Amount will accelerate the amortization of the Senior Certificates (other than
the Principal Only Certificates) in the aggregate relative to the actual
amortization of the Mortgage Loans. The Principal Only Certificates will not
receive more than the Discount Fraction of any unscheduled payment relating to a
Discount Mortgage Loan. To the extent that the Senior Certificates 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
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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 above
under "--Principal Distributions on the Senior Certificates," a greater
percentage of full and partial Mortgagor prepayments will be allocated to the
Senior Certificates in the aggregate (other than the Principal Only
Certificates) than would otherwise be the case, thereby accelerating the
amortization of the Senior Certificates 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.
The aggregate amount of Realized Losses which may be allocated in
connection with Special Hazard Losses (the "Special Hazard Amount") through
Subordination shall initially be equal to $_________. 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. As used in this Prospectus Supplement, "Special Hazard
Losses" has the same meaning described in the Prospectus, except that Special
Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses, and Special Hazard Losses will not exceed the lesser of
the cost of repair or replacement of the related Mortgaged Properties.
The aggregate amount of Realized Losses which may be allocated in
connection with Fraud Losses (the "Fraud Loss Amount") through Subordination
shall initially be equal to $_________. 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 aggregate amount of Realized Losses which may be allocated in
connection with Bankruptcy Losses (the "Bankruptcy Amount") through
Subordination 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 the Master Servicer is
diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (A) the related Mortgage Loan is not in default with regard to payments
due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments relating to that Mortgage Loan
are being advanced on a current basis by the Master Servicer or a Subservicer.
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The Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount are
subject to further reduction as described in the Prospectus under
"Subordination."
Advances
Prior to each Distribution Date, the Master Servicer is required to make
Advances 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
The Year 2000 ("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
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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 (the "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 ("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:
- ---------------------------------------------------------------
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 (i) create an inventory of all
Components and (ii) assess the Y2K risks
associated with those Components.
- ---------------------------------------------------------------
Phase III -- Assessment To (i) determine which
Components are not Y2K ready and (ii) decide
whether those Components should be replaced,
retired or repaired.
- ---------------------------------------------------------------
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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 described
above. 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 (i) renovation and validation of any
non-mission critical Components that the Y2K Project Team and related business
units determine to be necessary, (ii) validation of any remaining "mission
critical" Components that are either completing in-house remediation or waiting
for a vendor upgrade, and (iii) Y2K business continuity planning activities
discussed below.
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 (i) has not provided Residential Funding appropriate
documentation supporting its Y2K efforts, (ii) has not responded in a timely
manner to Residential Funding's inquiries regarding their Y2K efforts or (iii)
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:
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- ---------------------------------------------------------------
Phase Objective
- ---------------------------------------------------------------
Phase I -- Business Impact AssesToeassess 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 To develop broad, strategic plans
Development 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.
- ---------------------------------------------------------------
Phase III-- Business Continuity 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.
- ---------------------------------------------------------------
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 (i) collect, and
monitor any Subservicer's collection of, payments on the Mortgage Loans, (ii)
distribute those collections to the Trustee and (iii) 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 certain 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.
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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
certain circumstances, receive all Mortgagor prepayments made during the
preceding calendar month to the extent not paid to the Principal Only
Certificates. ]
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.
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<PAGE>
The rate of default on Mortgage Loans which are refinance or limited
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the Mortgage Loans
will be affected by the general economic condition of the region of the country
in which the related Mortgaged Properties are located. The risk of delinquencies
and loss is greater and prepayments are less likely in regions where a weak or
deteriorating economy exists, as may be evidenced by, among other factors,
increasing unemployment or falling property values. See "Maturity and Prepayment
Considerations" in the Prospectus.
As described under "Description of the Certificates--Allocation of Losses;
Subordination" and "--Advances," amounts otherwise distributable to holders of
one or more classes of the Class M Certificates may be made available to protect
the holders of the Senior Certificates and holders of any Class M Certificates
with a higher payment priority against interruptions in distributions due to
certain Mortgagor delinquencies, to the extent not covered by Advances. 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.
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 certain 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 subject to
various priorities for payment of principal as described in this Prospectus
S-44
<PAGE>
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, and the effect on the market value of
the Senior Support Certificates of changes in market interest rates or market
yields for similar securities may be greater than 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 a range which is
between approximately ___% SPA and approximately ___% SPA (the "PAC Targeted
Range"), 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 Balance of the TAC Certificates and Accrual Certificates is equal to
approximately ____% of the Certificate Principal Balance of the PAC
Certificates.]
S-45
<PAGE>
[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 certain
assumptions regarding the Mortgage Loans, the actual prepayment behavior of the
individual Mortgage Loans could be such that (i) the amount available for
distributions of principal in reduction of the PAC Certificates may not result
in their Certificate Principal Balances equaling their Planned Principal
Balances even if prepayments were at a constant speed within the PAC Targeted
Range, and (ii) 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, and 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
S-46
<PAGE>
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 ("PSA"), 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 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 described below regarding the weighted average characteristics
of the Mortgage Loans that are expected to be included in the Trust Fund as
described under "Description of the Mortgage Pool" 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:
Discount Non-Discount
Mortgage Loans Mortgage Loans
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)..............
(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)
S-47
<PAGE>
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
___________, ____ ((i) through (ix) collectively, 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 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.
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of each class of Offered Certificates (other
than the Variable Strip Certificates and Residual Certificates), and sets forth
the percentages of the initial Certificate Principal Balance of each class of
Offered Certificates that would be outstanding after each of the Distribution
Dates at the various percentages of PSA shown.
S-48
<PAGE>
Percent of Initial Certificate Principal Balance Outstanding
at the Following Percentages of PSA
Class A-1 Class A-2 Class A-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 on next page.)
S-49
<PAGE>
Percent of Initial Certificate Principal Balance Outstanding
at the Following Percentages of PSA
Class A-4 Class A-5 Class A-6
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 and continued on next page.)
S-50
<PAGE>
Percent of Initial Certificate Principal Balance Outstanding
at the Following Percentages of PSA
Class A-7 Class A-8 Class A-9
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 and continued on next page.)
S-51
<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-52
<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 subject to limitation
despite changes in LIBOR in certain 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
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.
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<PAGE>
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 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.
S-54
<PAGE>
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 by projecting the monthly 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 % % % % %
$ % % % % %
S-55
<PAGE>
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.
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.
S-56
<PAGE>
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.
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 ("SDA"), represents an assumed rate of default each month relative to
the then outstanding performing principal balance of a pool of new mortgage
loans. A default assumption of 100% SDA assumes constant default rates of 0.02%
per annum of the then outstanding principal balance of 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.
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
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
S-57
<PAGE>
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
<TABLE>
Class M-2 Certificates
<CAPTION>
Percentage of PSA
------------------------------------------------------------
Percentage of Loss Severity
SDA Percentage % % % % %
--- ---------- --
<S> <C>
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%
</TABLE>
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 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:
S-58
<PAGE>
<TABLE>
<CAPTION>
Aggregate Realized Losses
Percentage of PSA
------------------------------------------------------------
Percentage of Loss Severity
SDA Percentage % % % % %
--- ---------- --
<S> <C>
100% 30%
200% 30%
300% 30%
400% 30%
</TABLE>
Notwithstanding the assumed percentages of SDA, loss severity percentages
and prepayment rates reflected in the preceding table, it is highly unlikely
that the Mortgage Loans will be prepaid or that Realized Losses will be incurred
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the 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.
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 "Certain Federal Income Tax
Consequences"in this Prospectus Supplement and "United States 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
S-59
<PAGE>
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 some
of the Certificates, including the Residual Certificates, are also subject to
additional transfer restrictions as described in the Pooling and Servicing
Agreement. See "Certain Federal Income Tax Consequences" in this Prospectus
Supplement and "United States 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.
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 on December 31, ____, December 31, ____
and __________, ____. 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(1)
At December 31, ___ At December 31, ____ At ___________, ____
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>
Total Loan Portfolio ........
Period of Delinquency
30 to 59 days..........
60 to 89 days..........
90 days or more(2).....
Foreclosures Pending ........
Total Delinquent Loans ......
Percent of Loan Portfolio ...
</TABLE>
S-60
<PAGE>
- ------------
(1) The table relates to the mortgage loans referred to above. (2) Does not
include foreclosures pending.
<TABLE>
<CAPTION>
Total Reduced Documentation Loan Portfolio Delinquency Experience(1)
At December 31, ___ At December 31, ____ At ___________, ____
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>
Total Loan Portfolio ........
Period of Delinquency
30 to 59 days..........
60 to 89 days..........
90 days or more(2).....
Foreclosures Pending ........
Total Delinquent Loans ......
Percent of Loan Portfolio ...
</TABLE>
- ------------
(1) The table relates to the mortgage loans referred to above. (2) Does not
include foreclosures pending.
The following tables set forth information concerning foreclosed mortgage
loans and loan loss experience of Residential Funding as of December 31, ____,
December 31, ____ and ___________, _____, 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(1)
At or for At or for At or for
the year ended the year ended the [year] ended
December 31,__ December 31,__ [December 31],__
------------------------------------------------------------
(Dollar Amounts in Thousands)
<S> <C>
Total Loan Portfolio ...............
Average Portfolio Balance ..........
Foreclosed Loans (2) ...............
Liquidated Foreclosed Loans (3) ....
Foreclosed Loans Ratio .............
Gross Loss (4) .....................
Gross Loss Ratio ...................
Covered Loss (5) ...................
Net Loss (6) .......................
Net Loss Ratio .....................
Excess Recovery (7) ................
</TABLE>
S-61
<PAGE>
<TABLE>
Total Reduced Documentation Loan Portfolio Foreclosure Experience(1)
<CAPTION>
At or for At or for At or for
the year ended the year ended the [year] ended
December 31,__ December 31,__ [December 31,__
------------------------------------------------------------
(Dollar Amounts in Thousands)
<S> <C>
Total Loan Portfolio ...............
Average Portfolio Balance ..........
Foreclosed Loans (2) ...............
Liquidated Foreclosed Loans (3) ....
Foreclosed Loans Ratio .............
Gross Loss (4) .....................
Gross Loss Ratio ...................
Covered Loss (5) ...................
Net Loss (6) .......................
Net Loss Ratio .....................
Excess Recovery (7) ................
</TABLE>
(1)The tables relate only to the mortgage loans referred to above.
(2)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.
(3)Liquidated Foreclosed Loans is the sum of the principal balances of the
foreclosed loans liquidated during the period indicated.
(4)Gross Loss is the sum of the gross losses less net gains (Excess Recoveries)
on a ll 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 in footnote (5) below. Net gains from the liquidation of mortgage
loans are identified in footnote (7) below.
(5)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.
(6)Net Loss is determined by subtracting Covered Loss from Gross Loss. As in the
case in footnote (4) above, Net Loss indicated here may reflect Excess
Recovery (see footnote (7) below). Net Loss includes losses on mortgage loan
pools which do not have the benefit of credit enhancement.
(7)Excess Recovery is calculated only with respect to defaulted Mortgage Loans
as to which the liquidation of the related Mortgaged Property resulted in
recoveries in excess of the principal balance plus accrued interest thereon
plus all liquidation expenses related to that Mortgage Loan. Excess
Recoveries are not applied to reinstate any credit enhancement, and usually
are not allocated to holders of Certificates.
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
S-62
<PAGE>
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 (as defined in the Prospectus) evidenced by their respective
Certificates. The Pooling and Servicing Agreement will be subject to amendment
without the consent of the holders of the Residual Certificates in specified
circumstances.
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 (i) to purchase all
remaining Mortgage Loans and other assets in the Trust Fund, thereby effecting
early retirement of the Offered Certificates or (ii) to purchase, in whole but
not in part, the Certificates. Any such purchase of Mortgage Loans and other
assets of the Trust Fund shall be made at a price equal to the sum of (a) 100%
of the unpaid principal balance of each Mortgage Loan or the fair market value
of the related underlying Mortgaged Properties with respect to defaulted
Mortgage Loans as to which title to such Mortgaged Properties has been acquired
if such fair market value is less than such unpaid principal balance (net of any
unreimbursed Advance attributable to principal) as of the date of repurchase
plus (b) accrued interest thereon at the Net Mortgage Rate to, but not
including, the first day of the month in which 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 Master Servicer 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.
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Upon presentation and surrender of the Offered Certificates in connection
with the termination of the Trust Fund or a purchase of Certificates under the
circumstances described above, the holders of the Offered Certificates will
receive an amount equal to the Certificate Principal Balance of 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 above, in the case of the
termination of the Trust Fund resulting from a purchase of all the assets of the
Trust Fund.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, ___________________, counsel
to the Depositor, will deliver 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
Code ("REMIC I" and "REMIC II," each a REMIC).
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 "United States 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 "United States Federal Income Tax
Consequences--General" and "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" in the Prospectus.
The Internal Revenue Service (the "IRS") has issued regulations (the "OID
Regulations") under sections 1271 to 1275 of the Code 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.
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In certain circumstances the OID Regulations permit the holder of a debt
instrument to recognize original issue discount under a method that differs from
that used by the issuer. Accordingly, 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 "United States Federal Income
Tax Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates" and
"--Premium" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code generally to the extent that the Offered
Certificates are treated as "real estate assets" under Section 856(c)(4)(A) of
the Code. Moreover, the Offered Certificates (other than the Residual
Certificates) will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its startup day in
exchange for a regular or residual interest therein. However, prospective
investors in Offered Certificates that will be generally treated as assets
described in Section 860G(a)(3) of the Code should note that, notwithstanding
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 "United States 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 "United States Federal Income Tax
Consequences--REMICs" in the Prospectus.
Special Tax Considerations Applicable to Residual Certificates
The IRS has issued REMIC Regulations under the provisions of the Code that
significantly affect holders of Residual Certificates. The REMIC Regulations
impose restrictions on the transfer or acquisition of certain residual
interests, including the Residual Certificates. The Pooling and Servicing
Agreement includes other provisions regarding the transfer of Residual
Certificates, including (i) the requirement that any transferee of a Residual
Certificate provide an affidavit representing that the transferee (a) is not a
"disqualified organization," (b) is not acquiring the Residual Certificate on
behalf of a "disqualified organization" and (c) will maintain that status and
will obtain a similar affidavit from any person to whom the transferee shall
subsequently transfer a Residual Certificate, (ii) a provision that any transfer
of a Residual Certificate to a "disqualified person" shall be null and void and
(iii) a grant to the Master Servicer of the right, without notice to the holder
or any prior holder, to sell to a purchaser of its choice any Residual
Certificate that shall become owned by a "disqualified organization" despite (i)
and (ii) above. In addition, under the Pooling and Servicing Agreement, the
Residual Certificates may not be transferred to non-United 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 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 subject to specific restrictions under 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
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noneconomic residual interests. See "United States 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 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 certain pass-through entities, a Residual Certificate, may have
significant additional gross income with respect to, but may be subject to
limitations on the deductibility of, servicing and trustee's fees and other
administrative expenses properly allocable to the REMIC in computing 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 "United States 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 "United States Federal
Income Tax Consequences--REMICs--Taxation of Owners of REMIC Residual
Certificates" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions of an Underwriting Agreement, dated
_________________ (the "Underwriting Agreement"), ____________________ (the
"Underwriter") 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 (the "Underwritten Certificates"),
except that a de minimis portion of the Residual Certificates will be retained
by Residential Funding, and that portion is not offered hereby. It is expected
that delivery of the Underwritten Certificates (other than the Residual
Certificates) will be made only in book-entry form through the Same Day Funds
Settlement System of DTC, and that the delivery of the Residual Certificates
will be made at the offices of the Underwriter, ____________, _________, on or
about __________________ against payment therefor in immediately available
funds.
In connection with the Underwritten Certificates, the Underwriter has
agreed, subject to the terms and conditions of the Underwriting Agreement, to
purchase all of the Underwritten Certificates if any of its Underwritten
Certificates are purchased thereby.
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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 Securities and Exchange
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 of 1933, as amended.
The Underwriting Agreement provides that the Depositor will indemnify the
related Underwriter, and that under limited circumstances the Underwriter will
indemnify the Depositor, against certain liabilities under the Securities Act of
1933, as amended, 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. 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.
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
Underwriters 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
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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.]
[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 certain entities to the extent provided in
SMMEA. SMMEA provides, however, that states could override its provisions on
legal investment and restrict or condition investment in mortgage related
securities by taking statutory action on or prior to October 3, 1991. Some
states have enacted legislation which overrides the
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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.
See "Legal Investment Matters" in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any Plan, any insurance company (whether through its general
or separate accounts) or any other person investing "Plan Assets" of any Plan,
as defined under "ERISA Considerations--Plan Asset Regulations" in the
Prospectus, should carefully review with its legal advisors whether the purchase
or holding of Offered Certificates could give rise to a transaction prohibited
or not otherwise permissible under ERISA or Section 4975 of the Code. The
purchase or holding of the Offered Certificates (other than the Class M
Certificates or Residual Certificates) by or on behalf of, or with Plan Assets
of, a Plan may qualify for exemptive relief under the Exemption, as described
under "ERISA Considerations--Prohibited Transaction Exemptions" in the
Prospectus. However, the Exemption contains a number of conditions which must be
met for the Exemption to apply, including the requirement that any Plan must be
an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
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 Plan, any trustee or other person acting
on behalf of any Plan, or any other person using Plan Assets to effect such
acquisition or holding (each, a "Plan Investor") unless (i) the acquirer or
holder is an insurance company, (ii) 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
("PTCE") 95-60), and (iii) 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,
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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.
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 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 those Certificates by or on behalf of the
Plan Investor is permissible under applicable law, will not constitute or result
in a non-exempt prohibited transaction under ERISA or Section 4975 of the Code
and will not subject the 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 Plan Assets that proposes to acquire or
hold the Offered Certificates on behalf of or with Plan Assets of any Plan
should consult with its counsel with respect to: (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 Code to the proposed investment. See "ERISA Considerations"
in the Prospectus.
The sale of any of the Offered Certificates to a Plan is in no respect a
representation by the Depositor or the related Underwriter that such an
investment meets all relevant legal requirements relating to investments by
Plans generally or any particular Plan, or that such an investment is
appropriate for Plans generally or any particular Plan.
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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 (the "Certificates"),
issued under the Pooling and Servicing Agreement (the "Pooling and Servicing
Agreement"), dated as of __________ 1, ____, among Residential Funding Mortgage
Securities I, Inc., as seller (the "Company"), Residential Funding Corporation,
as master servicer (the "Master Servicer") and ___________________, as trustee
(the "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 Company, the Trustee and the Master Servicer that, either:
(a) The Purchaser is not an employee benefit or other plan subject to
the prohibited transaction provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code") (a "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 Plan within the meaning of the U.S.
Department of Labor ("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 ("PTCE") 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 Company, the Trustee and the Master Servicer that the
Purchaser will not transfer the Certificates to any Plan or person unless that
Plan or person meets the requirements in either (a) or (b) above.
Very truly yours,
By: ___________________
Name:___________________
Title:___________________
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<PAGE>
Residential Funding Mortgage Securities I, Inc.
$---------------
Mortgage Pass-Through Certificates
Series______-S__
Prospectus Supplement
[Name of Underwriter]
Underwriter
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the prospectus. We have not authorized anyone
to provide you with different information.
We are not offering the certificates offered hereby in any state where the offer
is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates offered hereby and with respect to
their unsold allotments or subscriptions. In addition, all dealers selling the
offered certificates, whether or not participating in this offering, may be
required to deliver a prospectus supplement and prospectus until __________,
_____.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Other Expenses of Issuance and Distribution (Item 14 of Form S-3).
The expenses expected to be incurred in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
Filing Fee for Registration Statement$ 0
Legal Fees and Expenses....................50,000
Accounting Fees and Expenses...............20,000
Trustee's Fees and Expenses
(including counsel fees).................... 25,000
Printing and Engraving Fees............... 20,000
Rating Agency Fees.........................75,000
Miscellaneous ........................ 20,000
----------------------------------
Total ...........................................$ 210,000
=-----------
Indemnification of Directors and Officers (Item 15 of Form S-3).
Any underwriters who execute an Underwriting Agreement in the form filed
as Exhibit 1.1 to this Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Securities Act of 1933
from certain information furnished to the Registrant by or on behalf of such
indemnifying party.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the 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
<PAGE>
-2-
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification or advancement of expenses provided
for by Section 145 shall not be deemed exclusive of any other rights to which
the indemnified party may be entitled; and empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent of
the corporation against any liability asserted against him or incurred by him in
any such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145 of
the General Corporation Law of the State of Delaware, the Registrant (i) shall
indemnify and hold harmless each person who was or is a party or is threatened
to be made a party to any action, suit or proceeding described in subsections
(a) and (b) by reason of the fact that he is or was a director or officer, or
his testator or intestate is or was a director or officer of the Registrant,
against expenses, judgments, fines and amounts paid in settlement, and (ii)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any such action, suit or proceeding if such
person is or was serving at the request of the Registrant as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
In addition, the Pooling and Servicing Agreements will provide that no
director, officer, employee or agent of the Registrant is liable to the Trust
Fund or the Certificateholders, except for such person's own willful
misfeasance, bad faith, gross negligence in the performance of duties or
reckless disregard of obligations and duties. The Pooling and Servicing
Agreements will further provide that, with the exceptions stated above, a
director, officer, employee or agent of the Registrant is entitled to be
indemnified against any loss, liability or expense incurred in connection with
legal action relating to such Pooling and Servicing Agreements and related
Certificates other than such expenses related to particular Mortgage Loans.
Certain controlling persons of the Registrant may also be entitled to
indemnification from General Motors Acceptance Corporation, an indirect parent
of the Registrant. Under 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.
<PAGE>
-3-
(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 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
<PAGE>
-4-
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.
5.2 -- Opinion of Orrick, Herrington & Sutcliffe with respect to
legality.
5.3 -- Opinion of Stroock & Stroock & Lavan with respect to legality.
8.1 -- Opinion of Thacher Proffitt & Wood with respect to certain tax
matters (included with Exhibit 5.1).
8.2 -- Opinion of Orrick, Herrington & Sutcliffe with respect to
certain tax matters.
8.3 -- Opinion of Stroock & Stroock & Lavan with respect to certain
tax matters.
23.1 -Consent of Thacher Proffitt & Wood (included as part of Exhibit
5.1 and Exhibit 8.1).
23.2 -Consent of Orrick, Herrington & Sutcliffe (included as part of
Exhibit 5.2 and Exhibit 8.2).
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.
<PAGE>
-6-
Undertakings (Item 17 of Form S-3).
A. Undertakings Pursuant to Rule 415.
The Registrant hereby undertakes:
(a)(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in this Registration Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this Registration Statement shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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
<PAGE>
-7-
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. 1 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 14th day of April, 1999.
RESIDENTIAL FUNDING MORTGAGE
SECURITIES I, INC.
By: /s/ Davee L. Olson
Davee L. Olson
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Davee L. Olson * Director and President April 14, 1999
Bruce J. Paradis (Principal Executive
Officer)
/s/ Davee L. Olson * Director, Executive Vice April 14, 1999
Davee L. Olson President and Chief Financial
Officer (Principal Financial
Officer)
/s/ Davee L. Olson * Director and April 14, 1999
- ---------------------------------------
Dennis W. Sheehan Assistant Treasurer
/s/ Davee L. Olson * Controller (Principal April 14, 1999
Jack R. Katzmark Accounting Officer)
*By: /s/ Davee L. Olson
Davee L. Olson
Attorney-in-fact
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
- ----------------------------------------------------------------------------------------
Number Description Location of Exhibit
in Sequential
Numbering System
- ----------------------------------------------------------------------------------------
<S> <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.
- ----------------------------------------------------------------------------------------
5.2 Opinion of Orrick, Herrington & Sutcliffe with respect to legality.
- ----------------------------------------------------------------------------------------
5.3 Opinion of Stroock & Stroock & Lavan with respect to legality.
- ----------------------------------------------------------------------------------------
8.1 Opinon of Thacher Proffitt & Wood with respect to certain tax matters
(included in Exhibit 5.1).
- ----------------------------------------------------------------------------------------
8.2 Opinion of Orrick, Herrington & Sutcliffe with respect to certain tax
matters.
- ----------------------------------------------------------------------------------------
8.3 Opinion of Stroock & Stroock & Lavan with respect to certain tax
matters.
- ----------------------------------------------------------------------------------------
23.1 Consent of Thacher Proffitt & Wood (included as part of Exhibit 5.1
and Exhibit 8.1).
- ----------------------------------------------------------------------------------------
23.2 Consent of Orrick, Herrington & Sutcliffe (included as part of
Exhibit 5.2 and Exhibit 8.2).
<PAGE>
- ----------------------------------------------------------------------------------------
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 Registration Statement (File No. 333-72493))
- ----------------------------------------------------------------------------------------
* Not filed herewith.
</TABLE>
<PAGE>
EXHIBIT 5.1
[Thacher Proffitt & Wood Letterhead]
April 14, 1999
Residential Funding Mortgage Securities I, Inc.
8400 Normandale Lake Boulevard
Minneapolis, Minnesota 55437
Residential Funding Mortgage Securities I, Inc.
Mortgage Pass-Through Certificates
Registration Statement on Form S-3
Ladies and Gentlemen:
We are counsel to Residential Funding Mortgage Securities I, Inc., a
Delaware corporation (the "Registrant"), in connection with the registration
under the Securities Act of 1933, as amended (the "1933 Act"), of Mortgage
Pass-Through Certificates (the "Certificates"), and the related preparation and
filing of a Registration Statement on Form S-3 (the "Registration Statement").
The Certificates are issuable in series under separate pooling and servicing
agreements (each such agreement, a "Pooling and Servicing Agreement"), among the
Registrant, a master servicer to be identified in the prospectus supplement for
such series of Certificates and a trustee to be identified in the prospectus
supplement for such series of Certificates. Each Pooling and Servicing Agreement
will be substantially in the form filed as an Exhibit to the Registration
Statement.
In rendering this opinion letter, we have examined the forms of the
Pooling and Servicing Agreement contained as Exhibits in the Registration
Statement, the Registration Statement and such other documents as we have deemed
necessary including, where we have deemed appropriate, representations or
certifications of officers of parties thereto or public officials. In rendering
this opinion letter, except for the matters that are specifically addressed in
the opinions expressed below, we have assumed (i) the authenticity of all
documents submitted to us as originals and the conformity to the originals of
all documents submitted to us as copies, (ii) the necessary entity formation and
continuing existence in the jurisdiction of formation, and the necessary
licensing and qualification in all jurisdictions, of all parties to all
documents, (iii) the necessary authorization, execution, delivery and
enforceability of all documents, and the necessary entity power with respect
thereto and (iv) that there is not any other agreement that modifies or
supplements the agreements expressed in the documents to which this opinion
letter relates and that renders any of the opinions expressed below inconsistent
with such documents as so modified or supplemented. In rendering this opinion
letter, we have made no inquiry, have conducted no investigation and assume no
responsibility with respect to (a) the accuracy of and compliance by the parties
thereto with the representations, warranties and covenants contained in any
document or (b) the conformity of the underlying assets and related documents to
the requirements of the agreements to which this opinion letter relates.
Our opinions set forth below with respect to the enforceability of any
right or obligation under any agreement are subject to (i) general principles of
equity, including concepts of materiality, reasonableness, good faith and fair
dealings and the possible unavailability of specific performance and injunctive
relief, regardless of whether considered in a proceeding in equity or at law,
(ii) the effect of certain laws, regulations and judicial or other decisions
upon the availability and enforceability of certain covenants, remedies and
other provisions, including the remedies of specific performance and self-help
and provisions imposing penalties and forfeitures and waiving objections to
venue and forum, (iii) bankruptcy, insolvency, receivership, reorganization,
liquidation, fraudulent conveyance, moratorium or other similar laws affecting
the rights of creditors or secured parties and (iv) public policy considerations
underlying the securities laws, to the extent that such public policy
<PAGE>
April 14, 1999 Page 2.
considerations limit the enforceability of the provisions of any agreement which
purport or are construed to provide indemnification with respect to securities
law violations.
In rendering this opinion letter, we do not express any opinion concerning
any laws other than the federal laws of the United States, the laws of the State
of New York and the General Corporation Law of the State of Delaware as
interpreted by judicial decisions. We do not express any opinion with respect to
the securities laws of any jurisdiction or any other matter not specifically
addressed in the opinions expressed below.
Based upon and subject to the foregoing, it is our opinion that:
1. Each Pooling and Servicing Agreement, assuming the authorization,
execution and delivery thereof by the parties thereto, will be a
valid and legally binding agreement under the laws of the State of
New York, enforceable thereunder against the Registrant in
accordance with its terms.
2. Each series of Certificates, assuming the authorization, execution
and delivery of the related Pooling and Servicing Agreement, the
execution and authentication of such Certificates in accordance with
that Pooling and Servicing Agreement and the delivery and payment
therefor as contemplated in the Registration Statement and the
prospectus and prospectus supplement delivered in connection
therewith, will be legally and validly issued and outstanding, fully
paid and non-assessable and entitled to the benefits of that Pooling
and Servicing Agreement.
3. The description of federal income tax consequences appearing under
the heading "United States Federal Income Tax Consequences" in the
prospectus contained in the Registration Statement, while not
purporting to discuss all possible federal income tax consequences
of an investment in the Certificates, is accurate with respect to
those tax consequences which are discussed.
4. To the extent that the description referred to in paragraph 3. above
expressly states our opinion, or states that our opinion will be
provided as to any series of Certificates, we hereby confirm and
adopt such opinion herein, as such opinion may be supplemented as
described in the related Prospectus Supplement.
Please note that paragraph 4. above applies only to those series of
Certificates for which our firm is named as counsel to the Depositor in the
related Prospectus Supplement and for which a REMIC election is made.
We hereby consent to the filing of this opinion letter as an Exhibit to
the Registration Statement, and to the use of our name in the prospectus and
prospectus supplement included in the Registration Statement under the headings
"Certain Federal Income Tax Consequences" and "Legal Matters", without admitting
that we are "persons" within the meaning of Section 7(a) or 11(a)(4) of the 1933
Act, or "experts" within the meaning of Section 11 thereof, with respect to any
portion of the Registration Statement.
Very truly yours,
THACHER PROFFITT & WOOD
By /s/ Thacher Proffitt & Wood
<PAGE>
EXHIBIT 5.2
[Orrick, Herrington & Sutcliffe LLP Letterhead]
April 14, 1999
Residential Funding Mortgage Securities I, Inc.
8400 Normandale Lake Boulevard, Suite 600
Minneapolis, Minnesota 55437
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-3,
to be filed by Residential Funding Mortgage Securities I, Inc., a Delaware
corporation (the "Registrant"), with the Securities and Exchange Commission on
April 14, 1999 (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended (the "Act") of
Mortgage Pass-Through Certificates (the "Certificates"). The Certificates are
issuable in series (each, a "Series") under a separate Pooling and Servicing
Agreement (each such agreement, a "Pooling and Servicing Agreement") by and
among the Registrant, the Master Servicer or Servicer named therein and the
Trustee named therein. The Certificates of each Series are to be sold as set
forth in the Registration Statement, any amendment thereto, and the prospectus
and prospectus supplement relating to such Series.
We have examined such instruments, documents and records as we deemed
relevant and necessary as a basis of our opinion hereinafter expressed. In such
examination, we have assumed the following: (a) the authenticity of original
documents and the genuineness of all signatures; (b) the conformity to the
originals of all documents submitted to us as copies; and (c) the truth,
accuracy and completeness of the information, representations and warranties
contained in the records, documents, instruments and certificates we have
reviewed.
Based on such examination, we are of the opinion that when the issuance of
each Series of Certificates has been duly authorized by appropriate corporate
action and the Certificates of such Series have been duly executed,
authenticated and delivered in accordance with the Pooling and Servicing
Agreement relating to such Series and sold, the Certificates will be legally
issued, fully paid, binding obligations of the trust created by the Pooling and
Servicing Agreement, and the holders of the Certificates will be entitled to the
benefits of the Pooling and Servicing Agreement, except as enforcement thereof
may be limited by applicable bankruptcy, insolvency, reorganization,
arrangement, fraudulent conveyance, moratorium, or other laws relating to or
affecting the rights of creditors generally and general principles of equity,
including without limitation, concepts of materiality, reasonableness, good
faith and fair dealing, and the possible unavailability of specific performance
or injunctive relief, regardless of whether such enforceability is considered in
a proceeding in equity or at law.
<PAGE>
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever appearing in the
Registration Statement and the prospectus contained therein. In giving such
consent, we do not consider that we are "experts," within the meaning of the
term as used in the Act or the rules and regulations of the Commission issued
thereunder, with respect to any part of the Registration Statement, including
this opinion as an exhibit or otherwise.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe LLP
ORRICK, HERRINGTON & SUTCLIFFE LLP
<PAGE>
EXHIBIT 5.3
[Stroock & Stroock & Lavan LLP Letterhead]
April 14, 1999
Residential Funding Mortgage Securities I, Inc.
8400 Normandale Lake Boulevard, Suite 600
Minneapolis, Minnesota 55437
Re: Residential Funding Mortgage Securities I, Inc.
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel for Residential Funding Mortgage Securities I, Inc. a
Delaware corporation (the "Company"), in connection with the authorization and
issuance from time to time in one or more series of Mortgage Pass-Through
Certificates (collectively, the "Certificates"). A Registration Statement on
Form S-3 relating to the Certificates (the "Registration Statement") is being
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"). As set forth in the Registration
Statement, separate Trusts (each, a "Trust") will be established pursuant to the
conditions of a separate pooling and servicing agreement (each, a "Pooling and
Servicing Agreement") and each Trust will issue Certificates pursuant to the
respective Pooling and Servicing Agreement.
We have examined original or reproduced or certified copies of the Certificate
of Incorporation and By-laws of the Company, each as amended to date, records of
actions taken by the Company's Board of Directors, a form of Pooling and
Servicing Agreement, forms of Certificates, the prospectus and form of
prospectus supplement relating to Mortgage Pass-Through Certificates. We also
have examined such other documents, papers, statutes and authorities as we deem
necessary as a basis for the opinions hereinafter set forth. In our examination
of such material, we have assumed the genuineness of all signatures and the
conformity to original documents of all copies submitted to us as certified or
reproduced copies. As to various matters material to such opinions, we have
relied upon the representations and warranties in the form of Pooling and
Servicing Agreement and statements and certificates of officers and
representatives of the Company and others.
Based upon the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement has been duly and validly
authorized, executed and delivered by the parties thereto, it will constitute a
legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms.
2. When a series of Certificates has been duly and validly authorized by
all necessary action on the part of the Company (subject to the terms thereof
being otherwise in compliance with applicable law at such time) and when
executed as specified in, and delivered pursuant to, a Pooling and Servicing
Agreement and when sold as described in the Registration Statement, they will be
validly issued and outstanding and entitled to the benefits of the Pooling and
Servicing Agreement.
3. The information in the prospectus forming a part of the Registration
Statement under the caption "United States Federal Income Tax Consequences," to
the extent that it
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constitutes matters of law or legal conclusions, is correct with respect to the
material Federal income tax consequences of an investment in the Certificates.
4. To the extent that the description referred to in paragraph 3 above
expressly states our opinion, or states that our opinion will be provided as to
any series of Certificates, we hereby confirm and adopt such opinion herien as
such opinion may be supplemented as described in the related Prospectus
Supplement.
Please note that paragraph 4 above applies only to those series of Certificates
for which our firm is named as counsel to the Depositor in the related
Prospectus Supplement and for which a REMIC election is made.
In rendering the foregoing opinions, we express no opinion as to laws of any
jurisdiction other than the State of New York and the Federal law of the United
States of America. Our opinions expressed in paragraphs 1 and 2 are subject to
the effect of bankruptcy, insolvency, moratorium, fraudulent conveyance and
similar laws relating to or affecting creditors' rights generally and court
decisions with respect thereto, and we express no opinion with respect to the
application of equitable principles in any proceeding, whether at law or in
equity.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the references to us in each prospectus and
prospectus supplement and to the filing of this opinion as an exhibit to any
application made by or on behalf of the Company or any dealer in connection with
the registration of the Certificates under the securities or blue sky laws of
any state or jurisdiction. In giving such permission, we do not admit hereby
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act or the General Rules and Regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Stroock & Stroock & Lavan LLP
STROOCK & STROOCK & LAVAN LLP
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EXHIBIT 8.1
See Exhibit 5.1
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EXHIBIT 8.2
[Orrick, Herrington & Sutcliffe LLP Letterhead]
April 14, 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 "United States Federal Income Tax Consequences" in the
prospectus (the "Prospectus") forming a part of the Registration Statement on
Form S-3 as prepared for filing by the Registrant with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act"), on
April 14, 1999 (the "Registration Statement"). Such description does not purport
to discuss all possible income tax ramifications of the proposed issuance, but
with respect to those tax consequences which are discussed, in our opinion the
description is accurate in all material respects. 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
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EXHIBIT 8.3
See Exhibit 5.3
<PAGE>
EXHIBIT 23.1
See Exhibit 5.1
<PAGE>
EXHIBIT 23.2
See Exhibit 5.2
<PAGE>
EXHIBIT 23.3
See Exhibit 5.3
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